Q3 2024 Compass Diversified Earnings Call

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Itineraries, the impact and expected timing of acquisitions and divestitures and future operational plans.

Words, such as believes expects anticipates plans.

<unk> 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 our newmar.

And in the risk factor 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 in particular, the domestic and global political and economic environment disruption in the global supply chain labor disruptions inflation risks associated with the company journey.

Italy, due to natural disasters or social civil and political unrest.

And changing interest rates all may have a significant impact on coty in 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 Sabo: Today I am pleased to announce we delivered another strong quarter.

In Q3, we saw our combined revenue grow double digits and our adjusted EBITDA grew by over 25% versus the third quarter of 2023.

Elias Sabo: Bounder friendly Investor Award.

Testament to our collaborative and bespoke approach to working with our businesses and management teams.

Elias Sabo: Our collaboration with our businesses goes well beyond traditional value drivers for example, the work of our internal audit team often that happens outside the spotlight, but creates tremendous value.

As you know, we typically acquire middle market companies that have varying levels of financial processes and controls in place.

Our internal audit team works very closely with our subsidiaries to systematically review and improve our subsidiaries financial processes and controls, creating both better outcomes and more confidence this positions our businesses to scale and ultimately drives exceptional value for all stakeholders.

Elias Sabo: Consistent with our long term strategy in the third quarter, we raised more than $17 million of preferred stock capital. We plan to continue to raise capital through the issuance of preferred stock as we believe this lowers our long term cost of capital, while maximizing our financial flexibility.

We also continue to focus on opportunities for capital deployment.

Elias Sabo: Our goal is to be active but disciplined as we look for the type of companies, we want to own and manage while the M&A market remains somewhat muted we continue to cultivate relationships with founders entrepreneurs bankers and private equity companies in order to position us to buy great co.

Elias Sabo: Like companies at appropriate prices.

Elias Sabo: Six about <unk> consolidated financial performance in the quarter.

Outlook for the full year.

Thank you Pat and the third quarter, we delivered consolidated net sales of $582 6 million.

Elias Sabo: An increase of 11, 8% over the prior year normalizing for the impact of acquisitions, our pro forma sales grew six 6% in the quarter.

Elias Sabo: As mentioned growth in the quarter was primary primarily driven by our branded consumer businesses with Lugano Boa Prime aloft and honeypot, all delivering double digit growth.

Elias Sabo: This growth was partially offset by the divestiture of philosophies crossman airgun business as well as more modest growth in our industrial businesses.

Our consolidated net income in the third quarter was $31 5 million, which compares favorably to a net loss of $3 8 million. We recorded in Q3 of 2023.

Adjusted EBITDA in the quarter was $114 million, representing a 28% increase over the same period in 2023, while our year over year performance benefited from the acquisition of Honeypot growth in our adjusted EBITDA was primarily driven by strong operational performance across most of our subsidiaries with.

Zyuganov Boa Prime aloft, and Arnold all significantly expanding adjusted EBITDA margins in the quarter.

Corporate cost and management fees were $22 $7 million in the quarter.

This represents an increase of greater than $2 million over the prior year and a sequential increase of $1 8 million for Q2 from Q2 of 2024. The increase this increase was driven primarily by one time cost associated with our recent CFO transition. Excluding these nonrecurring costs total corporate cost and management fees were down.

Both year over year and sequentially.

Adjusted earnings in the quarter were $48 7 million, which represents a 65% increase over Q3 of 2023.

In capital gains tax does that potentially impact the business and I guess, a more broader question without getting too political just across your businesses.

Speaker Change: Does the election.

Could that have any impact on you guys on a kind of broad brush basis yeah.

I'll leave it at that thanks.

Hey, Larry It's Pat I will start with just a little bit more color on Ghana. One then.

I'll, let elias handle the political question.

Speaker Change: Yeah.

I think the growth at Lugano continues to be broad we don't anticipate.

Speaker Change: Potential changes in capital expenditures or excuse me in cap gains tax rates to have an effect.

Continues to be broad geographically the number of transactions as well as the transaction size continues to increase and we continue to grow geographically, we just announced.

And it's been several papers that will be opening on the Gulf Coast and Chicago.

Elias Sabo: We have a great location there that we're excited about and that will be sort of in the first quarter, maybe spring of next year and we're considering other locations in the new locations are doing well I mean, we're having pretty good success internationally after opening our London.

Elias Sabo: London Salon so.

Elias Sabo: Everything is everything is kind of.

Doing really well at Lugano, and we are excited to continue to invest in the business.

I wonder if I could on the election results.

Know that we have any insight other than to say how different policies could.

<unk> as you know being selling consumer goods, we do import a lot of that product some of that product comes from.

Southeast Asia, and some particularly out of China.

