Q3 2021 Compass Diversified Holdings Earnings Call
[music].
Good afternoon, and welcome to Compass diversified third quarter 2021 conference call. Today's call is being recorded all lines have been placed on mute. If you would like to ask a question at the end our prepared remarks. Please press. The star then the number one on your Touchtone phone at this time.
I would like to turn the conference over to Matt Berkowitz of the 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 <unk> third quarter 2021 conference call, representing the company today, our lives say about Coty, CEO, Ryan Buckingham County, CFO and fat mass rollout.
Of Compass Group management before I begin I'd like to point out that the Q3, 2021 press release, including the financial tables and non-GAAP financial measure reconciliation are available at the Investor Relations section on the company's website at Www dot com to diversify dot com.
<unk> also filed its Form 10-Q with the SEC today after the market closed which includes reconciliations of non-GAAP financial measures discussed on this call, including adjusted EBITDA and cash available for distribution 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 is reconciled to net income in the company's financial filings. The company does not provide a reconciliation of its full year expected 2021 adjusted EBITDAR 2021 payout ratio because certain significant reconciling information is not available without unreasonable efforts.
Throughout this call, we will refer to compass diversified as Cody 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 Cody and subsidiaries and statements related to the impact of Coty is updated tax structure and the impact and expected timing of acquisition and disposition.
Words, such as believes expects plans projects and future or similar expressions are intended to identify forward looking statements. These forward looking statements are subject to the inherent uncertainties in predicting future results and conditions certain factors could cause actual results to differ on a material basis from those projected in these forward looking statements.
These factors are numerator then the risk factor discussion in the Form 10-Q as filed with the SEC for the quarter ended September 32021, as well as in other SEC filing.
In particular, the domestic and global economic environment is currently impacted by the COVID-19, pandemic and related supply chain disruption.
That's going to impact on our subsidiary companies, except as required by law Cody undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise at.
At this time I would like to turn the call over to ally is stable.
Good afternoon. Thank you all for your time and welcome to our third quarter earnings Conference call.
I wanted to start by pointing out the momentous milestone that <unk> achieved during the quarter.
After over a year of analysis preparation documentation and communication that culminated with a shareholder vote.
Elected to be treated as a C Corporation or U S federal income tax purposes.
I wanted to thank our entire team for their tireless effort to get this election completed.
We are confident the benefits of this election will be profound and long lasting and we are already encouraged by the initial reaction in the market.
We believe this change in tax structure will allow a wider audience of investors to access our company.
A lower cost of capital and give us more depth in our capital access.
With the lowest cost of capital among our peers. We believe we have built a competitive advantage in the marketplace that will be a key differentiator as we continue to seek opportunistic acquisition and build leading businesses.
In September we filed a prospectus supplement with the SEC to enable share issuance under an at the market common share program. We believe this program offers an efficient and cost effective way for us to raise common equity capital to fuel our growth and build towards our goal of <unk>.
$1 billion in EBITDA.
In pursuit of that objective, we have reconstituted our portfolio over the past three years to increase the company's core growth rate and provide a tailwind to meet our growth objectives that said, we are aware, we need more than core growth alone. The second part of our business model and critical to us achieving our growth.
Objective is by having a low cost efficient way to access equity capital.
Demonstrate this point I would like to take a moment to review our capital allocation and capital raising decisions over the past few years.
In 2019, when asset prices favor divestment, we sold clean Earth, and Manitoba harvest at record prices without deploying any capital.
Late in 2019, we raised $115 million of equity capital through the issuance of series D preferred stock by the end of the year, our balance sheet was strong and we were ready to pounce on opportunities with the strongest balance sheet in our company's history and record capital availability. We were then able to closed on marucci sports.
And both technologies in 2020, despite the far reaching implications of the COVID-19 pandemic.
To further strengthen our balance sheet. During 2020, we also raised an additional $88 million of equity capital and $200 million of unsecured bonds. These capital allocation and capital raising decisions, although creating modest equity dilution have allowed our growth rates and earnings power to materially accelerate this.
This is evidenced by the first nine months of this year during which we have produced $135 million of cash available to distribute and reinvestment and reinvest or cat. This is the highest amount of CAD ever produced in our company's history by a significant margin.
In 2021, we have continued to be active with capital raising and capital allocation decisions. Thus far we have refinanced our unsecured debt to lower the interest rate by 2.75 percentage points.
Or 34% from the original issuance rate while at the same time upsizing, the offering by an additional $400 million to $1 billion.
This series of decisions have put us in position to have the lowest cost of capital in our company's history and we are set to continue leveraging our permanent capital structure to drive long term shareholder value.
