Q3 2023 Compass Diversified Earnings Call
Good afternoon, and welcome to come back to that base diversify its third quarter 2033 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. Please press Star then the number one on your Touchtone phone at.
At this time I would like to turn the conference over to Koby slot of Gateway group for introductions and the reading of the Safe Harbor statement. Please go ahead Sir.
Yes.
Thank you and welcome to Compass diversified third quarter 2023 conference call representing the company today are Elias Sabo, Codi's CEO, Ryan Bulking am Cody CFO and Pat Mozzarella CLO.
Hello of Compass Group management.
Before we begin I would like to point out that the Q3 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 at Compass diversified.
The company also filed its Form 10-Q with the SEC today. After the market closed which includes reconciliations of certain non-GAAP financial measures discussed on this call and also 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 and the company's financial filings. The company does not provide a reconciliation of its full year expected 2023 adjusted earnings our adjusted EBITDA because certain.
Significant reconciling information is not available without unreasonable efforts.
This call, we will refer to compass diversified as Cody or the company now.
Now allow me to read the following Safe Harbor statement. During this conference call. We may make certain forward looking statements, including statements with regard to the expectations related to the sale of Maria Chi and the future performance of Coty and its subsidiaries the impact and expected timing of the acquisitions and divestitures, including the Divesture.
<unk> Morici and future operational plans, such as ESG initiatives words, such as believes expects anticipates plans projects should and future or similar expressions are intended to identify forward looking statements.
These forward looking statements are subject to the inherent uncertainties in predicting future results and conditions.
Certain factors could cause actual results to differ on a material basis from those projected in these forward looking statements.
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 <unk>.
In our subsidiary companies, except 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.
This time I would like to turn the call over to Elias Sabo.
Good afternoon, everyone.
And thanks for joining us today.
Before I discuss our third quarter results I would like to cover the press release, we issued this afternoon announcing the agreement to divest marucci sports to Fox factory holding company.
At an enterprise value of $572 million.
<unk> expects to realize a pre tax gain on the sale of between 225 million to $245 million and we expect the net proceeds will be used to pay down outstanding debt and for general corporate purposes.
We are extremely proud of the growth marucci has experienced under our ownership and we feel fortunate to have been able to partner with their outstanding team.
We acquired the business in April 2020, based on our confidence in both Marucci brand and management.
Keep in mind. This was at a time when few transactions were being completed due to the pandemic, but our flexible capital structure and our commitment to <unk> strong opportunities even in times of economic uncertainty allowed us to execute at a time when others work.
Since then the merchant team has acted decisively strengthening their brand and growing their core business.
They have gained share in new markets like fielding gloves and thoughtful we have also expanded the marucci product portfolio by acquiring blizzard skins and bounce back.
We are honored to have partnered in the success. Thank you to occur in the entire maruti team for their contributions over the last several years, we wish them nothing but continued success.
Now onto our third quarter.
We are pleased to report remarkably strong third quarter results.
Once again exceeded our expectations and have us raising our full year outlook.
Our consistently strong results reflect not only the diversification of our subsidiaries, but our ability to find excellent businesses that produce category leading growth to us.
Underscore this point since 2019, we have grown consolidated subsidiary adjusted EBITDA for four straight years, despite volatile economic cycles and a once in a generation pandemic.
I am pleased to tell you given our increased subsidiary adjusted EBITDA guidance that Ryan will highlight shortly we fully expect 2023 to be a fifth straight year of growth.
During the third quarter pro forma consolidated revenue declined by 1%, while pro forma adjusted EBITDA grew 11%.
EBITDA margins expanded by approximately 250 basis points to a record 21, 9% in the quarter.
The decline in revenue was due to our industrial businesses, while they benefited from lower commodity input costs driving the 19% EBITDA growth, we passed some of those lower input costs onto our customers and experienced the mix shift to higher margin categories, resulting in an 8% decline in revenues.
<unk>.
When you look at year to date EBITDA performance, our industrial businesses have performed exceptionally well posting 14% growth.
We expect this segment to produce strong growth in the fourth quarter and into 2024.
Our branded consumer businesses exceeded our expectations by growing in the third quarter.
Pro forma revenues increased by 2% and EBITDA increased by almost 9%.
This represents the first quarter of positive EBITDA growth this year.
As we have stated many times before inventory related destocking headwinds have significantly lowered our consumer growth rate in 2023.
Even though these headwinds still exist in the third quarter, we were able to produce solid growth.
We expect inventory Destocking to continue in the fourth quarter comparisons to prior year are expected to ease and we expect growth rates will further accelerate.
Given the broader difficult macroeconomic backdrop, we are certainly pleased with our subsidiaries resilience and performance to date, and we remain confident and an even stronger 2024 with that I will now turn the call over to Pat.
Thanks Elias.
