Compass Diversified Q1 2023 Earnings Call

Good afternoon, and welcome to compared to diversify its first squirt, turning turning three conference call to the east.

He is being recorded all lines have been placed on mute. If you would like to ask a question at the end of the preferred remarks police presence. This Turkey then the number one on the research cellphone.

At this time I would like to turn the conference over two qualities law, Okay, Great group.

And they're reading of the Safe Harbor statement. Please go ahead Sir.

Thank you and welcome to accomplish diversified first quarter of 2023 conference call representing the company today, our lives stable Cody CEO , Ryan walking him Cody CFO and.

And Pat Mozzarella C O O Compass group management.

Before we begin I would like to point out that the Q1 2023 press release, including the financial tables, and non-GAAP financial measure reconciliations for adjusted EBITDA adjusted earnings and pro forma net sales are available at the Investor Relations section on the company's website accomplish diversified dot com.

The company also file this Form 10-Q with the SEC today after the market closed which includes reconciliations a certain non-GAAP financial measures discuss 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.

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As reconcile the net income or loss from continuing operations and the company's financial filings. The company does not provide a reconciliation of its four year expected 2023 adjusted earnings are adjusted EBITDA, because certain significant reconciling information is not available without unreasonable efforts.

Throughout this call, we will refer to accomplish 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 with Cody and a subsidiaries the impact and expect the timing of acquisitions and future future operational plans such as ESG initiatives.

Words, such as believes expects anticipate plans projects and future or similar expressions are intended to identify forward looking statements.

These forward looking statements are subject to the inherits uncertainties in predicting future, resulting conditions certain factors could cause actual results to differ mateer 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 year 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, except as required by law Cody.

It takes no obligation to publicly update or revising forward looking statements, whether as a result of new information in future events or otherwise.

At this time I would like to turn the call over to Elias say, though.

Good afternoon, everyone and thanks for joining us today.

We are pleased to report financial results significantly exceeded our expectations the.

The strength and durability of our diversified group of subsidiaries was evidenced again in the first quarter as we delivered growth and both revenue and consolidated subsidiary adjusted EBITDA on a pro forma basis.

This is an extraordinary accomplishment amidst the backdrop abroad and unique macroeconomic challenges and as a result, we are raising our full year outlook for both subsidiary adjusted EBITDA and adjusted earnings.

I think the obvious question is how are we able to achieve this while it's no different than what we've said in the past, but perhaps this quarter, it's more apparent.

Our strategy of assembling a highly diversified group of companies that reach a broad set of end markets reach a wide set of consumer demographics and have a strong underlying core growth rate drove the results we reported today.

This is highly intentional and can be traced back to 2018, when we made a concerted strategic shifts to transform our business towards higher quality higher growth assets I'd like to recognize our amazing group of companies and colleagues for allowing us to deliver the strong results today.

But despite this the headwinds we overcame in Q1 are still very much out there and cloud our near term outlook simmer.

Similar to our remarks on our fourth quarter call. Some of our branded consumers subsidiaries with exposure to wholesale continue to experience significant inventory destocking headwinds.

As a reminder, and 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 in some retailers reckoning with the fact that they over ordered it has created a whipsaw effect until inventory has right sized until this happens our growth in these businesses will be constrained, but fortunately it is a unique event that we expect to start correcting in the second half of the year.

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Take Bulwell for example, this subsidiary is executing at an extremely high level and continues to take market share our.

Our products are on some of the strongest selling eskew used for our brand partners and we continue to accelerate the number of new S. K US we are gaining placement on.

The current rate of Destocking is so high that is actually outpacing the market share gains we are experiencing from product sell through an SKU count growth.

This is obviously a unique phenomenon and once we get beyond this current inventory destocking cycle, we would expect a significant snapback and revenue growth and profitability.

We are also seeing the same broad trends at prime aloft, given its similar position in the supply chain.

Taking together with Boa these represent two of our strongest and fastest growing businesses.

They represent our businesses with some of the best value propositions competitive differentiation margins and free cash flow generation.

So the fact that they're getting pulled down by an unusual phenomenon and we are still reporting consolidated growth ties back to the incredible performance are diversified business model facilitates.

Outside of these two subsidiaries, we delivered an astounding, 15% organic growth and adjusted EBITDA. The majority of our remaining subsidiaries are performing extremely well. This gives us confidence that once the inventory destocking headwinds subside with Bowen prime aloft reverting back to normalize growth.

