Q4 2022 Compass Diversified Holdings Earnings Call
Okay.
Good afternoon, and welcome to the Compass diversified third quarter 2023.
2022 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 of the prepared remarks.
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 Cody slot of Gateway group for introductions and the reading of the Safe Harbor statement. Please go ahead Sir.
Thank you and welcome to Compass diversified <unk> fourth quarter and full year 2022 conference call representing the company today are Elias Sabo, Codi's CEO , Ryan Bulking Ham <unk> CFO .
Mozzarella CLO of Compass Group management.
Before we begin I would like to point out that the Q4 and full year 2022 press release.
Including the financial tables and non-GAAP .
Natural measure reconciliations for adjusted EBITDA adjusted earnings and pro forma net sales are available at the Investor Relations section on the company's website at Compass diversified Dot Com. The company also filed its Form 10-K with the SEC today. After the market closed which includes reconciliations of certain non-GAAP financial.
<unk> discussed on this call and is also available at the Investor Relations section of the company's website. Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income or loss from continuing operations in the company's financial filings. The company does not provide a reconciliation of.
Its full year expected 2023, adjusted earnings or adjusted EBITDA, you get 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 call. We may make certain forward looking statements, including statements with regard to the future performance of Coty and its subsidiaries.
Impact and expected timing of acquisitions and future future operational plans such as ESG initiatives.
Words, such as believes expects anticipates 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 predicting future results and conditions certain factors could cause actual results to differ on a material basis from those projected in these forward looking statements and some of these factors are enumerated in the risk factor discussion in the Form 10-K as filed with the SEC for the quarter.
Ended December 31, 2022, as well as in other SEC filings in particular, the domestic and global economic environment supply chain labor disruptions inflation and rising interest rates all may have a significant impact on Cody and our subsidiary companies.
As required by law <unk> 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, everyone and thanks for joining us today.
I would like to start by recognizing that 2022 was a phenomenal year for Coty.
Despite persistent market headwinds driven by rapidly changing monetary policy.
<unk> chain imbalances and rising inflation, we produced record annual results for the full year, our branded consumer net sales were up 14% on a pro forma basis, while the net sales of our niche industrial businesses were up 9%, helping to drive record adjusted earnings and adjusted EBITDA.
These results confirm that our diversified subsidiaries combined with expert operational and financial execution can grow and take share even in a difficult market backdrop.
I'd like to acknowledge our recently announced divestiture of advanced circuits.
We are proud of our partnership and success with their team, which started more than 16 years ago Cody as permanent capital structure and support throughout this partnership has generated significant value for our shareholders and we are grateful for their contributions.
Look forward to their continued success.
Jumping back to our 2022 performance our subsidiaries manage the various macro challenge is exceptionally well and we remain confident in their ability to continue to grow and take market share over the long term.
That said our near term outlook is clouded by some unique cross currents, our branded consumer subsidiaries with exposure to wholesale are experiencing significant inventory destocking headwinds.
This is being driven by events that unfolded coming out of the pandemic in.
In the first half of 2022, we benefited from extremely high demand from customers, who needed our product to help manage their own supply chain issues.
With the pandemic winding down and some retailers reckoning with the fact that they over ordered it has created a whipsaw effect until inventory is right sized.
For our brands further down the supply chain like Boa and prime or lost the destocking headwinds are exacerbated power.
Pat will walk through specific brand performance shortly but I will just say that we expect the first half of 2023 to reflect lower performance from some of our companies with a reacceleration anticipated in the back half as inventory is worked through and comparisons ease.
On the other hand, we are seeing no signs of slowing demand with with our companies that have material direct to consumer component to their business like 511 in Lugano. This gives us confidence that the balance sheet of the affluent customer to which we sell many of our products is healthy more specifically.
Is that rising wages and the continued imbalance in the labor market are more than offsetting inflation and rising borrowing cost.
Notwithstanding the difficult macro climate and inventory headwinds, we firmly believe our subsidiaries are well positioned to achieve their long term growth targets to demonstrate this I'd like to highlight one of our niche industrial businesses Arnold Magnetics as a case study of how we improved value for our shareholders.
We acquired the business in 2012 based on Arnold's technology leadership, and the permanent magnet sub assemblies industry and strong growth tailwind for the use of permanent magnets to enable the clean energy transformation.
In 2016, we made the decision to replace senior management at Arnold, bringing in Dan Miller as CEO of that subsidiary as a reminder, Arnold is a long cycle business and Dan was confronted with the reality of some programs going end of life, while the pipeline of new opportunities was extremely weak restructuring and repositioning along.
Cycle business is an especially challenging situations.
In 2020 to Arnold strategic priorities priorities have been successfully repositioned to focus on new end markets like aerospace and defense, among others, which matched Arnold high end high margin low volume technical engineering and manufacturing capabilities Arnold added a tech center to improve its products.
Vance, it's technology edge improve its partnership with its customers and complete Arnold's transition from a products company to an engineered solutions company.
We supported Arnold's acquisition of Ram co electric motors to offer turnkey electric motor solutions further positioning the Arnold business for the Green economy.
<unk> executed well on this strategy and reported a record breaking year for bookings and double digit sales and EBITDA growth.
<unk> ended the year with 83 million in backlog and a book to Bill ratio of 113 setting it up for another strong year in 2023, the strength of this business and the long term runway for growth underscores the power of our diversified permanent capital capital model, which enables us to make long term decisions to maximize.
Value creation for our shareholders.
In 2022, we launched our first new verticals since coming public entering into the health care vertical with the announcement of Kirk Ross as our leader.
Kurt brings over 25 years of experience and a decade long partnership with Coty, and we couldnt be more excited to have him at the helm since his joining Kirk and his team had been working hard at developing a robust pipeline of M&A targets like other market deal activity has been suppressed by the macro environment, but we remain proactive.
<unk> and prepared for the inevitable turnaround.
Before turning the call over to Pat I would like to summarize our performance and outlook.
92 was a record breaking year, despite unprecedented headwinds proving the strength and durability of our subsidiaries and the power of our permanent capital structure.
As we sit here today the majority of our businesses are performing above our expectations and we believe are well positioned to achieve their growth potential.
Few of our businesses are working through the inventory shock that is making its way through the marketplace in a post pandemic world. We believe these headwinds will be short lived and expect a recovery in the back half of the year, our financial outlook takes into consideration these headwinds.
But the power of diversification is real and implicit in this outlook.
For example, we expect our niche industrial segment to have another year of robust growth in 2023.
And we expect Boa, who is currently in the crosshairs of the inventory destocking headwind to be down versus 2022, while up versus 2021, which was an extraordinary year of growth <unk>.
Notwithstanding a weaker demand outlook, we are confident in our company's competitive positioning and market share growth and believe we are poised to outperform our peers with that I will now turn the call over to Pam.