During the third quarter and subsequently we announced a few key transactions.
We closed on the divestiture of Liberty safe.
<unk> invested in all tour solutions by adding on Plymouth fall to strengthen all towards status as an industry leader.
Acquired Lugano diamonds, and jewelry, a new subsidiary that designs manufactures and markets high and one of a kind jewelry.
Announced the execution of a definitive agreement to divest advanced circuit, our longest holding which we expect to be closed in 2022 subject to satisfaction of closing conditions.
And just recently, we made an acquisition to add lizard skins tumor rucci, which will strengthen <unk>, leading position in diamond sports and offer an opportunity for expansion into new markets.
Taken together this collection of transactions over approximately one quarter represents our approach to sustainably investing with our permanent capital model.
We strategically acquire business is poised for growth to manage and build businesses with our resources and expertise and three divest opportunistically when it makes sense for all constituents.
The divestiture of Liberty safe and the anticipated divestiture of advanced circuits in particular highlight an important advantage to our permanent capital business model.
Both businesses were held for more than a decade, something nearly unheard of in the traditional private equity model overall.
Over our ownership, we invested significant growth capital in both businesses. This is a core component of our sustainable investing model that is enabled by our permanent capital approach at advanced circuits. We completed a number of add on acquisition and growth capital expenditures. The most recent of which upgraded at Arizona plant.
Become a world class manufacturing facility at Liberty, while we only completed one add on acquisition, we more importantly invested a significant amount of growth capital that enabled the company to dramatically expand its manufacturing capabilities and capture the revenue growth available to it as demand increased in 2020.
And into 2021.
Importantly, the ability to divest these businesses on our preferred timeline and not required based on fund life has enabled us to achieve a return on invested capital for Liberty that significantly exceeded our underwriting expectations and we expect a similar result for advanced circuit.
The platform acquisition of Lugano Diamonds, and jewelry is an exciting opportunity to bring a growing luxury good brands to the Coty portfolio. We are pleased to partner with Modi and it further as we seek to build lugano into a global iconic jewelry brands. When you look at this company closely.
We believe it is clear that the Lugano model is disruptive to the jewelry industry Lugano acquirers loose stones, and then designs unique one of a kind pizza. However.
However, these arent just sold in stores Lugano creates a bespoke selling experience in their retail salons, providing value to the customer with a streamlined simple and curated selling experience. We believe the addition of Lugano will be accretive to our growth profile over time.
<unk> will require a significant investment in inventory.
And growth capital expenditures as we build unique salon in strategic markets around the country and internationally.
Now turning to our financial performance.
I am pleased to report that our third quarter results were exceptional and once again exceeded our expectations throughout this presentation. When we discuss pro forma results. It will be as if we owned Boa marucci and Lugano and divested Liberty from January one 2020.
On a pro forma basis consolidated revenue grew approximately 18% and adjusted EBITDA grew approximately 19% over the prior year's quarter.
I would like to highlight that our consolidated adjusted EBITDA margin remained approximately flat at 19, 5% year over year.
This is an incredible accomplishment and reflects the dedication of each of our subsidiary company management teams.
Our subsidiary teams have encountered numerous challenges unique to their businesses and the ongoing pandemic recovery in particular supply chain disruptions lack of labor availability and rapidly increasing inflation have created challenges never experienced before where our company is to deliver nearly 20%.
Topline growth with static year over year margins is a testament to the exceptional talent, we possess at our subsidiary level.
Before I provide an update on our guidance I want to reiterate that the macro environment remains uncertain and many of the challenges we have dealt with throughout the year are increasing with each passing quarter.
Demand continues to remain robust throughout our portfolio. However supply side challenges are extensive and increasing.
There are significant parts shortages from our vendors lack of available shipping capacity issues with port congestion and finally, a lack of trucking capacity.
Our companies are performing admirably in dealing with these challenges. However, the current state of the supply chain is putting pressure on revenue growth and materially raising our cost to create product availability.
Second labor availability is scarce.
<unk> open positions are suppressing revenue growth and labor costs are rising rapidly as a result, these factors along with a significant increase in commodity costs are causing our cost structure to increase rapidly as a.
We have been forced to raise prices in order to protect margins. Thus far we have found demand to be inelastic. During these times as the veracity of demand has allowed us to raise prices without diminishing sales.
Notwithstanding these unique challenges and in light of our extraordinary year to date results and our expectations for the balance of the year. We now expect to produce pro forma consolidated subsidiary adjusted EBITDA of between $380 million and $390 million.
This represents pro forma growth of approximately 30% to 33% from the prior year and an improved payout ratio of less than 55% based on our historic distribution rate of 36.