Rates that are overall business will again show strong growth.

Before turning the call over to Pat I'd like to summarize our performance and outlook.

While we had an outstanding first quarter that was stronger than anticipated, we expect the negative effects of inventory destocking and other market headwinds to suppress earnings and Q2.

And demand for the majority of our goods and services remains strong. However, we experienced some moderation and and market sales as the quarter progressed in April has continued that trend.

Notwithstanding a modest slowing the most affluent consumer continues to spend as evidenced by the incredible performance that Lugano.

And as you are aware, we sell the majority of our goods at our consumer businesses to the more affluent consumer which positions us well during this time of economic uncertainty.

Notwithstanding the headwinds we expect to encounter in queue to the strength of our subsidiaries gives us confidence we will deliver growth in the second half of 2023, leading to growth for the full year with that I will now turn the call over to pass.

Thanks life throughout this presentation, when we discuss pro forma results it would be as if we owned prime aloft from January 1st 2022.

On a combined basis revenue and EBITDA grew slightly and exceeded our expectations as the Lions discussed.

Idly reporting supply chain disruptions in 2021, and 2022 created elevated inventory levels in multiple areas and in the quarter.

To order patterns that often differed materially from and customer demand <unk>.

Despite this challenging backdrop, our management teams and employees continue to perform with agility and skill now.

Now onto our subsidiary results.

Begin with our niche industrial businesses for the first quarter of 2023 revenues, where approximately flat and adjusted EBITDA increased by 19% versus the first quarter of 2022.

Each of our niche industrial business has expanded margins in the quarter and an aggregate adjusted EBITDA margins expanded by over 250 basis points and.

In the first quarter Arnold she'll, just a solid growth in revenue and EBITDA and bookings once again exceeded shipments Mar.

Margins expanded partially due to more positive sales mix as the company continues to provide more technologically advanced solutions to their customers.

Al towards revenue declined slightly in the quarter as some of its more cyclical and market spaced headwinds adjust.

Adjusted EBITDA increased by almost 11%, however, as raw material prices declined and management continued to work to gain efficiencies.

As a reminder, dairy Moody outdoor CEO , let a plan management transition a bit less than a year ago and we are very pleased by the early progress made by him and his team.

At Sterno demand for catering products continued to revert back to pre pandemic levels driving growth in the company's foodservice segment Sterno scented wax and oil business continued it solid performance as well and cause it to combine business, we're well managed in the quarter.

Turning to our consumer businesses.

For the first quarter of 2023 revenues increased by 2% and adjusted EBITDA declined by 5% is excess inventory and the supply change it Bella prime unlocked and velocity offset strong growth in Lugano, Maruti and 511 <unk>.

Abolished showed a decline in EBITDA versus a record Q1 2022.

Main very confident in the company's market share skew counts and product positioning.

Put simply in many segments are selling was less than or sell through as.

As we have discussed we believe this trend will continue in the second quarter before rebounding in the back half of the calendar year.

The team there continues to manage effectively and we continue to expect full year 2000, twenty-three EBITDA performance above 2021 levels. We were encouraged recently by the prelaunch of alpine boots, incorporating boas technology as well as the company's partnership with under armor on their new slip speed line of training shoes.

Marucci hadn't exceptional quarter as revenue grew by 12% and EBITDA grew by over 25% when compared to the strong Q1 2022.

Company benefited from exceptional sell thrones of its cat X line of bats introduced last year and experience strong growth in non-bank categories, including fielding gloves bags and helmets, all showing significant growth in the quarter.

Also significant air freight investments incurred in Q1, 2022 to maintain and grow shelf space did not recur in Q1 2023, and the company operated efficiently.

Ghana, and once again had a strong quarter as revenues and adjusted EBITDA grew by 36% and 38% respectively to.

The company saw strong those growth in multiple salons, including Newport Beach Palm Beach, and its newly opened Houston Salon.

Subsequent to quarter and Lugano officially opened in Washington D. C Salon, along with its exclusive purvey membership club in Newport Beach.

The company is currently building out its Greenwich, Connecticut location with a target completion date in the third quarter of this year Lugano was also targeting a second flagship location similar to the company's Newport Beach Salon and potentially its first international Salon in early 2024.

Similar to Lugano, 511 had a strong first quarter with revenue and adjusted EBITDA growing by 20% and 22% respectively spy.

