Q4 2023 Compass Diversified Earnings Call
Okay.
[music].
Operator: Good afternoon, and welcome to Compass Diversified's fourth quarter and full year 2023 conference call. Today's call is being recorded. All lines have been placed on mute.
Good afternoon, and welcome to Compass.
<unk> fourth quarter and full year 2023 conference call.
Today's call is being recorded.
All lines have been placed on mute.
Operator: If you would like to ask a question at the end of the prepared remarks, please press the star key, then the number one on your touchtone phone. At this time, I would like to turn the conference over to Cody Slach of Gateway Group for introductions and the reading of the Safe Harbor Statement. Please go ahead.
If you would like to ask a question at the end of the prepared remarks. Please press. The Sparky then the number one and your Touchtone phone.
Cody Slach: Thank you, and welcome to Compass Diversified's fourth quarter and full year 2023 conference call. Representing the company today are Elias Sabo, Cody's CEO, Ryan Faulkingham, Cody's CFO, and Pat Massarello, COO of Compass Group Management. Before we begin, I'd like to point out that the Q4 2023 press release, including the financial tables and non-GAAP financial measure reconciliations for subsidiary adjusted EBITDA, adjusted earnings, and pro forma net sales, is available in the investor relations section on the company's website at compassdiversified.com. The company also filed its Form 10-K with the SEC today after the market close, which includes reconciliations of certain non-GAAP financial measures Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income or loss from continuing operations in the company's financial filing. The company does not provide a reconciliation of its full year expected 2024 adjusted earnings, adjusted EBITDA, or subsidiary adjusted EBITDA because certain significant reconciling information is not available without unreasonable effort. Throughout this call, we will refer to Compass Diversified as Cody or the company. Now, allow me to read the following Safe Harbor statement.
Thank you and welcome to accomplish diversified <unk> fourth quarter and full year 2023 conference call representing the company today are Elias Sabal Coty CEO.
Ryan Falcon Ham <unk>, CFO, and Pat Mozzarella co CEO of Compass Group management before.
Before we begin I would like to point out that the Q4 2023 press release, including the financial tables and non.
non-GAAP financial measure reconciliations for subsidiary adjusted EBITDA adjusted EBITDA adjusted earnings and pro forma net sales are available at the Investor Relations section on the company's website accomplished diversified dot com.
The company also filed its Form 10-K with the SEC today after the market close which includes reconciliations of certain non-GAAP financial measures discussed on this call and is also available at the Investor Relations section of the company's website.
Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income or loss from continuing operations in the company's financial filings. The company does not provide a reconciliation of its full year expected 2024, adjusted earnings adjusted EBITDA or a subsidiary of <unk>.
Adjusted EBITDA, because certain significant reconciling information is not available without unreasonable efforts.
Throughout this call, we will refer to compass diversified as Cody or the company.
Now allow me to read the following safe Harbor statement. During this call. We may make certain forward looking statements, including statements with regard to the expectations related to the future performance of Coty and its subsidiaries.
Cody Slach: During this call, we may make certain forward-looking statements, including statements with regard to the expectations related to the future performance of Cody and its subsidiaries, the impact and expected timing of acquisitions and divestitures, and future operational plans, such as ESG initiatives. Words such as believes, expects, Participates, 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 factors discussion in the Form 10-K as filed with the SEC for the year ended December 31, 2023, as well as in other SEC filings.
Impact and expected timing of acquisitions, and divestitures 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 a numerator and the risk factor discussion in the Form 10-K as filed with the SEC for the year ended December 30.
<unk> 2023, as well as in other SEC filings.
Cody Slach: 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. Except as required by law, Cody undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise. At this time, I would like to turn the call over to Elias Sabo. Good afternoon, everyone, and thanks for joining us today.
In particular, the domestic and global economic environment supply chain labor disruptions inflation and rising interest rates all may have a significant impact on coty, and our subsidiary companies, except as required by law <unk> undertakes no obligation to publicly update or revise any forward looking statements, whether because of new information future events.
Or otherwise at this time I would like to turn the call over to Elias Sabo.
Good afternoon, everyone and thanks for joining us today.
Elias Joseph Sabo: I'm pleased to report a strong fourth quarter, capping off another exceptional year for Cody. Our results continue to demonstrate that owning premium businesses with defensible competitive moats can drive financial outperformance. Even during periods of economic uncertainty, these results are highly intentional.
I am pleased to report a strong fourth quarter capping off another exceptional year for Coty.
Our results continue to demonstrate that owning premium businesses with defensible competitive moats can drive financial outperformance.
Even during periods of economic uncertainty.
These results are highly intentional in 2018, we embarked on a strategy to own and manage high growth innovative and disruptive businesses.
Elias Joseph Sabo: In 2018, we embarked on a strategy to own and manage high-growth, innovative, and disruptive businesses. This transformation is driving a significant tailwind for our business, as evidenced by our fourth quarter. Despite experiencing unique challenges in our business, 2023 marked our fifth straight year of subsidiary-adjusted EBITDA growth. Our branded consumer businesses produced essentially flat pro forma subsidiary adjusted EBITDA results compared to the prior year.
This transformation is driving a significant tailwind for our business as evidenced by our fourth quarter.
Despite experiencing unique challenges in our business 2023 marked our fifth straight year of subsidiary adjusted EBITDA growth.
Our branded consumer businesses produced essentially flat pro forma subsidiary adjusted EBITDA results compared to prior year.
Elias Joseph Sabo: On the other hand, our industrial businesses produce 18% annual growth in subsidiary adjusted EBITDA. Our diversification has yet again led to a reduction of financial volatility, which we believe will be further reduced as we add more subsidiaries and enter the healthcare vertical. In our branded consumer vertical, inventory destocking issues will mask the underlying strength of most of the brands we own throughout 2023. Lugano once again delivered remarkable growth, producing 53% annual revenue growth and 65% adjusted EBITDA growth. As we have repeatedly mentioned, Lugano has created a very innovative and disruptive business model within the high jewelry industry.
On the other hand, our industrial business has produced 18% annual growth and subsidiary adjusted EBITDA.
Our diversification yet again led to a reduction of financial volatility, which we believe will be further reduced as we add more subsidiaries.
Her into the health care vertical.
And our branded consumer vertical inventory destocking issues masked the underlying strength of most of the brands we own throughout 2023.
Lugano once again delivered remarkable growth producing 53% annual revenue growth and 65% adjusted EBITDA growth.
As we have repeatedly mentioned Lugano has created a very innovative and disruptive business model within the high jewelry industry.
Elias Joseph Sabo: We continue to fund capital investment to expand the company's footprint and inventory position, realizing exceptionally strong returns on invested capital that is fueling the company's rapid growth. In the fourth quarter, our branded consumer businesses experienced strong subsidiary adjusted EBITDA growth of 26% over the prior year, as inventory destocking headwinds started to subside. You will remember the year the prior year's fourth quarter started a major inventory de-stocking trend that lasted
We continue to fund capital investment to expand the companys footprint and inventory position.
Realizing exceptionally strong returns on invested capital that is fueling the company's rapid growth.
In the fourth quarter, our branded consumer businesses experienced strong subsidiary adjusted EBITDA growth of 26% over prior year as.
As inventory Destocking headwinds started to subside.
You will remember that the prior year's fourth quarter started a major inventory destocking trend that lasted throughout 2023.
Elias Joseph Sabo: We believe channel inventory will continue to right-size and turn into a tailwind in 2024, which we expect will enable a much higher level of growth for many of our consumer businesses, making up for the growth we didn't experience in 2023. Our industrial business generated double-digit subsidiary-adjusted EBITDA growth in the fourth quarter and full year. The easing of inflationary pressures boosted margins and resulted in adjusted EBITDA growth above long-term trends.
We believe channel inventory will continue to right size and turn into a tailwind in 2024, which we expect will enable a much higher level of growth for many of our consumer businesses, making up for the growth we didn't experience in 2023.
Our industrial business has generated double digit subsidiary EBIT.
<unk> adjusted EBITDA growth in the fourth quarter and full year.
The easing of inflationary pressures boosted margins and resulted in adjusted EBITDA growth above long term trends.
Elias Joseph Sabo: We expect this tailwind to normalize as we progress through 2024 and for our industrial vertical to revert back to trend growth. We remain optimistic about our industrial vertical in 2024 since backlogs remain at very healthy levels. Now, I'd like to return to our competitive positioning.
We expect this tailwind to normalize as we progress through 2024 and <unk> in our industrial vertical to revert back towards trend growth, we remain optimistic about our industrial vertical in 2024 since backlogs remain at very healthy levels.
Now I'd like to return to our competitive positioning this.
Elias Joseph Sabo: The strategy we outlined at last month's Investor Day detailed our focus on buying and managing more innovative and disruptive businesses. We unveiled this strategy with our management change in 2018. Since then, we have been opportunistically divesting our subsidiaries that grew alongside their industry and focused our efforts towards acquiring more innovative and disruptive businesses with fundamentally faster growth rates. We've seen the efforts of this transition really begin to manifest in the numbers, as evidenced by our results in the fourth quarter and full year. This important shift has boosted the power of our growth engine to produce a more consistent, faster rate of growth.
The strategy, we outlined last month's Investor day detailed our focus on buying and managing more innovative and disruptive businesses.
We unveiled this strategy with our management change in 2018.
Since then we have been Opportunistically divesting our subsidiaries that grew alongside their industry.
<unk> focused our efforts towards acquiring more innovative and disruptive businesses with fundamentally faster growth rates.
<unk> seen the efforts of this transition really begin to manifest in the numbers as evidenced by our results in the fourth quarter and full year.
This important shift has boosted the power of our growth engine to produce a more consistent faster level of growth.
Elias Joseph Sabo: So, when one or two of our subsidiaries aren't growing near trend, for example, what we experienced in 2023 with both BOA and Primaloft, we have other subsidiaries growing at or above trend, like Lugano and our industrial vertical did in 2023. This diversification in growth drivers not only reduces financial volatility, but it also increases the likelihood of us achieving our core growth rate on an annual basis. As we outlined at our Investor Day, another way in which we create value for our shareholders is through opportunistic M&A transactions. Although the M&A markets were weak for most of 2023, we were able to consummate the divestiture of Maroochy Sports, realizing a significant gain for our shareholders. In early 2024, we acquired The Honeypot Company, an innovative, disruptive company in the feminine hygiene sector. We believe opportunistic M&A transactions, like Maruji and Honeypot, create value for our shareholders, accelerate our core growth rate, and minimize the likelihood of long-term growth decay on a consolidated basis. Before passing the call over to Pat, I'd like to discuss two things.
When one or two of our subsidiaries are growing near trend for example, what we experienced in 2023 with both <unk> and private law, we have other subsidiaries growing at or above trend like Lugano at our industrial vertical did in 2023.
