Earnings call transcript: Compass Diversified Q4 2024 misses EPS forecast

Compass Diversified Holdings (NYSE:CODI), a $1.55 billion market cap company with a 20-year track record of consistent dividend payments, reported its Q4 2024 earnings, missing analysts' expectations with an earnings per share (EPS) of -$0.06 against a forecast of $0.56. Despite the earnings miss, the company saw a 13.8% increase in consolidated net sales year-over-year, reaching $620.3 million. The stock experienced a slight decline of 1.71% during regular trading hours but rebounded by 2.44% in after-hours trading. Currently offering a 4.97% dividend yield, CODI maintains its position as a notable dividend player.

InvestingPro analysis reveals several key insights about CODI's position, with 7 additional ProTips available to subscribers.

Key Takeaways

• EPS missed expectations, coming in at -$0.06 versus the forecasted $0.56.
• Revenue increased by 13.8% year-over-year to $620.3 million.
• Stock price fell by 1.71% during regular hours but rose by 2.44% after hours.
• Adjusted EBITDA grew by 29% year-over-year to $118 million.
• The company acquired Honeypot and divested Ergobaby and Crosman Airgun business.

Company Performance

Compass Diversified demonstrated strong revenue growth with a 13.8% increase compared to the previous year, maintaining a solid 16.71% revenue growth rate over the last twelve months. The company's adjusted EBITDA saw a significant rise of 29%, indicating improved operational efficiency. Despite these positive metrics, the EPS fell short of expectations, which may have influenced the initial stock decline. The company maintains a healthy liquidity position with a current ratio of 4.22, indicating strong ability to meet short-term obligations.

According to InvestingPro's Fair Value analysis, CODI currently appears to be trading near its Fair Value, offering investors a balanced entry point.

Financial Highlights

• Revenue: $620.3 million, up 13.8% year-over-year.
• Earnings per share: -$0.06, missing the forecast of $0.56.
• Adjusted EBITDA: $118 million, a 29% increase year-over-year.
• Consolidated net income: $11.9 million.
• Cash flow from operations: $9 million.

Earnings vs. Forecast

Compass Diversified reported an EPS of -$0.06, significantly below the forecasted $0.56, marking a notable miss. Revenue also fell short of expectations, coming in at $620.3 million against a forecast of $630.85 million. This performance contrasts with the company's historical trend of meeting or exceeding forecasts.

Market Reaction

The stock closed 1.71% lower during regular trading at $20.47 but recovered by 2.44% in after-hours trading, reaching $20.61. With a beta of 1.61, CODI shows higher volatility than the broader market, which explains these price movements. This volatility reflects mixed investor sentiment, influenced by the earnings miss but buoyed by strong revenue growth and strategic acquisitions.

Outlook & Guidance

Compass Diversified remains cautiously optimistic about 2025, with a projected consolidated subsidiary adjusted EBITDA of $570-$610 million. The company anticipates continued growth in its branded consumer and industrial verticals, despite geopolitical uncertainties and potential trade tensions.

Executive Commentary

CEO Elias Sabo emphasized the company's focus on long-term value creation and innovation. "We utilize our permanent capital base and are here to drive innovation, accelerate market-leading businesses, and deliver long-term shareholder value," Sabo stated.

Risks and Challenges

• Geopolitical uncertainty and potential trade tensions.
• Regulatory challenges, particularly for the 5.11 brand facing PFAS regulations.
• Market volatility and consumer spending patterns.
• Integration challenges following recent acquisitions and divestitures.

Q&A

During the earnings call, analysts inquired about the company's tariff exposure and mitigation strategies, as well as the M&A market conditions. The management addressed Lugano's strong performance and outlined plans for a store strategy and brand refresh for the 5.11 brand.

Full transcript - Compass Diversified Holdings (CODI) Q4 2024:

Conference Operator: At this time, I would now like to turn the conference over to Cody Slaugh of Gateway Group for introductions and the reading of the Safe Harbor statement. Mr. Slaugh, you may now begin the conference.

