Q4 2021 Compass Diversified Holdings Earnings Call
And related supply chain and labor disruptions has a significant impact on our subsidiary company, 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 this time I would like to turn the call over to Elias Sabo.
Good afternoon. Thank you all for your time and welcome to our fourth quarter earnings Conference call.
I want to start by recognizing that 2021 was an outstanding year for Coty, our four consecutive quarters of record results have led to the best year in our history and I couldnt be prouder.
We continue to offer investors a unique opportunity to own a collection of diverse businesses across the consumer and industrial segments.
And soon potentially healthcare.
As we detailed at our Investor Day, we view healthcare as a natural mix vertical to bring value to our shareholders.
Ultimately the quality competitive position and extraordinary management teams of our current subsidiaries demonstrate how our strategy to patiently deploy capital continues to define our success in 2021, we continued our efforts with a number of significant transactions.
At a platform level, we acquired Lugano diamonds, and jewelry, which is a designer manufacturer and marketer of ultra high and one of a kind jewelry Lugano has a disruptive business model that brings significant value to its customers and we believe builds on our transformation to accelerate the collective growth potential of <unk>.
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Throughout the year. We also built on our long track record of being business builders are permanent capital advantage allows us to invest in the future of our subsidiaries and this year, we consummated three add on acquisitions.
<unk> Arnold technologies.
Third skins and demurrage export.
And Plymouth foam into all toward solutions.
We have now completed 31 add on transactions for our subsidiary since our inception.
All four of our acquisitions this year are meeting or exceeding our expectations and are on track to continue their growth trajectory.
In 2021, we also sold Liberty safe and announced the divestiture of advanced circuits.
Liberty Safe, we had made transformative investments during our 11 years of ownership that resulted in a solid gain for our shareholders.
While the advanced circuits transaction has not closed it is important to highlight how our unique permanent capital structure allowed us time and flexibility to take a long term approach to value creation investing in operations and capabilities of the company over our more than 15 year ownership period.
At the corporate level, we achieved a number of milestones that further at our pursuit of a lower cost of capital first and foremost we converted from a pass through entity to a C Corporation for U S Federal income tax purposes.
This critical change will remove certain administrative requirements for shareholders and we believe this will help expand our current shareholder base and will improve the likelihood of our stocks inclusion within indices.
In addition, it enabled us to implement an Atlas market stock issuance program, which is an important step to fund our business plan and a more efficient manner going forward.
Beyond that we also materially reduced our cost of capital by refinancing our 8% senior unsecured bonds with a $1 billion, 5.25% senior unsecured bond maturing in April 2029.
And in November 2021, we achieved a further reduction in our capital cost with the placement of a $300 million, 5% senior unsecured bond maturing in January 2032.
Each of these initiatives provided transformative tangible benefits in 2021, and ideally positioned us for further gains in 2022 and beyond as we patiently pursue value additive transactions.
Although this was a record year for Coty and it is important to recognize the ongoing challenges from inflation and supply chain disruptions.
For the decade, leading up to 2021, the global economy produced modest inflationary pressures oftentimes underrun and central bank expectations.
However, we are now grappling with inflationary pressures building at an unprecedented rate stemming from the effects of previously unseen levels of supply chain disruptions and an incredibly tight labor market with rapidly rising wages and very high levels of turnover as 2021 progressed. These challenged.
It became more acute and we expect to continue to experience. These headwinds at least through the first quarter of 2022.
Despite these challenges our subsidiary companies produced remarkable results.
Testament to the strength of our management teams and the quality of the companies we own.
We have conveyed repeatedly that we look to acquire market share leading businesses with defensible competitive barriers factors that allow for margins to be protected and differing economic environment.
I want to highlight that despite all the challenges from supply chain labor availability and rising inflation for calendar year 2021, we produced on a pro forma basis, almost 20% subsidiary adjusted EBITDA margins up 155 basis points over prior year.
In order to combat supply chain issues, we have chosen to significantly increase our inventory levels. However, a significant amount of our inventory at year end remained in a transit and unavailable for delivery.