This diversification and growth drivers not only reduces financial volatility, but it also increases the likelihood of us achieving our core growth rate on an annual basis.
As we outlined at our Investor day, another way in which we create value for our shareholders is through opportunistic M&A transactions.
Although the M&A markets were weak for most of 2023, we were able to consummate the divestiture of marucci sports realizing a significant gain for our shareholders. In early 2024, we acquired the Honeypot company.
Innovative disruptive company in the feminine feminine hygiene space.
We believe opportunistic M&A transactions like <unk> and honeypot create value for our shareholders accelerate our core growth rate and minimize the likelihood of long term growth decay on a consolidated basis.
Before passing the call over to Pat I'd like to discuss two topics first a few macro trends were seeing and second address the shift to the way we guide our business, which we believe will simplify how you think about evaluating Coty first a few thoughts on how macroeconomic conditions are affecting our business.
Elias Joseph Sabo: First, a few macro trends we're seeing, and second, address the shift to the way we guide our business, which we believe will simplify how you think about evaluating Cody. Including the Honey Pot Company, approximately 70% of our consolidated subsidiary adjusted EBITDA is generated by our branded consumer vertical. So far in 2024, the U.S. consumer is looking healthy, notwithstanding tighter monetary conditions that have existed over the past two years. Unemployment continues to be at historically low levels, wages continue to grow above trend, and the easing of inflationary pressures is causing real wages to grow again after declining for much of the past two years. Access savings continue to exist from pandemic-led government transfer payments, albeit at lower levels as savings buffered high inflation rates over the past couple of years.
Including the Honeypot company approximately 70% of our consolidated subsidiary adjusted EBITDA is generated by our branded consumer vertical.
So far in 2020 for the U S. Consumer is looking healthy notwithstanding tighter monetary conditions that have existed over the past two years.
Unemployment continues to be at historically low levels wages continue to grow above trend and the easing of inflationary pressures is causing real wages to grow again after declining for much of the past two years.
Savings continue to exist from pandemic led government transfer payments, albeit at lower levels as savings buffered high inflation rates over the past couple of years taken together, we believe this bodes well for our branded consumer business in 2024.
Elias Joseph Sabo: Taken together, we believe this bodes well for our branded consumer business in 2024. Regarding our industrial vertical, which represented approximately 30% of consolidated subsidiary adjusted EBITDA in 2023, global growth is expected to remain positive, but at subdued levels due to the negative impact of tight monetary conditions and global tensions. We believe our industrial subsidiaries are positioned to continue to gain market share through innovation, as evidenced by Altor Solutions being the first to market with a biodegradable solution, and Arnold Technologies leading the market in advanced materials used to generate green energy.
Regarding our industrial vertical which represented approximately 30% of consolidated subsidiary adjusted EBITDA in 2023 global growth is expected to remain positive.
Dude levels due to the negative impact of tight monetary conditions and global tensions.
We believe our industrial subsidiaries are positioned to continue to take market share through innovation as.
As evidenced by all source solutions being first to market with a biodegradable solution and.
And Arnold technologies, leading the market in advanced materials used to generate green energy.
Elias Joseph Sabo: We believe our industrial businesses will continue to perform well again in 2024 as a stable macroeconomy and company-led innovation is expected to lead to another year of growth. Thus far, our results have exceeded our expectations. While we are reiterating the outlook we provided just a few weeks ago at our Investor Day, we are certainly optimistic about 2024 and believe upside exists based on the trends we are currently experiencing. Speaking of our outlook, we are adjusting how we communicate our guidance to help simplify the analysis of our business. Today, we currently own 10 subsidiary businesses across the consumer and industrial verticals, and at some point, we expect to enter the healthcare market. We expect to own and manage 15 companies one day, and perhaps more than that in the future. To help quantify this scale more simply, we will provide subsidiary-adjusted EBITDA guidance ranges at both the branded consumer and industrial level.
We believe our industrial businesses will continue to perform well again in 2024 as a stable macro economy and company led innovation is expected to lead to another year of growth.
Thus far in 2024, our results have exceeded our expectations.
While we are Iterating our outlook, we provided just a few weeks ago at our Investor Day, We are certainly optimistic about 2024 and believe upside exists based on the trends we are currently experiencing.
Speaking of our outlook, we are adjusting how we communicate our guidance to help simplify the analysis of our business today.
Today, we currently own 10 subsidiary businesses across the consumer and industrial verticals.
Some point, we expect to enter the health care market, we expect to own and manage 15 companies, one day and perhaps more than that in the future to help quantify this scale more simply we will provide subsidiary adjusted EBITDA guidance ranges on a branded consumer and industrial level.
Patrick A. Maciariello: Despite this change, as part of our governance protocols, we remain focused on transparency, and we will continue to disclose the same level of detail as we have done previously. We are shifting the narrative as we believe it will be easier for you to follow Cody as we continue to expand the number of subsidiaries we own. With that, I will now turn the call over to Pat. Thanks, Elias.
Despite this change as part of our governance protocols. We remained focused on transparency and we will continue to disclose the same level of detail as we have done previously.
We are shifting the narrative as we believe it will be easier for you to follow Cody as we continue to expand the number of subsidiaries wheel with that I will now turn the call over to Pat.
Thanks Elias.
Patrick A. Maciariello: As a reminder, throughout this presentation, when we discuss pro forma results, it will be as if we own Primaloft as of January 1st, 2022. In addition, we have not included the Honeypot in our 2023 results, as it was acquired after a year. I am pleased to report on a very successful year for Cody in 2023, one in which we exited the year far stronger than we entered, thanks to the quality and positioning of our business. On a consolidated basis for the year, revenue was approximately flat, and pro forma subsidiary adjusted EBITDA grew by 4.4%. As Elias mentioned, in the fourth quarter, on a consolidated basis, we saw a material acceleration as many of the headwinds facing our businesses over the last year began to abate.
As a reminder throughout this presentation when we discuss pro forma results. It will be as if we owned primary loss as of January one 2022.
In addition, we've not included the Honey pot and our 2023 results as it was acquired after year end.
I am pleased to report on a very successful year for Coty and 2023, one in which we exited the year far stronger than we entered thanks to the quality and positioning of our businesses.
Consolidated basis for the year revenue was approximately flat and pro forma subsidiary adjusted EBITDA grew by four 4%.
As Elias mentioned in the fourth quarter on a consolidated basis, we saw a material acceleration as many of the headwinds facing our businesses over the last year began to abate.
Patrick A. Maciariello: As a result, in the fourth quarter, revenue and subsidiary-adjusted EBITDA growth exceeded our expectations, growing by 7% and 27.4% respectively. Both our industrial and branded consumer verticals had strong quarters, growing subsidiary adjusted EBITDA by 30.2% and 26.3% respectively, for the full year within our industrial vertical. Revenues decreased by 5.1% and subsidiary adjusted EBITDA increased by 18.3% for 2022. In this quarter, we saw broadening strength in our industrial businesses as a positive revenue mix to higher-margin products combined with lower input and shipping. In many cases, we pass on the benefits from lower costs to our customers, leading to the slight revenue decline. However, our industrial management teams continue to operate efficiently and drive solid margins. For the year, both Arnold and Altor grew adjusted EBITDA by over 20%, and Sterno by over 11%.
As a result in the fourth quarter revenue and subsidiary adjusted EBITDA growth exceeded our expectations growing by 7% and 27, 4% respectively.
Both our industrial and branded consumer verticals had strong quarters growing subsidiary adjusted EBITDA by 32% and 26, 3% respect respectively.
For the full year within our industrial vertical.
Revenues decreased by five 1% and subsidiary adjusted EBITDA increased by 18, 3% for 2022.
In this quarter, we saw broad earnings strength in our industrial businesses as positive revenue mix to higher margin products combined with lower input and shipping costs. In many cases, we passed on the benefits from lower cost to our customers leading to the slight revenue decline. However, our industrial management teams continue to operate efficiently and drive solid margin.
Both.
For the year, both Arnold and outdoor grew adjusted EBITDA by over 20% and sterno by over 11%.
Patrick A. Maciariello: A continued return to travel and more pre-pandemic activities continues to have a positive impact on several areas of our industrial business, and we believe this trend will be ongoing. In addition, specifically at Arnold, we want to once again point out the investments in research and development made over the last several years. As a result of Arnold's Technology Center, the team continues to add new projects and, though not a significant driver of growth in 2020, turning to our consumer verticals. For 2023, revenues increased by 2.7%, and pro forma subsidiary adjusted EBITDA was approximately flat for 2022. Growth accelerated in the back half of the year, however, and for the fourth quarter, revenue and subsidiary adjusted EBITDA grew by 13.4% and 26.3%, respectively, in Q4 2022. As Elias mentioned, we believe this quarter represents a transitional period where, though inventory-related distortions in the supply chain have not fully dissipated, the headwind they have had on our consumer revenues has weakened significantly, specifically to give color on two of our businesses furthest up the supply chain. However, challenges at Primaloft remain.
Our continued return to travel and more pre pandemic activities continues to have a positive impact on several areas of our industrial business and we believe this trend will be ongoing in.
In addition, specifically at Arnold we want to once again point out the investments in research and development made over the last several years as a result of Arnold's Technology Center. The team continues to add new product projects and.
So not a significant driver of growth in 2023, the company is growing rapidly and new industries, including medical devices.
Turning to our consumer vertical for 2023 revenues increased by two 7% and pro forma subsidiary adjusted EBITDA was approximately flat versus 2022.
Growth accelerated in the back half of the year, However, and for the fourth quarter revenue and subsidiary adjusted EBITDA grew by 13, 4% and 26, 3% respectively for Q4 2022.
As Elias mentioned, we believe this quarter represents a transitional period, where the inventory related distortions in the supply chain have not fully dissipate dissipated the headwind they have had on our consumer revenues has weakened significantly.
Specifically to give color on two of our businesses further up the supply chain challenges that primal remain they appear to be abating somewhat and we are seeing improvements brand partners are delaying the timing of their orders often to the latest possible moment, but many indicate solid order expectations on a full year basis.
Patrick A. Maciariello: They appear to be abating somewhat, and we are seeing improvements. Brand partners are delaying the timing of their orders often to the latest possible moment, but many indicate solid order expectations on a full year basis.
Conversely <unk>.
Patrick A. Maciariello: Boa Technologies returned to growth and adjusted EBITDA in the quarter, and we are further encouraged by double-digit growth in bookings thus far in 2024. Lugano once again led our growth for the quarter and for the year, as both revenue and adjusted EBITDA grew by 53% and close to 65%, respectively. We grew revenue in every salon in 2023 and saw meaningful increases in average transaction value. In addition, in the fourth quarter, we benefited from the relocation and expansion of our flagship Palm Beach salon. We are excited about the opening of our London salon in the second quarter of this year and continue to evaluate additional markets.