Throughout this presentation when we discuss pro forma results it will be as if we owned primary loss from January one 2022.
As Elias mentioned performance in Q3 materially exceeded our expectations and we experienced significant growth growth in both our consumer and niche industrial segments.
We will continue to perform extremely well driven by new Salon openings, a strong management team and a disruptive business model.
Last quarter, we mentioned that we faced headwinds in several segments due to correcting inventory levels in the supply chain.
These headwinds have eased in certain areas, but remain in others.
Specifically in Q3, <unk> financial performance was muted at Butler bookings turn positive.
<unk> on the other hand continued to see reduced demand as apparel makers remain cautious about consumer demand in 2024.
There was significant headwind to <unk> performance in 2023, we continue to expect these businesses to become a tailwind as the rate of inventory Destocking continues to decrease though it may not happen at the same time for prime a lofton boa due to different industry dynamics, we are confident it will happen for both.
Now onto our subsidiary results I'll begin with our niche industrial businesses for the year to date period, ending September 2023 revenues declined by five 7%. However, adjusted EBITDA increased by 14, 5% versus the same period last year for.
For the third quarter adjusted EBITDA increased by 19%.
On a combined basis, our industrial businesses expanded margins in the quarter significantly and consolidated adjusted EBITDA margins grew by over 400 basis points versus the prior year's quarter.
The adjusted EBITDA declined slightly for Arnold in the third quarter for the year to date period. The company continued to show solid growth in revenue and adjusted EBITDA as they gain traction securing new projects across markets demand levels in the aerospace and defense markets remain elevated driven by the commercial aerospace sector and for the year to date period the companies.
To bill ratio remains above one <unk>.
<unk> continued to show a profit growth in the quarter as adjusted EBITDA increased by almost 21% in the year to date September period. The revenue continues to be pressured as lower margin more cyclical end markets faced headwinds.
And the company passed on contractual raw materials savings the efficiency gains made by the management team at outdoor significantly more than offset these revenue headwinds.
At Sterno revenue declined by approximately 8% in the year to date September period, compared to a year ago again, driven by Lumpiness in the Companys Senate wax business. Despite this decline the company continued to operate efficiently and benefit from reduced input and shipping costs, leading to growth in EBITDA of over 40% in the quarter and <unk>.
12, 5% on a year to date basis.
Turning to our consumer businesses for the year to date September 2023 period revenues increased marginally and adjusted EBITDA declined by two 2% as compared to the prior year.
As a group.
These businesses showed significant improvement in the third quarter, However, as revenue and adjusted EBITDA increased by two 1% and eight 6% respectively versus Q3 'twenty two we.
We are hopeful that Q3, representing a turning point for <unk>, while the company continued to show a decline in adjusted EBITDA through the year to date period bookings were positive in Q3 versus prior year and our belief is that the worst of the inventory destocking headwinds are behind us for this business as we approach ski season, the buzz surrounding the launch of alpine boots, incorporating our technology.
<unk> continues to gain momentum and we anticipate a strong launch lugano.
<unk> growth accelerated further in the third quarter and for the year to date period revenues and adjusted EBITDA grew by 48% and over 56% respectively compared to prior year.
The company benefited from a solid increase in average transaction size in the quarter and saw strong growth in many of its salons, including Washington DC.
And as new Greenwich, Connecticut slot.
Progress continues to be made on our second flagship Salon in Palm Beach, and we anticipated opening in the fourth quarter. Similarly construction of the company's London Salon is scheduled to begin prior to year end and we anticipate opening in the first half of 2024.
The management team at Lugano continues to execute at an incredibly high level and we look forward to 2024.
<unk> once again had an exceptional quarter and for the year to date period revenue and adjusted EBITDA grew by over 17% and over 50%, respectively compared to the year ago period.
Primarily continued to show modest declines in both revenue and adjusted EBITDA in the September year to date period as compared to the prior year.
As we enter booking season for fall Winter 2024 brands remain cautious that the company is adding new programs and customers and we have experienced very little customer attrition, we anticipate a muted Q4, but remain optimistic about the companys prospects in 2024 and beyond.
Under <unk> ownership, primarily remains well positioned and we believe it will prosper following industry wide inventory destocking trends in the apparel business.
511 had another solid third quarter and for the year to date September 2023 period.
Revenue and adjusted EBITDA grew by 10% and eight 6% respectively.
The company is not immune to the headwinds facing consumers today 511, once again benefited from its diverse channel mix as its professional sales increased both domestically and internationally during the quarter.
We continue to see this momentum in the fourth quarter.
Velocity continued to struggle in the third quarter performance did improve significantly on a sequential basis. We continue to focus both on cost controls and demand stimulation and believe performance will improve in 2024.
Before turning the call over to Ryan I wanted to discuss a regulatory change coming in the near future impacting our business.