We experienced a steady decline in warehouse deliveries throughout the fourth quarter with an offsetting increase in our in transit inventory.
This past January marked a lull for deliveries to our warehouses.
February has proven to be marginally better product availability is still the largest challenge our subsidiary space.
We expect supply chain issues to linger throughout the first half of 2022 and cost pressures to continue to rise where appropriate we expect our subsidiaries will continue to raise prices in order to combat rapidly rising costs and protect margins.
Before turning to our financial results I would like to discuss the initial public offering process for 511.
As you are aware in November of 2021, we announced the filing of our registration statement for the proposed public offering of five eleven's common stock.
After being cleared by the Securities and Exchange Commission to proceed with the proposed offering we monitored the market monitor the markets carefully to find an opportune time to take the company public.
The markets in the fourth quarter of 2021, and thus far in 2022 have been unsupportive for new issuances.
We have always viewed a public offering of 511 as a highly opportunistic about and we do not feel compelled to complete a transaction while sub optimal market conditions persist.
511 has substantial runway to continue to grow at an accelerated rate as it builds out its domestic consumer business.
Five eleven's domestic consumer business represents just over 50% of total sales and with expected growth rates in the consumer business far exceeding that in our professional division. We would expect the business mix to continue to shift towards consumer going forward gives.
Given the continued market and economic uncertainty we believe it is in the best interest of 511 and can be shareholders to postpone the proposed initial public offering.
511 has an enthusiastic customer base and a strong position in the market and we remain committed and excited for its continued growth in the meantime, we will continue to assess the capital markets and when appropriate we will consider leveraging the hard work already performed particularly positioned 511 to become a public company.
Now turning to our financial performance.
I am pleased to report that our fourth 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 <unk> rucci and Lugano and divested Liberty from January one 2020.
On a pro forma basis in the fourth quarter of 2021.
Validated revenue grew approximately 20% and adjusted EBITDA grew approximately 17% over the prior year's quarter.
For the full year consolidated revenue grew by 24% and adjusted EBITDA grew by 34%.
And as a reminder, our subsidiary adjusted EBITDA grew by 1% in 2020 over 2019.
In order to eliminate the base year effect in 2020, where results were distorted due to the pandemic, we would like to highlight that our compounded annual growth rate of subsidiary adjusted EBITDA from 2019, the year before the pandemic started has been approximately 16%. We believe this is a more reflective.
<unk> of our growth given the dynamic environment and the execution of our acquisition strategy that has resulted in a much faster core growth rate over the past two years.
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 2021 have continued into 2022.
Demand continues to remain robust however.
However, the extensive supply side challenges continued to increase there are a significant part shortages from our vendors.
Lack of available shipping capacity issues with port congestion and a lack of trucking capacity.
All our companies and their management teams are taking all appropriate actions to mitigate the impact of these challenges supply chain constraints continue to put pressure on revenue growth, while materially raising product availability cost.
Notwithstanding these unique challenges we expect to produce for the full year of 2022 consolidated subsidiary adjusted EBITDA of between $400 million and $420 million.
This represents pro forma adjusted EBITDA growth of approximately 1% to 6% from the prior year period.
It is important to note that adjusted EBITDA includes advanced circuits, notwithstanding it as held for sale classification.
In addition, we expect full year 2022, adjusted earnings of between $110 million and $125 million.
Our 2022 adjusted earnings range does not include advanced circuits due to its held for sale classification.
We are guiding to a lower adjusted EBITDA growth rate than experienced over the past two years, principally due to two factors first we expect our velocity outdoor business to revert to a more normalized level of demand.
Velocity experienced a large spike in demand brought on by the pandemic and as a result was unable to fully satisfy clustered customer demand in the back half of 2020.
This resulted in velocity fulfilling stocking orders in the first quarter of 2021 that will not repeat in 2022.
Second supply chain and inflation remain a concern.
As a result central banks around the world are becoming more restrictive monetary policy, adding an element of risk to future demand.
Consequently, we anticipate our adjusted EBITDA in the first quarter of 2022 to be flat to down a few percent as compared to the prior year.