Our technology has returned to growth in adjusted EBITDA in the quarter and we are further encouraged by double digit growth in bookings thus far in 2024.
Lugano once again led our growth for the quarter and for the year as both revenue and adjusted EBITDA grew by 53% and close to 65% respectively.
We grew revenue in every salon in 2023 and saw meaningful increases in average transaction value.
In addition in the fourth quarter, we benefited from the relocation and expansion of our flagship Palm Beach Salon.
We are excited about the opening of our London Salon in the second quarter of this year and continue to evaluate additional markets.
Ryan J. Faulkingham: As a whole, we are very pleased with the performance of our subsidiary businesses in 2023 and, particularly, in the fourth quarter. We are confident in the positioning of our businesses and the outlook for 2024. I will now turn the call over to Ryan for additional comments on our financial results. Thank you, Pat.
As a whole we're very pleased with the performance of our subsidiary businesses in 2023 and in particular in particularly in the fourth quarter.
We are confident in the positioning of our businesses and the outlook for 2024.
I will now turn the call over to Ryan for additional comments on our financial results.
Yes.
Thank you Pat.
Ryan J. Faulkingham: Moving to our consolidated financial results for the quarter ended December 31, 2023, I will limit my comments largely to the overall results for Cody since the individual subsidiary results are detailed in our Form 10-K that was filed with the SEC earlier today. As a reminder, our sale of Marucci occurred in the fourth quarter of 2023, and its results have been reclassified to discontinued operations for all periods.
Moving to our consolidated financial results for the quarter ended December 31, 2023, I will limit my comments largely to the overall results for Coty since the individual subsidiary results are detailed in our Form 10-K that was filed with the SEC earlier today.
As a reminder, our sale of marucci occurred in the fourth quarter of 2023 and its results have been reclassified to discontinued operations for all periods.
Ryan J. Faulkingham: On a consolidated basis, revenue for the quarter ended December 31st, 2023, was $567 million, up 7% compared to $529.7 million for the prior year period. This increase was primarily a result of strong growth in Lugano and 511, partially offset by lower revenue at Sterno, Altor, and Veloci. Consolidated net income for the fourth quarter was $139.4 million, compared to a net loss of $11.8 million in the prior year.
On a consolidated basis revenue for the quarter ended December 31, 2023 was $567 million up 7% compared to $529 7 million for the prior year period. This increase was primarily result of strong growth at Lugano, and 511, partially offset by lower revenue at Sterno All tour.
And velocity.
Consolidated net income for the fourth quarter was $139 4 million compared to a net loss of $11 8 million in the prior year.
Ryan J. Faulkingham: The fourth-quarter net income was primarily due to the gain on the sale of Marucci, partially offset by impairment expense recorded at Primaloft. Adjusted EBITDA in the fourth quarter was $94.8 million, up 35% compared to $70 million in the prior year. The increase was due to strong growth at Lugano and 511, as well as an expansion and EBITDA margin at our industrial business. Also included in adjusted EBITDA in the fourth quarters of 2023 and 2022 were management fees and corporate costs of $20.9 million and $20.8 million, respectively. Adjusted earnings for the fourth quarter were significantly above our expectations, coming in at $38.1 million.
The fourth quarter net income was primarily due to the gain on the sale of marucci, partially offset by impairment expense recorded at prime or left.
Adjusted EBITDA in the fourth quarter was $94 8 million up 35% compared to $70 million in the prior year.
The increase was due to strong growth at Lugano in 511, as well as an expansion in EBITDA margin at our industrial businesses.
Included in adjusted EBITDA in the fourth quarters of 2023, and 2022 or management fees and corporate costs of $20 9 million and $20 8 million respectively.
Adjusted earnings for the fourth quarter were significantly above our expectations coming in at $38 1 million. This was up significantly from $16 3 million in the prior year quarter and up 29% sequentially.
Ryan J. Faulkingham: This was up significantly from 16.3 million in the prior year quarter and up 29% sequentially. Adjusted Earnings was above our expectations due to strong performances at Lugano and 511 and by our industrial business. In addition, our adjusted earnings were positively impacted throughout 2023 by much lower taxes than we anticipated at our subsidiaries, primarily Velocity and Primaloft, where we had weaker performance and related income tax benefits. We believe that for modeling purposes, the tax provision at our subsidiaries on a consolidated basis will approximate 10% of their adjusted EBITDA.
Adjusted earnings was above our expectations due to strong performances at Lugano in 511 and by our industrial businesses. In addition, our adjusted earnings was positively impacted throughout 2023 by much lower taxes than we entered it anticipated at our subsidiaries, primarily velocity and prime aloft, where we had weaker performance and <unk>.
Related income tax benefits.
We believe that for modeling purposes, the tax provision that our subsidiaries on a consolidated basis will approximate 10% of subsidiary adjusted EBITDA How's.
Ryan J. Faulkingham: However, in 2023, our tax provision was only 7% of subsidiary adjusted. Now on to our financial outlook. At our Investor Day in January, we mentioned that we would be enhancing our guidance to the street to reduce confusion. Providing guidance on our adjusted earnings and subsidiary adjusted EBITDA will continue and remain the same. However, we are adding a third guidance metric called Adjustments. This differs from subsidiary-adjusted EBITDA in that we deduct corporate-level expenses and corporate-level management. As a reminder, we will refer to subsidiary-adjusted EBITDA on a pro forma basis upon acquisition. But we will not provide adjusted EBITDA nor adjusted earnings on a pro forma basis.
However in 2023, our tax provision was only 7% of subsidiary adjusted EBITDA.
Now onto our financial outlook.
At our Investor Day in January we mentioned that we would be enhancing our guidance to the street to reduce confusion.
Providing guidance on our adjusted earnings and subsidiary adjusted EBITDA will continue and remain the same.
However, we are adding a third guidance metric called adjusted EBITDA.
This differs from subsidiary adjusted EBITDA and that we deduct corporate level expenses and corporate level management fees. One additional note we will refer to subsidiary adjusted EBITDA on a pro forma basis upon acquisitions, but we will not provide adjusted EBITDA, nor adjusted earnings on a pro forma basis.
Ryan J. Faulkingham: We are also enhancing guidance by providing subsidiary adjusted EBITDA separately for our consumer and industrial verticals, as Elias previously mentioned. So now, moving to our 2024 guidance. As a reminder, we acquired The Honeypot Company on February 1st of this year. We expect full year 2024 subsidiary adjusted EBITDA consistent with the range we provided at our investor day of between $480 million and $520 million. The midpoint of this range, 500 million, implies an 11% growth rate over 2023. This is pro forma for the acquisition of the honeypot.
We are also enhancing guidance by providing subsidiary adjusted EBITDA separately for our consumer and industrial verticals as Elias previously mentioned.
So now moving to our 2024 guidance as a reminder.
We acquired the Honeypot company on February one of this year.
We expect full year 2024 subsidiary adjusted EBITDA consistent with the range, we provided at our Investor day of between $480 million and $520 million the.
The midpoint of this range $500 million implies an 11% growth rate over 2023.
This is pro forma for the acquisition of a honeypot.
Ryan J. Faulkingham: The subsidiary adjusted EBITDA range for our industrial businesses will be between $125 million and $135 million. The subsidiary adjusted EBITDA range for our branded consumer businesses will be between $355 million and $385 million. Moving to our new Adjusted EBITDA guidance, we expect full-year 2024 Adjusted EBITDA to be between $390 million and $430 million. This range factors in an expected $86 million in corporate level overhead and management fees in 20
The subsidiary adjusted EBITDA range for our industrial businesses will be between $125 million and $135 million the.
The subsidiary adjusted EBITDA range for our branded consumer businesses will be between $355 million and $385 million.
Moving to our new adjusted EBITDA guidance, we expect full year 2024, adjusted EBITDA to be between $390 million and $430 million.
This range factors in an expected $86 million in corporate level overhead and management fees in 2024.
Ryan J. Faulkingham: This compares to $341 million in adjusted EBITDA in 2023. Now on to Adjusted Earnings. We expect full-year 2024 adjusted earnings to be between $145 million and $160 million. At the midpoint of this range, and assuming the same share count as at December 31, 2023, of 75.3 million shares, we expect to earn $2.03 in adjusted earnings per common share.
This compares to $341 million and adjusted EBITDA in 2023.
Now on to adjusted earnings we expect full year 2024, adjusted earnings to be between $145 million and $160 million.
At the midpoint of this range and assuming the same share count as at December 31, 2023 of $75 3 million shares we expect to earn $2 <unk>.
And adjusted earnings per common share.
Ryan J. Faulkingham: Given the discontinued operations in 2023, it's challenging to compare 2024 adjusted earnings to 2023 adjusted earnings. However, as I mentioned earlier, last year's adjusted earnings benefited by approximately $13 million from lower taxes at our subsidiaries than we had anticipated. Turning to our balance sheet, as of December 31, 2023, we had approximately $450.5 million in cash, approximately $598 million available on a revolver, and our leverage was 3.11 times. During the fourth quarter, we sold Marucci, providing approximately $480 million in cash at closing. We also sold 3.5 million common trust shares in a private placement, yielding approximately $74 million in cash.
Given the discontinued operations in 2023, it is challenging to compare 2024 adjusted earnings to 2023 adjusted earnings. However, as I mentioned earlier last year's adjusted earnings benefited by approximately $13 million from lower taxes at our subsidiaries and we had anticipated.
Turning to our balance sheet.
As of December 31, 2023, we.
We had approximately $455 million in cash approximately $598 million available on our revolver and our leverage was 311 times.
During the fourth quarter, we sold marucci, providing approximately $480 million in cash at closing.
Also sold $3 5 million common trust shares in a private placement, yielding approximately $74 million in cash proceeds.
Ryan J. Faulkingham: Subsequent to the end of the fourth quarter, we acquired the Honeypot Company for an enterprise value of $380 million. We used cash on our balance sheet to fund our $343 million investment, with the remainder of the purchase price provided by minority shareholders. After closing the Honeypot acquisition, our total leverage increased to approximately 3.7 times. As a reminder, the first and second quarters are traditionally our lower cash flow quarters. In addition, we pre-funded Lugano with significant inventory early in the first quarter of 2024 in preparation for the London Salon opening, which is planned for the second quarter, and thus, we anticipate our leverage will increase during the first and second quarters, then decline sequentially in the third and fourth quarters as a result of the strong growth we expect in our subsidiary adjusted EBITDA.
Subsequent to the end of the fourth quarter, we acquired the Honeypot company for an enterprise value of $380 million we.
We used cash on our balance sheet to fund our $343 million investment with the remainder of the purchase price provided by minority shareholders.
