Yahoo Finance Compass Diversified (NYSE:CODI) Q1 2024 Earnings Call Transcript
Compass Diversified (NYSE:CODI) Q1 2024 Earnings Call Transcript May 1, 2024
Compass Diversified isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to Compass Diversified First Quarter 2024 Conference Call. Today's call is being recorded. All lines have been placed on mute. [Operator Instructions] 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 sir.
Cody Slach: Thank you, and welcome to Compass Diversified's First Quarter 2024 Conference Call. Representing the company today are Elias Sabo, CODI's CEO; Ryan Faulkingham, CODI's CFO; and Pat Maciariello, COO of Compass Group Management. Before we begin, I'd like to point out that the Q1 2024 press release, including the financial tables and 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 at compassdiversified.com. The company also filed its Form 10-Q with the SEC today after the market-closed, which includes reconciliations of certain non-GAAP financial measures discussed on this call and is also available at the Investor Relations section of the company's website.
Please note that references to EBITDA and 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 subsidiary adjusted EBITDA because certain significant reconciling information is not available without unreasonable efforts. Throughout this call, we will refer to Compass Diversified as CODI 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 CODI 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, anticipates, plans, projects, should and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factor discussion in the Form 10-K, as filed with the SEC for the year ended December 31, 2023, as well as in other SEC filings. In particular the domestic and global economic environment, supply chain, labor disruptions, inflation and changing interest rates all may have a significant impact on CODI and our subsidiary companies.
Except as required by law, CODI 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’d like to turn the call over to Elias Sabo.
Elias Sabo: Good afternoon, everyone and thanks for joining us today. I am pleased to report yet another strong quarter of results. We once again exceeded our expectations. Our success in this first quarter, can be attributed to our deliberate focus on owning and managing a growing number of innovative, and disruptive businesses that have industry-leading growth potential. This strategy not only reduces financial volatility, but also accelerate our annual core growth rate. As we saw this past quarter, the diversification of our subsidiaries mean that if a few of our companies lag in growth, others may be able to compensate resulting in a more consistent and reliable growth engine. This quarter we saw the strongest performance from our branded consumer vertical, which reported 11% growth in pro forma revenue and 22% growth in pro forma adjusted EBITDA.
Pat and Ryan will, of course go into greater detail but I will tell you, Lugano produced another quarter of remarkable results, and the company currently shows no signs of slowing down. With the opening of its new London salon earlier this week, we believe international expansion will be a huge opportunity for this business. You will remember, we were expecting both BOA and PrimaLoft to rebound against the inventory destocking headwinds of the recent past and we believe they are now through the worst of it. I am pleased to announce BOA, had a great first quarter, better than expected. While PrimaLoft continued to see revenue and adjusted EBITDA declines in Q1 they saw bookings growth in the first quarter, which provides confidence they will return to growth in the second quarter.
The Honey Pot Company, a business we only acquired in the first quarter of this year is already integrated with a newly appointed world-class Board of Directors, and we’re seeing significant gains in shelf space across key retail partners. Additionally, point-of-sale data remains robust reflecting strong consumer demand for The Honey Pot Company's better-for-you products. Thanks to the strong performances of Lugano, BOA and the acquisition of The Honey Pot Company. Adjusted earnings for this quarter were above our expectations and up significantly over Q1 of last year. I'd also like to briefly discuss the divestiture of Crosman, the air-gun division of Velocity Outdoor to Daisy Outdoor products. We are grateful for its contributions to Velocity Outdoor and CODI, and I want to thank the entire Crosman team for their dedication over the years.
Velocity Outdoor continues to be a subsidiary, specializing in archery and hunting apparel, and we are excited by its planned product launches in the coming years. This opportunistic divestiture of Crosman also aligns with our strategic focus of adding value through the management of innovative and disruptive companies that are poised to outpace industry growth rates. We believe Crosman's sale to Daisy, a recognized industry veteran in the air-gun space, positions it well for future success. Despite our outperformance in the quarter continued elevated inflation, delayed rate cuts and heightened geopolitical risks, all combined to create a weakening macro-economic backdrop, which has negatively affected our industrial vertical. Across our three industrial businesses, we saw a slight decline in both revenues and adjusted EBITDA in Q1.
However, we remain confident in the positioning of these businesses and anticipate our industrial vertical could possibly see modest growth later this year. All-in-all, I am extremely pleased with our first quarter. This is our strategic repositioning in action. Despite a mixed economic environment, we delivered a strong first quarter. Both our results for the quarter and our outlook for the rest of the year demonstrate that owning and managing a diversified group of companies with a growing share of disruptive, high-growth businesses is the right strategy, and we believe positions our business for sustained outperformance. We believe across our branded consumer vertical, inventories are now more balanced, and we expect the headwind suffered in 2023 to turn into tailwinds for the remainder of the year.