Cody Slaugh, Gateway Group Representative, Gateway Group: Thank you, and welcome to Compass Diversified's fourth quarter and full year twenty twenty four conference call. Representing the company today are Elias Sabo, Cody's CEO Steven Keller, Cody's CFO and Pat Massarello, COO of Compass Group (LON:CPG) Management. Before we begin, I'd like to point out that the Q4 and full year twenty twenty four press release, including the financial tables and non GAAP financial measure reconciliations for subsidiary adjusted EBITDA, adjusted EBITDA, adjusted earnings and pro form a net sales are available at 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 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 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 subsidiary adjusted EBITDA because certain significant reconciling information is not available without unreasonable efforts. Unless otherwise noted references in these remarks to company specific financial metrics relate to the fourth quarter of twenty twenty four and references the period to period increases or decreases in financial metrics are year over year. 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 conference 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.

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 12/31/2024, 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, changes The U. S.

Tariff and importexport regulations, risks associated with the company generally due to natural disasters or social, civil and political unrest and changing interest rates as well as difficulties in integrating acquired businesses 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 would like to turn the call over to Elias Sabo.

Elias Sabo, CEO, Compass Diversified: Thank you, Cody. Good afternoon and welcome to Compass Diversified's fourth quarter earnings call. I'm very pleased to report that once again we delivered strong financial results. For the full year 2024, we achieved double digit sales growth and increased our adjusted EBITDA by more than 30%. Growth in both revenue and adjusted EBITDA accelerated in the fourth quarter, exceeding our expectations for both the quarter and for the full year.

Before I hand it over to Pat and Steven to provide more details on our performance in the fourth quarter and for the full year, I want to take this opportunity to reflect on the progress we made in 2024 and also provide a little more color on both our long term strategy and our current operating environment. 2024 was a transformational year for Cote. We took concrete steps to shift our focus to more innovative and disruptive businesses that can grow faster and drive long term value creation for all stakeholders. In 2024, we acquired the Honeypot, a purpose driven business focused on disrupting the feminine hygiene market by educating consumers and providing plant derived better for you feminine care solutions. Further, our Altor subsidiary acquired LifeVone, a leading manufacturer of temperature controlled packaging products that will expand our presence in the cold chain sector and diversify our customer base with additional blue chip cold chain accounts.

We also strategically divested our Ergobaby subsidiary, a global leader in premium juvenile products and further streamlined our Velocity Outdoor business by divesting the Crosman airgun business. Both transactions were aimed at optimizing our long term focus while ensuring these businesses are well positioned for their next phase of development under new ownership. Outside of our strategic M and A activity, we continued to focus on improving our capital structure. For the full year 2024, we raised more than $115,000,000 in preferred equity. Adding this flexible, non dilutive capital helps us deleverage our balance sheet and reduces our overall weighted average cost of capital supporting our long term strategy.

As we discussed at our Investor Day last month, we also bought back more than 400,000 shares of Cody common stock in the fourth quarter. While our preference remains to use our capital to fund our long term strategic plan, the large discount between our share price and what we believe to be the intrinsic value of our shares encouraged us to return capital to shareholders. As we move forward, we will continue to look for ways to drive shareholder value and expect to reinvest in our businesses to accelerate earnings growth, while also looking for efficient ways to return capital to shareholders. Consistent with our goal of driving shareholder value, earlier this year, we revised our management services agreement. While we discussed this in detail during our Investor Day, I want to reiterate it here as we believe this will have a meaningful impact on our shareholders.

The key changes include implementing a sliding scale for base management fees, introducing an incentive management fee, eliminating integration services fees on acquisitions and excluding excess cash from the management fee calculation. Collectively, these changes will significantly reduce long term costs for shareholders, further align management compensation with shareholder interests, increase the oversight of our Board's Compensation Committee and focus any performance rewards on active members of our management team. Organizationally, we are also excited about our emerging centers of excellence. These centers of excellence will focus on critical areas such as internal audit and financial controls, sustainability, AI and business automation. These are areas that our individual subsidiaries may not have the resources or bandwidth to tackle independently.