If there are 10% to 60% tariffs get enacted on all of our trade partners clearly that's going to create some level of disruption Larry.

You know outcome and transition of power I think that is going to free up a lot of deal flow.

And we're hearing the bank pitch activity has been extremely strong. So I think there is going to be more activity coming into 2025, but I just want to reiterate we will be very disciplined to the types of companies that we want to buy we think that the opportunity cost is much greater.

To act on something that's not consistent with our strategic mandate.

Elias Sabo: In terms of the balance sheet, we continue to remain under four times leverage.

We're a little bit outside of the top end of our leverage parameter, which is three and a half it's not materially outside of that one of the things that has occurred over the last half a dozen years is we've moved from a portfolio that grew generally down at GDP or zero to three.

Per cent to now a portfolio that is growing.

Kind of high single digit to this year low double digit rates and I think that supports natural deleveraging better than we have ever had before depending on lugano as growth rate clearly depending on its capital needs that alters sort of the balance sheet equation, but we're now at a pause.

Elias Sabo: <unk>, where we're generating.

Well north of $100 million of retained cash on an annual basis and thats something that we can use to support whether its the buyback whether thats into M&A opportunities supporting capital deployment into Lugano clearly the growth of the business is a deleverage or just because the <unk>.

Emanate or is getting larger in that equation.

And we would expect that to continue not only in Q4, but into 2025 as well. So we're comfortable with where our leverage is given all of those dynamics, which frankly are in the best position. This company has ever been in in terms of growth cash flow before working capital investment.

Elias Sabo: You name it.

Elias Sabo: In terms of where we are capacity wise relative to our full revolver commitment.

I am very confident and we talk with our financing partners. All the time that there are available capital in different parts of the market whether that be term loans. We have a term loan a outstanding right now that is something available to tack onto the term loan b market is available to us. So we have a lot of secured lending capacity that.

We can move around revolver and open up additional liquidity.

Enter into the bond market, where we continue to trade extremely well relative to what our rating is so we feel very good about our balance sheet and all of the capacity that we have.

Speaker Change: Okay throw as always thank you I'll leave it there.

Elias Sabo: Thank you.

Our next question coming from the line of Matthew Horowitz from Jefferies. Your line is now open.

Hi, guys great quarter.

Could you talk about.

The full width and supply chain impact.

On various portfolio companies and when when that might sort of unwind.

Become a tailwind just in terms of the destocking trends that we've seen.

Elias Sabo: Sure.

This is Pat I don't know as to whether or not when it will become.

<unk> per se I will say or if it will sometime.

Sometimes you don't want to have too much of a tailwind from where you are now because that means you're overstocking at retail and that sets you up for.

That set you up for issues in the future.

Portfolio wide, we think we're kind of in equilibrium now if that makes sense. We don't think were overbuilding. We don't think were kind of draining supply within the channel portfolio wide I would say, we generally feel like we are.

And in those sort of early early supply chain businesses, we generally feel like we are sort of.

Producing in a manner, that's roughly equal to consumer demand.

Okay. That's helpful Great.

Speaker Change: And then could you just talk about how youre thinking about the dividend at this point.

Obviously leverage has been fairly consistent in.

You're out earning it.

By a large margin, but just how youre thinking about dividend payments going forward.

Speaker Change: Yeah, as we've said publicly in the past our board makes the decision on the dividend.

We paid a dividend since coming public every quarter that we've been public and that is the current.

Speaker Change: <unk> of the company is.

We are a dividend payer and we will be unless there is some change in strategic plan, which is not being considered right now.

Speaker Change: Okay helpful. Thanks, very much.

Speaker Change: Thank you.

Speaker Change: And the next question coming from the line of Robert Dodd from Raymond James Your line is now open.

Hi, guys. Congrats on is kind of going back to that.

Speaker Change: M&A.

Kind of kind of issue I mean, maybe.

Cody M&A optimism index question, I mean more than likely over the next quarters that has been very muted I'm hitting attempting pipelines are building etcetera, but what's your level of optimism over say the next 12 months do you think the market's going to be conducive to you.

Finding the kind of deal to one I mean going into.

An auction process.

We are highly competitive healthcare company might not be ideal for you Mike.

Speaker Change: Kind of businesses.

Approaching normal take.

Speaker Change: What's your view on over an extended period.

The market is going to be conducive to some.

Speaker Change: Yep.

We're very optimistic right now Robert.

Speaker Change: We think the.

The M&A market, which had been subdued as I said for a couple of years.

Really can only stay there for so long eventually people do need to move on there is a state planning for entrepreneurs and tax planning that ends up occurring theirs.

<unk> equity fund lives that end up coming into a kind of a <unk>.

Situation for them or there is just the desire for them to exit so that they can have realizations to move forward.