Despite broad retail pressures in the U S. The company once again benefited from strength and its diverse sales channels and and markets as professional sales both domestically and internationally led its growth.

Additionally, the team at 511 did an excellent job in the quarter operating effectively and efficiently and we're able to gain leverage is adjusted EBITDA growth outpaced revenue growth.

Prime aloft showed a slight decline in both revenue and EBITDA as customers continued to pull down their target inventory levels, while financial performance to date is not fully met our expectations at the time of acquisition. We believe the company is taking market share.

And given where it sits in the supply chain and the impact of inventory rebalancing. We believe it is outperforming its competitors. The company's project pipeline for 2024 is as broad as ever and we remain bullish about prime Melas financial prospects following inventory stabilization in the supply chain.

Touching briefly on velocity.

Point of sale activity has slowed following strong performance during and immediately post pandemic and.

In addition, retail partners and both of the companies segments have sought to further reduce inventory levels.

So it is our belief that on a sequential basis quarterly performance will improve as we move through the year. We continued to examine additional options to right size parts of velocities cost structure to better reflect current demand patterns.

As a whole we were very pleased with the performance of our businesses in the first quarter I will now turn the call over to Ryan for his comments in our financial results.

Thank you got.

Moving to our consolidated financial results for the quarter ended March 31st 2023.

My comments largely to the overall results for Cody.

Since the individual subsidiary results.

Are detailed in our Form 10-Q that was filed with the SEC earlier today.

As a reminder, or sale of events circuits occurred in the first quarter of 2023, and therefore was reclassified to discontinued operations and our first quarter 10-Q.

Now to our quarterly consolidated results.

On a consolidated basis revenue for the quarter ended March 31.

2023, with $542 $2 million six.

6% compared to $510.5 million for the prior year period.

You over a year increase primarily reflects our acquisition of prime loss during the third quarter of 2022.

Consolidated net income for the first quarter was $109 $6 million compared to net income of $29.7 million in the prior year <unk>.

The increase was primarily due to the 98 million dollar gain on the sale of advanced circuits in the first quarter offset by an increase in interest expense as a result of financing the prime aloft acquisition and rising interest rates.

Adjusted EBITDA in the first quarter was $91.9 million up 11% compared to $83.2 million in the first quarter of last year the.

The increase was due to the benefit of the final acquisition.

Adjusted earnings for the first quarter was the bulb our expectations at $33.2 million.

Down from $36 million in the prior year quarter. The decline was primarily a result of higher interest expense.

Now onto our financial outlook as a result of the strong performance in the first quarter relative to our expectations. We are increasing our adjusted EBITDA and adjusted earnings estimates.

For the full year 2000, twenty-three, we expect consolidated subsidiary adjusted EBITDA to range between $430 million and 460 million.

An increase of $10 million at the bottom end of our initial range.

For the full year 2023, we expect adjusted earnings to range between $110 million and $135 million.

An increase of $5 million at the bottom end of our initial range.

As a liaison Pat have covered this outlook expects a challenging second quarter given the headwinds discussed.

And assumes a mid single digit percentage decline and adjusted EBITDA sequentially.

And then Ah reacceleration in the second half of the year.

Turning to our balance sheet as of March 31st 2023, we had approximately $53.7 million in cash.

Approximately $590 million available on a revolver and our leverage with 3.87 times.

We have substantial liquidity and that's previously communicated we have the ability to upsize a revolver capacity by an additional $250 million.

During the quarter, we use the net proceeds from the sale of advanced circuits to repay our leverage our our revolver balance therefore, reducing our leverage levels.

In addition, subsequent to quarter and we used approximately $20 million to fund <unk> an acquisition of bombast.

With our liquidity and capital, we stand ready and able to provide our subsidiaries with a financial support they need invest in subsidiary growth opportunities and act on compelling acquisition opportunities as they present themselves.

Turning now that cash flow provided by operations.

During the first quarter of 2023, we received 15.5 million of cash flow from operations pre.

Primarily a result of strong operating performance.

We use $31.5 million in working capital during the first quarter of 2023, a substantial decrease from $95.7 million in the prior year quarter.

When we needed to support many of our businesses inventory levels as a result of supply chain disruptions.

Lugano will continue to require working capital investments. However, we expect to produce strong consolidated cash conversion in 2023 for our remaining subsidiaries in total.

Also of note during the quarter the manager waves 50 per cent of the management fee owed by the company and respected front left.

And finally turning to Capex.