By helping to develop foundational frameworks and best practices, we enable our businesses to identify opportunities, ensure and ensure that our businesses stay ahead of industry shifts. Whether it's improving financial compliance, strengthening sustainability principles to bolster corporate citizenship or leveraging AI to improve operations, our centers of excellence represent a major opportunity to drive value and further differentiate both COTE and our subsidiaries. Looking ahead, we remain cautiously optimistic about COTE's prospects for 2025. The CODI momentum index, our proprietary gauge of economic activity based on booking and sales activities from our subsidiaries currently reads 1.06. While this is a slight decline from year end levels, it remains consistent with a stable outlook.

Although we have observed a modest slowdown in economic activity in recent weeks, we continue to expect resilience and growth in the economy throughout 2025. Consumer spending remains steady with higher income consumers standing out as a key driver. Given our portfolio's focus on innovative and differentiated solutions, many of which ultimately cater to more affluent consumers, we believe our businesses are well positioned to outperform the broader market. Obviously, geopolitical uncertainty driven by tariffs and the potential for a trade war create incremental risk for 2025. We are monitoring the situation closely, but believe that our subsidiaries have taken the right steps to diversify our supply chain and limit risk.

We believe that our subsidiaries are positioned as well or better than our competition and we expect to be able to successfully navigate the evolving tariff landscape. Our focus remains on acquiring and managing high quality companies for long term success. We are committed to identifying, owning and actively supporting strong businesses with innovative and sustainable business models. Guided by our buy, build and grow philosophy, we seek to create lasting value for all stakeholders. While M and A activity has increased recently, the overall market remains subdued.

Nevertheless, we continue to cultivate relationships with entrepreneurs, bankers and private equity firms to identify and acquire great companies at appropriate valuations. Our goal is to be the buyer of choice for exceptional businesses that can benefit from our long term capital, strategic guidance and hands on support to unlock their potential. Despite macroeconomic and geopolitical uncertainties, we believe our values driven approach, diverse group of subsidiaries, unique business model and disciplined capital allocation position us well for continued growth in 2025 and beyond. With that, I will now turn the call over to Pat. Thanks Elias.

In 2024, our subsidiaries continue to perform well and exceeded our expectations.

Pat Massarello, COO, Compass Group Management: We remain confident in our strategy and believe we are well positioned for a successful 2025. For the full year 2024, our consumer vertical saw pro form a revenues grow double digits and pro form a adjusted EBITDA increased by greater than 27% versus prior year. This is despite the one time impact of an approximately $12,000,000 write down of inventory at 5.11 related to PFAS regulations. Excluding this impact, our pro form a adjusted EBITDA on the consumer segment grew over 30% and our adjusted EBITDA margin was greater than 27% representing a more than 400 basis point improvement over 2023. Lugano continues to post exceptional results with annual sales growth of more than 50%.

For the full year 2024, Lugano delivered adjusted EBITDA of $195,000,000 an increase of 76.4% versus the prior year. This performance is a direct result of the company's disruptive business model, redefining the greater than $160,000,000,000 luxury collectibles market. As we've discussed, Lugano continues to consume significant amounts of working capital as they invest in their long term growth. Lugano plans to open one new salon in the first half of the year and two more in the second half of twenty twenty five. We are excited about the continued growth potential at Lugano and believe the momentum will continue.

Outside of Lugano, BOA continues to perform exceptionally well, delivering more than 20% growth in revenue and greater than 30% growth in adjusted EBITDA for the full year. In addition, Honeypot performed well in 2024 and we believe it is well positioned for long term growth. From an adjusted EBITDA perspective, five point one one had a challenging year due to PFAS regulations. These challenges are now behind us and we believe the company is well positioned for an improved 2025 with a focus both on growth from new product introductions and continued penetration in the direct to consumer segment. Turning to our industrial businesses.