After closing the Honeypot acquisition, our total leverage increased to approximately three seven times.
As a reminder, the first and second quarter are traditionally are lower cash flow quarters.
In addition, we pre funded Lugano, what's in it.
With significant inventory early in the first quarter of 2024 and preparation for the London Salon opening which is planned in the second quarter and thus we anticipate our leverage will increase during the first and second quarter.
<unk> declined sequentially in the third and fourth quarter as a result of strong growth, we expect in our subsidiaries adjusted EBITDA.
Ryan J. Faulkingham: We have substantial liquidity, and, as previously communicated, we have the ability to upsize our revolver capacity by an additional $250 million. With our liquidity and capital, we stand ready and able to provide our subsidiaries with the financial support they need, invest in subsidiary growth opportunities, and act on compelling acquisition opportunities as they present themselves. Turning now to cash flow provided by operations, during the fourth quarter of 2023, we received $21.1 million of cash flow from operations, primarily due to strong operating performance. This is up 10 million from the prior year's comparable period. During the fourth quarter, we used $24.4 million in working capital, a decrease from the use of $27.7 million in the prior year.
We have substantial liquidity and as previously communicated we have the ability to upsize our revolver capacity by an additional $250 million 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.
Turning now to cash flow provided by operations during the first quarter fourth quarter of 2023, we received $21 1 million of cash flow from operations, primarily due to strong operating performance. This was up $10 million from the prior year's comparable period.
During the fourth quarter, we used $24 4 million in working capital a decrease from use of $27 7 million in the prior year.
For the full year 2023 period cash flow provided by operations increased $106 million as compared to the prior year.
Ryan J. Faulkingham: For the full year 2023, cash flow provided by operations increased $106 million as compared to the prior year. During 2023, Lugano invested $157 million in inventory to fund its growth. This inventory investment has generated an exceptional return on invested capital and enabled the strong growth Lugano has experienced. Outside of Lugano, our remaining subsidiaries will monetize significant working capital during 2023, and finally, Turning to Capital Expenditures. During the fourth quarter of 2023, we incurred $17.2 million of capital expenditures at our existing subsidiaries, compared to $23.7 million in the prior year period. The decrease was primarily a result of the timing of retail buildouts at Lugano to support their continued growth. For the full year of 2024, we anticipate total CAT VACs of between $50 million and $60 million.
During 2023, Lugano invested $157 million in inventory to fund its growth. This inventory investment has generated an exceptional return on invested capital and enabled a strong growth Lugano has experienced.
Outside of Lugano, our remaining subsidiaries monetize significant working capital during 2023.
And finally, turning to capital expenditures.
During the fourth quarter of 2023, we incurred $17 2 million of capital expenditures at our existing subsidiaries compared to $23 7 million in the prior year period.
The decrease was primarily a result of the timing of retail buildout that lugano to support their continued growth.
For the full year of 2024, we anticipate total capex of between $50 million and $60 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 capital expenditures in 2024 will primarily be at Lugano for new retail <unk>.
Ryan J. Faulkingham: We continue to see strong returns on invested capital at several of our growth subsidiaries and believe they will have short payback periods. Capital expenditures in 2024 will primarily be at Lugano for new retail salons. With that, I'll now turn the call back over to Eli. Thank you, Ryan.
Lance.
With that I'll now turn the call back over to life.
Sure.
Thank you Ryan.
I would like to close by briefly providing an update on the M&A market and our strategic initiatives.
In the fourth quarter, we not only saw an increase in deal activity, but also in the quality of businesses coming to market.
Our competitors continue to struggle with leverage buyout financing as a function of the current environment specifically in consumer we are seeing our cost of capital advantage significantly expand in this environment, which leads us to believe that now is a great time for us to be an acquirer.
Elias Joseph Sabo: I would like to close by briefly providing an update on the M&A market and our strategic initiatives. In the fourth quarter, we not only saw an increase in deal activity but also in the quality of businesses coming to market. Our competitors continue to struggle with leveraged buyout financing as a function of the current environment, specifically in consumer.
Our acquisition of the Honeypot company in February is a perfect example.
Our competitors in the consumer market pulled back dramatically just as their financing partners have which is how we were able to get this deal done.
Elias Joseph Sabo: We are seeing our cost of capital advantage significantly expand in this environment, which leads us to believe that now is a great time for us to be an acquirer. Our acquisition of the Honey Pot Company in February is a perfect example. Our competitors in the consumer market pulled back dramatically, just as their financing partners have, which is how we were able to get this deal done. For an on-trend company in the personal health and well-being space, we were able to transact at a multiple that was lower than the historic average. Today's market reminds us of the financing market of 2020, when large uncertainties driven by COVID kept competition sidelined, yet our permanent capital structure allowed us to buy quality assets like Merugi and Boa.
For an on trend company in the personal health and wellbeing space, we were able to transact at a multiple that was lower than the historic average today.
Today's market reminds us of the financing market of 2020, when large uncertainties driven by Covid kept competition sideline, yet our permanent capital structure allowed us to buy quality assets like Marucci Adebola.
Today, we have a level of optimism that we haven't had in years were able to consummate M&A at more attractive valuations with better shareholder return prospects than in past years.
On the ESG front.
Our focus continues to not only be about compliance, but ESG is integral to our mission.
Reflecting our commitment to transparency and responsible business practices.
Elias Joseph Sabo: Today, we have a level of optimism that we haven't had in years. We're able to consummate M&A at more attractive valuations with better shareholder return prospects than in recent years. On the ESG front, our focus continues to be not only about compliance, but ESG is integral to our mission, reflecting our commitment to transparency and responsible business practice. This focus is essential for our continued success and the creation of long-term value for our investors and stakeholders. We will release our first sustainability report in Q2, which we expect to include details of our greenhouse gas emissions, human capital initiatives, and governance practice.
This focus is essential for our continued success and the creation of long term value for our investors and stakeholders.
We will release, our first sustainability report in Q2.
Which we expect to include details of our greenhouse gas emissions human capital initiatives and governance practices. Additionally, we will continue to seek partnerships and acquisitions that align with our sustainability values, ensuring that our growth is both responsible and aligned with our <unk>.
Long term vision.
Our most recent acquisition of the Honeypot exemplifies the type of company that aligns with <unk> strategic vision and objectives to.
Elias Joseph Sabo: Additionally, we will continue to seek partnerships and acquisitions that align with our sustainability values, ensuring that our growth is both responsible and aligned with our long-term vision. Our most recent acquisition, The Honeypot, exemplifies the type of company that aligns with Cody's strategic vision and objectives. To conclude, we continue to make great strides improving upon the quality of our subsidiaries as a whole. In addition, we remain steadfast in our efforts to identify and acquire similar disruptive businesses to further build upon our track record of delivering growth for our shareholders. I'd like to thank the entire Cody team for their tireless efforts in transitioning this business into a different and stronger company than we were six years ago. With that, Operator, please open the lines for Q&A. Thank you.
To conclude we continue to make great strides improving upon the quality of our subsidiaries as a whole.
In addition, we remain steadfast in our efforts to identify and acquire similar disruptive businesses to further build upon our track record of delivering growth for our shareholders I'd.
I'd like to thank the entire Coty team for their tireless efforts and transitioning this business into a different and stronger company than we were six years ago with that operator. Please open the lines for Q&A.
Thank you ladies and gentlemen, we will now begin the question and answer session.
At this time I would like to remind everyone in order to ask question. Please press Star then the number one on your telephone keypad.
Operator: Ladies and gentlemen, we will now begin the question and answer session. At this time, I would like to remind everyone, in order to ask questions, please press star, then the number one on your Telzone keypad. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. If you would like to withdraw from the question queue, please press bar 2. If you're using a speakerphone, please lift the handset before pressing any key.
You will hear a three ton prompt acknowledging your request and Youre questions will be pulled in the order they are received.
If you would like to withdraw from the question queue. Please press star two.
If you are using a speaker phone please lift the handset before pressing any keith.
Your first question.
It comes from Larry Solow of CJ esque Securities. Your line is already open.
Lawrence Scott Solow: Your first question comes from Larry Solow of CJS Securities. Your line is already open. Great. Thanks. Good evening, guys.
Great. Thanks, Good evening guys.
I guess.
First question, maybe just.
Well the acquisition environment. It sounds like as you expressed last month too.
Elias Joseph Sabo: I guess, first question, maybe Elias, just on the acquisition environment. Sounds like, as you expressed last month, too, it has gotten a lot better, and it kind of fits right into your sweet spot. I'm just curious what your leverage is going to be around four times. During the first half year, at least, what are your larger-size assets? Would you want to go up to five times plus? How do you look at that? Maybe you might entertain the idea of selling some of your smaller computers.
I've gotten a lot better and it kind of fits right into our sweet spot I'm just curious with your leverage is going to be it sounds like around four times.
During the first half year.
What's your.
Yeah.
The ability to acquire.
Larger size.
We want to go up the quad pumps quality or how do you look at that maybe would you might entertain the idea of selling some of your smaller.
<unk> subsidiaries.
Yes, Larry I would say.
Elias Joseph Sabo: Yeah, Larry, I would say, and thank you for the question and good afternoon. I would say the acquisition market is better. I don't know that I'd refer to it as a lot better. It's clearly not 2021 when we were seeing deals, you know, kind of at a very high level, and some good quality companies that were coming. But you know, compared to 22 and 23, we often say it's hard to fall off the floor. And I think 23 sort of kind of represented the floor. So it's clearly a pick-up.
Thank you for the question and good afternoon.
I would say the acquisition market is better I don't know that I'd refer to it as a lot better.
Clearly 2021, when we were seeing deals kind of at a very high level and some good quality companies that were coming but compared to 22 and 'twenty. Three we often say it's hard to fall off the floor and I think 'twenty three sort of kind of represented the floor. So it's clearly a pickup.
Elias Joseph Sabo: And, you know, not only are we seeing a pickup in the number of deals, but we're also seeing some quality companies come through as well. So, you know, that bodes well. You know, regarding your question, I think, you know, right now we're at 3.7 times leverage. It's a little bit outside of our, you know, kind of leverage window. You know, as Ryan mentioned in his commentary, it could float up a little bit. But it's not going to be a material that floats up at the beginning of the first half of the year. And then it will come down.
Not only are we seeing a pickup in the number of deals, but we're also seeing some quality companies come through as well so.
Bodes well regarding your.
Your question I think right now we're at three seven times leverage it's a little bit outside of our kind of leverage window.
As Ryan mentioned in his commentary it could float up a little bit it's not going to be a material floating up in the beginning of the first half of the year.
And then it will come down it's partly just the funding of inventory growth at Lugano.
So.
Yeah.