As has been broadly covered California, and several other states have enacted laws banning the sale and distribution of textiles containing <unk> chemicals effective January one 2025.
These chemicals are used broadly to impart water resistance and oil repellant seat and prevent staining.
Amongst our subsidiaries this regulatory change will have the most impact on 511.
However, they have been proactive in sourcing non <unk> versions of the impacted products and we will be transitioning in 2024.
As a whole we are pleased with our performance in the third quarter as it came in significantly above our expectations, while inevitably there will always be challenges in a broad group of diversified businesses. The quarter's performance. Once again demonstrated the strength of our model and we look forward to growth in the fourth quarter and in 2024 I will now.
Turn the call over to Ryan for his comments on our consolidated financial results.
Thank you Pat.
Moving to our consolidated financial results for the quarter ended September 32023, I will limit my comments largely to the overall results for Coty since the individual subsidiary results are detailed in our Form 10-Q that was filed with the SEC earlier today.
On a consolidated basis revenue for the quarter ended September 32023 was $569 6 million down 1% compared to $575 8 million for the prior year period.
This slight year over year decrease primarily reflects declines at velocity and depot as a result of inventory destocking headwinds, partially offset by strong revenue growth at Lugano in roofing.
Consolidated net loss for the third quarter was $3 8 million compared to net income of $2 6 million in the prior year the decrease.
It was primarily due to impairment expense recorded at velocity outdoor of $32 6 million, partially offset by strong consolidated gross margin performance.
Adjusted EBITDA in the third quarter was $103 9 million up 13% compared to $91 9 million in the third quarter of 2002.
The increase was due to an expansion in EBITDA margin at a consolidated level as our industrial companies expanded margins significantly as Pat highlighted earlier.
EBITDA margin expansion at our consumer businesses.
Primarily due to Lugano in marucci.
Adjusted earnings for the third quarter was significantly above our expectations at $41 million.
This was down from $41 6 million in the prior year quarter.
Primarily due to increased interest expense, but up sequentially by over 15%.
Adjusted earnings were above our expectations also due to the strong performance at Lugano in marucci.
Now onto our financial outlook.
We are pleased to announce that we are raising our full year adjusted EBITDA and adjusted earnings guidance as a result of the strong performance in the third quarter.
We are continuing to include Maruti and our guidance ranges as we are not certain the timing of the close of that sale process.
For the full year 2023, we now expect consolidated subsidiary adjusted EBITDA to range between $450 million and $465 million, an increase of $12 $5 million at the midpoint.
This implies 4% growth over the prior full year adjusted EBITDA.
Pro forma for the acquisition of Prime aloft and implies our fourth quarter 2023 consolidated subsidiary adjusted EBITDA will be up over 10% from the prior year comparable period.
For the full year 2023, we expect adjusted earnings to range between $130 million and $140 million, an increase of over $13 million at the midpoint.
Turning to our balance sheet.
As of September 32023, we had approximately $64 7 million in cash approximately.
$486 million available on our revolver.
And our leverage was 4.03 times.
Our leverage decreased sequentially.
And we expect it to decline in the fourth quarter, we have substantial liquidity and as previously communicated we have the ability to upsize our revolver capacity by an additional $250 million.
Upon the close of the Maruti sale process, which we expect in the fourth quarter, we anticipate using the proceeds to pay down existing debt and for general corporate purposes.
With our 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 <unk>.
Turning now to cash flow provided by operations.
During the third quarter of 2023, we received $19 $7 million of cash flow from operations, primarily result of strong operating performance.
This is up $24 3 million from the prior year's comparable period.
During the third quarter, we used $48 7 million in working capital a substantial decrease from 60 $62 8 million in the prior year when we needed to support many of our businesses inventory levels as a result of supply chain disruptions for.
For the year to date period cash flow provided by operations has increased almost $100 million as compared to the prior year.
Year to date Lugano has consumed $139 million in working capital to fund its inventory growth, which has generated exceptional return on invested capital and enabled the strong year to date growth rate we have experienced.
We expect to continue to monetize working capital across the business in Q4 with the exception of Lugano as we continue to fund its growth objectives.
And finally, turning to capital expenditures during the third quarter of 2023, we incurred $12 1 million of capital expenditures at our existing subsidiaries compared to $15 million in the prior year period. The decrease was primarily a result of the timing of retail build outs at Lugano in 511 to support their continued growth.
For the full year of 2023, we anticipate total capital expenditures of between $60 million and $70 million.
We continued to see strong returns on invested capital at several of our growth subsidiaries and believe they will have short payback periods capital expenditures in the fourth quarter will primarily be at Lugano for new retail salons.
With that I'll now turn the call back over to our lives.
Thank you Ryan.
I would like to close by briefly providing an update on the M&A market and our strategic initiatives.