We also believe through company-led innovation, our industrial vertical could see another year of modest growth in 2024 and is positioned well for 2025. Combining our first quarter performance with our forward momentum, we’re feeling bullish about the rest of the year. So we are raising our full year adjusted earnings outlook, which Ryan will detail for you in just a few minutes. With that, I will now turn the call over to Pat.
Pat Maciariello: Thanks, Elias. As a reminder throughout this presentation, when we discuss pro forma results, it will be as if we own The Honey Pot Company as of January 1, 2023. I'm pleased to report on another successful quarter. On a combined basis, revenue and pro forma adjusted EBITDA grew by 4% and 15% respectively, in the quarter. Though Lugano, once again was a significant driver of our growth, growing revenue and EBITDA by 61% and 83%, respectively. We continue to see positive trends throughout our business. Within our industrial vertical, for the first quarter of 2024, revenues decreased by 10% and adjusted EBITDA decreased by 3% versus Q1 2023. Arnold continued to grow revenue in the quarter though experienced higher SG&A costs due to increased sales and marketing expenses and the timing of certain professional services fees.
Bookings for the quarter significantly outpaced revenues, and we believe the company remains poised for a solid 2024 and continues to build upon its long-term project pipeline. At Altor, revenue declined slightly as we experienced churn in projects with a couple of our larger customers. The pipeline of new products is robust however, and we believe the company will return to revenue growth in the back half of this year. We also note that Altor continues to increase margins in the face of revenue headwinds, and we remain confident in the business and the team. Sterno grew adjusted EBITDA slightly in the quarter as the strength of the company's food service division offset slightly weaker demand levels in its [centered wax] (ph) division. Turning to our branded consumer vertical.
For the first quarter of 2024, pro forma revenues increased by 11% and pro forma adjusted EBITDA increased by 22% versus Q1 2023. As Elias mentioned, clearly, the strongest performer in the quarter remains Lugano. We saw growth in each salon and geography, and benefited significantly from investments made in our flagship salons in Newport Beach and Palm Beach. This week the company opened its long-awaited London salon. And though early, by all accounts, the opening has been a success and we look forward to expanding the Lugano model internationally. Last quarter, we touched specifically on two of our businesses, furthest up the supply chain, BOA and PrimaLoft, and how order patterns were normalizing as their respective channels cleared. At that point, it appeared that BOA was perhaps a bit more than a quarter ahead of PrimaLoft, incurring the inventory headwinds in their supply chains and returning to growth.
We are pleased to report that BOA grew revenues and adjusted EBITDA by 13% and 15%, respectively in the first quarter of 2024. In addition, bookings outpaced revenue growth, which supports our expectations of a strong 2024. At PrimaLoft, though revenue and adjusted EBITDA continued to decline in Q1 of 2024, we did see solid double-digit bookings growth in the quarter, which gives us increased confidence as we enter the second quarter. Touching on our newest business, The Honey Pot Company. It performed in-line with expectations as revenues were approximately flat and adjusted EBITDA declined slightly in the first quarter of 2024 on a pro forma basis. Consistent with our understanding at the time of the transaction, the company had one large promotional event at retail in February of 2023 that did not repeat in the same magnitude this quarter.
In addition, the company continued to add infrastructure, including head count and a dedicated distribution center to support its growth which pressured adjusted EBITDA margin slightly. Importantly, though the company grew point of sales for its core products in almost all its retail partners and added shelf-space for new products with several partners so far this year. We remain excited about The Honey Pot Company and expect a solid year in 2024. 5.11 was approximately flat in revenue and up slightly in adjusted EBITDA in the first quarter of 2024. Strong revenue growth in the professional channel offset both market related and self-induced challenges in our DTC channels. We have seen improvement in these areas subsequent to quarter-end, and we believe the 5.11 management team is taking the right actions and the company is on solid footing.
As a whole, we were very pleased with the first quarter and have confidence in our increased outlook for the full year. I will now turn the call over to Ryan for additional comments on our financial results.
Ryan Faulkingham: Thank you, Pat. Moving to our consolidated financial results for the quarter ended March 31, 2024, I will limit my comments largely to the overall results for CODI, since the individual subsidiary results are detailed in our Form 10-Q that was filed with the SEC earlier today. On a consolidated basis, revenue for the quarter ended March 31, 2024 was $524.3 million, up 8% compared to $483.9 million for the prior year period. This increase was primarily a result of The Honey Pot Company and strong growth at Lugano and BOA, which was partially offset by lower revenue at Sterno, Altor and Velocity. Consolidated net income for the first quarter of 2024 was $5.8 million compared to net income of $109.6 million in the prior year.