Elias Joseph Sabo: It's partly just the funding of inventory growth at Lugano. So, you know, we're opening a London fund. So, we expect really strong growth. So, I would say because of both the cash flow, you know, the generation power of the company, as well as the growth and the expected deleveraging back down into our financial policy target range, which, you know, goes to kind of three and a half times at the high end, we still feel comfortable doing a deal. And, yeah, we could push leverage up into the fours, you know, kind of temporarily here at the beginning of the year, but then we expect it to fall, you know, kind of, you know, back down below that. You know, obviously, it's dependent on the size of the deal. It's dependent on the multiple that we pay.
Yes.
So we expect really strong growth, so I would say because of both the cash flow.
Kind of generation power of the company as well as the growth and the expected deleveraging back down into our financial policy target range, which you know goes to kind of three five times at the high end.
We still feel comfortable doing a deal and yes, we could push leverage up into the fours kind of temporarily here at the beginning of the year, but then we expect it to fall kind of back down below that.
Obviously, it's dependent on size of deal it's dependent on multiple that we pay.
So it's a little hard to be precise until we have something.
In our site.
Elias Joseph Sabo: And so, it's a little hard to be precise until we have something, you know, kind of in our sights. I would tell you we will not take our leverage to five times. And so, that's off the table. But could it go over four times to consummate a deal the size of the honeypot or a little bigger?
I would tell you we will not take our leverage to five times.
So that's off the table, but could it go over four times to consummate a deal the size of the honeypot are a little bigger absolutely and given the confidence that we have in our earnings trajectory right now and the cash flow producing.
Elias Joseph Sabo: Absolutely. And given the confidence that we have in our earnings trajectory right now and the cash flow-producing, you know, power of this business, we are absolutely comfortable with that and the fact that our deleveraging post and acquisition will bring us back in line to where we need to be. I appreciate that caller.
Power of this business, we are absolutely comfortable with that and the fact that our deleveraging post acquisition will bring us back in line to where we need to be.
I appreciate that color and then just a second question maybe a two part question just talking about the inventory headwinds in 'twenty three.
Elias Joseph Sabo: And then just a second question, maybe a two-part question just on that inventory headwind of 23. And it feels like maybe those are certainly some exciting, significantly, right. And you mentioned, maybe even in terms of a tailwind in 24.
It feels like maybe those are slightly.
Adding.
Significantly right and you mentioned, maybe even I'll turn to a tailwind in 'twenty four.
Can you just discuss sort of.
Specifically.
And claim a loss I think were the two.
Bigger brands that were kind of impacted.
Elias Joseph Sabo: Can you just just discuss sort of Unknown Attendee, Kyle Joseph, Mark Feldman, Unknown Attendee, Kyle Joseph, Mark Feldman? Yeah, so I'm going to let Pat speak specifically to some of the trends we're seeing at FOA and Primaloft and how that headwind, which we think sort of turned neutral in Q4, was, it was, not a headwind or a tailwind, how that will, you know But let me address the last part of that first, which is built into our guidance. We have not built a tailwind from inventory and sell-in matching sell-through. We have not embedded that into our guidance.
Underlying trends at both of those.
Maybe.
Maybe a little more color there and then the upside to guidance, perhaps that you mentioned would that be kind of maybe of the inventory actually turn into a tailwind.
Yes, so I'm going to let Pat speak specifically to some of the trends, we're seeing at Boa and private law and how that headwind, which we think sort of turned neutral in Q4. It was no. It was no we're not a headwind or tailwind how that will hopefully build into 'twenty four but let me address the last part of that first.
Which is built into our guidance, we have not built a tailwind from inventory.
Sell in matching sell through we have not embedded that into our guidance and that's why if there's one thing I would say to take from this call.
Elias Joseph Sabo: And that's why if there's one thing, you know, I would say to take from this call, it's just too early. We gave you a guidance range three weeks ago. It would be too early for us to increase that right now, and I think that would be irresponsible.
Is it just too early we gave you three weeks ago, our guidance range. It would be too early for us to increase that right now and I think that would be irresponsible. However, if we were reissuing guidance today, we'd probably be more optimistic.
Elias Joseph Sabo: However, if we were reissuing guidance today, we'd probably be more optimistic. And, you know, I think there are clear catalysts for us to exceed the range here. And it could be material.
And I think there are clear catalyst for kind of us to exceed the range here and it could be material and one of those catalysts could be inventory changes starting to become a tailwind. We're selling just has to match sell through forget the fact that there could be inventory building.
Elias Joseph Sabo: And one of those catalysts could be inventory changes starting to become a tailwind, where sell-in just has to match sell-through. Forget the fact that there could be inventory building again at some point. We just want to get back to the point where inventories are no longer depleting, which has been sort of the constant theme over 23. So, you know, there's absolutely upside that is available for that. You know, I would tell you that we were a little bit shell-shocked by the kind of depth of the inventory changes at 23. And so, we've been hesitant to build that in. But we think that there is some nice upside that could exist as we go forward. And I'll ask Pat to comment on your questions about both Primaloft and Boa.
At some point.
We just wanted to get back to the point, where inventories are no longer depleting, which has been sort of a constant theme over 23. So.
Absolutely upside that is available for that.
I'll tell you that we were a little bit shell shocked by kind of the depth of the inventory changes of 23, and so we've been hesitant to build that in but we think that some nice upside that could exist as we go forward and I'll ask Pat to comment on your questions on <unk>.
Patrick A. Maciariello: Yeah. So, Boa is strengthening. And, hey, Larry, and it's tough to kind of tease out.
Both private lots of bullets, yeah, So huawei is strengthening.
Hey, Larry.
And it's tough to tease out.
Patrick A. Maciariello: You know, what part of that is the model count? What part of that is an easing of pressure, you know, on the model count growth? What part of that is an easing of the headwinds that we talked about? And what part of it is just, you know, really strong execution by the management? Clearly, there's aspects of each, and I can't point you to kind of, you know, percentages, but I can tell you that collectively, those are each driving kind of bookings to be better than we saw a year ago, right? So, at Primaloft, I'd say the language from customers is clearly that these headwinds are easing, and the language from customers is clearly that, you know, we're going However, you know, many of the brands are willing to chase the season, if you will, and not sort of order in advance. So, there's just a little bit of a lag, but that's how I differentiate between those two, if that makes sense. It feels like the easing at BOA is a little bit ahead of the easing at Primaloft.
What part of that is model count what part of that is an easing of pressure.
<unk> growth what part of that is an easing of these headwinds that we talked about and what part of it is just really strong execution by the management team clearly theres aspects of each and I can't point, you to kind of percentages, but I can tell you that collectively.
Each having.
Each driving kind of bookings to be better than we saw on a year ago basis right. So at final up I'd say D.
The language from customers is clearly that these headwinds are easing the language from customers is clearly that we're going to have a.
A more stable solid 2024.
However.
Many of the brands are willing to chase the season, if you will and that sort of order in advance. So there is just a little bit of a lag, but that's how I differentiate kind of those two if that makes sense. It feels like they're easing at boa.
A little bit ahead of the easing of prime a loss.
I appreciate the color thanks, guys.
Thank you Larry.
Your next question comes from Matt.
Koranda of R. O T H M. Kim your line is already open.
And I think as Mike said, Brian on for Matt.
Maybe just starting with the 24 God.
The industrial segment adjusted EBITDA to get to the midpoint of $1 40, I guess just based on recent underperformance relative to our expectations I wanted to cut out of sterno, but at the same time, we are facing two straight years of negative growth. There. So I guess just are we still expecting low to mid single digit growth.
Patrick A. Maciariello: Appreciate the call. Thanks, guys. Thank you, Larry. Your next question comes from Matt Koranda of ROTH MKM. Your line is already open. Hey guys, it's Mike Zabran.
In the industrial segment for 24, and maybe just give a bit more color on where we are seeing headwinds in the industrial segment.
Matthew Butler Koranda: I'm for Matt, in the industrial segment, and which business do we expect to be the heaviest drag in 24? Yeah, so I'll let maybe Pat touch on some of the industrial drivers, but I think you might be off on your numbers. So, Industrial for the full year produced an adjusted EBIT of 128.6, so the midpoint of our guidance that we provided implies kind of a 1-2% growth as we think about 2024. I think we'd all agree that's a little bit conservative. As you mentioned, there's not a lot to cut here, right? Altura's performing well, Arnold's performing well, same with Sterno.
<unk>.
Which I guess business, we expect to be the heaviest drag in 2024.
Yes, so I'll, let maybe.
Pat touch on kind of the industrial drivers, but I think you might.
Be off on your numbers, so industrial for full year produced adjusted EBITDA of $128 six so the midpoint midpoint of our guidance that we provided implies kind of a one 2% growth as we think about 2024.
I think we'd all agree that's a little bit conservative as you mentioned, there's not a lot to cut here right all towards performing well Arnold's performing well.
Ryan J. Faulkingham: So, I think we feel like there's upside to that midpoint, but Pat, do you want to provide any other kind of color on the industrial trends that you think will benefit 2024? Yeah, I just don't know about the underperformance external. I'm not seeing that I'm I mean, by our accountant, which is what we published, we grew sort of 11 to 12% there. And I don't I don't see, you know, I guess I can't answer your question because I don't agree with the basis of your question, if that makes sense, respectfully. Yeah, no.
Same with Sterno. So I think we feel like there is upside to that mid point.
But Pat you want to provide any other kind of color on the industrial trends that you think will benefit 2024.
Yeah, I, just don't know about the underperformance at Sterno I'm not seeing that.
By our count and what we published we grew sort of 11% to 12% there.
And I don't I don't see.
I guess I can't answer your question because I don't agree with the basis of your question if that makes sense respectively.
Yes.
Yes.
Patrick A. Maciariello: Sorry, just meant under performance relative to our numbers that we had in our model, but I totally understand where you're coming from. Maybe just anything, anything stimulating growth in 2024. And kind of, Yeah, just where we expect the growth in industrial production to come from in 2024. Yeah, so let me just give kind of a high level here.
Sorry.
Underperformance relative to our numbers that.
That we had in our model but.
Totally understand where youre coming from maybe just anything anything stimulating growth in 2024.
And kind of.
<unk>.
Yes. This is where we expect the growth in industrial to come from in 2024.
Yes, So let me just give kind of a high level here. So we grew mid teens.
Elias Joseph Sabo: So we grew mid-teens and, on a consolidated basis, in 23 over 22. That is far in excess of our core growth rate in industrial. And so I think we're all a little hesitant to get over our skis right now and say that you can back up an extraordinary year where you sort of triple your core growth rate and have not some payback that could happen from that. A lot of that is due to margin expansion that occurred in 23 as a result of commodity price deflation.
On a consolidated basis and 23 over 22.