During the first quarter of 2023, we incur at $16.1 million of capital expenditures at our existing subsidiaries compared to $10.4 million in the prior year period. The increase was primarily a result of the timing retail buildouts at Lugano and 511 to support their continued growth.

For the full year of 2023, we anticipate total capex spend of between $60 million and $70 million. We continue to see strong returns on invested capital at several several of our growth subsidiaries and believe they will have short payback periods.

The 20 twenty-three capital expenditure spend will primarily be at Lugano for new retail salons and at 511 as we continued to increase its retail store counts from its current 118 stores.

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

Thank you Ryan.

I'd like to close by briefly providing an update on the M&A market and our strategic initiatives.

In terms of M&A not much has changed since we last spoke in March Dale activity remains suppressed well below historic levels and we continue to believe activity in the second half of 2023 will improve as economic headwinds moderate.

On the ESG front, we continue to advance our key initiatives and execute our strategy during the quarter, we had a variety of achievements throughout organization that I would like to highlight reflective.

Reflective of <unk> commitment to creating a positive impact for people and planet. We're thrilled to be awarded the silver badge from catalyst 2030, an organization that partners with corporations.

To achieve the 2030 sustainable development goals outlined by the United Nations, We were awarded the silver badge and recognition of our work with social enterprises and the way we've actively used our purchasing power to partner with organizations with clearly defined social goals.

Looking at our company's last month Bower released their annual sustainability, and social responsibility impact report, which outlines their future goals to significantly reduce their carbon footprint and create a more inclusive environment with equitable opportunities.

Arnold magnetic technology has announced its partnership with cyclic materials a.

A pioneer in developing more sustainable domestic supply chains for rare Earth elements Arnold and cyclic will work together to develop a rare earth recycling program, creating an unprecedented circular supply chain for rare earth materials.

I am proud of the progress Cody and our subsidiaries are made against R. E. S. P framework and we look forward to continuing on this path.

In conclusion, we're proud of our first quarter results, which are a testament to the successful execution of our strategy. The fact that we were able to generate organic growth in revenue and EBITDA amongst a such a challenging operating environment speaks volumes to the quality of Cody subsidiaries the benefit of diverse.

[noise] suffocation amongst industries and the accelerated pace of our core growth rate without operator, please open up the lines for Q&A.

About this time I would like to remind everyone in order to ask a question. They start then the number one.

Your first question comes from your line.

Oh very solo.

Cga's Securitas. Please go ahead.

Thanks, good good evening or good afternoon.

I guess.

First question observation.

You started off really strong better than expected just trying to tell us that the sort of the the sequential little bit of a drop mid single digits millions or percentage is it.

Some <unk> some inventory I guess a combination of.

Inventory drawdowns or more than your original expect you to a longer than you originally.

Two two on some sort of a little bit of a N market slowed down and on the analog installed on other particular businesses at all cause.

Does it feels like most of the businesses with larger ones are still doing strong outside walking towards that down. So I'm just trying to get a little more color on you know where you can't even a little bit of with some actual unlock in Florida.

Yeah, Hi, Larry It's eliason. Thank you for the question.

You know Q1 was a really good quarter for us I think we sat here a couple of months ago, and we talked about you know the first quarter on our fourth quarter earnings call. We had guided that we thought we might be down kind of high single digits to low double digits and you know obviously, we perform signal.

Difficultly better than that really almost across the board you know the business you know Boa, obviously had as you see some of the weakness that we expected from you know kind of this inventory Destocking, which you know is quite severe.

I would say you know that's continuing but in general you know our businesses performed really well coming into Q2, I think we're just taking a more conservative you know and cautious outlook yet again in our guidance you know it's weighing on us what we're hearing in terms of the macro environment.

Out there you know we're starting to see some of the data really weakening jolts came out you know down you know a couple I think it's at two year lows right. Now on you know kind of job openings. You know there is weakness in the regional banking sector. There's a bank down 40 plus percent in the aftermarket right now.

You know and there's just.

These continuing you know kind of rolling issues, you know so we want to be more cautious Larry I would say principally what you're hearing in terms of our <unk> our outlook and Q2 is more us just being cautious and conservative there's nothing that I would say is you know kind of materially slower.

There may be you know a little bit of slowdown for example, within the 511 D. T C business that we're seeing but it's not so material that we would you know get really nervous right now I would say our industrial portfolio.