Per share each quarter to.
To aid in our comparisons given the number of transactions that occurred in the quarter I would like to walk through our guidance as compared to the prior quarter.
<unk> was expected to produce approximately $25 million and adjusted EBITDA and included in our updated guidance is an expectation for lugano to produce $35 million and adjusted EBITDA.
Thus the net effect of the M&A transactions, we completed were to increase our guidance by $10 million on a pro forma basis.
This would have made last quarter's guidance range increased to $360 million the $380 million on a pro forma basis to include the acquisitions and divestitures.
As you will see from this analysis, we are raising our guidance by $20 million on the bottom of the range and $10 million on the top of the range.
I would also like to take a minute to discuss our ongoing ESG efforts.
We are pleased to announce that we have hired a new head of ESG, who will be starting with us on December one.
We believe this will allow us to accelerate our ESG initiatives that Tony level, while at the same time, leading the acceleration of initiatives across all portfolio companies.
I also wanted to highlight recent ESG success stories at two of our subsidiaries first at our <unk> solutions subsidiary, we experienced an increase in customer wins at a rational packaging minority investments.
We are proud to highlight that our investment in rational packaging in September 2020 was crucial to commercializing their products, which are manufactured using recycled and environmentally friendly input and are 100% post consumer recycle.
In addition at all.
Also we continue to make progress towards the development of a fully curbside recyclable custom packaging product offering that we expect to have commercialized by 2022. We believe this initiative along with rational packaging will allow us to offer a robust suite of environmentally friendly products to our.
Tumors by mid next year, we are incredibly proud of the <unk> management team and working towards reducing our environmental impact.
At Ergo Baby, we expanded our ever look program to Europe, which provides consumers with previously loved carriers.
<unk> also published internally its first ever annual impact report, which will serve as a baseline across five important categories for the company to measure annually.
Staying ability diversity equity and inclusion.
Education and science, giving.
Giving back and people and policy, we are proud of fatty reader and the entire ergo baby team for taking leadership in this important area.
We continue to see compelling ESG opportunities across our subsidiaries that we believe will drive growth and increased profitability over time, and we look forward to having our new head of ESG lead these efforts.
Before turning the call over to Pat I want to say that I am also proud to announce that over the past 90 days, including post Q3, we have invested approximately $110 million in growth capital at our subsidiary through add on acquisitions and growth capital expenditures. These investments are a continuation.
<unk> of the sustainable investing we are afforded under a permanent capital model and we believe these investments provide tangible benefit to our constituents our employees benefit from enhanced opportunities our communities benefit from increased employment and our shareholders benefit from the synergy and return on.
<unk> capital, we expect to achieve with that I will now turn the call over to Pat.
Before I begin on our subsidiary results I wanted to talk generally about the industry trends, we saw throughout the quarter. We believe our branded consumer businesses continue to be well positioned to benefit from the changing consumer landscape.
With the exception of Ergo Baby, which had a COVID-19 related shutdown at ex Vietnamese manufacturing partner each of these businesses exceeded our expectations and important in the quarter.
As a group our niche industrial businesses also performed above expectations as.
As Elias mentioned all of our subsidiaries continued to experience significant increases in costs in the quarter and all of them face some supply chain disruptions. So these disruptions will continue in the fourth quarter. Our management teams continue to demonstrate the ability to adjust on a real time basis with the fluid conditions because of their adept work, we believe coty as a.
Hole is comparatively well positioned to weather this challenging season.
Now onto our subsidiary results I'll begin with our niche industrial businesses in the third quarter of 2021 revenues increased by 14, 1% EBITDA increased by eight 8% versus the third quarter of 2020.
On a year to date basis revenues increased by 13, 8% and EBITDA increased by nine 6% versus 2020.
With a year to date period revenue and EBITDA at advanced circuits were approximately flat as compared to the first nine months of 2020.
Backlog across the company's three facilities is at near record levels as bookings significantly outpaced billings due to continued part shortages, particularly in the Companys Assembly business unit.
Arnold Magnetics revenues increased by 33, 3% EBITDA increased by 107% to $16 5 million in the first nine months of 2021 as compared to the prior year, notably we acquired Ram co on March 1st of this year and.
And their performance is included in our financials since that time. The majority of this increase was driven by organic growth. Following 2000, Twenty's Covid depriest, COVID-19 depressed demand levels across commercial aerospace and industrial customers.
Arnold has exceeded our expectations for the year to date period, we anticipate supply chain issue as being a headwind for the company during the fourth quarter.
Outdoor solutions revenue grew by 37, 2% and EBITDA grew by eight 1% in the year to date September 'twenty, one period compared to the same period in 2020 meeting our expectations margins continue to be under pressure in the third quarter due to significant increases in the companys core raw material.