That is far in excess of our core growth rate in industrials and so I think we're all a little hesitant to get over our skis right now and say that you can back up an extraordinary year, where you sort of triple your core growth rate and have not some payback that could happen for Matt a lot of that is due to margin.
Spansion that occurred in 'twenty three as a result of commodity price deflation.
Elias Joseph Sabo: And as we've been saying, we've passed a lot of that commodity deflation to our customers, which is why revenues were down slightly, but EBITDA grew so rapidly. So, you know, our industrial businesses performed exceedingly well in 23, and they entered 24 with a really healthy balance sheet. Now, that said, you know, I think we're a little cautious, which is why we only guided to sort of, you know, kind of 1-2% growth here. And that's, you know, it's not really based on what we're seeing in the numbers manifest right now. It's much more based on the fact that, you know, we came off of a really extraordinary year. We don't know if that, you know, we'll get paid back some in 2024.
And as we've been saying we passed a lot of that commodity deflation to our customers, which is why revenues were down slightly but EBITDA grew so rapidly. So our industrial business has performed exceedingly well in 2003 and they enter 'twenty four with really healthy backlogs.
With that said.
We're a little cautious which is why we only guided to sort of kind of one 2% growth year.
And that's it's not really based on what we're seeing in numbers manifest right now it's much more based on the fact that we came off of a really extraordinary year.
Don't know if that will get paid back some in 2024.
Elias Joseph Sabo: But, frankly, there's really no reason to expect that the company is not going to grow back at its, or the industrial group isn't going to grow at its, you know, kind of normal longer-term rate of mid-single-digit. I would say, as Ryan mentioned, it is being conservative, and we think that's just kind of prudent given the macro outlook right now. I mean, remember, there are global tensions and wars that are happening, you know, kind of in Europe.
There is really no reason to expect that the company is not going to grow back at it or the industrial group isn't going to grow at its kind of normal longer term rate of mid single digit I would say as Ryan mentioned it as being conservative.
And we think that's just kind of prudent given the macro outlook right now I mean remember there are global tensions and wars that are happening kind of in Europe, and so you just have to be cognizant of.
Elias Joseph Sabo: And so, you know, you just have to be cognizant of, you know, kind of those threats that are out there, and we want to make sure that, you know, we are guiding appropriately. But I would say there is some upside to our guidance numbers. You know, specifically, Arnold is doing really well.
Of those threats that are out there and we want to make sure that we are guiding appropriately, but I would say some upside exists to our guidance numbers, specifically Arnold is doing really well sterno as Pat said kind of grew double digits year over year.
Elias Joseph Sabo: You know, Sterno, as Pat said, kind of grew double digits year over year. We have decent expectations for them to grow again. And Altor is, you know, performing really well, and we have an exceptional management team there. So, there's, like, no real issues that I could point to.
We have decent expectations for them to grow again, and all tour is performing really well and we have an exceptional management team. There. So there's no real like issues that I could point to any one of the companies other than to say again, when you've tripled sort of your core growth rate in a year euro.
Patrick A. Maciariello: [inaudible] Okay. It makes sense. Thank you for clarifying, Elias. Switching to the consumer side, at 5.11, given we're pausing the store growth strategy this year, maybe just speak to where we're planning to deploy that capital at 5.11 and just help us level set growth expectations for 2024. Sure.
Little hesitant to go too far out on your skis in the following year, but there's no reason, we should underperform our core growth rate of mid single digits. This year.
Got it makes sense. Thank you for clarifying Elias.
Switching to the consumer side at 511, given we're pausing store growth strategy. This year, maybe just speak to where we're planning to deploy that capital at 511, and just help us level set growth expectations for 2024.
Sure So first.
Patrick A. Maciariello: So first, kind of going backwards, outside, we believe we will have another year of growth, probably similar to this year, outside of what we alluded to earlier, that there might be some charges for the PFAS transition, right? So we think we will have a growth level that's consistent with prior years' growth in 2024, if that makes sense. As far as where we're reallocating, I mean, we're trying to be best in class, sort of in the DTC sector. So we're trying to get better at customer service. You know, everybody's always trying to get better at customer service, but we're really trying to... You know, provide a best in class experience to our customers online as well, and drive that online business, if that makes sense. Secondarily, we're seeing, you know, we mentioned that we mentioned some of the geopolitical tensions.
Going backwards.
Hi.
We believe we will have another year of growth probably similar to this year outside of what we alluded to earlier that there might be some charges for the <unk> transition right. So we think we will have a growth level that is consistent with prior year's growth in 2024, if that makes sense.
As far as where we're reallocating I mean, we're trying to be best in class.
Sort of in the DTC sector. So we're trying to get better and customer service.
Everybody is always trying to get better at customer service, but we're really trying to.
It provides best in class experience to our customers online as well and drive that online business. If that makes sense secondarily, we're seeing we mentioned that.
We've mentioned some of the geopolitical.
Michael David Zabran: Well, that drives our professional growth as well. And we're seeing strong growth in professional services, and we believe we'll continue to see strong growth in professional services. Got it.
Tension.
That drives our professional growth as well and we're seeing strong growth in professional and we believe we'll continue to see strong growth in professional.
Got it that's all from me guys. Thank you.
Kyle Joseph: That's all from me, guys. Thank you. Thank you. Your next question comes from Kyle Joseph of Jeffreys. Your line is already open.
Thank you.
Yes.
Your next question comes from Kyle Joseph.
Of Jefferies. Your line is already open.
Kyle Joseph: Hey, good afternoon, guys. Thanks for taking my questions. Ryan, obviously, the portfolio has evolved over the past couple years, but can you just kind of refresh it?
Hey, good afternoon, guys. Thanks for taking my questions. Brian obviously, the portfolio has evolved over the past couple of years, but can you just kind of refresh I think you touched on this in your in your commentary but.
Ryan J. Faulkingham: I think you touched on this in your commentary, but on seasonality in terms of adjusted earnings. Yeah, so seasonality adjusted earnings are, you know, I think if you look back at prior years, it's pretty representative. I mean, similar to what we've said on cash flow, the first quarter is generally, first and second quarters are kind of generally slightly weaker than the third and fourth quarters because a lot of our businesses have, you know, momentum to close out the year, whether it be, you know, the outdoor season or the holiday season, etc. So, you know, no one business in particular, Lugano, obviously, is a pretty significant percentage of our business now, that business doesn't have a tremendous amount of seasonality given the fact that there are events or, you know, anniversaries or birthdays, etc., all year, but they do tend to have a little bit more in the fourth quarter around the holiday season; people generally, I guess, you know, become gift giving around So, outside of that, I'd say, again, kind of, if I were modeling, I'd say roughly 60% back half, 40% front half. That's how I would think about it.
On the on the seasonality in terms of adjusted earnings.
Yes, so seasonality adjusted earnings.
I think if you look back at prior years, it's pretty representative.
What we said on cash flow as you know the first quarter's generally.
First and second quarter kind of generally slightly weaker than the third and fourth quarter, because a lot of our businesses have momentum to close out the.
The year, whether it be the outdoor season or the holiday season et cetera.
So no one business in particular.
<unk>, obviously is a pretty pretty significant percentage of our business now that business doesn't have a tremendous amount of seasonality given the fact that there's events or anniversaries or birthdays et cetera, all year, but they do tend to have a little bit more on the fourth quarter around the holiday season people generally I guess become <unk>.
Giving around that so.
So outside of that I'd say again, if I were modeling I'd say roughly 60% back half, 40% front half is how I would think about it.
Ryan J. Faulkingham: Yeah, helpful. And then in terms of adjusted earnings guidance, I think you talked about on a dollar per share basis being relatively flat year over year. The headwinds there are just a higher share count and the tax rate, I think you mentioned. Or anything else we should be thinking about? Because he is the new model for you guys and did really, really strong epitaph growth.
Okay helpful. And then in terms of adjusted earnings guidance I think you talked about.
Per share basis, being relatively flat year over year.
The headwinds there just a higher share count and tax rate I think you mentioned or anything else, we should be thinking about.
<unk> do Mato.
You guys had really really strong EBITDA growth.
Ryan J. Faulkingham: Yeah, so Kyle, I mean, last year. It's always tough to compare adjusted earnings when you have a discontinued operations, right? So last year, we pulled out HCI and Marucci, right? So that lowers our adjusted earnings. So the way I would think about it is we had guided on the third quarter earnings call for adjusted earnings between 130-140 million, roughly. You know, I think if we had owned Marucci for the whole fourth quarter, we certainly would have beat that guidance. But we see this year being slightly up to 2023.
Yes, so Kyle I mean last last year, it's always tough to compare adjusted earnings when you have a discontinued operations right. So last year, we pulled out ACI and Meru Chi right. So that lowers our adjusted earnings.
So the way I would think about it is we had guided on the third quarter earnings call adjusted earnings between 130 $140 million roughly.
Sure.
I think if we had owned rucci the whole fourth quarter, we certainly would have beat that guidance.
But we see this year being up slightly to 2023.
Ryan J. Faulkingham: So, you know, I think there is growth in adjusted earnings. I think that the challenge that we have with respect to adjusted earnings is Lugano, because Lugano's growth carries with it, you know, less leverage on adjusted earnings, because you've got, you know, it's a taxpayer, number one. And number two, it's got a pretty high non-controlling interest shareholder, right? The management team owns, you know, north of 40% of the business. So that creates a pretty high level of non-controlling interest that lowers adjusted earnings. So, you know, we're going to have, as we've indicated, pretty substantial subsidiary adjusted EBITDA growth year over year, but not as high of adjusted earnings growth, given that most of our growth would be in Lugano.
I think there is growth in adjusted earnings I think the.
Challenge that we have with respect to adjusted earnings is Lugano, because lugano as growth carries with it.
Less leverage of adjusted earnings because you've got.
It's a taxpayer number one.
And number two it's got a pretty high Noncontrolling interest shareholders right. The management team owns you know north of 40% of the business. So that creates a pretty high level of noncontrolling interest that lowers adjusted earnings so.
We're going to have as you as we've indicated pretty substantial.
Subsidiary adjusted EBITDA growth year over year.
But not as high adjust.
Adjusted earnings growth given that most of our.
Growth would be Lugano.
Ryan J. Faulkingham: Yeah, but Kyle, just to point out, the tax rate differential is a significant drag coming into 2024. We had roughly 7% of adjusted EBITDA, a subsidiary adjusted EBITDA, and we're modeling in 10% now. So, if you take that 300 basis points on $500 million, it's $15 million; it's 20 cents a share. So, if you're at 223 versus 203, and that's just having the same tax rate, the adjusted earnings growth per share, or adjusted earnings, would be commensurate to the adjusted EBITDA growth.
Yes.
10 point out.
Yes, just to point out the tax rate differential is a significant drag coming into 2024, we had a roughly 7% of adjusted EBITDA.