Which was seeing incredible bookings growth you know kind of in the first quarter has now slowed to seeing pretty good bookings growth.

So you know it's I I would say there are some kind of evidence of a slight slowdown in new orders that are coming in but on the other side. We're seeing some of the inflationary pressures come off margins improve you know I think he probably saw we add a massive improvement in margins within our industrial poor.

Polio you know we would expect that to continue so you know I would say that a lot of what we're forecasting here in the second quarter continues to be you know just an uneasiness that we all have about the macro headlines, but there is nothing right now in the business.

That I would say you know that points us to expect materially weaker results as we move forward and and and with respect to some of these inventory destocking headwinds I think they're as we anticipated.

And we anticipated that they were gonna go you know at least through the second quarter.

That seems to be on schedule right. Now you know there is some you know I would say green shoots that we see here and there where we get a good bookings week that comes along that's probably a little bit of an improvement of where we are and we need to start seeing that in order to then get consistently good booking weeks you know.

At Boa and Prime aloft, which is where most of the destocking issues are hitting the hardest. So I think you know in general that feels to be on where we are and as we sit today, Larry we have a better you know kind of outlook and a higher you know kind of.

Level of confidence in being able to achieve the annual numbers that we set out but you know we we are not immune to some of the headlines that we're all hearing right now and we'd rather just be a bit conservative.

Yeah now that that's done.

Yeah I was gonna ask you a question about the Donald and maybe just done 511, so that I know that you know.

Obviously, the businesses did remarkably well last couple of years well through Covid and then with a lot of other <unk>.

Few quarters have really struggled.

Continued to grow up maybe you could you could just give it to you mentioned D C, which I always had been the big grow driver that's still growing just a little bit slower maybe give us a little update there and and just some new store opening plan, but by the 11th.

Yeah, So I'd say, our GTC comes will remain.

Remain positive in Q1 of this year and that sort of all the caller, we typically give on on comps. Larry This is Pat by the way, but I think that's you know.

That's a positive sign a lot of strength came from our professional business selling into law enforcement agencies was a very good business for the company in in the first quarter in it again.

Unlike a lot of consumer brands out there right. This diversified strategy really provides for consistency of earnings at 511 and that paid off as it relates to the new store we have.

All it.

Between 10, and 20, new stores planned to be open this year, a little bit less than last year, but we are continuing to open them because the economics are just just continue to be very compelling.

Gotcha, and if I could just slip one more just salt Lake Lugano just.

To the rapid growth there and I think you guys are open to new Salon last year.

The growth.

The growth driven by forlorn opening.

There must be an optimal amount.

You can't just open wherever so I'm just trying to.

<unk> get a little more color on you know.

Growth trajectory, which had been amazing Goin' quality I I feel like a little slow, but you know any any thoughts on that.

Yeah. The growth is partially driven by salon openings. It's also driven by increases in sort of average order size, which continues to increase materially right and so does and new customers and we're adding a line of new customers and not all of those come from salons. Some of them may come from or a question and operations or they may come.

From other relationships and other events. So I really can't it's not like 511, where you can point out you know harder next stores time. This equals that right like <unk>. It's a much more just sort of complex picture there I'm, sorry, I can't give you a formula per se, but short short answer as it is.

Coming from everywhere.

Yeah, that's right. Thanks, a lot I appreciate it.

You got it.

Thank you.

Your next question comes from your line of Kennedy.

I'm there.

Please go ahead.

Good afternoon, and thanks for taking my question.

<unk> given what you just talked about on the macro side talk about your confidence in the visibility for the snap back in the second half for Boa and Prima loft.

Yeah, Chris Thanks for the question and good afternoon, you know the <unk> I can't give you exact timing right and you know sort of Larry was you know kind of asking is it either deeper in terms of inventory.

Kind of draw down or you know is it going longer you know of.

Little bit of that is gonna be hard for us to tell I think one of the things that impacted you know both boa and prime aloft was really this kind of zero Covid policy out of China, and I know, we're beyond that now, but if you just think about how many of our brand partners get a material amount of their say.

Cells in the greater China market, and having you know kind of a number of months, where Chinese consumers were on the sideline. It isn't just the product we sell to China Center customers that then sell to the China market. You know it's brand partners globally that are sitting on.

Significant inventory now with zero COVID-19 being behind Us, China reopening and consumption coming back you know I think that's gonna clear inventory and clear the way for us to you know be.