In terms of M&A, we have seen some green shoots emerge with a few higher quality deals being reviewed but overall markets are weak of course, the current economic backdrop suppresses M&A activity with rising borrowing cost and treasury yields hitting 20 year highs.
The lack of visibility continues and as we remain on the sidelines, we continue to strengthen our pipeline of targets for each of our verticals, including healthcare and fully expect to capitalize once the broader market headwinds ease.
In the realm of ESG, our steadfast objective has always been to create tangible social and environmental benefits that resonate with our core values, while delivering robust financial returns for our stakeholders.
Transparency and accountability have remain the cornerstones of our business ethos driving us to invest in people refine processes and explore growth avenues that paved the way for transformative long term changes within our companies.
Throughout 2023, we have developed a systemic approach to ESG initiatives, we focused on climate action with a number of new programs aimed at waste reduction in emissions scope, one and two.
We have made progress on social responsibility with diverse new hires new programs designed to improve the wellbeing of our employees and by strengthening partnerships with community organizations. We've recently developed our human rights and labor policy and through sound corporate governance, we continue to uphold.
The highest standards of ethics transparency and accountability in order to safeguard our shareholders' interests. We are also collaborating with each of our subsidiaries. So that they too can create their own ESG strategies that align with our vision.
I extend my gratitude to our dedicated employees shareholders and all stakeholders, who have partnered with us in our journey towards positive change and sustainable value creation moving.
Moving forward Compass remains committed to driving positive change and leading the industry to become the model of choice through our unwavering commitment to ESG principles. We will continue to innovate collaborate and set an example for others, ensuring our business practices not only meet the demands of the present.
But also enhance the future.
In conclusion, we're proud of our third quarter results. They continue to highlight the benefits of our strategy.
Owning a diversified group of strong disruptive and industry, leading businesses is how we were able to produce the robust double digit adjusted EBITDA growth we saw this quarter.
As we continue to work through this period of uncertainty we are entering the end of the year from a position of strength the.
The strategic decision to divest marucci will allow us to deleverage our balance sheet and provide ourselves with strong liquidity to act when we feel is appropriate.
I'd like to extend my thanks to the entire <unk> family for their strong execution during the quarter amidst the persistent challenging environment.
Before turning over to Q&A I'd like to mention that we will be hosting our investor and analyst day in Newport Beach, California on January 17th 2023.
We will be showcasing our lugano diamonds subsidiary with presentations from Lugano and Cody management.
And we will hold the event at their newest membership club prepay.
Expect more details in the coming weeks, but we hope to see you all there with that operator, please open the lines for Q&A.
Sure.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one and your telephone keypad.
And your first question comes from the line of Larry Solow from CJS Securities. Your line is now open.
Great Good afternoon guys.
<unk>.
The announced sale.
It looks like 11, five times trailing EBITDA.
Our members visit correctly, that's about what you paid for it.
Of course, we've grown the business quite some distance.
No.
I guess first question.
In terms of reducing the debt.
Are there any restrictions or youll be able to reduce sorted.
The variable piece first alright.
Yes, Larry this is Brian.
Yes.
Yeah, So sorry, yeah Theres no.
No inability of us we could pay our revolver back in our term loan a both our pre payable.
Got it okay, great and then just switching gears.
<unk> you gave us a good kind of state of the union on the M&A environment.
How about just in terms of obviously it feels like the consumer has certainly gotten a little bit better through the year certainly.
Not as worse as we thought it was going to be the beginning of the year.
And.
It looks like.
Inventory destocking might be starting to wane, but just kind of what's your assessment, where you stand today from where we were in the beginning of the year in terms of your average consumer I know you had kind of gotten a little bit more optimistic that allow you to get consumers werent being impacted by this.
And in the economy, but any kind of update on that those thoughts would be great.
Sure Larry.
I would say if you went back to a year from today or at the beginning of the year.
We are much more constructive and positive really across the board.
Obviously, our industrial businesses have had a great year, you know a lot of that.
There is some revenue headwind but.
A big chunk of that is due to the.
Declines in commodity costs and us sharing those with our customers. So I think you need to look through that because unit growth is still present the companies are.
Forming exceptionally well.
On a kind of earnings generation standpoint, we would expect that to continue the big change from a year ago and from the beginning of the year is how we look at kind of our consumer businesses and so when you think about and consumer demand.
Up better than I think anybody as anticipated over the course of the year, that's not just for us Thats just consumption broadly.
And we see strong wage growth, that's still out there and employment growth and I think thats a great underpinning clearly it's kind of.
Balancing some of the increased kind of interest costs and monetary headwinds that we're all suffering from but the consumer has broadly held up.
For us.
The big issue because a lot of our earnings are generated.
At the wholesale level will rule selling into.
Retailer or even farther out in the case of private locked or a Boe.
The whole year have been sounding the alarm bells that this inventory destocking is a headwind that frankly, a year and a half ago. We didn't anticipate I don't think anybody really did and it's sort of a generational type of thing I mean this is all the result of distortion.