Subsidiary, adjusted EBITDA and <unk>.
Modeling and 10% now so if you take that 300 basis points on 500 million Bucks, it's $15 million. It's 20, a share. So if you were at $2 23 versus two or three and Thats just having.
<unk> tax rate the adjusted earnings growth per share and adjusted earnings would be commensurate to the adjusted EBITDA growth and what Ryan has said is also true when Lugano carries higher growth. It comes with lower adjusted EPS growth because of the minority interest and capital investment, but I just wanted to be like.
Elias Joseph Sabo: And what Ryan has said is also true, when Lugano carries higher growth, it comes with lower adjusted EPS growth because of the minority interest in capital investment. But I just want to be, you know, very clear here that if the tax rate is to stay the same, we would expect to get some leverage on adjusted earnings and adjusted EPS from our adjusted subsidiaries. I got it. No, that's very helpful.
Clear here that if the tax rate is to stay the same we would expect to get some leverage on adjusted earnings and adjusted EPS.
Kyle Joseph: That makes it all make sense. Appreciate it, guys. Thanks for taking my questions. Thank you. Thanks, Kyle. Your next question comes from Mark Feldman of William Blair. Your line is already open.
From our adjusted subsidiary EBITDA.
Okay I got it no that's very helpful and that makes that makes it all makes sense. Appreciate it guys. Thanks for taking my questions.
Thanks.
Thanks Scott.
Your next question comes from Marc Feldman of William Blair. Your line is already open.
Mark Feldman: Hey guys, thanks for taking the questions here. So just a question about some of the recent management changes. I know you've had changes at 511 and Primaloft.
Okay.
Hey, guys. Thanks for taking the questions here. So just a question with some of the recent management changes I know you had.
Is that 511 and prime a loss can you just talk to any major changes in strategy is that both of those companies are priorities.
Patrick A. Maciariello: Can you just talk about any major changes and strategies at both of those companies or priorities? You know, with Primaloft, obviously, there's a lot of interest in expanding into newer verticals and new products. So just any update you can provide.
Prime of life honestly, there was a lot of.
Interest in expanding into new verticals and new products.
Any update you can provide.
Patrick A. Maciariello: Sure. I mean, at Primaloft, there are a couple things. It's stayed the course. It's got a great business, and a great IP. I think we probably would like to invest in the brand at Primaloft a little bit more and bring forth a little bit more of what Primaloft provides to the end user. And Ann Cavazos' experience there is very strong. And so we're excited
Sure I mean in prime a lot, but it's a couple of things stay the course, it's got a great business a great IP.
I think we probably would like to invest in brand at prime aloft, a little bit more and bring forth a little bit more of what <unk> provides to the end user.
And and collapses experience there is very strong and so we're excited to have her at 511 Troy.
Patrick A. Maciariello: At 5.11, Troy Brown, who has had very high positions at Zumiez for many years, along with many other businesses like that and relevant businesses, is really, we believe, very strong at operational excellence. And he'll be working with Francisco Morales there, as Francisco understands brand and product development and will stay on as Executive Chairman. And Troy, you know, we just believe he is very strong at driving operational efficiencies and at delivering for the end customer in a DTC environment. And we think that combination will really yield tremendous benefit. I got it.
Troy Brown, who.
Very high positions at Zumiez for many years along with.
Many other businesses like that and relevant businesses.
Is really we believe.
A.
Very strong in operational excellence and he'll be working with Francisco morale is there.
As Britain, Cisco understands brand and product development, and we will stay on as executive Chairman and Troy.
We just believe is very strong and driving operational efficiencies.
And at delivering for the end customer on it yet and a DTC environment and we and we think that combination will really yield tremendous benefits.
Marc Feldman: Appreciate that. And then, I guess, you know, one other question as it relates to the consumer brands. You talked about 511 and BOA, inventory destocking, but I guess, you know, one other subsidiary that would be impacted would be Velocity. So if you could just talk about trends there and anything else that you're foreseeing, and then, you know, any changes and strategies with that business going forward. Yeah, it's tough. I mean, it's two or three businesses, but on the archery side, we've seen some of that same destocking or some inventory reduction levels that have hit the business. I think we're excited about the new products that we're coming out with this year in archery, and we think they will be really well-received later in the year by customers. On the sort of more Crossman side, it just continues to have slightly weaker or weaker POS than we would hope, really driven by a lot of buying kind of during the pandemic era, and so a lack of replenishment really needed.
Got it.
And then I guess, one other question as it relates to the consumer brands.
511 and <unk>.
Inventory destocking, but I guess, one other subsidiary that'd be impacted would be velocity. So if you could just talk about trends, there and anything else that you're foreseeing.
Any changes in strategy is about that business going forward.
Yeah, it's a tough I mean, it's too it's two or three businesses, but in the.
<unk> is in the archery side, we've seen some of that same destocking.
And.
Or some some inventory reduction levels that.
<unk> hit the business I'd say, we're excited about the new products that we're coming out with this year in archery and we think it will be.
There'll be well received later in the year by.
Customers.
On the sort of more crossman side.
It just continues to have slightly weaker or weaker Pos.
Then we would hope really driven by a lot of buying kind of during the pandemic here.
So.
Lack of planning replenishment really needed.
Patrick A. Maciariello: So, you know, we're working every day to write the course there, but that's also one of the benefits of having a diversified business of, you know, 10 companies, right? And so, but we continue to be focused and working every day there. Great, thanks for taking my question. Your next question comes from Robert Dodd of Raymond James. Your line is already open.
So we're working every day to to write the course there.
But that's also one of the benefits of having a diversified business.
<unk> companies right.
So, but we continue to be focused and working everyday there.
Great. Thanks for taking my questions.
Your next question comes from Robert Dodd of Raymond James Your line is already open.
Robert James Dodd: Hi guys. On, almost back to Larry's question, on the leverage question, I mean, when would it be realistic for you to be entering the healthcare vertical? I mean, you said you'd be willing to take up leverage a little bit, but healthcare businesses do tend to go for pretty high multiples. I mean, NextGen, which is probably on a different scale than you're looking at, and we went for 30 times EBITDA. So, with that dynamic, you know, if the leverage did go up to the mid-fours, would you be out of the acquisition market for maybe a couple years to grow EBITDA to get leverage down into your 3, 3.5 target range, or what's the thought there on taking acquisitions now? and potentially reducing your ability to take incremental opportunities unless you make a sale, obviously. Yeah, Robert, I would say, first of all, we're not paying 30 times EBITDA for a business. So that's off the table.
Hi, guys.
Almost back to Larry's question on the net.
Which question I mean, when would it be realistic.
For you to be entering the health care setting.
Said, you would be willing to take up leverage a little bit, but healthcare businesses do tend to go for putting high multiple I mean.
Nextgen, which is probably a different scale than youll looking at and we Wouldnt put 30 times EBITDA. So.
With that dynamic.
Which did go up to the mid fours would you be then out of the acquisition market.
Maybe a couple of years to grow EBITDA to get leverage down in tier three.
Joel.
Yes.
They have on an.
Making the acquisition now potentially.
Reducing your ability to take incremental opportunities unless you make the sale.
Yes, Robert I would say.
One we're not paying 30 times EBITDA for a business.
That's off the table.
Elias Joseph Sabo: You know, I think that the businesses we're looking at are trading at, you know, a premium to where the, you know, kind of innovative and disruptive consumers, businesses are trading right now call it, you know, if those are in the 12, 13, 14 times range, you know, good, innovative healthcare businesses that have real good you know, kind of moats around them, you know, are probably a 20% premium to that just to give, you know, kind of a some type of, you know, kind of baseline. So I think, you know, if we were to do a deal today in healthcare, you know, it's going to bring us temporarily probably to, you know, kind of mid fours, maybe, or, you know, depending on the size of the deal, again, it's, you know, we'd have to figure out how big the company is, if it's a $50 million EBITDA company, it's going to bring the leverage up more than if it's a 20 or 30. million dollar EBITDA company.
I think that the businesses, we're looking at are trading at.
Our premium to where the kind of innovative and disruptive consumers businesses are trading right now call. It those are in the 12 13 14 times range.
Good.
Innovative healthcare businesses that have real good kind of moats around them.
Probably a 20% premium to that just to give kind of a.
Some type of kind of baseline.
So I think if we were to do a deal today in health care.
It's going to bring us temporarily probably to kind of mid fours maybe.
Or depending on the size of the deal again, we'd have to figure out how big the company is if it's a $50 million EBITDA company, it's going to bring the leverage up more than if it's a 20 or $30 million EBITDA company.
Elias Joseph Sabo: And so, you know, a little bit of that is fluid. I will tell you that, you know, we have been, over the last few years, opportunistically divesting some businesses, and that's not going to stop. And so, part of our commentary in our script is that we're trying to move away from businesses that grow in line with their industry. And look, we own some great businesses that grew in line with their industries, and we still have some in our portfolio. And a lot of times, they're really niche businesses; they're the kind of industries that they're in their market share leaders, probably creating good cash flow.
So a little bit of that is fluid I will tell you that we.
We have been over the last few years Opportunistically divesting some businesses, that's not going to stop and so part of our commentary in our script.
As we are trying to move away from businesses that grow in line with our industry and look we own some great businesses that grew in line with the industry and we still have some in our portfolio and a lot of times. They are really niche businesses are niche kind of industries that they are in their market share leaders probably create good cash flow.
Elias Joseph Sabo: But you know, we've really moved to want to own companies more like BOA and Primaloft and Lugano and, you know, Marucci, which we had a huge, you know, kind of transaction and sale on recently. So, you know, those are the companies that we've been consciously moving towards. And at the same time, we've been making a concerted effort to sort of get rid of some of the companies that grow, you know, kind of with their industry.
But we really move to want to own companies more like bold and prime aloft in Lugano in marucci, which we had a huge cut off.
Transaction and sale on recently so.
These are the companies that we've been consciously moving towards and at the same time, we've been making a concerted effort to sort of get rid of some of the companies that grow kind of with their industry. So I think there will always be looking at making those portfolio changes and as we.
Elias Joseph Sabo: So, you know, I think there we will always be looking at making those portfolio changes. And as we, you know, kind of gear up and buy another business, whether it's in healthcare or consumer, there's probably going to be, you know, a couple more divestitures over the next 12 to, you know, 24 months that helps to bring leverage down and be because the companies that we're growing and are more core in our portfolio are growing at such a higher growth rate. You know, we feel real conviction that our leverage comes down pretty dramatically, just through free cash flow generation and growth in the portfolio. And so I get, you know, your concern. And, you know, clearly, that's something we manage every day too, which is how much, you know, acquisition dry powder do we have? Where do we want to deploy this? What are the best opportunities?