Thanks Lyne.
Throughout this presentation when we discuss pro forma results it will be as if we owned prime aloft in Lugano from January one 2021.
On a combined basis pro forma revenue and adjusted EBITDA in both our branded consumer and our niche industrial businesses grew significantly and contemplate.
These are our expectations.
For the year pro forma revenue grew by 12% and pro forma adjusted EBITDA grew by 13% to $467 million excluding.
Excluding advanced circuits pro forma adjusted EBITDA grew by 14% in 2022.
In the fourth quarter on a consolidated basis pro forma revenue and adjusted EBITDA growth met our expectations growing by 4% and 3% respectively.
Before I get to our subsidiary results I want to provide a high level view of the quarter.
As Elias mentioned in Q4 several of the businesses in our consumer segment were impacted by inventory drawdowns in the supply chain and therefore, our sales of decency, Aries lagged and consumer demand for their products.
Impact was most pronounced in our businesses, who operate further down the supply chain, specifically Bowen Prime a lot as mentioned we see this trend continuing in the first half of 2023.
Despite the challenges in the quarter on a consolidated basis, we were able to meet our expectations. Our subsidiary management teams once again executed well and continuously changing environment now onto our subsidiary results I'll begin with our niche industrial businesses for 2022 revenues increased by 9% and adjusted EBITDA.
Increased by 8% versus 2021.
Excluding advanced circuits revenues increased by 10% and adjusted EBITDA increased by 11% in 2022.
Driving these results were meaningful revenue and adjusted EBITDA growth from Arnold and outdoor.
<unk> continued to show improving margins driven by technology investments made over the last several years and is benefiting from a shift in sales mix towards higher growth industries focused on electrification.
As we mentioned last quarter the company comps against the very large defense related orders that benefited Q4, 'twenty one, but the company book to Bill ratio remains very strong and we believe points to continued growth in 'twenty three.
Al Gore once again had solid growth solid growth in the quarter gross margins improved both sequentially and versus Q4 'twenty one.
And we expect this trend to continue as raw material price pressures continue to abate and al Gore management achieved efficiency gains.
The Sterno group was down slightly in the corner quarter end for 'twenty two.
So the Companys foodservice business is benefiting from the continued return to normal levels of activities and travel and conferences. The company continued to see pressure in salvage value driven line of Senate waxes.
<unk> basis, we believe this business will be stable in 'twenty three.
Please return to moderate growth.
Turning to our consumer businesses.
For 2022 pro forma revenues increased by 14% and pro forma adjusted EBITDA increased by 15% as compared to 2021.
Well I had a very strong 22 and finished the year with 26% and 38% growth in revenue and adjusted EBITDA, respectively.
For the fourth quarter, However, revenue declined slightly and EBITDA was approximately flat due to the factors we discussed.
We believe the supply chain pressures will continue in the first half of 2023 part of the company returning to growth in the back half of the year.
To put what we are seeing at boa into context.
<unk> purchased the company in late 2020 and in that year.
It grew slightly over $30 million of EBITDA.
Due to significant market share gains and strong consumer demand for products, incorporating bullish technology. The company grew to over $60 million and adjusted EBITDA in 2021, and most recently over $82 million in 2022.
We believe the inventory Destocking headwinds discussed will lead to a short term decline in financial performance in 2023.
We believe performance will be above 2021 levels were.
We are also confident that the company will then return to growth as these pressures abate.
Headwinds notwithstanding borrowers, making significant strides in market share and expansion of its technologies measurements by model count on which bodes products are used the fall winter 2023 season, we'll see growth of close to 10%, which is expected to accelerate further.
In fall Winter 2024.
Based on initial discussions with brand partners. In addition, we were ecstatic that the market's reception to bolus Alpine ski technology as four of the company's brand partners recently prelaunch Alpine ski boots, integrating the bolus system, giving skiers unprecedented fit and performance.
The quantities are limited until the official launch this fall for the 2023 2020 for ski season. The excitement is significant and we believe that with its brand partners Boa has the opportunity to revolutionize fit in the industry.
Mcdonald's growth continued in the fourth quarter and for the year as both revenue and EBITDA grew by over 45% and 60% respectively.
In the quarter, we benefited from the recent openings of Mcdonald's Houston Salon and its flagship Salon at fashion Island in Newport Beach and.
In addition, the company continued to benefit from increases in average transaction size and.
In 2023, the company will open locations in Washington D. C. In Greenwich, Connecticut, and is considering other avenues for geographic expansion and additional new flagship salons.
Marucci continued upon its strong run.
Quarters as sell through and Reorders of a CAD X line of bass were above expectations and the company continued growing in new markets.
For the year Marucci is revenue and EBITDA grew by 40% and 27% respectively.
Margins remained strong in the quarter as supply chain related issues continue to improve.
Marucci continued to diversify its product mix and enter new markets in 2022, the company saw significant growth in its apparel and fueling glove categories and made significant inroads geographically through opening and Japanese operations.
The 2023 represents a year without a major cat bat launch the company is launching several new products and its growth in adjacent categories and geographies drives optimism for the year.
511 continue to Buck the trend of struggling apparel brands and in 2022 grew revenue and EBITDA by 9% and 6% respectively.
We remain proud of the company's performance in a difficult environment in the fourth quarter EBITA group growth outpaced revenue growth and the company's DTC comps remained positive led by strong E Commerce sales.
511 is having a solid start to 2023 and we believe it will be another year of growth for the company.
Turning now to prime a lot.
In 2022 pro forma revenue and EBITDA increased by 21% and 24% respectively.
In the fourth quarter on a pro forma basis revenue growth grew slightly and EBITDA declined slightly from 2021 as the company's price increases did not take effect until the end of 2022 and several extremely experienced factors led to higher margins in Q4 of 2021.
Spike facing similar challenges boa given its position in the supply chain and inventory levels within the channel. We believe prime office yield growth this year and remain confident in the medium and long term outlook for the business.
Velocity outdoor continued to struggle in the fourth quarter as inventory levels at retail and its archery business remained high and sell through remains challenged in both segments of the business. Following COVID-19 related searches and outdoor activities were working diligently with management to rationalize the company's cost structure to this new environment, while remaining focused on innovation.
<unk>.
We expect a challenging first half of 2023 for this business as we proceed down this path, but our confidence in the outcome.
As a whole we are very pleased with the performance of our businesses in 2022 for the fourth quarter was challenging for several of our subsidiaries and the outlook for the first half of the year is mix in several places.
We are confident in the positioning of our businesses and the outlook for Coty.
I will now turn the call over to Ryan for additional comments on our financial results.
Thank you Pat.