We expect our growth rate in 2022 to be temporarily depressed and below our long term core growth rate due to the factors highlight however, when we look at our growth over a three year period from 2019, and including our guidance for 2022, our compounded annual rate of growth of pro forma consolidated subsidiaries.
Adjusted EBITDA would be approximately 11% to 13%.
During 2021, we continued our efforts to refresh our board of directors.
We were pleased to welcome Alex Footfall to our board on January one of this year.
Alex brings a wealth of experience related to smaller privately held companies, including consumer product companies and his knowledge has already been quite valuable to our board.
Our board is regularly reviewing its composition to ensure we have the right balance of skills and experience to oversee the coty business. Accordingly, we will continue to refresh the board I'd.
<unk> with diverse candidates as we round out our collective skill set and seek to enhance our board's effectiveness.
In addition to the board refresh process that we have undertaken the board recently approved an amendment to our organizational documents to declassify our board.
This declassification will result in an annual election for all of our board members starting with the May 2022 annual meeting.
As a reminder, previously our board with staggered with each director serving three year terms Declassifying. The board is an important governance enhancement for our shareholders and aligns with our philosophical view of accountability.
Before I finish discussing our board I want to take a moment to acknowledge the passing of gene Yoon.
Jean was an initial director accompanies when we became a public company in 2006 over the years gene added and measurable value to our board gene was a tremendous colleague and a personal friend for many years, we will sorely Miss him.
Lastly, before turning the call over to Pat to discuss our subsidiary results. We're excited to have <unk> join us as our new head of ESG Zoe brings a wealth of experience to our ESG initiatives and we will report on some of the work she will undertake in the coming year and beyond.
With that I will now turn the call over to Pat.
Thanks Elias.
Before I begin on our subsidiary results I want to talk generally about the industry trends, we saw throughout the quarter.
Revenue and EBITDA in our branded consumer businesses as a whole exceeded our expectations even as in many cases, our businesses could not fully meet the demand for their products due to supply chain constraints.
Similarly, our niche industrial businesses also performed above expectations as a group.
In certain instances margins and EBITDA performance, while strong lag revenue growth.
These lags were driven predominantly by the extraordinary measures taken by our companies to meet or exceed the expectations of their end customers.
In Q4, this pursuit often required increased airfreight and expedited shipping among other increased costs in each case, our management teams performed admirably now onto our subsidiary results I'll begin with our niche industrial sites for.
For the fourth quarter of 2021 revenues increased by 58% and EBITDA increased by 15, 3% versus the fourth quarter of 2020 for.
For the year revenues increased by 14, 4% and EBITDA increased by 11% versus 2020.
For the full year 2021 revenue at advanced circuits increased two 7% versus 2020, the company experienced a strong fourth quarter and backlog caused by supply delays in Q3 mitigated the modest December slowdown typically experienced by the company.
The management team at advanced circuits worked effectively in 2021 to limit the impact of pandemic related supply chain initiatives and backlog across the company's three facilities remained strong.
We believe the closing of the advanced circuits transaction remains on track and is expected to occur early in the second quarter of this year.
Arnold Magnetics revenue increased by 41, 4% and EBITDA more than doubled to $21 6 million.
Full year of 2021, notably we.
We acquired Ramsey on March one 2020 and their performance is included in our financial sensitive.
The majority of increases in revenue, however were driven by organic growth. Following 2000, twenty's cope with depressed demand levels across aerospace related industrial and automotive customers.
We expect the company continues to continue to make progress in 2022 and are encouraged by the projects coming out of this new technology Center.
Performance in 2022, however, it is likely to be muted for 2020 one's growth levels as Arnold ship. The majority of several large defense orders in 2021.
Outdoor solutions revenue grew by 38, 6% and EBITDA grew by 8% for the full year 2020.
Though the company acquired <unk> home at the beginning of Q4 comparable period includes the sales of a significant amount of COVID-19 related to accident quarters that did not repeat in 2021.
Margins continued to be under pressure in the fourth quarter due to significant increases in the companys core raw materials.
We expect the company to show material growth in 2022, driven by add on acquisitions completed in the last 12 months, we do expect margin volatility to remain.