That came out of the pandemic supply chain issues, requiring us to over order kind of across the board and then dealing with all of that excess inventory. So we were very cautious that that was going to create.
Depression.
Our depress our earnings.
On our consumer side and it in fact did.
Where we stand today isn't to say that those headwinds are gone completely but the comparisons have become so easy now as we come into the fourth quarter, we feel it's very easy to lap those with companies like Boe private law.
<unk> 511, everybody who's through the consumer wholesale market and as we come into 2024.
Eventually sell through will match sell it and when that happens we expect a real strong snap back and kind of earnings from Boa private law, all the companies that have that wholesale exposure or either or even farther down I will say for now we are.
Seeing some sequential improvement in terms of order patterns out of those companies, but it is it back to where it was a year and a half ago, but they are comparisons it becomes so easy they are no longer headwinds. So we are very bullish we feel Q4 and what we've seen so far in October.
US to believe we're going to have another great quarter.
And as Ryan come into 'twenty four we're preparing for what we think is going to be.
Really strong year.
Awesome.
You gave a lot of detailed Lugano obviously.
Welcome to cover up the ball just just on Boa, which obviously one of your larger consumer brands and probably been taken the brunt.
Impact from the Destocking.
Can you just speak to some of the sort of the operating trends outside of that Destocking. I know you had I think at the beginning of the year.
Projected or called out that you thought skewed we'd be up over 10%.
Compared to last fall for what it's worth I have seen a lot more.
<unk> and Oreo circulars and whatnot, so it does seem to be.
Anecdotally getting more into the U S. But just any color on the trends that we might not actually be seeing in the in the reported numbers would be great. Thanks.
Sure.
Yes.
This is Pat Larry how are you.
I would just say we touched on it that the headwinds in bookings are starting to not be as much headwinds anymore and I touched on that specifically.
We are continuing to grow Skus and at every quarterly board meeting I see solid growth in our Skus I don't have the exact numbers.
In front of me, but it's in that same realm and as you look out to 'twenty five kind of project it beyond 'twenty four project.
User are strong too.
We mentioned our client is getting a really strong start if you go into the.
Any of the ski ski outfitters and ski stores I think they'll tell you the same thing.
It's taking a significant chunk of demand there.
And then theres other pockets I mean, we have some strong momentum in some of our Asian businesses.
And you've probably seen the under armour slip speed, which is being pushed very well and is a really amazing schuh I'm wearing them right now.
So there's a lot of other pockets of sort of success and growth there.
Great. Thanks, I appreciate it and thanks for all the color guys.
Thank you Eric.
Your next question comes from the line of Matt Koranda from Roth Capital. Your line is now open.
Okay.
Again, I think youre on mute.
Yes. Your next question comes from Robert Dodd from Raymond James.
Hi, guys.
Congrats on the quarter.
But to your point.
Yeah.
Sure.
All.
When exactly that is.
Yes.
At these times with the bottom end of your target range.
Three times, I think maybe even slightly below that.
Sure.
Does that increase the likelihood of Av.
Spending.
We will vigorously into that the health care vertical in 2020, given you will have <unk>.
A lot of available capital at that stage by by the standards.
Where do you normally make large acquisitions.
Hi, Robert This is Elias and thank you for the question the answer is yes.
Would it be very quickly.
Clearly, we were being cautious as our leverage.
Outside of the stated leverage range that we wanted to be in.
<unk>.
It.
Just so happened to be at a time when M&A activity is that.
Basically 20 year lows.
So it wasn't that hard to be patient and disciplined during this time, having capital available right now and as you mentioned being.
Now well within our leverage targets.
It is a really good opportunistic spot for us and.
Generally in conditions, where it's murky as.
The outlook and.
You can't turn on CNBC or Bloomberg or any of the other financial outlets without hearing kind of what is going to be the economic outcome from all of this monetary tightening.
How are consumers going to hold up and you can name a whole myriad of kind of issues and problems that everybody is looking at right now and how that's going to impact.
Kind of the economy.
And generally that causes buyers to really heads up we've found historically.
And if we can be active in markets, because we have permanent capital our capital as committed from our banks as you know.
And we have very a lot of flexibility. We found that these are the most ideal time to be an aggressive acquirer and so it really works out quite well that we're opening up all of those balance sheet capacity at a time when economic kind of murky notes is probably reaching its peak in general.
That creates really good opportunity to the extent, we could deploy and acquire a health care company or two that would be outstanding again.
Rob who runs our group is sitting next to me right now.
On this call and he is pursuing a number of different opportunities that are out there we have a very robust pipeline.
But it takes two to tango as you know and we need the kind of sellers to be out there, but we have.
A list of companies that were following that we think would be great targets within that space.