Be able to snap back I can't tell you, whether it's Q3, Chris or it's Q4 I think we're getting through this inventory overhang you know kind of faster than you know in in a very accelerated basis, but I feel confident in the snap back I just don't know when the timing is going to be.

And you know we won't I won't give you specific numbers on how much but I can tell you from our analysis. We think there is a dramatically higher amount of sell through then there is Sal Lynn.

And so.

Some point unless inventory goes to zero in the supply chain, which you know is obviously not possible at some point, we have to start to match or sell through.

And just give in the delta between sell in and sell through right now that will provide eight material jump and revenue and profitability. One I think that is probably far stronger than what any of us would be talking about this isn't consistent with bows historical gloat gross.

Right or private <unk>, both of which had been north of 20 per cent revenue growers overtime. This is kind of a snap back that could be well in excess of that given.

The differential that exists right now between.

Sell in and sell through I also would point everyone to the fact that we do measure the amount of additional skews that were going on and there has been no deceleration in the amount of skew growth that we've had at both Boa and prime aloft.

So we are picking up massive amounts of share, which just add to the fact that this snapback is going to be you know in our opinion really violent and and a good way and when it happens it's gonna drive significant kind of revenue and earnings growth because it will at a minimum.

Start to match what sell through is so I can't tell you the exact timing I wish we had a crystal ball to be able to do it I think were largely working through some of the inventory issues. You know if you go to some of the larger companies you know the largest shoer accompany footwear company in the World said they thought by.

The end of their kind of second quarter, which ends in may they would largely be right sized with inventory I don't know that that's representative of every footwear company, but I bet. You that is representative of where the industry is going so if I had to take a guess I think you know as we get through Q too.

We probably start in Q3, getting some kind of orders to revert back to normal and then I think Q4 is going to look very strong for both of those businesses, but frankly, that's more of you know trying to put together a mosaic from what you're hearing in the marketplace and it's not based on analytical data that we've got coming in.

Right now, but I do think we can all anticipate the snapback is going to be very strong and I think because this started.

In the fourth quarter really with Prime aloft, we started seeing this in the third quarter of 22 and Bowl we saw it in the fourth quarter of 22, we're about ready at the back of this year to start entering some much easier comparisons and I think as a result of that it's gonna take some of that pressure on earnings.

Off and even if the snapback is it until the fourth quarter or even the first quarter. You know, we're just not gonna have the severe headwinds because the comparison get so much easier. So we feel very good that as we get to the second half of the year the portfolio will show and deliver growth and that's why we're very confident that will.

We'll get growth for you know the whole year, but I can't predict with any exact certainty when the snap back we'll be at bowl and primal off but I think it's going to be really strong and we're all going to feel really good when it happens.

Yeah.

Sure if that and then just a clarification on prime aloft not meeting your initial expectations is that primarily related to the inventory issue or is there something more going on there. Thanks a lot guys.

This is back their customer acquisitions have been.

At or above our our expectations.

They're sort of new technology, Rollouts has been at or above our expectations.

It's just again the existing customers an existing skews the orders and the replant orders had been less than we expected do too when we perceive and when we're confident in our inventory issues in the supply chain.

Understood. Thank you.

Thank you.

Your next question comes from Atlanta.

Please go ahead.

Hey, guys. It's my Xavier and on from that just starting with velocity, both top line growth and margins were under quite a bit of pressure in Q1 from the lower selanne, but what are we expecting retailers to start stocking up for the summer quarters, what does that mean for overall seasonality throughout the year and in turn should we expect the typical three Q season now.

Already and velocity to be less aggressive this year, given we're still seeing some caution from key retailers.

Yeah, there's a lot there so let me let me unpack it a little I'd say, we think Q2 will be better than Q1, and Q3 will be better than Q too. So let me start with that sequentially right within that we we do believe we will see more sort of strength.

In the archery side than in the air gun side, given those dynamics, you talked about around hunting and gearing up for hunting if that makes sense. So.

Q1 was very weak I would see Q1 as being a smaller percentage of the year than normal absent that we don't really have too much clarity.

Okay. That's helpful move into working capital specifically on inventory how are we thinking about inventory about how they inventory balance should move throughout the year given the different puts and takes from store in salon build out to 511 as well as you know further the caution we're seeing from key retailers.

[noise] around restocking.

Yeah. So I think what you guys saw is and you know at least in the cash flow statement of use of inventory in the first quarter and that was at really two businesses that was.