The Sterno group's revenue increased by one 4% and EBITDA declined by 8% respectively.
Full year of 2021.
This year as we have noted sternal experienced over $5 million of restructuring expenses.
Exited at a lower margin business. These costs will not repeat in 2022 and no volatility in foodservice related sales will remain due to the ebbs and flows of the reopening process. We expect the company to return to EBITDA growth in 2022.
Now turning to our branded consumer businesses.
Which as a group experienced an exceptional year in 2021.
Our results are presented as if we owned <unk> and Lugano from January one 2020.
In the fourth quarter. These businesses grew revenue and EBITDA by 22, 7% and 18, 5% respectively.
For the year each of our branded consumer businesses showed meaningful growth and as a group revenues increased by 37% EBITDA increased by 49, 3% in each case versus 2020.
For the full year of 2021, <unk> increased revenue by 55, 3% EBITDA increased by 77, 1% versus 2000 $20 million to $65 million.
Exceeding our expectations, but we'll continue to experience strong demand across most of its categories lead by athletic outdoor snow customers in.
In 2021, but we'll continue to make gains in spectrum <unk>.
Creasing the number of models that they are partnering on Bravo.
We are also excited to announce that we expect <unk> will be entering the alpine skiing category in the fall of 2023 <unk>.
BOE is partnering with several at several of the industry's leading brands and innovative products.
Some portion of both exceptional growth stems from partners ordering ahead to supply chain constraints. We believe the company is well positioned to show solid gains in 2022.
We remain excited about <unk> future and continue to be impressed by the company's management.
Herbal babies full year 2021 revenue increased by 25, 3% compared to 2020.
EBITDA increased by 26, 1% to $19 $7 million the company experienced a strong fourth quarter I think fulfill third quarter distributor orders that were delayed due to COVID-19 restrictions at a large southeast Asian, and you factoring partner earlier in the year.
So we expect over maybe to have some volatility in 2022 financial performance driven by supply chain tightness lumpiness in the comparable 'twenty, one 2021 period.
A new product introduction calendar, that's more back half weighted than typical we believe ergo baby is still well positioned to have another solid year.
Lugano continued its strong performance center acquisition in early September of 2021.
In 2021 full year revenue increased by over 86% versus 2020 full.
Full year 2021, EBITDA increased by over 20 million to $41 4 million as the company benefited from growth in recent reopened some lines and the geographies as discussed given Mcdonald's disruptive business model. This growth requires investment in inventory and we continue to support and apparel in the fourth quarter. We also made several important.
In the fourth quarter and early in Q1 2022 to build the infrastructure required for growth.
We remain excited by Louganos prospects of 2022 and beyond.
For the full year 2021, Rucci grew revenue by 79, 2% and EBITDA grew by over 112%.
Archie grew revenue significantly in the fourth quarter as they continued to be granted additional shelf shelf space at several key retail customers and achieve growth both in <unk> and non that category.
Margins were impacted by supply chain issues in the fourth quarter as the company remained relentlessly focused on meeting the needs of their retail partners. The company is very well positioned to have a strong 2022.
<unk> recent acquisition metrics teams performed above expectations in the quarter.
Main excited about its prospects.
Velocity outdoors 2021 full year revenue increased by over 25% compared to the prior year.
EBITDA increased significantly.
Up 30% to $51 4 million.
However, the company's performance declined slightly in Q4 as Mandan, it's across both divisions outpaced supply.
Due to difficulties in receiving certain key components. In addition, retail demand and the company's Aragon Division.
Some modest declines from pandemic peaked in Q4 2020 in Q1 2021.
While inventory at retail has returned to normal pre pandemic levels. We note that point of sales data indicates materially stronger demand and pre pandemic levels early indications in 2022 appear to point to a solid year in the company's cross border. However.
However performance in Aragon is expected to be between that pre pandemic and pandemic levels.
Five eleven's full year EBITDA increased by 19, 1% versus 2020 and full year revenue grew by 10, 9% over the same period the growth remains solid in the quarter and total direct to consumer comps remained materially positive 511 faced headwinds due to Eric.