2024 saw flat sales and a modest decline in adjusted EBITDA as we focused on repositioning our businesses for the long term. Performance in Q4 improved significantly as we saw immediate benefit from Altor's acquisition of Lifefone. We're very excited about this acquisition as we believe it significantly bolsters Altor's operation and strategically positions it in the faster growing segments of the market as demand for temperature controlled packaging grows due to emerging drugs and drug development. The integration is progressing well and we anticipate it will drive meaningful synergies over the next several quarters. Overall, our industrial subsidiaries continue to make progress.

And while there have been challenges, we believe performance in this segment will improve as we move through 2025. Before wrapping up, I want to take a moment to address the evolving tariff landscape. While the situation remains fluid, we believe we are well positioned to navigate any potential challenges that may arise. Over the past few years, we proactively taken steps to geographically diversify our sourcing operations, strengthening our global supply chains. As Elias noted earlier, we believe our supply chain capabilities are as good or better than those of our competitors.

And as a result, we do not anticipate being at a competitive disadvantage as we adapt to the changing tariff environment. That said, we recognize the broader risk lies in the potential economic impact of escalating trade tensions on both The U. S. And global economies. A few of our subsidiaries do have exposure to Mexico and Canada.

However, we have been working closely with our suppliers to mitigate potential disruption, strategically building inventory stockpiles in certain instances and identifying alternative sourcing strategies. With these measures in place, we expect to be able to manage through potential tariff related headwinds, while continuing to drive long term value. I will now turn the call over to Stephen, who'll provide more details on Coty (NYSE:COTY)'s consolidated performance in Q4 and the outlook for 2025.

Steven Keller, CFO, Compass Diversified: Thank you, Pat. Before we begin, I would like to remind you that we sold our Ergobaby subsidiary in late twenty twenty four for an enterprise value of $104,000,000 The results of Ergobaby have therefore been reclassified as discontinued operations and are not included in the results we will discuss today. In the fourth quarter, we delivered consolidated net sales of $620,300,000 representing an increase of about 13.8% over the prior year. Normalizing for the impact of the HoneyPad acquisition, our pro form a sales grew 8.9% in the quarter. As mentioned, growth in the quarter was primarily driven by our consumer businesses with Lugano, Boa, Primaloft and the Honeypot all delivering double digit growth.

The acquisition of LifeHome further accelerated growth. The growth reported growth in the quarter was partially offset by the previously completed divestiture of Velocity's Crosman Airgun business. Our consolidated net income in the fourth quarter was $11,900,000 which is down versus Q4 of twenty twenty three when we recorded a large gain on the sale of our Marucci business. Adjusted EBITDA in the quarter was $118,000,000 representing a 29% increase over the same period in 2023. While year over year performance benefited from the acquisitions of the Honeypot and LifeBoom, growth in our adjusted EBITDA was primarily driven by strong operational performance across most of our subsidiaries with Lugano, Boa, Primaloft and Sterno all significantly expanding adjusted EBITDA margins in the quarter.

It's important to note that adjusted EBITDA includes a one time charge of $11,800,000 related to the write down of inventory at 5.11 due to the PFAS regulations. This is a one time cost that will not repeat. Public company cost and corporate management fees were $22,700,000 in the quarter. Adjusted earnings in the quarter were $46,600,000 which is up 34% versus Q4 of twenty twenty three. Turning to our cash flow, in the fourth quarter we generated $9,000,000 of consolidated cash flow from operations.

As Pat mentioned, Lugano continues to be a user of cash as we fund long term growth. Excluding the impact of Lugano, our other businesses generated greater than $25,000,000 in the quarter. In terms of capital expenditures, we invested $22,900,000 in the quarter, an increase of $6,000,000 over the prior year. The increase in capital investments was primarily related to a plant relocation at Arnold. Our balance sheet is strong and we ended the fourth quarter with $60,000,000 in cash and approximately $490,000,000 available on our revolver.