And to the extent they come to market, which we're hearing.
Going to happen in 'twenty four I think we would love to be able now to more aggressively move into healthcare and start to get the benefits of our broader diversification strategy that we outlined to you guys a year and a half ago. When we initiated this vertical.
Got it I appreciate that yes.
The timing of the acquisition Melucci kind of.
As to exactly that point as well.
That's gone.
It's.
It's been very successful.
On the working capital question I was going to be.
Why.
Very strong on the working capital investments as well.
Is there a point at which.
The amount of work.
The amount of working capital.
Allocated to the Lugano.
That would be compensation that begins to be a concern or is that a point at which you have to look at.
Alternative.
Find out yielding financing business is hopefully a little balance sheet.
At which that doesn't become ideal given given how much working capital in that business can consume and use.
We utilize.
Yes, I mean look Robert I think Thats, a great question and one that we think about all the time.
No.
<unk> 24, or 25 issue as we look out but as this company continues with growth rates, which frankly are just tore it at this point.
Look it could get to the point, where its sheer size starts too.
Kind of exceed what our diversification sort of efforts would look like.
The company is going to continue at these growth rates clearly we would be all ecstatic. If it can continue at these growth rates and given the return on invested capital. We're enjoying we would love to fund that but your point is very well taken and what we don't want to do is essentially be a proxy for any one company.
And so to the extent that its growth.
We're starting to overwhelm us that potential opportunity to kind of seek alternative financing it outside financing will still being part of the Coty portfolio clearly exists for us I think in the near term and I'm going to say in the near term over the next couple of years.
Even on some of the more bullish assumption that we could make we don't believe that we would kind of reached that point, but to the extent it was starting to get there.
We would have and do have available to you was kind of outside.
Our off of our balance sheet financing opportunities that we could pursue but I do want to point out a couple of years away and that's if the company was continue to grow at this level.
Which is a really high bar that you would we would be asking.
Yes.
Thank you for that one last one if I can kind of it yet.
With the with the California with the <unk>.
Topics.
Have you done any.
Okay.
Testing with customers.
Customers.
Notice any performance difference on the alternative fabrics.
Old ones and frankly, if they get to them.
Or do you think just not going to be an issue because anybody else selling legitimately.
California kind of thing.
The same issue.
Hey, Robert Pat Let me, let me say it this way we believe there is a case that certain customers will still want pizza ads products right and so that creates yet.
Demand, but also complexity.
It's a good product there's also a lot of.
Uncertainty in the enforcement of this regulation enforcement agency I don't believe has been named yet. So there is uncertainty out there as to what's going to happen on 125, So I can't answer it broadly other than to say it.
It's seven states. So by definition 43 other states at least for now.
We will still allow Pete and I would assume some customers either on the consumer or law enforcement side.
In those states and internationally would want <unk> product.
Got it thank you.
Thank you.
Your next question comes from the line of Matt Koranda from Roth Capital. Your line is now open.
Hey, guys, Hey, Brent on for Matt can you hear me all right.
Absolutely.
Okay great.
Maybe just on the Maruti. So can you just help us better understand what net proceeds from the transaction after taxes after fees and after the CGM.
Payment will look like and what we'll do.
Let's do the pro forma net leverage.
Yes sure. This is this is Ryan so I think the best way to think about it is $572 million of gross proceeds and then you could take the diluted ownership percentage.
The minority shareholders would share in that so post minority shareholders. It's about $500 million from there. We would have in these numbers still would still need to be calculated we would have our allocation interest payment as well as.
Tax payment given our reclassification to a C corp, and that nets, all down again, those numbers aren't finalized but around $400 million of net proceeds, which we could use to pay off our debt.
That helpful.
Absolutely thanks for that Brian.
Yes, and I think you pointed out earlier about leverage leverage levels will be within our.
Financial policy of three to three five times.
Got it.
Helpful. Thank you Ryan.
Moving to 511, maybe just speak to the progress and status of the retail build out strategy that were still spending capex.
And then where do we stand cleaning up the inventory it's been a drag on margins in prior quarters.
Lastly, just any callouts on the mix or purchasing behavior pro schumer's versus everyday consumers.
Yes sure.
Let's see on retail.
On retail we are I'd say, we're given the current retail environment, we're slowing our store rollout and we're going to come up with a plan a more limited planned for 2024.
I would say, though that our E. Com continues to be a growth continues to grow.
So that's.
Let's not say.
And retail continues to grow so it's not to say that DTC is not going to be a driver of growth. It just maybe a little bit less investment in 2024, and you'll see that in our our capex numbers holistically when we when we provide those fruit for 2024 on.
On inventory, we think we're managing it well.
Yeah.
I've learned long ago never to say never as far as.
Inventory goes and if you need to take further actions.
But we believe we're managing it well I would.
And a lot of cases, we can.