Kind of gear up and buy another business, whether it's in health care consumer Theres, probably going to be a couple more divestitures over the next 12 to 24 months that helps to bring leverage down.
And because the companies that were growing in our more core in our portfolio are growing at such a higher growth rate.
We feel real real conviction that our leverage comes down pretty dramatically just through free cash flow generation and through growth in the portfolio and so I get your concern.
Clearly that's something we are managing everyday too, which is how much acquisition dry powder do we have where do we want to deploy it what are the best opportunities and when we get to a leverage level that sort of.
Elias Joseph Sabo: And when we get to a leverage level that sort of, you know, gets to a point where we're comfortable, but any more leverage would push us out of our comfort zone, then it really kind of dictates that we look at raising capital, selling some of the companies to continue the portfolio repositioning, you know, those things are on the table. And look, historically, you know, we've raised capital opportunistically and, you know, kind of in interesting ways. The ATM has been used historically when the stock price reflects closer to fair value.
Gets to a point, where we're comfortable by any more leverage would push us out of our comfort zone, then it really kind of.
Dictates that we look at raising capital selling some of the companies to continue the portfolio repositioning those things are on the table and look historically, we've raised capital opportunistically in kind of interesting ways. The ATM has been used historically when the stock.
This reflects closer to fair value.
Elias Joseph Sabo: You know, we don't feel that's the case right now. We've issued preferred shares, which are non-dilutive. And so there are other components of capital that we think, you know, can become available to us that don't necessarily dilute shareholder equity to the extent we have a, you know, great opportunity. Now, ultimately, we're always balancing what is the cost of that capital versus what is the new opportunity that we're bringing in. And if we can drive a significant enough discount on the upfront purchase price, we're willing to pay a little bit more for our capital. And so it's a balancing act right now. I can tell you that we feel, you know, firmly in the market for both healthcare and consumer businesses.
Don't feel that's the case right now we've issued preferreds, which are non dilutive and so there are other components of capital that we think can.
Can become available to us that don't necessarily dilute shareholder.
Equity to.
To the extent, we have a great opportunity now ultimately we're always balancing what is the cost of that capital versus what is the new opportunity that we're bringing in and if we can drive a significant enough discount.
Purchase price, we're willing to pay a little bit more for our capital and so it's a balancing act right now I could tell you that we feel firmly in the market for both healthcare and consumer businesses, we are comfortable taking our leverage up a little bit.
Elias Joseph Sabo: We are comfortable taking our leverage up a little bit. But, you know, it's hard for me to say, does the next deal then prevent us from being back in the acquisition market? Because I don't know what our leverage profile is going to look like after that next deal.
But it's hard for me to say Doug. The next deal then prevent us from being back in the acquisition market because I don't know what our leverage profile is going to look like upon that next deal.
Elias Joseph Sabo: And, you know, you all wouldn't be privy to what we're currently working on that may be divestitures, too, until we get, you know, some of those closed. But, you know, this portfolio transformation that has been, you know, kind of a big undertaking by the entire management team since, you know, I took over in 2018 is not going to stop until we get sort of the portfolio that we are, you know, looking for, which is, you know, as I said, and you're going to hear these words a lot, we're looking for great, innovative, disruptive businesses. And that's what we will own in our portfolio; we were not going to be owning companies that are more growing in line with our industries. That was sort of a legacy business model. And we will transition this portfolio over from, you know, what we had in the legacy to sort of the new vision. And that's going to free up capital to continue to invest.
Dan.
You all would it be privy to what we're currently working on that maybe divestitures too.
Until we get kind of those close.
But this portfolio transformation that has been kind of a big undertaking of the entire management team.
I took over in 2018 is not going to stop.
So we get sort of the portfolio that we are looking for which is as.
As I said and Youre going to hear these words a lot we're looking for great innovative disruptive businesses and at some point, what we will own in our portfolio. We were not going to be owning companies that are more growing in line with our industries that was sort of a legacy business model and we will transition this portfolio over.
From.
What we had in legacy to sort of the new vision and that's going to free up capital to continue to deploy I think the other thing to keep in mind is that these businesses are generating faster levels of growth.
Elias Joseph Sabo: I think, you know, the other thing to keep in mind is that these businesses are generating faster levels of growth. And so, you know, our full expectation is that as we continue to execute on this, our growth rate is going to continue to pick up, our core growth rate. And one should be more comfortable with a slightly higher level of leverage when you have better quality businesses with more defensibility around those companies. They have better growth profiles, longer term, because they're able to take market share, not just grow in line with their industry. Very helpful. Thank you. I appreciate all that, Kyle.
No.
Our full expectation is as we continue to execute on this our growth rate is going to continue to pick up our core growth rate.
One should be more comfortable with a slightly higher level of leverage when you have better quality businesses with more defensibility around those companies they have better growth profile longer term because they are able to take market share not just grow in line with their industries.
Very helpful. Thank you.
Elias Joseph Sabo: Now, flipping it the other way, if I can, companies have been almost, to put air quotes around, too successful. I mean, Lugano, I mean, on the back of the envelope for me, it looks like it could be as much as a third of Consolidated Subsidiarity Vida next year because it's been so successful. At what point does it get too big?
Now flipping the other way if I can companies had been almost flat.
Around two successful I mean lugano.
I mean look back of the envelope for me it looks like it could be as much as.
Consolidated subsidiary EBITDA next year.
It's been so successful.
At what point does it get too big like its very successful it's not growing in line with it.
Elias Joseph Sabo: Like, it's very successful; it's not growing in line with its industry; it's massively outgrowing that. But at what point does it become too much? Or is there just no line at which it's too much of a share of? Subsidiary that is, that it becomes a concern for you that you don't have the counter-cyclicality if it's dominating everything and your jewelry company. Yeah, and it's a great question, Robert. I mean, clearly, the D and Cody and we keep talking about the benefits of diversification start to slow down, and we don't really have those benefits to the extent that one of our companies, you know, starts representing too large of a component of our overall earnings. Like, it's a valid question.
Industry, it's massively outgrowing that but at what point does it become too much or is that just don't want to.
Too much of a share.
<unk>.
Subsidiary EBITDA, then it becomes a.
Our concern for you that you don't have to counter cyclicality.
Eliminating everything.
Jewel of the company.
Yeah, It's a great question Robert.
Clearly the D in Coty, and we keep talking about the benefits of diversification.
Dart to slowdown and we don't really have those benefits to the extent that one of our companies starts representing too large of a component of our overall earnings.
It's a valid question and legato is growth rate and sort of what Modi and indeed have built there. It is just truly phenomenal. It's honestly one of the businesses that.
Elias Joseph Sabo: And Lugano's growth rate and sort of what Modi and Adit have built there is just truly phenomenal. It's honestly one of the businesses that, you know, I've just never seen anything like it. I don't think there are many businesses that are as good as this company out there. And so, on the one hand, you know, you kind of don't want to let go. I think, you know, kind of rule number one in portfolio management theory, and we're not stock traders. So, you know, this doesn't really apply, but you kind of ride your winners, and you get out of your losers.
I've just never seen anything like it I don't think Theres. Many businesses that are as good as this company that are out there and so on the one hand.
Don't want to let go I think.
Rule number one in portfolio management theory, and we're not stock traders so.
This doesn't really apply but you kind of ride your winners and you get out the year losers.
Elias Joseph Sabo: You know, it's, you know, kind of that rule applies here a little bit. You know, this is a business that, look, it's still got, it's got a massive PAM. It's got huge market potential and opportunity. It's got a visionary founder and leadership team.
Kind of that rule applies here a little bit this is a business that.
Look it's still got its got a massive Tam, it's got huge market potential and opportunity. It's got a visionary founder and leadership team.
Elias Joseph Sabo: And we have the capital to support its growth needs. So that argues for holding it and continuing to, you know, let that growth benefit our shareholders. On the other hand, there is a point where it becomes too big, and it sort of overwhelms the system. And so that's something that, you know, we're on the lookout for.
And we have the capital to support its growth needs. So that argues for holding it and continue to let that growth.
Benefit our shareholders on the other hand, there is a point, where it becomes too big and it sort of overwhelmed the system and so that's something that we're on the lookout for I think if it becomes a third of our EBITDA like you referenced we're going to have a really good year. This year.
Elias Joseph Sabo: I think if it becomes a third of our EBITDA, like you referenced, we're going to have a really good year this year. Because you're talking about, you know, a business that's going to generate kind of growth rates similar to 2023. And I promise you, that is not built into our guidance at all.
He goes you are talking about a business that's going to generate kind of growth rates similar to 2023 and I promise you that is not built into our guidance at all.
Elias Joseph Sabo: I think if we're getting there, it probably is something where, you know, if we're looking at the end of 2024 and saying this company represents a third of EBITDA and it's still growing at double the growth rate or triple the growth rate of our overall company, then we're probably considering, you know, different options for financing the business. And I think there are a plethora of opportunities where we could continue to, you know, kind of participate in the growth and, you know, but not have it be, you know, all funded by us. So that will be explored, sort of, depending on how 2024 develops.
If we're getting there it probably is something where if we're looking at the end of 'twenty four and saying This company represents a third of EBITDA and it's still growing at double the growth rate or triple the growth rate of our overall company.
Then we're probably considering you know.
Different options for financing the business and I think there are a plethora of opportunities where we could continue to.
Kind of participate in the growth.
And.
And but not have it be all funded by us so that will be explored sort of depending on how 'twenty four develops but this is a really high class problem for us to have.
Elias Joseph Sabo: But this is a really high class problem for us to have, and your point is a good one. And I would tell you, this isn't, you know, this is not a company that we look at and say, we want this to represent 50 percent of our EBITDA. So, you know, if it continues to grow at historical growth rates, it's going to be a really great 24. And we're going to evaluate, you know, kind of what that means going forward and how we would want to think about financing in that context for the business as it goes forward.
And your point is a good one and I would tell you. This is this is not a company that we look at it and say we want this to represent 50% of our EBITDA. So if it continues to grow at historical growth rates.
To be a really great 'twenty, four and we're going to evaluate kind of.
What that means going forward and how we would want to think about financing in that context the business as it goes forward.
Elias Joseph Sabo: Got it. Got it. Thank you. And yeah, it's just been a tremendous success. So it is a high class problem.
Got it got it thank you and yes, it's just been a.
Tremendous success. So it is a high class problem.
Operator: Thank you. 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 CODI. Thank you for your support. Thank you. This concludes Compass Diversified's conference call. Thank you and have a great day. You may now disconnect.
Thank you.
Thank you operator, there are no as always I'd like to thank everyone again for joining us on today's call and for your continued interest in coding. Thank you for your support.
Thank you. This concludes Comcast diversify its conference call. Thank you and have a great day you may now disconnect.