Moving to our consolidated financial results for the quarter ended December 31, 2022, I will limit my comments largely to the overall results for Coty since the individual subsidiary results are detailed in our Form 10-K that was filed with the SEC earlier today.
As a reminder, our sale of advanced circuits occurred in the first quarter of 2023.
<unk> results of operations are included in our fourth quarter and full year 2022 operating results ACI will be reclassified to discontinued operations in our first quarter 2023 10-Q.
In addition, our 2023 guidance discussion that will make shortly excludes aci's results.
Now to our quarterly consolidated results on a consolidated basis revenue for the quarter ended December 31, 2022 was $594 9 million up 6% compared to $559 9 million for the prior year period. This year over year increase primarily reflects our acquisition of prime loft during.
The third quarter of 2022.
In addition, we had strong sales growth at our branded consumer subsidiaries on a combined basis.
Consolidated net loss for the fourth quarter was $11 8 million compared to net income of $25 9 million in the prior year.
The decrease was primarily due to a $26 million impairment of our Ergo baby subsidiary in the fourth quarter and an increase in management fees and interest expense as a result of the prime aloft acquisition in the third quarter.
Adjusted EBITDA in the fourth quarter was $87 3 million up 5% compared to $83 3 million in the fourth quarter of 2021.
For the full year, adjusted EBITDA was $369 8 million up 20% compared to a year ago.
The increase was primarily due to the strong performance at <unk> branded consumer subsidiaries and the benefit of the final often lugano acquisitions.
Adjusted earnings for the fourth quarter was in line with our expectations at $28 7 million down from $37 1 million in the prior year quarter. This decline was primarily a result of financing costs for the acquisition of Prime are locked in July ahead of its seasonally slow third and fourth quarter earnings periods.
Now onto our financial outlook for 2023, which is unchanged versus the preliminary expectations. We shared at our January Investor Day.
Never now excludes advanced circuits.
For the full year 2023, we expect consolidated subsidiary adjusted EBITDA to range between $420 million and $460 million.
And we expect adjusted earnings to range between $105 million and $135 million.
As Elias and Pat have covered wealth. This outlook expects a challenging first half of the year given the headwinds discussed and then a reacceleration in the second half of the year.
Turning to our balance sheet.
As of December 31, 2022, we had approximately $61 $3 million in cash.
Proximately $443 million available on our revolver and our leverage was 397 times.
We have substantial liquidity and as previously communicated we have the ability to upsize our revolver capacity by an additional 250 million subs.
Subsequent to year end, we received approximately $170 million in net proceeds from the sale of advanced circuits circuits, which we used to repay our revolver balance and reduce our leverage levels.
With 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.
Turning now to cash flow during.
During the fourth quarter of 2002, we received $11 6 million of cash flow from operations, primarily a result of strong operating performance we.
We used $29 2 million and working capital during the fourth quarter and continued to strategically increase inventory levels at Lugano to support near term demand.
We expect to produce strong consolidated cash conversion in 2023.
Also of note during the fourth quarter, the manager waived 50% of the management fee owed by the company in respect of <unk> left.
And finally, turning to capital expenditures during the fourth quarter of 2022, we incurred $24 6 million of capital expenditures of our existing subsidiaries compared to $12 6 million in the prior year period. The increase was primarily a result of the timing of retail build outs at Lugano and $5.
<unk> to support their continued growth.
For full year of 2023, we anticipate total capex spend of between $70 million and $80 million. This.
This spend will be in line with 2022.
We continue to see strong returns on invested capital at several of our growth subsidiaries and believe they will have short payback periods.
2023 capital expenditure spend will primarily be at Lugano for new retail salons in Washington, D C and Greenwich, Connecticut, as well as expansion of its Palm Beach, Florida location.
And at 511, as we continued to increase its retail store count from its current 117 stores.
With that I'll now turn the call back over to Elias.
Thank you Ryan.
I would like to close by briefly providing an update on the M&A market and our strategic initiatives.
M&A activity continues to be significantly below historical levels. We are hopeful that the M&A environment improves in the back half of 2023, if economic headwinds moderate.
On the ESG front, we continue to advance our key initiatives and we are excited to announce that in the fourth quarter, we implemented a customized ESG technology platform for data collection, which will enable us to consider setting time bound targets in the future. In fact, we are are already preparing to collect scope one and two.
Two emissions data for our subsidiaries.
This will aid in the continue advancement of our ESG platform.
And ensure we are tracking the necessary metrics in order to regularly improve our ESG strategy.
We also publicly released our corporate citizens chip statement on our website, which provides shareholders access to information on our ESG approach and a summary of our policy.
In conclusion, we're proud of our 22 results, which were significantly ahead of our expectations. Despite a challenging macro backdrop I'd like to thank our management teams and employees for their continued commitment to success with that operator, Please open up the lines for Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Your first question comes from the line of Chris Kennedy.
From William Blair Cris Kennedy. Please go ahead.
Your line good afternoon.
Good afternoon, and thank you for taking the questions. It's clear that first half will be.
Little bit more challenging relative to the second half can you give us an update on kind of trends quarter to date.
And how we should think about first half performance relative to the second half that you can thank you.
Sure Chris.
And thank you for the question, Yes, I mean, it's.
No apparent to us that the first half is going to be difficult and it really is due to inventory destocking I mean, what we're hearing in the companies that are having the biggest challenge Bowen Prime aloft is that our products and the end market are actually selling really well and so I think there's we tried to highlight two.
Two was abnormal in the first half due to the supply chain issues that caused an over ordering throughout the end of 'twenty, one and then a fulfillment in 'twenty. Two so if you think about it we're comping against a really kind of high level in 'twenty. Two and then we have to burn off some of this inventory and I think it is masking.
Some of the kind of the.
Positioning within the companies that is just much better and Pat alluded to a bowl of for example, where our model account growth is up kind of north of 10% that should be the best indicator of kind of growth and market share taking but the inventory headwinds are just so steep here and significant that it's going to create some headwinds.
<unk>.
I would say initial trends and read that we're seeing you know frankly outside of the kind of probably both <unk> and.
And <unk> to some degree.
I would say the business is actually performing better than the first two months than we would've anticipated and you know if you look kind of from where we were at Investor day to today.
You know the companies that have direct to consumer exposure I can tell you 511 in Lugano, both feel better right now than they did at Investor day.
And beyond that you know you've got companies like marucci in our tire industrial businesses all three of them.
Businesses feel really good too so.
And then kind of the whole most of our businesses are actually performing better than expectation and what we felt I don't know a month a little over a month ago at Investor day on the other hand, I would say the severity of the inventory headwinds, especially for a company like Boa, which sits so far down the supply chain you know and.
And if you think about it.
Take a retailer they have excess product. So they don't order from the shoe manufacturer. So now that stocks up kind of product with our customer and then our customer has to bleed through not only the retailer getting back to ordering but then they've got to get through their inventory to reorder. So we did.