As discussed at our Investor Day in early January, we further raised $300,000,000 in incremental term loan A. We funded $200,000,000 of this facility immediately and have an additional $100,000,000 available to us via six month delay draw. Our total leverage ratio declined to 3.58 times at the end of the quarter. It's important to note that calculation of our leverage ratio includes greater than $20,000,000 of one time costs associated with the 5.11 PFAS write off and the facility move at Arnold. Excluding these one time non recurring costs, our leverage ratio would have been significantly below our 3.5 times target and actually closer to 3.4 times.

We remain focused on deleveraging and believe that we are well positioned to both fund the growth of our subsidiaries as well as act on attractive acquisitions as they become available. Turning to our outlook for 2025, as Elias mentioned earlier, we see positive momentum across our businesses and are establishing our full year guide as follows. We expect our consolidated subsidiary adjusted EBITDA to be between $570,000,000 and $610,000,000 We expect our branded consumer vehicle to deliver adjusted EBITDA between $440,000,000 and $465,000,000 Adjusted EBITDA for our industrial vertical is expected to be between $130,000,000 and $145,000,000 for the full year. On a consolidated basis, we expect our adjusted EBITDA to be between $480,000,000 and $520,000,000 inclusive of corporate cost of management fees. Our full year adjusted earnings are expected to be between $170,000,000 and $190,000,000 Our CapEx in 2025 is expected to be between $80,000,000 to $90,000,000 driven by growth investments at Luganda as well as other businesses.

We also make some productivity related investments at Altore. Obviously, our outlook does not include the impact of any potential acquisitions or divestitures and it seems no significant impact from tariffs and or trade war. With that, I will now turn the call back over to Elias.

Elias Sabo, CEO, Compass Diversified: Thank you, Steven. As we have discussed, 2024 was a great year for Cody. With a strengthened portfolio of businesses, a well capitalized balance sheet and a clear strategic vision, we believe we are well positioned to continue to deliver for all stakeholders. Before beginning the Q and A portion of the call, I want to quickly reiterate what I think is at the core of what sets Codia apart, our unwavering commitment to purpose. Unlike some of our competitors, where financial engineering and short termism often drive decisions, we are focused on long term value creation and are guided by our values.

This is not rhetoric. Our values and long term orientation drive every decision we make. We are cultivating a culture of innovation across our organization and are committed to empowering our businesses to succeed. At Cote, our ethos is to challenge conventions and push boundaries to be and do better. Our long term focus enables us to acquire and actively support innovative and disruptive businesses that challenge the status quo and deliver outsized growth.

We believe that our approach generates superior returns without compromising our values. We are not constrained by fund life or limited time horizons, allowing us to manage our businesses for the long term. We utilize our permanent capital base and are here to drive innovation, accelerate market leading businesses and deliver long term shareholder value in a way that is transparent, responsible and fundamentally different from the status quo. With that operator, please open the lines for Q and A.

Conference Operator: Our first question comes from the line of Larry Solow from CJS Securities.

Larry Solow, Analyst, CJS Securities: Great. Thanks guys. Good to hear a lot of consistency from I guess what we heard at the Analyst Day. I guess first question just on the guidance. So look breaking out the TIM branded industrial, it looks like branded you have growing like 15% to 20%, maybe a little bit less than 15%, but around there.

Can you just give us just like a I know you don't guide by holding, but I know Lugano, if we take from what you said at the Analyst Day, it sounds like that's still going to grow very rapidly. So is that driving the majority of that growth in branded as you look at '25 or how should we kind of look at that?

Elias Sabo, CEO, Compass Diversified: Yes, Larry, it's Elias. And welcome. Good afternoon. I would say the with Lugano as we said, we are funding Lugano and expect Lugano to grow consistent with sort of the growth rates we've experienced over the last couple of years, but we don't forecast that. We have a much more modest expectation for growth that we forecast.