The first quarter of 2024 included an $8 million goodwill impairment charge at our Velocity Outdoor subsidiary. Net income in 2023 included a $98 million gain on the sale of Advanced Circuits. Adjusted EBITDA in the first quarter was $94.8 million, up 28% compared to $74.1 million in the prior year. The increase was due to the acquisition of The Honey Pot Company and strong growth at Lugano and BOA. Included in adjusted EBITDA, in the first quarter of 2024 and 2023, were management fees and corporate costs of $21.4 million and $19.4 million, respectively. Adjusted earnings for the first quarter were above our expectations coming in at $34.3 million. This is up significantly from $19.8 million in the prior year quarter due to strong performances at Lugano and BOA.
So now moving to our 2024 guidance. As a result of the strong performance in the first quarter and our expectations for the remainder of the year, we are raising our subsidiary adjusted EBITDA guidance by $10 million. However, with the sale of Crosman, we are reducing our guidance by a similar amount. Thus, our full year 2024 subsidiary adjusted EBITDA is consistent with what we provided on our last earnings call, of between $480 million and $520 million despite the sale of Crosman. The subsidiary adjusted EBITDA range for our industrial vertical remains $125 million to $135 million. The subsidiary adjusted EBITDA range for our branded consumer vertical remains $355 million and $385 million. 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. This compares to $341 million in adjusted EBITDA in 2023. Now on to adjusted earnings. With the paydown of revolver debt outstanding of approximately $60 million, which includes proceeds from the sale of Crosman, we are increasing our full year 2024 adjusted earnings guidance range by $3 million and expect it to be between $148 million and $163 million. At the midpoint of this range and assuming the same share count at March 31, 2024 of 75.3 million shares, we expect to earn $2.07 in adjusted earnings per common share in 2024. A note for investors and analysts, the Crosman sale will not be recorded as discontinued operations, and thus we expect we will record a relatively small financial statement impact from the sale in the second quarter, we plan to offset any positive or negative impact from the sale in our adjusted earnings calculation in the second quarter and for the full year of 2024.
Turning to our balance sheet. As of March 31, 2024, we had approximately $64.7 million in cash, approximately $552 million available on our revolver and our total leverage ratio was 3.84 times. Our leverage at the end of the quarter was lower than we anticipated, as a result of strong operating performance. We used our proceeds from the sale of Craftsman to pay down revolver debt outstanding, and thus absent any acquisitions in Q2, we expect our total leverage ratio to decline in the second quarter. 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 first quarter of 2024, we used $13 million of cash flow from operations. Lugano used $65 million in cash flow from operations to support its continued extraordinary growth. Outside of Lugano, our subsidiaries produced $52 million in cash flow from operations in the first quarter, allowing us to reduce our leverage as stated earlier. And finally, turning to capital expenditures. During the first quarter of 2024, we incurred $7.7 million of CapEx at our existing subsidiaries compared to $14.9 million in the prior year period. The decrease was primarily a result of a decline in 5.11 store rollouts in 2024. For the full year of 2024, we anticipate total CapEx of between $50 million and $60 million.
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 Elias.
Elias Sabo: Thank you, Ryan. I’d like to close by recognizing a significant ESG milestone and also by giving you a brief update on our view of the current M&A market. On the ESG front, I am proud to announce that earlier this week, we released our inaugural sustainability report. The report provides insight into how we manage ESG, both at CODI and at our subsidiaries. It outlines our ESG framework and the actions we have taken, designed to bring about social and environmental benefits. This report underscores our belief that ESG is an ongoing commitment, and we are dedicated to achieving substantial deliberate progress. You can view the report on our website to learn more about our vision and our progress to-date. We have made significant strides over the last few years and this progress wouldn't have been possible without the engagement of our Board, our leadership team and most importantly, the participation of our employees, both at CODI and at our subsidiaries.
Our goal remains to make improvements that align with our company values and create strong financial returns for our stakeholders. I’d like to thank our Head of ESG, Zoe Koskinas, and her team for their passion and all the work they have put in to get us to this point. When it comes to the M&A markets, we feel a level of optimism that we have not felt in years. We continue to see an improvement in the quality of businesses coming to market. We also see our competitors continue to struggle with leverage buyout financing, specifically when it comes to branded consumer businesses. This only creates more opportunities for us. When debt markets are weak for single asset buyouts, our competitive advantage grows. We believe today's market, landscape allows our competitive advantage to shine, setting the stage for consummating M&A at more attractive valuations, which of course, leads to improved shareholder returns.
We remain steadfast in our efforts to identify, acquire and manage disruptive and innovative companies. And as Ryan mentioned, our strong liquidity position enables us to act on acquisition opportunities and also invest in our subsidiaries to further build upon our track record of delivering growth for our shareholders. While I’ve tremendous confidence in our strategy and our competitive advantages, I'd also like to take a minute to recognize our employees, who deliver these outstanding results day in and day out. Thank you to our subsidiary management teams and employees and to the entire CODI team for your hard work executing this growth strategy. With that, operator, please open the lines for Q&A.
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