It's going to be a little bit more elongated in terms of how long it takes to work through this but it's nothing structurally that's a problem with the company in fact, if anything the company is better positioned today and we look at Alpine, which we just launched and we had one brand partner, which said this is the biggest thing to hit the <unk>.
<unk> market in 60 years and so we think this is revolutionary and that's kind of some of the things that BOE was working on I mean, there are management execution.
As an a plus.
And these are just straight market kind of conditions that are causing this from inventory build.
Specifically answer your question I think.
We would see the first half trending down.
Down.
Or at least in the first quarter, we see it trending down kind of high single digits to kind of low double digits.
But as Ryan had indicated we see that turning around so I would say, we expect the first quarter to be the worst quarter for our comparisons for US we expect the second quarter to be down, but not down as much and then we would expect a reversal in to be able to make up for any of the headwinds that we have from the first half to be made up in the <unk>.
Second half and again I would say what we're seeing in terms of consumer strength in our direct to consumer and what we're hearing from a lot of our partners in terms of our product sell through gives us confidence that once this inventory destocking is completed that we should be reverting back to our normal.
<unk> growth rate.
Yeah. That's very helpful. Thank you and then just a quick update on the health care initiatives. Please thanks for taking the questions.
Sure. So Kurt is here he's engaged working with our team members to kind of create a plan for our health care vertical you know a lot of kind of leg work is being done right now.
Meeting with investment bankers and other intermediaries that are active in the deal market kind of some of the proprietary opportunities that we have through <unk> are also being explored right now and trying to push those forward. So I would say a lot of leg work is being done to establish that vertical.
Establish our name in the vertical I'd say a huge positive for US is a lot of the investment banks that work within the health care space are also banks that are active in consumer and industrial and we have great relationships across those banks and so you know we have not been in health care before obviously, that's a disadvantage but give.
The relationships with these influential banks, you know add through our consumer and through our and industrial practices. It gives us instant credibility on those market. So there is a robust.
Pipeline that is being built right now potential target companies.
Pat said.
R R.
Might've said, if one of US said the M&A market is really weak right now, including in health care. I mean, Unfortunately, you know the markets are kind of seized up across kind of all categories health care, maybe a little bit better than something like consumer industrial but in general the whole market is just incredibly weak. So right now we think the best thing is continuing to do the <unk>.
We're continuing to build a pipeline of opportunities that we think are coming to market later in the year and starting to reach out and make preliminary contact so that we can tee up some opportunities for later in the year and into 'twenty four.
Great. Thank you.
Your next question comes from the line of Larry Solow.
From C J.
S Securities.
Larry Solow your line is open.
Just a follow up on the acquisition question.
Of.
I know you guys don't have like a target leverage, but still you know you're a little bit Levered historic versus historical numbers for little four times wouldn't.
Wouldn't you probably caught a want a wait it out a little bit and maybe some opportunistic small acquisitions, but would you be in a position today to really do a large acquisition earlier this year anyhow.
Yes, I think Larry the the good news.
Theres not a lot of opportunities to transact again, so I don't think it creates a problem for US right now because the pipeline is just so weak on new M&A active opportunities. We are upward towards as of 12 31, we were at the upper bounds of kind of beyond the upper bound of where we want to be.
In terms of leverage that is as you know can move up and down and remember we did sell advanced circuits and so what's not included in that number is the proceeds and the application of that $170 million towards the repayment of debt and so we deleverage by virtue of up and then we expect.
To create a significant amount of cash conversion as Ryan alluded to in his section we had to build a lot of inventory and over the course of 'twenty, one and 'twenty two in our working capital really exploded now we have by and large slowed our inventory purchases and so it's you know kind of.
Ironic what we're talking about broadly in the market as these inventory destocking headwinds are hitting us, but we're doing the same thing and we're monetizing our inventory and hitting our vendors with the same type of Destocking right. So it is going to I mean.
I'm sure you guys are hearing this from most of the companies that you're talking to but we will be kind of monetizing a bunch of our inventory now the problem is when.
When you go through something like this we've had inventory that's flowing in we have inventory that took a while to get through the ports. We slow our inventory in the first thing that happens is we pay off some of our payables and our accrued expenses come down so working capital actually rises in the beginning but then we expect to have a flood of cash as we monetize inventory.
And we get through that cash conversion cycle and eventually when we normally get back to a normal buying we'll get our AP and accrued backup and I know it might be a little bit too granular, but it's how the cash conversion cycle works and so right now I would say were at peak working capital and we expect to have a significant amount of liquidity.
<unk> come in as a result of free cash flow from operations based on our 23 plan plus what we expect from working capital monetization. So we have what we think is kind of all the ingredients for deleveraging in place and as a result of that if there were to be an acquisition that was incredibly into.
We're seeing we feel that we would be able to act on it but as you opened up with your statement. The market is so weak right now it's not an issue that we really have to even deal with.
Got it and then just on the on the guidance.
You shared with US six weeks ago, I would say about six weeks ago.
You know that the supply concerns in inventory inventory concerns in the front half and you also I think included in your in your outlook you kind of built in Kantar.
Continued sort of slowdown in the economy, maybe even a recession in the back half of the year, the shallow and I think you kind of where <unk> was hoping for.
It feels now like what that could still happen, but it feels like perhaps you guys don't maybe are not as concerned about the economic impact on your companies.
So maybe so maybe it's just more of that supply inventory issue in the front half and more.
More of a rebound in the back half I'm, just trying to get a little more clarity on that and then also normally.
And more premium off theyre much more front end loaded.
But they are kind of facing more challenges on that front and would they be a little bit less front end loaded this year because of that so it's kind of a two pronged question.
Yes, so I'll answer the first and I'll ask Pat to answer the bow on Prime a last question on seasonality.
In terms of.
Really it's sort of a macroeconomic kind of outlook I think in terms of is it a recession that is coming in what do we look at.
We don't see any signs of it and I think we're in conditions that we've largely never seen before we have unemployment market where demand for labor dramatically exceeds supply of labor and every month that we go through thinking the kind of rapid increases in monetary policy is.
Going to push inflation down significantly while it has on the good side, but if you pull inflation apart, it's not doing a lot on the service side because labour inflation is continuing to run at a pretty high level and so as we look at it today.
We would say from a macro standpoint in the U S. We still have a lot of savings that got transferred during the pandemic right. There was something like six trillion dollars that got printed and kind of pumped into the economy, and so that really fat and consumers savings and we may be whittling it down, but if you look at a graph, it's still higher than it was pre.
The start of the pandemic. So savings are still a net positive you have jobs that creation that is at really an unprecedented level right now and the demand for labor is so high it's been my experience over time that when a consumer has money and they have a job and they have mobility.