As we mentioned last quarter margins also continue to be impacted by the acquisition of Polycom in Q3 of 2020 carries lower margins.
<unk> margins to improve for outdoor overtime, but believe we will experience some margin volatility from quarter to quarter Delta is outdoor managers, both rapidly changing raw material prices and delayed contractual pass throughs.
The Sterno group's year to date 2021 revenue increased by three 6% and EBITDA declined by six 2% respectively versus year to date 2020, where.
But we have seen foodservice demand improve year to date Covid precautions taken as a result of the Delta variant in Q3 did slow that recovery.
Last quarter, we mentioned that sterno was exiting lower margin product lines at the company would experienced approximately $5 million of related restructuring expenses.
Half of those expenses were realized in Q3 and are included in the year to date EBITDA figures referenced.
<unk> continues to see solid demand for its line of wax and essential oil products. In this business segment continues to make a positive contribution to the Sterno group.
Turning to our branded consumer businesses, which as a group experienced another exceptional quarter.
Our results are presented as if we owned <unk>.
<unk> and Lugano in January one 2020.
For the quarter the majority of our six branded consumer businesses exceeded our expectations and experienced significant growth.
As a group revenues increased for the quarter by 21, 2% EBITDA increased by 24, 1% versus the year to date period in 2020.
On a year to date basis revenues increased by 34% and EBITDA increased by 63, 7% versus 2020.
Oh as year to date revenue increased by 55, 5% versus the comparable comparable period in 2020.
Urinate EBITDA increased by 89 three.
$46 $3 million versus the comparable period in 2020 exceeding our expectations.
We'll continue to experience strong demand across most of its categories lead by athletic Workwear snow customers.
This quarter the company experienced broad demand across brand partners and geographies and made several key senior hires and promotions.
The company for future success.
In addition, while we'll continue to make strides in product development as we mentioned last quarter. We believe that some portion of boas exceptional growth stems from partners ordering ahead due to supply chain constraints.
Regardless, we believe the company remains well positioned to grow market share. We remain excited about <unk> future and continue to be impressed by the Companys management team.
During the quarter, most successfully repurchased outstanding Boa shares remain significant minority shareholder valued at $48 million as a result of this repurchase Moody's primary ownership percentage and Boa increased 92, 7%.
Ergo baby as year to date 2021 revenue increased by 16, 8% year to the same period in 2020 year to date EBITDA increased slightly to $13 9 million.
Anthony continued to have solid demand growth. However, it experienced significant supply chain disruptions in the quarter one of its large southeastern southeast Asian manufacturing partners. The operations were halted for a significant period of time due to COVID-19 restrictions.
Normal operations have resumed and we are working closely with our partners to fill both prior months and current month's orders.
Currently believe this will result in several million dollars of revenue shifting from Q3 to Q4 should result in stronger financial performance in Q4 2020 levels.
<unk> continued its recent strong performance since our acquisition in early September year to date revenues increased by 77, 7%.
Comparable period in 2020 year to date EBITDA increased by $13 6 million.
$7 6 million.
Company benefited from growth in recently open Salon and new geographies.
We are excited to partner with Lugano I remain impressed with the company's strategic vision and execution as well as the artistic capabilities of their team.
We believe there are numerous opportunities for geographic expansion.
<unk> on the future of this brand.
Lastly, we're excited to add two new directors to Louganos Board of directors Redrow Cunene, former president and CEO of Tiffany <unk> co and David Arnold Vice Chairman of the Rab report a tremendous experience leading some of the worlds most recognizable jewelry luxury and lifestyle brands.
There are additions will provide valuable guidance during this period of accelerating growth for Lugano.
<unk> had another strong quarter that exceeded expectations.
Right, having a difficult comparable period as the third quarter of 2020 represented an opening up of team sports and the launch of the highly successful cat nine line of bats company grew revenue and EBITDA in the 2021 quarters.
And the year to date period, ending September the Companys revenue grew by 82, 5% EBITDA grew by over 175%.
Margins were impacted slightly by increased expedited freight costs company successfully navigated strong demand and supply chain challenges and the brand remains in demand at all levels of baseball.
We're very optimistic about the company's future of note marucci closed on the acquisition of Blizzard skins designer and seller branded grip products subsequent to the end of the third quarter. We believe the transaction comes with a number of strategic synergies and are excited about the combination.
Lots of the outdoors revenue and EBITDA increased significantly in the year to date September period up 38, 9% and 64, 5% respectively compared to 2020.