And then as Lugano hopefully exceeds and kind of meet growth rates split are consistent with the past couple of years, we're able to beat and raise guidance. So I would say some of the growth is coming from Lugano, but a good portion of growth is coming from other companies as well.

Steven Keller, CFO, Compass Diversified: That's fair.

Larry Solow, Analyst, CJS Securities: So it sounds like if you hit not to put words in your mouth, but as Lugano kind of does what continues to grow, it's probably hard to forecast, I think it's going to grow up 30%, forty % every year. But if it does do that or even 25% on EBITDA basis, you're going to probably be at the high end of your range, if not higher, at least on the branded side, even assuming the other

Elias Sabo, CEO, Compass Diversified: I think that's a fair assumption.

Larry Solow, Analyst, CJS Securities: Okay. And then on specifically, I guess, just on 05/11, I wanted to ask a couple of things. I guess the PFAS, the charge, the $11,000,000 charge, you're actually you're showing that in the $11,000,000 EBITDA this quarter would actually have been $22,000,000 if we add back that charge, right?

Elias Sabo, CEO, Compass Diversified: That's correct.

Larry Solow, Analyst, CJS Securities: Is that correct?

Randy Binner, Analyst, B. Riley Securities: That's correct Larry.

Steven Keller, CFO, Compass Diversified: Got you. And Pat It's closer to $12,000,000

Larry Solow, Analyst, CJS Securities: but

Steven Keller, CFO, Compass Diversified: go ahead. Close to $12,000,000

Larry Solow, Analyst, CJS Securities: right, right. So and with that add back $5,110,000 even in a challenging year actually was pretty flat. I think it actually even grew a little bit driven more by the professional side. But without giving us numbers on what you think we're going to be in 2025, but just give us a little bit better look how things have been improving on Detroit's new leadership on the consumer side, what kind of initiatives you've been doing beyond sort of the PFAS challenges, but and what we should look for in 2025 and 05/2011?

Pat Massarello, COO, Compass Group Management: Sure. So Larry, this is Pat. But I think I would kind of focus on three things. We're sort of reinvigorating the DTC through marketing is one and through sort of more effective execution. We will have a brand refresh at some point this year that we're really excited about and we think will drive further sales.

And then we also have some what I believe is some really exciting new product that will come out sort of in Q3 and will further refresh our DTC strategy. So there's kind of three prongs or three things that I would look for this year at 5.11 and I'm excited about each.

Steven Keller, CFO, Compass Diversified: Thanks, Pat. Appreciate the color.

Conference Operator: Thank you. One moment for our next question. Our next question comes from the line of Lance Vitanza from TD Cowen.

Lance Vitanza, Analyst, TD Cowen: Thanks guys. Great quarter. I have a couple of questions if I could. The first is going back to the tariffs and I appreciate the prepared remarks, but could you talk a little bit more about what you've done to date versus what if anything still kind of remains a work in progress or perhaps work that remains ongoing? And then I know this is tough to sort of talk about, but how do you feel about how your portfolio companies in the main are kind of exposed to tariffs versus the competitors of those platforms?

Pat Massarello, COO, Compass Group Management: Sure. So this is Pat. I'll take a shot at it and then Elias can jump in. I would say it's really been sort of a several year process as far as preparing our companies. There was a Trump one and we were sort of made aware that possibilities.

At the same time, there were also tensions with China, etcetera. So all of those things kind of I would say it's several of our most single geography dependent subsidiaries. We sort of mitigated and diversified our geographic supply chain or our supply chain geographically I should say, kind of over the last three or four years, right? Not to say it's perfect. It's not to say we're not exposed at all.

Of course, we are. So that's number one. It's been a long term process at many of our subsidiary businesses, if that makes sense. As far as how we think we'll handle, we went company by company. We spent a long time sort of strategically working with our CEOs, understanding tariff impact at each business.