To go to another job they spend and so you know I think there are impacts like inflation, which is coming down on the good side. So that actually is positive right.
And there's kind of tighter monetary policy, so financing costs are going up but a lot of mortgages were locked in and a lot of them are not floating right now so the ingredients for consumer spending still feel really really healthy.
And you know and I know, we skew more towards an affluent customer, but we're not seeing a slowdown and I know that you would say well, but you are expecting to be down kind of.
High double high single digits to double digit in EBITDA in the first half ex strike that's strictly inventory because the companies that are driving that are not suffering from end market demand at least from what we're hearing from.
Our customers' customers. So we feel really good Larry that conditions are not present for a recession now if anything I would say I might feel that interest rates have more to go than what the market is predicting because it's hard for us to see inflation coming down significantly.
Significantly from here given that labor demand remained so strong and wage growth is still running 5% plus I think that generally consistent with <unk>.
Inflationary conditions in as long as jolts keeps coming out with 10 and 11 million prints.
Compared to our historical norm of six or seven it just demonstrates the kind of power that the labor.
Has today in this market and so I think that's a nice tailwind for the rest of the year I would also say when you look internationally. We are now getting China, which was comping against kind of zero Covid policy.
And kind of shutdowns that were periodically running through the country when that happens in China impacts Asia dramatically and so now that China has reopened we are seeing strength in some of our international operations, where we have Asian kind of distribution.
That's likely a positive tailwind to global growth and as you know Europe last year after Russia invaded Ukraine dealt with inflation that was four to five times higher than us and an energy inflation that was in order of magnitude higher than what we were dealing with and that really hammered the consumer.
Over there so I know, there's still a war going on but there are inflation is coming down and we.
We took a very difficult kind of dose of medicine in Europe in 2022, and now 2023, if anything has upside from the severity of the drop in 'twenty, two so from where I sit I would tell you Larry it feels better in terms of end markets.
<unk> and the economy through the rest of this year now that may not bode well for 24, if interest rates have to go up significantly higher but I think that's something that the fed and economists will generally have the play kind of think about and plan out for us and where we're looking for 23.
Things feel relatively robust and so I think when we get through this inventory destocking. There is nothing that makes us feel like our core growth rate or even exceeding our core growth rate isn't possible.
Given some of the dynamics that exist within the consumer today.
Yeah.
Great I appreciate that.
Thanks, Larry.
Okay.
On board last year, they were front end loaded a little bit maybe in 'twenty, one or not historically as front end loaded as that right and I think clearly they will be more backend loaded this year than last year and probably than 'twenty one.
Laughter Primo loft, usually how about Puma la fleche as usually I believe.
Well at least last year was much more front end loaded will still be runoff they'll still be.
Much stronger in the front end than in the backend.
What's happening is.
Our and our customers.
Ordering the products later and later because they don't have the supply chain worries that they did a year ago or even two years ago and so we may get a little bleed a little more bleed into the into Q3, and Q3 may be proportionately, a little bit bigger than typical but it'll still be a largely front end business.
Okay. If I can just slip one more question just from a simplistic level.
The EBITDA is dropping.
Or 70 to 440, that's mostly on the sale of ACI.
How come.
Adjusted net income goes from 160 to $1 <unk>.
I mean, I guess, it's the ACI EBITDA is that little tax and then there's the higher interest expense, but.
You also get back some interest expense on the sale of ACI and you have people opt for a full year last year.
Full year this year, so I'm just trying to.
Those two those dots.
Yes.
Larry you're right it's come down.
But the numbers you highlighted are accurate.
And you're correct the sale of ACI, which was a pretty pretty good adjusted earnings contributor just given that business model.
But yeah, it's it's primarily interest cost right we've got.
At yearend, we had the 395 million of term a plus the $155 million revolver, all floating rate and you've seen that rate go from.
Roughly 1% call it a year zero percent year, and a half ago to now over four so that's meaningful to adjusted earnings so.
No slowdown I would say in general in terms of operating opportunity from the businesses its really corporate costs, that's overlaying that.
So it's really that 20 million interest post the sale of ACI I guess Israel.
Correct.
Okay.
Okay.
I mean, the Olympics Yep Yep.
Okay, Yeah that makes sense. Thanks, so much guys.
Sure.
Your next question comes from the line of Matt Koranda from Roth.
Matt Koranda your line is now open.
Hey, guys. Good afternoon, thanks for taking the questions.
So just wanted to make sure I understood the inventory Destocking commentary.
Typically so it sounds like it may be more acute with Oems versus retailers, but wanted to see if you could parse that out for US and then also just it sounds like Youre signaling Destocking cycle goes through the first half, but then we should pick up in the back half of the year, just any data points on your comfort that things.
Get better in the second half what are you seeing in terms of the order books, maybe that gave you comfort there.
That's my first question.
Yes, just I'll answer real quickly on your sort of inventory level question. It vary geography by geography. So in Asia. For example, there is inventory at retailers as people had been locked up a lot.
Excuse me.
As people have been in their homes and not out and about quite as much.
Due to Covid.
I think it's probably less at the retailers in North America, and my guess would be somewhere in between in Europe . So I'll just answer that and then I'll, let Elias answer your other question, Matt, Yes, and your other question about what gives us confidence Matt going into the back half of the year that things are going to improve I mean, if we look at where.
The consumer leaves.
Again, if we go back to our DTC businesses, right, where we have a big presence Lugano is all direct to consumer and then 511 and we look at the sales that both of those companies are generating and then we look at a company like marucci and how well their sell through is doing we look at our industrial businesses.
<unk>, which had a great 2022, and frankly have come out in January even stronger than where they finished in 2022.
So that encompasses right there five of our businesses and they are incredibly strong.
And outside of that Ergo is doing fine right now and we could go through some of the other businesses.
Principally where we're seeing some weakening demand is kind of at velocity and velocity had.
A pandemic run up that more than doubled earnings and as you know when companies go through cycles that have sort of a boom and bust characteristic to them the down cycle. Unfortunately, it's like a pendulum o'clock they don't ever stop right in the middle So we had a boom cycle and now the bus cycle is.
You know kind of taking it passed we're mid cycle is that's the one company that we have right now where we would look and say end market demand does not feel good outside of that we have nine businesses, where end market demand feels good now we have to trust our customers and we have to trust our customers know their customers in some cases.
A rollout and a prime aloft.
But given how robust everything feels outside of really velocity, and then kind of below with kind of the inventory destocking.
Just leads us to believe that there is more strength in the economy and there's more strength in the consumer than what we had forecasted.
And so if anything I would say, we may be a little bit conservative in the back half as we stand right now and incorporated into our guidance based on how things are running how things are running right now math would imply a better back half than what we've built in and so that inherently suggest.