<unk> performance continued to surpass our expectations interest in outdoor activities remained strong even while the country slowly exits pandemic conditions.
Inventory at retail for many of the companies category has returned to healthy pre pandemic levels. We believe revenue will be driven by end consumer demand in the coming quarters.
Challenges in the supply chain at the company continued in Q3 and in some instances became even more acute.
Finally by a 11 year to date September 'twenty, one revenue grew by 13, 9% and EBITDA increased by 33% the same period in 2020.
As a reminder, similarly last quarter through the process. We have initiated at 511, we won't be delving further into into the specifics of five eleven's 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 September 32021, I will limit my comments largely to the overall results for Coty since the individual subsidiary results are detailed in our Form 10-Q that was filed with the SEC earlier today.
As a reminder.
As a result of the sale of Liberty safe during the third quarter, our historical Liberty results have been reclassified as discontinued operations in our financial statements.
On a consolidated basis revenue for the quarter ended September 32021 was $488 2 million up 25, 9% compared to $387 7 million for the prior year period.
This year over year increase primarily reflects our acquisition of Boa during the fourth quarter of 2020.
In addition, we had strong sales growth at our branded consumer subsidiaries and our niche industrial businesses on a combined basis.
<unk> net income for the quarter ended September 32021 was $90 2 million compared to $20 9 million in the prior year.
The increase in net income was primarily due to a $72 $7 million gain on the sale of Liberty safe.
Cash flow available for distribution and reinvestment or CAD for the quarter ended September 32021 was <unk> 42, and a half million dollars a little below prior year last year, our third quarter CAD benefited from a significant cash tax reversal.
Our CAD that we generated during the quarter was above our expectations, primarily due to the outstanding performance performance at our most recent acquisitions rucci in bulk as well as continued strong performance at our consumer and industrial businesses.
Other factors impacting our cabinet third quarter compared to the prior year include higher Capex spend and increase in cash taxes and higher management fees. As a result of the acquisition of <unk> in the fourth quarter of 2020.
Turning to our balance sheet as of September 32021, we had approximately $70 million in cash approximately $465 million available on our revolver and our leverage was approximately two nine 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 and act on compelling investment opportunities as they present themselves.
<unk>.
Turning now to capital expenditures.
During the third quarter of 2021, we incurred $8 $1 million of maintenance capital expenditures of our existing businesses.
<unk> to $3 8 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 as well as substantial spend that marucci is a result of facility enhancements required due to significant flooding experienced earlier this year.
During the third quarter of 2021, we continue to invest in growth capital spending $3 $2 million in the quarter, primarily related to five eleven's long term growth objectives growth capex in the prior year quarter was $4 1 million.
I'd like to now spend a few minutes to discuss how we are considering considering communicating our financial performance going forward.
First we will continue to provide our adjusted EBITDA on a consolidated and subsidiary level valuing our businesses using multiples of adjusted EBITDA remains important to the market.
Second we recognize cash flow available for distribution and reinvestment or CAD has been a challenge for the market to not only digest and understand but also to compare this metric against other cash flow based metrics in the market.
We are considering using a free cash flow metric going forward that we will define in the near future. This.
This would be calculated from the cash flow statement and provide a measurement that can be compared to others in the market.
After the end of 2021, we will no longer provide cat to the market.
Finally, as we've mentioned previously we are working on defining and adjusted EPS that will provide a more uniformed earnings metric that other companies use and the market sees on a regular basis. We continue to evaluate this metric and anticipate discussing this metric with shareholders over the coming months.
As a reminder, we are having our investor day on December 9th it will be a virtual meeting and then in addition to an update on <unk> go forward strategy. We are excited to have Kurt Ainsworth.
Youll Marucci, who will provide an in depth review of the rucci business as well as the growth opportunities. He sees in the business if you'd like to register for our Investor Day. There is a link on the Investor Relations section of our website.
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.
Cody permanent capital structure offers shareholders a unique opportunity we were able to drive value at every stage of our investments by leveraging our sector expertise to build businesses for the long term, we pride ourselves on being business builders not asset traders, which was why we have completed nearly 30 add an attractive transaction.
And for our subsidiary since our inception.
We are partners to our subsidiaries and are proud of the flexibility that our permanent capital advantage bring to the table, which enables us to invest in the future of our subsidiaries regardless of the environment at the end of the day. This is a core pillar of our approach to sustainable investing being able to identify platform acquisitions that will bend.
Fit from our ability to invest in them through the cycle and then divest them when the time is right for us and.
This is how we turn our permanent capital advantage into long term shareholder value.
As we have started to emerge from the pandemic market conditions have changed rapidly and asset prices have appreciated materially thus far in 2021.