511, and Lugano and both of that really was to support the growth. We saw exiting 2022, but also the first quarter. So as we progress through the year, both inventory and working capital B expect to come down for a majority of the businesses the exception being <unk>.

Right. We if we continue to see this type called growth, we will continue to support that business with inventory outside of them, though we should see a significant cash conversion amongst the other nine subsidiaries as the year progresses.

That's helpful last one from you guys just on the health care front, maybe just an update on where we stand and building out a team there has our appetite for potential acquisition within 2000 twenty-three changed at all and maybe just speak to the relative size of the pipeline and how we feel about current private market.

<unk> specifically in healthcare.

Yeah, So really no major update from where we were.

And the last conference call team remains the same led by Kurt Roff, and then you know kind of assisted by human capital that we have within the firm you know kind of at various levels and that's how staffing will look until we start to.

Get a couple a company or two acquired and then we'll start building up that you know kind of vertical segment from our human and capital standpoint terms of desire to do a deal. It's there we wanna be able to kind of get some health care assets invested in and you know kind of in house.

Unfortunately, Mike the M&A markets remained really suppressed.

And it remains suppressed around you know kind of all categories sellers continue to be very cautious I don't think what's happening and.

Kind of bank market helps [laughter] Oh, you know when you see regional banks going out of business and their cost of capital you know kind of investment grade rated capital going into junk territory right. Now that's not you know kind of conducive to the M&A markets just broadly so we continue.

You to see that I think being a kind of huge weight on all markets now all that being said there are a couple of health care deals that have come through that have priced I'd say broadly.

The pricing has been you know more elevated than one would anticipate given the massive run up and capital costs over the course of the last year.

And I would say pricing has really been more consistent with you know kind of where pricing wasn't a free money economy of 21 and prior to that then it should be in an economy that has 5% you know federal funds rate right now and I think it's indicative.

But with the fact that there's just a lot of capital out there that is sitting on the sideline and when you think about kind of the private market, where we are generally competing for these assets against private equity buyers. There was just an enormous amount of capital that has been raised and continued to be raised.

Up until you know kind of a last year year and a half those funds all have relatively short term time horizons. It's one of the things that we always point to as being a key differentiator and <unk> business model, our competitors have to put money to work over a five year period.

We were able to be more patient and pick and choose when we want to put money to work and not really suffer from that moral hazard of you know you either put it to work or you lose it and that creates a current incredible you know uhm divergence of interests between investors and those private.

Equity effort and the management teams in general partners and Luckily our business model, you know really eliminates that it avoids that moral hazard now if you think there's five year commitment windows in traditional private equity.

We're now a year and a half into this fed tightening cycle and the M&A markets being flat on their back that basically eight up a third of the kind of time under which P. E funds can put their money to work.

It's creating an in our opinion that overhang will create really a level of desperation, and we're sort of seeing that when the limited number of assets come to market. So private market pricing you know <unk>.

Remains elevated we're really can't find price discovery outside of health care, because really not much is going on but in the health care space. There have been a couple of deals and I would say you know if you're a seller of a health care company now is not a bad time to go to market because that overhang is driving <unk>.

This is an even though you can't get financing.

Some of the players in the market today are just assuming that financing they can take out financing a year or two from now when markets become more accommodative and these assets are being bid up at you know kind of prices that you know in some cases make you scratch. Your head. So you know it's not I think it will this.

Something we've dealt with by the way high pricing for the better part of the last decade. So it's not something that's unique right now, but I would say pricing continues to remain elevated for the limited number of deals that we see in market.

Very detailed and helpful. Thanks, a lot that's all from you guys.

Thank you.

Your next question comes from God Joseph from Geoffrey.

Please go ahead.

Hey, Thanks, a lot.

Just kind of a follow up there obviously you're focused on on health care there but.

Cody you know at least in Covid and it's kind of had a history of Ziggy, England, either Zag and you guys did two acquisitions during the pandemic, which is obviously bin.

Being very been very fruitful, but it sounds like prices had been stubbornly high but so just thinking about right leverage in market dislocation in terms of you know your capital allocation strategy is now the environment, where it's kind of.

Oh, a layer on acquisition environment, you know it doesn't sound like there's a lot of platform acquisitions out there given the M&A, but just kind of thinking about how you guys are thinking about capital allocation and this you know given all that.

Dislocation in the market.

Yeah. So Kyle I think one you are right. We are looking more an add on acquisitions.