Sales slow moving inventory through our DTC channel, which obviously has higher margins, obviously maximizes the chance that you don't have to take any markdown, so never say never and Theres a lot of.
Stuff out like <unk> that we just talked about but we're going to we're going to try hard to manage inventory.
Appropriately and then with last question is on the pro Sumer.
Anecdotally I have heard.
The.
Conflict in the middle East driving pockets of orders here orders, there I haven't broken that out and I haven't seen that broken out.
Professional.
Business, specifically, but I would say our professional business has been a driver of growth was a driver of growth in Q3, and we believe we will continue to be a driver of growth in Q4 and really.
Speaks to our to our diversified model and the strength of that within 511, specifically.
Got it.
Tim I saw sense last one from me I guess, just preliminarily how are we thinking about top line growth in 2024, maybe just speak to which brands might be leading the way and why and then which brands.
Just a couple of couple of group group of brands could be potentially more constrained based on today's environment.
Yeah.
Yeah, So Mike we don't give sort of topline growth targets, we typically give EBITDA growth and as you know.
With 10, I guess now going down to nine subsidiaries.
That can vary and margins are a lot different and so.
We focus a little bit less on top line and we've always focused on kind of EBITDA and adjusted earnings as the right metrics as I said earlier.
And to start the call.
Holistically, we feel that Q3 was a turning point for us.
There is accelerating results in Q4 and 2024.
Should be a really good year for us and I would say if you think about what we've said historically.
Our core growth, we expect to be high single digit, possibly low double digit we're going to be.
Half of that this year.
Is it possible next year, we have enough growth to make up for kind of coming in underneath it so that over the two year period together, we get back to our core growth. It's absolutely possible now im going to ask everyone not to take that as a.
Kind of early guidance, but I've been saying that as a possibility given what we're seeing right now and trending if you want to get a little bit more granular I would say, we look at our as in our industrial vertical which has had a phenomenal year in 2023 is likely slowing the pace of growth.
In 'twenty, four but still having good growth.
A double digit growth kind of vertical we've never thought of it is that so I think that probably revert back to something that is more normalized which is kind of a mid single digit growth.
And then within the consumer business I think as you look across to clear.
Clearly, we have big expectations for Lugano, we expect to continue to have large funding needs that will go into that one of the things with Lugano as it's not an up leveraging when we fund additional working capital the way that translates into EBITDA growth does that add leverage it's not.
Huge deleverage or.
But it is an up leverage or as well.
Lugano.
Continue to remain with very high expectations, I think youre going to see <unk> come back with some pretty good growth probably as the year develops and inventories start to settle in and starts to match sell through my sense is youre going to see that accelerating pretty strong, but we are.
Pretty good expectations.
Now.
Thank you.
In general we would see our consumer businesses getting back holistically to be kind of that double digit type growth business that it has been historically and that we would expect going forward, which drives sort of the consolidated growth rate in that high single digit low double digit range.
<unk>.
It's a little early for us to give too much more granularity than that but I would say.
It feels like there is some tailwind coming in terms of are there any problem areas that we look at coming into 2024.
Answer is no right now we suffered through a really difficult year with consumer wholesale and that negatively impacted 511 and negatively impacted.
Ergo baby.
Negatively impacted big time level velocity prime aloft, and Boa and so we look at that and say if those if that huge negative is starting to subside. It is eventually going to actually turn into a positive I think that really.
Bodes well for our business.
That's kind of a.
Idiosyncratic micro economic issue that's benefiting us.
Don't really know the macro and how 'twenty four is going to shape up it could be a soft landing it could be a shallow recession could be continued growth I think none of us really know thats, creating the burkina's, but regardless of that I think the micro kind of economic outlook at each of our companies.
Our suffering from or benefiting from going forward give us great optimism that there really are right now anticipated problem areas coming in the portfolio in 2024.
Very helpful.
Thats all from me guys. Thank you.
Thank you.
Your next question comes from the line of Chris Kennedy from William Blair. Your line is now open.
Good afternoon, and thanks for taking the question can you talk about the wide range of guidance for the fourth quarter. What brings you to the upper end of that range and what brings you to the lower end some of the puts and takes.
Yes, sure Chris I'll take that in our lives you can add some color.
Certainly we've highlighted as part of our script the.
Expectations for adjusted EBITDA, we think it'll be midpoint of that guidance implies greater than 10% growth. So that's obviously very positive we feel certainly good about that.
Adjusted earnings is can be interesting as you get into the fourth quarter, specifically around taxes, which.
A broken record on behalf of compass, but taxes can be challenging for 10 different subsidiaries, having different tax situations that can impact fourth quarter, specifically, so just maintaining a little bit of conservativism. There if you run those numbers.
The midpoint of adjusted earnings implies some growth over last year, but not as much as adjusted EBITDA and we certainly could get there if taxes turn out to be less than we anticipated.