An abundance of equity capital coupled with strong availability of debt capital has driven an increase in M&A activity and an appreciation in asset prices.
<unk> remains well positioned to succeed in these market conditions as evidenced by our successful series of transactions over the past few months.
Our permanent capital structure allows us to be flexible and take advantage of market conditions in.
In addition, the dramatic reduction in 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, 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 permanent capital structure and differentiated strategy has set us apart for more than 15 years and it remains consistent.
In 2021, we remain intensely focused on executing our proven and disciplined acquisition strategy improving the operating performance of our companies.
Opportunistically divesting.
Enhancing our commitment to ESG initiatives at Cody and across our portfolio and creating long term shareholder value with that operator. Please open the lines for Q&A.
Secondly, we will now begin the question and answer session. If you would like to ask a question. Please press star followed by one on your Touchtone keypad. If for any reason you would like to remove that question. Please press star followed by Tim again to ask a question. Please press star one as a reminder.
If youre using a speakerphone. Please remember to pick up your handset before asking your question, we will pause here briefly to allow questions to generate in Q.
So first question is from the line of Larry Solow with CGS Securities You May proceed.
Great. Good afternoon, guys lots of lots of activity good good stuff.
Maybe to get some cliff notes to his call, but could you maybe just first question.
Hum.
I know you touched on it briefly but just on the Lugano acquisition, obviously, it's a very interesting acquisition, a little bit different than I think your pest.
Companies that you've owned.
You talked about sort of growth strategy under the compass umbrella just expanding on the salons I guess I'm just trying to get a little more color on that I know they only have a few salons and I guess for this kind of a.
Product you probably don't it's a lot of word of mouth and whatnot. So maybe you don't need that many salons salt lake or Tiffany or something so just kind of curious what you guys will bring to the table, maybe a little more color on the acquisition and the outlook there.
Yes. Thank.
Thank you Larry and thanks for the question and nice speaking with you. This afternoon.
The quarter and it's been a pretty busy year for us.
Pleased with a lot of things that are going on but specific to lugano I'm going to ask Pat to fill in a lot of the blank. So I'd say I think it is consistent in terms of the premium in fact in this case, a very luxury good consumer good and we have a lot of experience in building luxury.
Good businesses and turning them into really kind of iconic brands and global brands and you've seen that in a lot of the businesses that we've done before one thing I will know and then I'll ask Pat to fill in is this is a business that you don't.
It's quite capital intensive and I think for everybody as you think about it we need to invest a significant amount of capital in working capital.
Principally through inventory to enable growth.
This business you have got a product in order to be able to.
Sell the product and grow revenues I think one thing Youll see is inventory turns relatively slow here.
It's kind of rule of thumb about one time, it's a little better than that but this is all good very high quality sellable inventory, because it's primarily diamonds in the environment, we're in which has a decent amount of inflation.
<unk> monetary printing.
Owning hard assets like that probably isn't the worst thing, especially with financing costs being so low but I do think we all should and one aspect of the company's growth that we will be instrumental in and this has nothing to do with shaping strategy or what Pat will talk about is simply funding the <unk>.
Capital requirement to enable it to grow and I will tell you we will specifically call out some of those investments quarter to quarter, because they may be large to the extent the company is growing very rapidly, which it is right now and I think it's important to call that out so with that I'll ask Pat maybe to fill in a little more on what we see.
Opportunities too.
To build the brand.
I would just add that I mean this is ed.
A different business as you hit on than we're used to buying and used to partnering with them, We really party partner partnered with.
And the team.
There is a at the end of the day. These people are artists and they're very good artists.
<unk> product that's in demand.
At the same time, there is a they have a really deep network.
Buyers to make attractive purchases when they become available. So it's sort of that combination if that makes sense over the next 12 to 24 months I would envision we build two to three more salons and we have sort of identified sort of high single digits beyond that over the next four to five years, if that makes sense.
Yes, absolutely.
Great Pat maybe a question for you on the just on the on the supply.
Supply chain issues inventory issues.
Rising cost of labor, obviously, it sounds like.
Most companies.
<unk> got some gotten worse, we're getting slightly worse not better.
And you've.
How does one bill that you still have an ability to pass on price.
But it does sound like Youre able to pass on price, but you also mentioned that there are some lost revenue opportunities and I suppose at a point you can't continue to raise prices right. So is it fair to say that.
Your numbers are fabulous and probably would be even.
Better.
Without these supply chain issues, even though you're able to cover a lot of that with the price.
It's fair to say that our numbers would be better without the supply chain issues, yes.
There are certainly places within the portfolio that we could take additional price and Theres certainly places where as you mentioned we can't.