And there are some benefits. There are some competitors of ours that may import when we produce domestically in several instances, right? And so I wouldn't say there's as many benefits as cost, but there are some benefits. And those costs that we have will be shared by everybody in the industry. So we feel like we're pretty well positioned.

Lance Vitanza, Analyst, TD Cowen: Thanks. That's helpful. And then maybe could you talk about and maybe

Steven Keller, CFO, Compass Diversified: I'll ask, could you talk

Lance Vitanza, Analyst, TD Cowen: a little bit about the environment for buying and selling companies in 2025? And do you expect to be more or less active over the coming twelve months versus the prior twelve months? And here I'm thinking about macro factors on the one hand, sure, but also the specific dynamics of kind of where your platform companies are these days?

Elias Sabo, CEO, Compass Diversified: Sure. So I would say on a macro basis, Lance, the market is a little better than where it was over the last couple of years. Twenty twenty one was really a banner year and then starting in 2022, '20 '20 '3 and unfortunately now three years into 2024 have been relatively muted years. 2024 picked up a little bit, did not have the quality that we were looking for in terms of meeting some of the innovative and disruptive nature of businesses that we want to buy. Now that being said, at the beginning of the year, we closed on Honeypot and we were also successful in closing on LifeVome as an acquisition into Altor.

So we felt pretty good. We were able to deploy, call it, up around $500,000,000 of capital, which I think is kind of a reasonable expectation for us. Some years we can hopefully be better than that. If the market comes back, I think we can be significantly better than that. But I would say the market is recovering slightly.

Now the question you just asked, which has kind of what is the impact of tariffs and there's other federal policies that right now I think are having the effect of creating some uncertainty just generally in the economy and that can quell M and A activity. But the initial read coming into 2025 is that activity should pick up a little bit. In terms of specific to our companies, we feel really good about the portfolio that we have right now. We have reoriented the portfolio and become much more aligned with our strategic vision of innovation and disruption and being able to significantly outgrow the underlying markets in which our companies participate in. So we feel great about that.

We feel great about how our leverage has come down. At 3.58%, which is the actual number, a little bit of that I think is misleading because we have some one time costs that are obvious in there. So I'm going to quote the number of 3.4% because that's kind of how we think about it and our lenders are kind of think about it similarly with us. We feel really good about our progress on leverage. I mean, a year ago, we were at four times, now we're back within our leverage parameters.

So, our company portfolio the portfolio is positioned well. Our companies within the portfolio, even given that positioning, feel like they have positioned themselves well vis a vis their competitors and barring some type of economic kind of slowdown that's unanticipated right now, we feel pretty good about their ability to grow and our balance sheet is strong. So all of those things coalesce to create a really good environment for us to be on the acquisition hunt and with deals becoming a little bit more than they were over the last couple of years, we would anticipate picking up the pace from where we were over the last year or two.

Joseph, Analyst, Roth Capital Partners: Great.

Lance Vitanza, Analyst, TD Cowen: Thanks so much for your help.

Conference Operator: Thank Our next question comes from the line of Matt Koranda from Roth Capital Partners.

Joseph, Analyst, Roth Capital Partners: Good afternoon, guys. It's Joseph on for Matt. I just wanted to talk about Lugano for a second. We see that flow through on EBITDA is greater than the 60% zone in 4Q. It's quite a bit higher than like the 3040% you guys spoken on in the past calls.

Is there any excuse

Steven Keller, CFO, Compass Diversified: me, is

Joseph, Analyst, Roth Capital Partners: there any callouts to why this is so strong and any update on longer term flow through goals for your incremental revenues?

Pat Massarello, COO, Compass Group Management: So we don't guide again company by company. The strength this year was just driven by a strong market and the continued I would say the continued acceptance of what we believe is a really unique disruptive business model by its consumers. And you see that as far as average purchase size, you see that as far as repeat purchases, you see it on almost every metric. And so while we don't guide again and I'll say that again specifically by company, We did mention that we do have at least one large salon opening that's been publicized in Chicago, likely in Q2 of this year. And we have a couple other in the works as well for later on in the year.