As that we have built in some economic softness into the back half from where we stand today. So we do feel that when we get through this you know things are going to.
Revert to feeling pretty good in the back half in generally.
As you know the economies unless there is some extraneous events don't really turn on a dime.
And so it's I don't think we're looking at the economy, just falling off a cliff next month or the month after.
And so where we sit today it feels like you know 23 from a.
GDP standpoint could be better than what we anticipated a month ago.
Okay Super helpful detail. Thanks Elias.
And then on.
Just more specifically on the <unk> I'm curious how you guys are contemplating growth in Lugano in 2023 within the framework of your guidance that <unk> given I mean, it just looks like it continues to grow pretty aggressively and the margins are coming in well ahead of at least our expectations.
It seems like.
And based on your commentary in the call turn the call. So far it sounds like that consumers just super healthy. So I'm just curious how you're thinking about the growth of that segment and 23.
Yes, we are.
We generally like to be conservative, it's hard for us to own a company. That's correct not heart, we love owning a company that grows 50% a year, but it's hard for us to forecast that that will continue and so there's nothing right now Matt in the first two months that suggests that that isn't the case.
<unk> can speak to the January and February results.
And how they were relative to last year, but we embedded in our guidance is that Lugano would come down materially from the growth levels that we had in 'twenty, two but still be a good strong double digit grower now Pat in January and February I think anyone who has very strong February has come.
Beginning of the year is fine.
In line with exactly where our lives was saying if not a little better yes. So there's been no slowdown map and that business in January February from where we exited 22 and what the Q4 year over year was but again, we just would we would rather be conservative and plan for that business to grow.
But grow at a more reasonable rate and then over deliver and have that help carry our results going forward.
Okay makes sense and then just last one for me.
$170 million in proceeds from ACI divestiture, just if you could put a finer point on how much debt repaid after sort of fees, what does that do to pro forma net leverage kind of.
Post debt Paydown and then just you mentioned on the working capital front like plenty of opportunity to flash inventory I think that's right.
Maybe underappreciated.
The investment community. So maybe just if you could help us kind of shape up the potential inventory velocity this year and how much that contributes to cash.
And where.
Perhaps that leverage could shake out by the end of this year.
Yes sure.
Matt happy to happy to assist with that.
Yes, so the $170 million proceeds we used to pay down our revolver as we mentioned.
And there is there is a profit allocation payment that will be made on that gain.
So that will be net against that.
And that amounts not calculated yet it's in process.
So yes, a couple of tenths of a turn essentially is the effect of that and you can kind of do the math on what those proceeds would do to our leverage.
And we highlighted.
To your second question, we highlighted at Investor Day.
The retained cash that we have in the system now.
And 2023, we expect to be.
At or above 2022 levels.
And we had we had said in the in the.
The Investor day deck that we had just about $75 million of routine cash pre working capital. So as we think about that amount next year and then as Elias highlighted some of our working capital coming back in.
It sort of implies north of $75 million.
Now as I think about inventory levels.
We had used last year about $200 million.
Throughout the year of working capital a good portion of that was inventory.
Some of that though was to support Lugano and as Lugano continues to grow as we hope it will that business will still need some inventory. So we don't see that inventory coming back.
Some of that inventory was just needed to support the.
14% growth, we had last year, but then there is another roughly third of that.
Excess and that's what we expect in addition to the retained cash I mentioned that will come back into the system. So hard hard to put dollars on that.
For you, but I think a good reasonable amount would be to assume same level of retained cash.
Hopefully no working to working capital build next year and then Russ.
Roughly third of last year's inventory use coming back as cash conversion in 2003.
Okay very helpful and detailed.
Jump back in queue. Thank you.
Thank you ma'am.
Your next question comes from the line of Robert Dodd from Raymond.
Raymond James Robert Dodd Your line is now open.
Hi, guys.
Some of these questions.
This is partially been answered I think.
All of them.
Particularly on both.
You look into the expectation.
A rebound.
That capacity.
Wade.
You talked about you know the sell through the end product is that et cetera, but when would you need to be getting.
Booking the orders slipped necessary.
Sure.
Orders need to be coming in.
To be to be actually manifesting in terms of the second.
And how much visibility I mean, you talked about the visibility of your expectation, but when would you know.
If I can put it this way.
Got it.
Yes. The short answer is that our Q1 earnings call, we'll have a pretty good picture on kind of at the beginning of how Q2 is trending at various industry by industry.
And sort of who is taking the orders, but there is a good.
Usually for six to eight.
That sort of lag and that sort of timeframe right. So we will have a better picture is.
If what we believe is being confirmed sort of.
At the end of our Q1, we'll have a little bit of a picture sort of better Q1 earnings call I would say the part of the part.
Part of the comfort comes from what we're also hearing from our OEM partners about inventory if that makes sense and about sell throughs and what we're seeing in terms of model account right. So there is there are several different factors that play into alliances and mine.
And that statement.
And Robert we can take.
The backlog, we take orders four to six weeks out is when we can take an order and still ship. It. So you know it's.
I would say, it's not a business where you have like a three or four months kind of lead time, it's a lot shorter than that its a month lead time. So we.
We'll be able to tell definitively.
You know kind of the back house likely until were.
In June July and we're starting to get kind of trends for the third quarter bookings are going to look like and what we can ship against that probably by July we'll have a pretty good read on that about the third quarter and that will inform a lot from a trend standpoint, where the fourth.
Quarter is I will tell you that as the first quarter has gone on bookings have gotten better January was incredibly slow February is not great, but it's not awful.
And so there's been a general pickup that we've seen already starting to happen and that can like the depth of kind of the drawdown that we're seeing in Q1 might actually work to kind of recover have this business recover more quickly it could be.
In Q2, we just arent too at a point, where we're going to see that yet.
Given the short term nature of how quickly we can fulfill an order.
Got it got it. Thank you I really appreciate the extensive color.
One and you probably just answered this.
Laguna.
It was I think the biggest one of the biggest contributors to working capital buildup.
<unk> 22 to be clear I mean, you talked about you're still investing.
Change.
Changes to the segment.
Only.
Policy scheduled to open two stores.
Those side I mean, we're going to hold as we grow working capital I want to remind you that this working capital is not widget that if you had to.
So you'd sell at cents on the dollar right, we're selling the closest thing where.
Our inventory is made up of the closest thing to money day that you have right.
Sort of gold and diamonds and other other finestone right, but.
But the short answer is we'll continue to build.
Yes.
The question is it still going to be it's still going to be heavily invested in Vegas.
Legato.
Yeah.
Let's just say quite yet.
Robert Yes. The answer is yes, I would tell you and I mentioned this earlier we have.
Have planned for a much more conservative growth plan, we have lugano and that is embedded in the overall guidance of the company there.