It probably it wouldn't be prudent to at this time.
Companies are managing through this the management team extremely well, sometimes as in the case of Ergo baby pushes revenue from one quarter to another other times honestly.
We don't have quite all the revenue that we would have despite our strong performance. So they continue to it to really be adept in agile and we think we're going to work through this and we think we're better positioned than most.
Okay. That's fair enough and then just just one comp is just a question just on <unk>.
Off the chart numbers here again.
Quarters, and I know it does sound like some pull forward has probably occurred like you mentioned, but.
Even so it seems like Youre way ahead of expectations. Just curious are you seeing more I know you've gotten a lot of new customer wins is it.
New shoe winds and whatnot from existing customers or are you expanding the customer base or is it more growth within.
And just new lines at existing customers.
But perhaps a little bit of all of the above honestly I mean this company is meticulous tracking market share by industry segment and sort of what number of platforms. There and number of platforms that are out there and the preponderance of growth has been driven by sort of what I'll call increased market share.
For their or their products are four four there.
Their products working again in existing markets. There are examples of where we're growing in new markets.
In Asia, I can think of one or two specifically and then there are several examples of where we're.
Where we plan to grow in new markets over the next several years that are exciting as well. So it's all of the above I would say the most most of this growth is driven by market growth and increased market share for both products.
Right got it okay, great I appreciate all the color guys. Thanks again.
Thank you Larry.
Yes.
Thank you Mr. Sullivan.
The next question comes from the line of Matt Koranda with Roth Capital You May proceed.
Hey, guys. Thanks for taking the questions.
Just wanted to start off I mean, there are a lot of moving pieces I guess with the balance sheet heading into year end here with the divestiture of ACI and some of the tuck ins that you've made so I just wondered if maybe you could help us kind of bridge.
Raise your cash and revolver debt positions to the year end 2021 number of pro forma.
Just assuming I guess that we get.
ACI divested.
Assuming that all of the capital outlays from the recent tuck ins that you've done kind of go through.
And then if there are any other incremental balance sheet items, we should be considering through the year end 2021.
Yes sure.
This is Ryan thanks for the question.
So yes, so from September 30th Theres certainly been.
A balance sheet transactions.
We did the outdoor solutions add on we've done the <unk> add on as well.
The amount of the <unk> purchase price was disclosed around 60.
<unk> was not but youll see that in the in the 10-Q.
Just under $50 million roughly so that's been about $110 million of deployed capital. We have of course, working capital movements, plus or minus just depending on subsidiary cash flows that come up to us.
But those are the two substantial transactions.
There are other small ones such as our bond interest payment was due in October of course, our distributions as well.
So those are all quantifiable.
And then <unk>.
Circuits, though will be a 2022 transactions so as we roll to December 31.
That will not necessarily reduce our revolver outstanding.
I can tell you, though we expect the cash receipts from our companies and in addition, as we highlighted on the on the script, we do have our <unk>.
ATM program that would open up after earnings to the extent raising equity capital at a good price makes sense, we will do that so can't can't give the exact dollar of course, but those are the large items.
That's very helpful. Thanks, Brian.
And then just a broader question probably for Elias here.
I wondered if you could speak for a moment on the pipeline.
A potential acquisition. So just any update on the maturity of some of the acquisitions that are in the funnel relative size of some of the platform opportunities that youre seeing currently.
Just any commentary on sort of how acquisitions may skew between platform versus tuck in on a go forward basis. I know you mentioned some stuff at the end of the call that was interesting, but maybe you could expand upon some of the commentary that you.
You had there that'd be helpful.
Sure, Matt So I would say just in general.
The M&A markets are robust, maybe a bit of an understatement.
But there's.
The significant increase in the number of transactions that we are seeing right now now that being said I would say there is a kind of equal or even higher increase in acquisition multiples that are being paid and they give you just think of the landscape.
We still have.
The number of specs that were raised obviously that are competing in the market for assets.
But even more so you have private equity firms, who by and large sat on the sidelines during 2020 and now losing a year against what is already a relatively short timeline to put money to work right. Typically these and these vehicles have five years to put capital.
The work if you lose one of those years.
All of a sudden you're down to four that's a material increase in the activity that you need to kind of go forward with and so we're seeing this high end demand principally from PE firms.
Drive asset prices incredibly high and so as a result of that obviously, we have to pick our spot.
The pipeline is strong, but we are remaining disciplined and on some of the larger platform opportunities that we're looking at I would say in many instances pricing is.
And where we want to reach now that being said you asked kind of size of things that we're looking at in general consistent with our philosophy and where we're trying to build the business. We're looking slightly larger and so I would say there is numerous transactions that sort of are in that $40 million to $50 million EBITDA range.