So I think there is going to be a lot of forces for why.

Sellers should be starting to come back into the market everybody has been really hesitant because nobody wants to bring in a plus asset to market and be the first one with price discovery and fall flat on your face. So it's created a catatonic kind.

A seller market right now with interest rates coming down that first 50 basis point move I think helps if the.

Kim Fed is continuing to move monetary policy looser, that's going to help these type of assets, we're already seeing lending start to come back in more the leverage multiples start to come back in the marketplace. So the ingredients are in place that give us a lot of optimism Robert <unk>.

Next year is going to be a pretty good balance back and we should be able to transact against the company of the ilk that we want to buy.

For that and then go to ask the.

Speaker Change: Question.

On store openings next year.

What do you have any preliminary I mean, it takes a while to open up.

I mean, if you're out to one by the middle of next year, you could have a location already picked out.

Speaker Change: So what's kind of the.

Any color you can give us on how many you think might be opened next gen. Do you think youll into our second international I mean, London seems to be going quite well, but.

Nothing has been you can sell internationally.

But do you think thats going to be more international footprint expansion.

Speaker Change: <unk>.

The potential customer base.

Speaker Change: Alright.

Yes, so the board hasn't the board of <unk>, and we haven't reviewed with them sort of the strategic plan for 2025.

That being said.

As you would expect us to and as you want us to do we always have irons in the fire and there are several locations that we're evaluating.

Speaker Change: Not at any point in time, but lately and there are several locations now.

Speaker Change: And one of the several is international and more than one of the several or not.

That a good a good sort of summary, I'd say there is room for growth. We've identified a lot of markets that we think are attractive and that does do garneau model wood.

Fit into.

Speaker Change: And.

Absent something happening, we would envision incremental store openings next year.

Speaker Change: Got it maybe if.

If I had to guests.

Do you want me to rollout a number right I mean, maybe sure I mean on the number.

Speaker Change: Sure.

Speaker Change: Okay. Thank you.

Robert: Thank you Robert.

Speaker Change: Thank you.

And the next question coming from the line of Jonathan <unk> from TD Cowen. Your line is now open.

This is Jonathan on for Lance.

Just one question for me with the decreasing of rates with it seems to be a good.

Quarter end the raised guidance how are you thinking about balancing the share buybacks potentially acquisitions in 2025.

As well as mentioned that Mike how do you prioritize or does it change based on what's going on in the market at the time.

Yes, Jonathan this is Elias.

Our capital allocation as fluids.

Clearly, we would like to retain capital to proceed against our strategic plan.

As we've said many times to the market a strategic goal within our strategic plan is to hit $1 billion of EBITDA, and we think that size and breadth of.

Subsidiaries in end markets all the diversity that comes from.

It continues with our close to lower our cost of capital.

So that is our strategic north star that we constantly point too.

Speaker Change: And internally generated capital as well as whatever we generate in the market.

Through capital raising and through divestitures, our first goal would be to prioritize acquisitions that align with our strategic vision.

Speaker Change: <unk> said, we cannot be immune to the stock price.

Our opinion of intrinsic value starts to deviate materially from the stock price then it's incumbent upon us to.

A floor in or at least use better capital allocation to buyback those shares because the return on that buyback is on a risk adjusted basis better than what we think we can get in the market by deploying against our strategic plan.

I know that doesn't give you an exact answer is fluid.

Speaker Change: Our priority is to follow our strategic plan that being said at this level of discount we are willing to step in and use the buyback and support the share price at this type of return we think we would be getting on that capital that's being used I also want to point out.

One of the comments that I made in the script is that we raised $17 million of preferred capital in the third quarter.

We have also raised capital in the fourth quarter, we don't disclose how much until the following that's preferred capital we raised in the fourth quarter. So far before the window was shut in October we would anticipate as long as that product is available to us at reasonable cost, which it is right now that we would continue.

<unk> to raise that as a form of equity capital that can be used to either invest in lugano.

It could be used theoretically to buyback shares right money is fungible, so wherever the highest return on invested capital as I can tell you in our opinion right now nothing is as attractive as investing in Lugano, because the returns that guests are really exceptional.

So that raising preferred can be there can buy back our stock it can be part of the acquisition capital that we have to go buy new companies that we view as a viable source or just general deleveraging and so there is capital coming in the door through that means and as M&A.

Markets become more active for us on the acquisition side, we do think that there are some divestiture opportunities that we would continue to pursue as.

<unk> continued to say we March against our strategic plan.

Got it thank you.

Thank you.

Thank you.

There are no further questions at this time I would now like to turn the conference call back over to Mr. <unk> lives.

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

Thank you for your support.

Ladies and gentlemen, this concludes.

Speaker Change: <unk> conference call. Thank you and have a great day.

Speaker Change: Yes.

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