Faced headwinds to e-commerce sales growth due to significantly lower in stock rates as a result of port congestion and extended delivery times from Asian factories.
<unk> has been working diligently to mitigate the impacts of the supply chain disruption.
Due to the recent efforts we believe that January represented a low point for receipts and thus far in February we have seen meaningful improvement combined receipts in January and early February .
Five eleven's financial performance will be below our prior expectations for the first quarter. However demand for the brand remains strong and we believe the company is well positioned to show solid growth in 2022.
I will now turn the call over to Ryan for his comments on our financial results.
Thank you Pat moving to our consolidated financial results for the quarter ended December 31, 2021, I will limit my comments largely to the overall results for coding since the individual subsidiary results are detailed in our Form 10-K 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.
In addition, advanced circuits is being treated in our financial statements as held for sale given the potential sale expected early in the second quarter of 2022.
As a result advanced circuits assets and liabilities have been reclassified on our balance sheet to held for sale and its results of operations and cash flows have been reclassified to discontinued operations in the current quarter and all prior periods.
On a consolidated basis revenue for the quarter ended December 31, 2021 was $536 6 million up 27, 3% compared to $421 6 million for the prior year period.
This year over year increase primarily reflects our acquisition of Lugano during the third quarter of 2021.
In addition, we had strong sales growth at our branded consumer subsidiaries and our niche industrial businesses on a combined basis.
Consolidated net income for the quarter ended December 31, 2021 was $25 9 million.
<unk> to $8 8 million in the prior year.
The increase in net income was primarily due to an income tax benefit recorded at corporate associated with advanced circuits held for sale accounting offset by an increase in interest expense.
We are introducing adjusted earnings is a new non-GAAP financial measure this quarter.
This new metric will allow investors to assess our operating performance and a more meaningful and transparent way.
To provide this transparency.
We have provided reconciliations from net income as well as reconciliations to adjusted EBITDA in our Q4 earnings press release.
Adjusted earnings for the quarter ended December 31, 2021 was $32 5 million up $9 8 million or 43% from the prior year quarter.
Our adjusted earnings that we generated during the quarter was above our expectations, primarily due to the outstanding performance at our most recent acquisitions Lugano solar energy as well as continued strong performance at our other consumer businesses and improved performance at our industrial businesses.
Cash flow available for distribution and reinvestment or CAD for the quarter ended December 31, 2021 was $42 1 million up 17% from last year's quarter.
As we had mentioned previously at our Investor Day, we will no longer provide the CAD metric going forward as we believe adjusted earnings is a more appropriate representation of our results moving forward.
Turning to our balance sheet.
As of December 31, 2021, we had approximately $157 1 million in cash and approximately $600 million available on our revolver and our leverage was 296 times.
We have substantial liquidity and as previously communicated we have the ability to upsized, our revolver capacity by an additional $250 million.
As Elias mentioned earlier, we issued in November a 300 million senior unsecured bond at 5% due 2032 with.
With this liquidity and capital we stand ready enable to provide our subsidiaries with the financial support they need invest in subsidiary growth opportunities and act on compelling acquisition opportunities as they present themselves.
Note during the quarter given the sizable cash balance at December 31, we waived management fees on cash balances held at Cody.
Turning now to cash flow provided by operations.
During the fourth quarter of 2021, we used $13 1 million of cash flow from operations, primarily a result of working capital use in the fourth quarter of $63 9 million.
A substantial portion of this working capital spend was at Lugano to support inventory build as we are seeing a direct comparison to inventory on hand and sales and.
In addition, we strategically increased inventory levels across many of our consumer companies to support near term demand, which in turn should produce strong cash conversion in the first half of 2022.
And finally, turning to capital expenditures.
During the fourth quarter of 2021, we incurred $12 5 million of capital expenditures of our existing businesses compared to 10 point.
Compared to $10 million in the prior year period.
The increase was primarily a result of the need for increased spend at many of our subsidiaries to keep up with elevated demand levels.
For full year of 2022, we anticipate total capital expenditure spend of between $70 million $80 million. This is a substantial increase from 2021. However, we believe these capital expenditures will have short payback periods and provide strong returns on invested capital the.