Yes, Chris I would just follow up to say you know kind of the range that we gave obviously.
One third of the quarter through right now and we have decent visibility on where revenues came out in October I think I also mentioned earlier in the call based on what we saw in October it would lead us to be more bullish not more pessimistic and probably lead us to be more at the high end of the range at the low end.
Because there was a very positive October that we saw sort of across the board.
But that being said as you know, there's two very important months and as holiday season approaches becomes really meaningful the number one determinant that can swing our earnings within that range is frankly, how we got it.
And we know it's large kind of business within our portfolio.
It is also one that does not have a backlog in.
It's benefited by being and distributor of the product throughout the year and not having inventory destocking headwinds, but it also has the shortest visibility because every day, we wake up if we look at what the sales were from the day before to figure out how the company is doing so.
Give the level of uncertainty, obviously, because we don't have that backlog outside of that I think most of our other businesses either work on backlog.
And of some varying late that give us a little bit more confident but I think within that range. The high end of the range or exceeding the high end will be predicated on performance at Lugano in.
What we've seen over the last over the course of this year, but even over the last month in October and before that.
<unk> gives us a lot of confidence that they're going to perform like they have been throughout the year and so we feel really good about the guidance range and hopefully being able to do what we've done all year, which is give a guidance range and then come in and be able to exceed it.
And kind of raise guidance, although since it's the fourth quarter or the last part of that is applicable.
But I think we want to provide something that we feel very certain about and then hopefully be able to over deliver on expectations.
Yes. Thank you for that very helpful. And then just a follow up on.
<unk> I think you've talked about softer demand. There can you just talk give US a reminder on.
The visibility of that business and win.
We should start to see bookings improve or whatnot.
Yes, so were starting to book now for fall Winter of 2024 for the most part.
And so that's where I was saying that a lot of the brands are cautious if you read.
Name the names, but if you read some of the big brands.
Discussions they are cautious about what the first half of 2024 is going to look like that obviously flows through to.
To how they how they work right.
Right and so we're our hope is that what we're gonna do we see.
Later orders and kind of see that order book build later over time, but we're just not there yet.
In the fall winter 2000 and for booking cycle.
Got it thanks for taking the questions.
Thank you Chris.
As a reminder, if you have a question. Please press star one on your telephone keypad.
And your next question comes from the line of Barry Haimes from Sage asset management. Your line is now open.
Thanks, so much congrats on the corner.
Two questions one is getting.
Getting back to the inventory destock.
<unk> consumer.
If next year.
You got to a point where.
Selling and sell through matched.
What sort of range of incremental revenues.
You get next year or said another way.
How much revenues hurt this year by the fact that.
Selling was less and sell through and then my second question is on.
Im Lugano realizing in each location is a little different could you give us just sort of a rough range to stand up a new location between Capex and working capital what kind of range per location were talking about thank you.
Sure and thank you for the question so in terms of.
Inventory destocking.
It's impossible to tell because we don't get from our consumers from our customers exactly what their sell through is and what their sell is it sell in as I can.
I can tell you anecdotally for private law for example, one of their customers. We talked to you as Pat said, we don't name names of customers, but we talked to are a person who is handling the general management of that product and they said, yes, we expect to be up double digits with it and we talk to the purchasing department.
Yes, your sales are going to be down 20%. Your orders, so that would kind of correlate to call. It a 30%.
Just to remind us inventory contraction that is your kind of net cost of inventory contraction to our revenues this year.
I think broadly I would say between 20 and 40% seems about right. I gave you one other anecdotal piece of evidence one of our own companies, which is farther up the supply chain.
First our CEO what are our purchase orders right now relative to what they would normally be to the factory and believe it or not they are down about 50% and so.
It's going to vary by company.
Further the point of how long do you think until we're reverting back to normal orders to our factory and the response was will probably be back to normal by mid next year. So that means orders will start getting to those factories 90 to 120 days in advance. So in this particular company, we're probably looking at.
At year end, when we start to open up orders to a more normalized basis. So I think it's impossible to tell I would be absolutely stunned if the impact was less than 20% and I can tell you, it's not more than 50%, but I think 20% or maybe 30% is probably if you ask for a.
Kind of instinct and a swag.
<unk> like the right number in terms of legato.
I'll, let Pat answer that I mean, there's a broad range based on the store it can be from.
$410 million plus Capex based on the store and then inventory is at least the high end of that.
It is kind of what we stock it with and probably a little more so I think if you're modeling it I would say $15 million to $20 million of total investment that goes into the business between Capex and inventory and then we stand these things up and look we expect to get.
Very high returns on invested capital, 30%, 40% types of return on that.
Great. Thank you so much 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 <unk>. Thank.
Thank you for your support.
This concludes compass diversified its conference call. Thank you and have a great day.
Thanks, Carl has been India.