We're currently running dramatically ahead of where our growth plan would be.
And what we've embedded in our guidance that requires us to invest capital what we've seen and what we experienced over the course of our ownership is that if we invest a dollar in inventory that yields about an additional dollar of revenue and that sort of.
Incremental 40% margin right EBITDA margin and as long as that trend continues and we're able to get a 40% pre tax return on invested capital on that inventory.
We're going to continue to do it because we can't find opportunities like that very often too.
Deploy our capital into so.
Question will and what we look out on frankly.
Frankly, a weekly and monthly basis is ours.
Our inventory investments continuing to yield the sales growth and are the relationships remaining consistent and so far they are and they have over the course of our ownership. So we will continue to invest in.
The growth of Lugano.
And so right now.
Our forecast is that we're not going to put a lot of capital in and there is not going to be kind of a huge amount of EBITDA growth I think we'll all be happy if instead of having to invest 30 or $40 million of inventory, we have to invest $100 million because the incremental 60 or 70, probably generated another $20 to $25 million of EBITDA.
And that's kind of how we look at it and I think to the extent, we can continue to invest more in inventory it will help us exceed our financial forecast and it could on a meaningful at a meaningful level.
Right.
I'll, let Dennis.
Got it.
Don No assumptions.
Two.
A greater number of the budget.
Realizations healthy outlooks.
During the course of the year than the other businesses.
A way of putting it.
I think based on current trends.
Lugano has the most.
Probable.
Our highest probability of upward revisions going forward based on what we've seen in January and February to our current plan.
Got it thank you.
Thank you.
Your next question comes from the line of Matthew Howlett from B Riley Matthew Howlett. Your line is now open.
Oh. Thanks. Good afternoon. Thanks for taking my question first.
The show up to on the 1 billion in 2028 long term target is still contemplates about a 10% long term growth rate of the company that youre still good with that.
Going forward, it's still good with long term growth trajectory of that.
<unk>.
Yeah, I mean, Matt if there is anything and it's one of the things I wanted to point out with Arnold. The purpose of doing that is was really to suggest that the positioning of our companies is so much better today than it's been in.
In prior years, and some companies that even where difficult like Arnold to turn around.
<unk>.
Again complement Dan Miller, and the management team. They took something that was a very difficult situation and have created a really incredible company with a lot of legs and a lot of growth and it's positioned in the perfect part of the economy right electrification and.
And we know that the green economy is something that <unk>.
Regardless of what happens in the macro economics.
Global macroeconomic picture the Green economy is still going to grow and it's still going to drive growth and so I use that as one example, but I could go across the board all tour and the management team that we have in there.
He and his team are doing incredible things to drive efficiency and to grow margin and.
To grow revenues and we're seeing it and I could go across pretty much every one of our companies and tell you that they are better positioned today, even if they are suffering a headwind I mean, Pat mentioned at Boa is going to grow their model count by over 10%. This year compared to last year. They are taking market share. So we can't really like if I look.
At everything that is happening and I look at the management and the execution. That's going on there is nothing that suggests that our long term growth rate would be any different than what we suggested and in fact, if anything it's probably higher probability of achieving to exceed right now on the other.
As you guys know advanced circuits was a great company, but it did not grow it was materially below our consolidated growth rate. So just by virtue of removing a company whose growth rate was kind of GDP or a little less than GDP and were kind of high single digit to low double digit grower that is accretive to <unk>.
Growth. So there is nothing.
Obviously, nobody likes to go through conditions like we're going through and Trust me no. One in our firm as you know kind of happy we're doing this but I don't know what we could do differently other than maybe next year not last year not supplying our customers. So that the comps were easier, but if you think about what's happening and how our management teams are executing theyre execute.
Being at an extraordinary level and I think when we get through this destocking, we're going to see our core growth at least be at the levels, we've outlined to you.
Yes, you're right in that the continent shrunk the comps just throw everything off this huge huge years 'twenty.
So absolutely I recognize and I appreciate that.
Great.
Great target and I guess that falls onto the question and you guys are long term holders.
One of the beauties of the structure.
Bankers the conversations you have with bankers today about your portfolio you are very close to our IPO at 511 before it's shot if things do rebound in the second half I mean are you being approached that maybe there could be a window, maybe as a business back out there that is hungry for something could you look to get rid of sell.
While some of the smaller stuff out there, but what can we.
In terms of that could we expect something would you want to give Kurt.
It started more capital you could buy back stock a little more stocking.
To enable the bankers are saying.
Your appetite is to maybe approach the apple market in the back half of the year.
So I mean alliance has said many times bad debt.
Many of our businesses are for sale, it's all a matter of price and so but we're not actively going out we don't have plans to actively go out and market any business. This year at all on the 511 side I would say to the extent the IPO market opens next year.
Never say never the company has got a great management team they are executing well and it's one of the most powerful brands we have ever been associated with if that makes sense. So those would that would be how I would answer both of those lives. What would you add yes bankers. We constantly are talking to bankers as you would anticipate and about the markets. The capital markets have been dead I think.
Correct me, if I'm wrong, but I don't think there was a single consumer IPO in 2022.
And I think in the first quarter, we're not going to see one. So it is incredible that we've gone this long with the IPO market being shot as it is.
But given what's happened in the overall market and the uncertainty in the macro picture and kind of the federal reserve being as tight as it is it's not surprising that the capital markets are closed.
As I've talked to my team.
And just to remind us that the sun.
Always comes up and it may take a little bit longer, but the Sun will eventually come up a day again, there will be a day, where capital markets open up again, where the M&A markets open up again, we just happened to be in a period, where the sun isn't rising as quickly as we'd all like it but these things don't shut forever and I would anticipate.
<unk> that kind of as we work our way through this year and into next year, even if macro conditions don't change at some point the markets will open up because they've been on pause for so long there is a need for new supply to come in and so it feels like we're probably going to work our way through that.
Here in the next kind of.
A few quarters and I think to the extent that the markets are open to high quality companies and giving decent value kind of good valuations to high quality companies and 511 is a very high quality company. Then we would consider like we did a couple of years ago.
Taking that company public and having a piece of that.
Floated in the public market and their couch.
Capital requirements being funded by.
The public investors.
So I think we have to just wait and see where it is I can tell you that company is very much a public ready company.
And its performance relative to other companies in the apparel space over a really difficult time as Pat indicated earlier I think does nothing other than enhance its attractiveness to public investors because when other companies are seeing huge pressure on revenue growth.
<unk> in the apparel space on margins, we're able to generate almost double digit revenue growth and had only a small amount of deleveraging I mean, it was 9% revenue growth and 6% EBITDA growth last year. So it's extraordinary considering the conditions and I think it really helps to.