The 2022 capital expenditure spend will primarily be at Lugano for new retail salons and at 511 as we continued to increase its retail store count from its current 87 stores.
With that I'll now turn the call back over to Elias.
Thank you Ryan.
I would like to close by briefly discussing our go forward growth strategy.
Cody permanent capital structure offers shareholders a unique opportunity.
We are able to drive value at every stage of our investments, while leveraging our sector expertise to build businesses for the long term.
We pride ourselves on being business builders not asset traders true partners to our subsidiaries as we bring the financial flexibility and scale of our strong balance sheet to the table.
This advantage enables us to invest in the future of our subsidiary regardless of the environment.
One recent example of that Marucci, where the team chose to airfreight product to its retail partners that we are offering additional shelf space in the store.
Although this decision temporarily depressed margins in the fourth quarter. We believe that this investment will pay dividends through increased revenue opportunities going forward.
At the end of the day.
Is the core pillar of our approach to sustainable investing.
Being able to identify platform subsidiary acquisitions that will benefit from our ability to invest in them through the cycle and opportunistically divest such subsidiaries to promote their or our long term growth strategy.
The more we continue to take the necessary steps at a corporate level to lower our cost of capital and strengthen our capital structure, making us even more competitive.
This is how we turn our permanent capital advantage into long term shareholder value.
As we enter 2022 market conditions are changing rapidly.
The Federal reserve has indicated that monetary accommodation will be reduced and interest rates are expected to increase materially.
The stock market has experienced an increase in volatility and stock prices have fallen.
That being the case I would like to point out that private market valuations move more slowly and methodically.
There remains an abundance of equity and debt available to pursue M&A activity and asset prices remain elevated we expect these conditions to remain in effect for the foreseeable future Coty remains well positioned to succeed in these market conditions as evidenced by our successful series of transactions over the past few years.
Additionally, the dramatic reduction in our cost of capital over the past few years allows us to be selectively aggressive on acquisition opportunities that we believe will ultimately 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 strategies are.
Our permanent capital structure and differentiated strategy has set us apart for more than 16 years and it remains consistent in 2022.
We remain intensely focused on executing our proven and disciplined acquisition strategy improving the operating performance of our companies enhancing.
Enhancing our commitment to ESG initiatives that Cody and across our subsidiaries and creating long term shareholder value with that operator, please open up the lines for Q&A.
Okay.
Thank you very much loss and as a reminder, if you'd like to ask a question. Please press the star key followed by number one on your Touchtone phone.
If you'd like to remove your question freestyle stuff would apply to and when preparing to ask a question. Please ensure that your phone is on mute locally.
And our first question is from Christopher Sorry, Chris Kennedy from William Blair Christian on is now open if you'd like to proceed with your question.
Hey, guys. Thanks for taking the question Elias mentioned that just wanted to dive a little bit more into kind of the updated pipeline looking into 2022 more platform deals are add ons. What are you seeing out there in the market.
Yes, Chris.
Good afternoon, and thanks for being on our call.
The market is really fluid right now I would say we were hearing about a number of transactions that we are likely to come to market in early 2022.
And we were prepared for I would say.
Larger than usual number of platform acquisition to be looking at now as we're all aware market conditions are really fluid right. Now. So we can look at what's happening in the debt and equity markets, which are less than accommodative, obviously to M&A, but also just what's happening to operational performance across.
Most companies with kind of the supply chain the number of factors that were dealing with.
<unk> throughout the country are dealing with the same problem. So I would say, we're seeing some of the platform opportunity that we expected to come in be put on hold right now I would anticipate that the beginning part of the year is going to be muted in terms of new platforms. I. Do however think there are a number of companies.
That are ready to come to market and will come to market, but it's likely to be later in the year.
In terms of add ons, we're always looking for add ons, we had a good successful year last year completing three.
There's a number of opportunities within our portfolio of companies right now to complete some.
Small add on acquisition. So we continue to stay focused but as you know Chris it's hard to give you a direct answer on whether it will be platform or add ons, we're always out and our teams are constantly pounding the pavement looking for opportunities, but I would say I would be surprised.