That seems like kind of a good sweet spot for us to be able to make an initial investment and then try to build it.
$70 million to $100 million through add on and through growth initiatives, but in general you will see the size of companies that we're looking to acquire are.
Our larger if they are smaller theres got to be a real angle to be able to grow either through organic growth or through add on acquisition.
Its always impossible to say, whether we'll be able to transact and the frequency of transaction.
That will be able to close.
We have been very fortunate in that we closed three add on transactions. This year. If you went back to Ram co <unk>.
<unk> foam into all tour Ram co was into Arnold and then lizard skins, just most recently into Maruti.
We are looking constantly for add ons.
But we're open to do either add ons or a platform and we feel that our capital availability is really strong. It does come down to are we finding high enough quality growth opportunities and these companies because pricing is at a level, where you really have to be able to underwrite.
And feel good about the growth to be able to kind of justify pricing and earn the level of return that we expect to return <unk> to.
To achieve so I know that doesn't answer your question specifically there are a lot of transactions that are happening right now there's a lot in the pipeline and continues to grow pretty rapidly.
Kind of high pricing is moderating some of the activity, we would otherwise expect to see with this level of transactions that we're looking at.
Okay very detailed note it's helpful to kind of get the overview of their lives I appreciate it.
And then I think last one for me.
Maybe Pat could help with this one but.
Just curious to get a little bit more of a view on some of the synergies you see.
With Maruti and lizards gains it just seem notable to me that they have a number of verticals that they play and beyond Diamond sports and it seems like they have a strong presence there as well.
But wondering if this gizmo rucci sort of the right to play in some additional verticals.
If youre just going to kind of keep the lizard skins brand standalone in gist.
A bit more color on that would be great.
Obviously, the first opportunity is putting lizard skins on route batch right, but.
With that I'll actually take the question over to Dave Swanson.
For minimum roofing.
Please go ahead Sir.
Yes.
I think youre right the biggest synergies we'd see our obviously in diamond sports and I would expand beyond.
Baseball too to softball, so.
I'd say that the main appeal of the transaction and why we are really excited about it.
As you mentioned they also have a nice presence in bike and.
Small presence in hockey and in esports and so I would say we will probably.
Play that one more bye bye you I think it could become an opportunity over time, but I would say that that wasn't kind of the rationale of the transaction. We think just from a diamond sports perspective, it makes a lot of sense.
But potentially some some future opportunities in other areas.
For Mercury as well.
Great. Thanks, a ton of sense I appreciate all the answers guys I'll jump back in queue.
Thank you Matt.
Thank you Mr Conder.
Again, if you would like to ask a question. Please press star followed by one on your Touchtone keypad.
The next question comes from the line of Cris Kennedy with William Blair You May proceed.
Hey, guys. Thanks for taking the question congratulations on all the activity and I appreciate the detail.
Two quick ones.
Lugano can you talk about kind of the seasonality of that business over a quarters, which what should we think about there.
It's not that seasonal I mean it.
Management would say its really not seasonality at all and that there is that it is relatively even over the four quarters.
Got it.
Okay, and then Eli.
Elias.
I think I always ask this question, but can you give an update on potentially expanding beyond the consumer and the niche industrial vertical is kind of where are you in your thought process and then that Jeremy Thanks, a lot guys.
Yes, Chris and.
Thank you for the question.
Nice talking to you. This afternoon, we continue to make progress as we've said we are looking to enter into the health care vertical given how I would say kind of <unk>.
Unique that vertical is and the skill sets that are needed. We have taken our time to identify individuals who could come in and be a leader.
We don't think that we could do this without having some sector expertise.
At the top to lead the efforts we've made material some pretty good progress not to a point, where we want to announce anything yet, but I would say we continue to make progress with kind of at least at a candidate and a couple that are in the system and I would think in the next because it is very senior debt.
Physician.
<unk>.
Skill set needs to be very specific and the cultural fit has to be right. When you are coming in at that level through our firm it sort of takes on a different level of kind of recruiting.
And so with all that said we feel good about where we are we feel in 2022, we will be able to execute on launching that new vertical around.
New individual.
And we're in the final throes, we think of kind of securing somewhat in the next.
Call it three to six months.
Great to hear thanks, a lot.
Thank you Mr. Kennedy.
There are no additional questions waiting at this time I would like to pass the conference back over to Elias for any closing remarks.
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 coding we look forward to sharing our progress with you at our Investor Day on December nine.
That concludes the conference Diversifies <unk> third quarter 2021 conference call I Hope you all enjoy the rest of your day.
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