Kind of tie a bow on how differentiated this company is and how strong. This company is and so I think when the market opens up it probably is more attractive to public investors than it was even a couple of years ago. When we approach the market last time.
I really appreciate that and then we'll be certainly watching where they to that Dave.
The price tag that was very high for that.
It would be it would be great to be able to monetize some of that and I guess that leads me to the last question, but you guys are shareholder friendly.
Aiding at 11 times and larger portfolio companies could be worth a lot more than what's the appetite to repurchase stock you. Obviously didn't put the program in there. If you didn't think the stock was undervalued.
If you get some of this cash conversion was the Abbott and obviously with this pay down on that to answer it just what's the appetite to return capital via share repurchases. Thank you.
Yes, I mean, as you know, Matt we already returned a decent amount of capital through our annual dividend, but as you said the stock price is.
So attractive today that it warrants us having a buyback in place.
And.
So we put it in place because we are absolutely prepared to act on it.
As all of these buybacks are they are kind of scaled generally against where the prices in the marketplace.
And our view is if investors have such a short term nature, where theyre looking at a quarter or two of result against what the long term is then will advantage to our long term holders by buying back their shares.
Because there's nothing fundamentally that has impair in any of these businesses. These businesses are better positioned than they were a year ago, and we were trading kind of in the low thirty's. So if investors want to sell shares to us on the.
For the benefit of our long term shareholders to accrete more value over time to them then we'll take advantage of that on their behalf will ultimately.
We are a young growth company and we would like to use our capital to facilitate growth through acquisition and investment in our subsidiary. So there is the reality of capital allocation that we constantly are looking at but with our stock down here in the kind of low <unk>. It's <unk>.
Just hard for us not to look and say this is the best opportunity for our shareholders to deploy our capital against buying it back and that may be a temporary condition.
We would hope so because we hope our stock kind of rebounds, and kind of reflects the value and the intrinsic value of these companies and the efforts that we're putting in.
But in the near term, sometimes dislocations happen and Youre able to take advantage of that for your long term shareholders and we're prepared to do that.
I appreciate you haven't got your hip pocket I'm sure you'll utilize it and I really appreciate it. Thank you.
Thank you Matt.
Your next question comes from the line of Barry Haimes from Sage asset management, Barry Haimes. Your line is now open.
Thanks, so much.
I had two questions. The first one is.
You guys talked about.
Some of the macro issues the consumer doing better.
And the tight labor market, but the flip side of that is the upward pressure on inflation and rates and so the question is how youre thinking about.
Your debt and whether you want to try to raise more long term debt or in that you know obviously.
10 year yield.
Yields move down natural has backed up a little bit so I'm, just kind of curious how you're thinking about.
Kind of long term debt capital.
Then the second question on Lugano.
Great feedback on.
On the return on inventory.
But I'm curious.
Since youre opening a couple of new locations I imagine you've looked at lots of potential locations how many locations.
Do you think.
There are potentially lugano locations over the next.
Three to five years.
Sort of ROIC. She did you get on a new location and how long does it take.
For that new location to get.
More of a steady state.
12 to 18 month thing or a two or three year thing so any color on those two would be great. Thank you.
Thank you for the question and your first question remember the vast majority of our debt is locked into the late Twenty's and so I think Ryan correct me, if I'm wrong, it's like 28 and 2030 when already 933.
Okay. So even longer 2900, <unk> do we have five and 5.25% respectively fixed rate bonds in the marketplace a billion three of the 1 billion seven that.
Of that roughly is outstanding as you know we had a kind of a $400 million term loan we had revolver borrowings that were outstanding but we paid off our revolver borrowings with the proceeds from ACI. So $400 million on a 1 billion seven is 23% we have 76% of our debt is fixed rate.
Now, 23% that's floating clearly.
We would rather have 100% that was fixed right now but.
But if we were to enter the market and we could and we talk to our bond investors, who have appetite. If we wanted to term out that debt and we are we have talked to bankers who.
Have given us price talk the problem is it is kind of a couple of few hundred basis points more than what we are paying currently and Thats. Just you could look at market pricing of our bonds right now trading in the I think low eighty's and it kind of indicates a yield to worst that's two to 300 basis points higher than.
Where we issued our last debt tranches, so I think rather than going out and terming that debt right now, we'd rather sit with kind of the secured capacity.
Being utilized at a very small level remember, it's only one turn of secured debt less than a turn of secured debt. So from a financial covenant standpoint, we have availability. We have liquidity, we have no covenant pressure whatsoever. Now obviously if rates continue to rise it's going to put some upward pressure on that.
At $400 million.
But I think it's still we'd have to consider a pretty big increase in rates happening from here until the rate picture stabilizes in order to have it makes sense to have that $400 million Tranched out right now I think.
We think it's probably makes a little bit more sense to be patient right now with that and if the interest rate picture stabilizes later in the year in the bond market starts to recover and we can do a primary issuance kind of closer to where we priced our last bonds, it's not going to be at five or five in a quarter, but I think.
We were able to kind of narrow that spread down to 100 or 150 basis points and be in the six is that would start to look interesting to us to free up the secured capacity, but I think for right now we feel pretty good having roughly 75% of our debt kind of fixed in our capital structure. Pat you want to talk about we got it all just saying I'm going to give you a whole.
Unsatisfactory answer and I apologize, but that is it depends and I'll give you some factors around that.
The payback on.
And some stores is very fast.
And when we opened in Houston, and we have a lot of client talent in that area already.
It's definitely under 12 months.
When we open in a greenfield that we opened internationally, we have an international location opened in 'twenty, four and that may take a little bit longer to seed on the inventory question, it's not formulaic and it's not as if you know.
The company has excellent sales are opening wide salons, if they open up one more you do the math and add that it's a little less than that and we gain a little bit of efficiencies in that because we share inventory sort of across the lines inventory is not necessarily 100% Salon dependent and then as it relates to the number.
Of stores I mentioned, a couple this year that we're targeting there maybe one more.
And then we need to.
We'll digest dosing through it and probably have something that looks similar in 2024, but remember we need to sort of build out.
Kind of a lot of the talent that it takes too.
To work and to manage those salons as well and that's not that.
That takes time as well these are highly skilled people.
Data that it takes time to develop.
And then number of ultimate locations any feel for that.
This year or next year.
Just how many many I have.
No it's not.
We could have a location that does one location that doesn't massive amount of revenue based on where it was so it's not it's almost not the right question to ask respectfully.
More about sort of what markets can we penetrate as far as gaining.
Gaining new customers in.
Got it. Thanks, that's very helpful color I appreciate it.
Thank you.
There are no further questions at this time I would now like to turn the conference back over to Mr. Elias Sir.
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.
You for your support.
That concludes our call.
This concludes compass diversified conference call. Thank you and have a great day.
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