If theres platform acquisition that we consummate here early in 2022, just given the backdrop of market conditions.
Understood. Thank you and then just one follow up if you could just.
Give us a little bit more clarity on the whole supply chain issue that you guys are having and then your ability to pass on.
Higher prices to consumers there'll be any glass of demand if you could thanks a lot guys.
Sure.
Supply chain has been a major problem here.
Here about we talk about inflation and supply chain and labor if I were ranking them in terms of problems supply chain would probably be.
Number one two and three and then everything else would start beyond that.
It is very difficult to quantify when you will get product way, even if product gets unloaded off of containership at Fitbit ports for extended time, there's limited trucking capacity that's out there and as you guys. Can appreciate we are trying to anticipate product coming in if it doesn't come.
In we have labor in our warehouses.
And it becomes incredibly inefficient. So the challenges are as bad as we've ever seen.
We saw January probably be the low point in terms of supply chain across the entire portfolio.
Issue is raising prices, which we are doing by the way doesn't really help with that if we just.
Just on available product itself, because it's in transit rather than in our warehouse. We just can't create revenue from that but we do have some of the expenses for the expected shipping either incoming or outgoing of that product.
So it's been a real challenge, Chris and I would say, we hope that it's going to get better, but it's not something that's within our control. We just need to see some of the surge in product that's coming through the port the reduced shipping capacity, we need to see some relief. There I will tell you that February has been a little bit better than January .
But it's nowhere near normal.
Now our teams are doing an extraordinary job of trying to compensate for it frankly in a really low carrying cost environment like we're in right now and when we placed the $1 3 billion of bonds that we did last year at really attractive rates in the kind of low 5% contact.
That gave us the ability to add some inventory at a relatively low cost and one way to get through the supply chain challenges is to increase the inventory levels that we have now eventually that inventory will land in our warehouses and we'll be able to make up a lot of the shipping that were not good.
Right now in January and February as the year unfolds. So we have taken the approach that we will soften the supply chain impact with increased inventory investment and Ryan alluded to the fourth quarter, how we did that.
As that becomes in our warehouses I think thats going to help in terms of the question on pricing and elasticity of demand.
This is one of the things that we tried to highlight for years are companies that we own are great market share leaders are consumer brands are.
Lentic aspirational brand that creates a lot of pricing power and when were in a rising.
<unk> environment like we're in today companies of that ilk are going to have the best pricing power of any companies look as evidenced in our results last year to be able despite all of those challenges to engineer a 155 basis point margin improvement I think that speaks to the quality of the positioning of our company.
Now in some cases, we're playing catch up and expenses are rising we don't have the ability to pass through cost quick enough to be able to fully protect our mark that's what we would expect to happen here in the first quarter, probably realistically in the first half, but because our company has.
Such pricing power in the marketplaces that they operate we anticipate that to be a temporary phenomenon and frankly that will provide a tailwind at some point as cost start to level out and as our price increases continue to go in and we would expect to capture any loss margin that we may have in the first half.
When we lap that in next year. So it is a temporary challenge we are raising prices so far.
Seeing a result manifest pretty well for us at least in 2021.
We anticipate some pretty stiff headwinds as problems have just gotten much more acute here as the year came to an end.
Great. Thanks, a lot guys.
Thank you guys.
Thank you for your question, Chris and as a reminder, if you'd like to ask a question. Please tell star followed by one on your Touchtone phone.
If you'd like to come to your request freestyle stuff for the buyer to.
When preparing to sort of what the parents you ask a question. Please ensure that youll phone is on mute it locally.
I will just leave a moment for any further questions to registered.
As a reminder, that staff by one two minutes to your question.
And as a final reminder, please call staff by one on your Touchtone phone, if you'd like to ask a question.
That staff voted by one.
And it appears we have no questions being registered at this time, so I'll hand back to a loss for any further 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 <unk>. Thank you for your continued support.
That concludes our call.
Alright.
Thank you to everyone who has joined US today. This concludes the conference call and you may now disconnect your lines.
Yes.
<unk>.