And those generally tend to be much smaller the competitiveness is typically a lot less.

And pricing comes in at much better price at much better levels and then obviously you have you know kind of either cost saving a revenue synergy opportunities that we look to extract that I didn't you know kind of you can look at the most recent acquisition, we made about bass into Rucci sports.

We think that's going to be a great opportunity to add that brand and a different technology and there are some real revenue synergies that exist. So we couldn't be more thrilled you know to acquire a company like that but I would.

Anticipate we're gonna see more balance type you know kind of acquisitions not from just marucci, but in terms of add on acquisitions that have you know either good cost saving or synergy opportunities within our portfolio. I think you are also right that given you know the dosage of new platform opportunities.

That are out there trading and when there is you know kind of one or two they seem to fetch pricing that does it take.

Take into account the new elevated you know kind of borrowing costs that we have I think it's probably a bit more of a stretch to think that will do a platform. Although sometimes these things can come up and we can find one and we think there is great value and we can move really quickly. So I don't want to rule it out, but I would just say from a <unk>.

Probability weighted basis, it's a laugh you know a bit less likely that we're gonna find that so when you think about capital allocation that would say.

A number one priority within our firm is to form the kind of high return opportunities within our portfolio.

In Lugano, clearly you know kind of goes to the top of that list you see that as we've been building inventory and the company. We've been generating you know and generated plus 30 per cent growth rates and that company I think there's a lot of runway to continue to invest there and have very high return on invested capital.

511 has been another company, where you know by building out its store network, we've been able to get a very high return on invested capital. So that will clearly be priority number one priority number two will be to acquire companies principally add ons, because I think platforms will be a little bit harder to come by.

And then our third capital allocation priority is you know right now is the buyback and although you know our goal is to grow and we need capital to grow so doing a buyback on top of you know returning capital through a dividend doesn't really feel like you know kind of consistent with our long term growth plan.

<unk>, we are in a short term period, where these price levels are just you know extra.

Extraordinarily disconnected from the reality of what our businesses are worth.

And so it makes more sense for us just to continue to buy back our stock and a creep value to our shareholders and I said this on the last conference call and I'll reiterate it today. If someone is so short term oriented to Wanna sell our stock because boa and primal off are going through inventory destocking.

Then we'll happily buy it back for our shareholders, who are more long term oriented and will accrete value because there will be a big snapback in both of those businesses in our growth rate will revert back to its historical averages and so for us it's going to be a sacrifice, where we're gonna sacrifice using capital to <unk>.

Essentially either stock on our balance sheet.

For a future acquisition or do acquisitions, now because you're the best opportunity to accrete value for our shareholders is.

Through execution of this buyback and so you know at some point I think maybe the stock will react and come back and that will become less of an opportunity but in the current environment with this current reality that has to be a high capital allocation priority.

Got very helpful. Thanks for answering my questions.

Thank you.

Your next question.

Adams Raymond James.

[noise], Hey, guys. It seems like you get you pretty much hit everything I had with Boa and primal locked basically if if I understand you guys correctly that you don't really know if this is gonna continue past two cute. So I just need to run right on that might be a little bit.

Difficult, but as far as private lost goes have you guys see any interest in any other regions.

Any other regions.

Yeah, I mean, I mean, we sell globally right. So our brand partners manufacturer through contract manufacturers in.

And Asia and then they sell you know uhm globally, and you'll see the prime aloft brand on a lot of brands.

Snow gear outerwear everywhere right. So I think when you say other region, we do have some projects, where specifically working on in Europe , now that that could be agreed but other than that I'm not sure. We sell globally. We we ship primarily to or are we have we work with our menu.

Factoring partners in Asia, who <expletive>.

Then sell to.

The partners of our end customers, mostly in Asia and then those are shipped globally does that makes sense.

Yeah, Yeah, just to clarify I meant that approximately 83 per cent of the revenue was coming from Asia Pacific So which is of course because of the textile industry, but I didn't know if you guys were getting any interest from you know sell directly to any.

We can't track exactly where it ends up does that makes sense. So that's where the the buyers are contracted from the the brands and there's kind of a pass through there. So that's actually you're right that is where the the revenue comes from but that's not where the consumer buys the products that makes sense.

Gotcha.

Perfect sense. Thank you.

Thank you.

No further questions at this time.

During the conference back to over.

Yes.

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

Thank you for your support.

<unk> University of fights conference call. Thank you I'll have an exciting day.