So we're confident that we'll once again have a good growth here at Lugano.

Joseph, Analyst, Roth Capital Partners: Got it. And then just on 05/2011, if you could, now that Troy has had a year under the helm, what's the store strategy for a store growth strategy now, If you could provide any details on that?

Pat Massarello, COO, Compass Group Management: We're going to likely at the end towards the end of this year, we'll likely launch a couple of you sort of stores with sort of a different profile. And we're not getting into specifics about that profile right now, but we're going to potentially change things up a little bit and sort of test and learn. So I would say test and learn is our retail strategy in 2025.

Joseph, Analyst, Roth Capital Partners: Okay. I appreciate you guys answering the questions. Thank you.

Conference Operator: Thank you. One moment for our next question. Our next question comes from the line of Randy Binner from B. Riley Securities.

Randy Binner, Analyst, B. Riley Securities: Hey, thanks. I have a couple, they kind of been addressed in different ways. So I might ask it just a little more directly, and that is that with Lugano, the EBITDA margin was at least quite a bit better than we thought it would be in the fourth quarter. And so setting aside kind of the revenue comments there, was there anything unusually good from an EBITDA margin perspective at Lugano this quarter that wouldn't necessarily be something that run rate in the model?

Elias Sabo, CEO, Compass Diversified: No, I would just say the you do get the benefit of operating leverage clearly and when revenue growth accelerates, you would expect to have some kind of margin accretion as a result of that. And the other component is we do usually have a little bit of wholesale revenue in there. That was much smaller in the fourth quarter than what we've had before. So that creates some margin accretion. And lastly, the team is just executing an exceptional level and that is on kind of buying, it's on gross margin that they're able to generate, which is directly attributable to buying.

I would say our buying efforts and sourcing became quite a bit stronger over the course of 2025 and that flowed through to margin. So there's nothing that I would look at and say was unusual. That being said, we are opening three new salons in 2025 and we are going to have significant cost increases that come along with that. And before those salons come fully up to scale, there's going to be some margin kind of dilution that comes from that. So I would keep that in mind.

It will be dollar gross profit and EBITDA accretive, but margins can come down a little bit, especially when we accelerate from a historical rate of one to two salon openings to three this year that will have an even slightly more dilutive effect on gross margin percentage. But I would say the business just continues to execute at such an extraordinary level. These are some of the things that happen. You find gross margin and profit upside when companies are executing this well.

Randy Binner, Analyst, B. Riley Securities: All right. That's fantastic. And then if you cover this at Investor Day, I apologize, I don't recall, the three new salons are being opened in what cities?

Pat Massarello, COO, Compass Group Management: Chicago, we've announced we're going to let the company announce the other two.

Steven Keller, CFO, Compass Diversified: Okay.

Randy Binner, Analyst, B. Riley Securities: Okay. So it's yes, I was kind of thinking through like your comment on the health of the high end consumer. Is that is it is the regionality of that and maybe that's not a really word, but has that we know Texas has done well. There's areas of the country that any is any of that changing with kind of the more economic noise so far this year or is it just too early to tell?

Elias Sabo, CEO, Compass Diversified: Yes, I mean with respect to Lugano, this customer With respect to Lugano, yes. Yes. So in that context, you have to understand this customer is a highly, highly affluent customer. Remember, our average ticket price approaches $500,000 So when you're at that kind of level, you're dealing with a different customer set than the broad macro economy touches. In general, we're not really seeing anything through our other companies in terms of the affluent customer region by region.

But with respect to Lugano, this is a very economically, I would say, a sensitive customer base. If the economy does well, they buy. If the economy doesn't do well, they buy. I mean, this is just someone who buys based on more kind of want. And I think that it is very well insulated.

So we're seeing nothing from region to region, international versus U. S, but I would anticipate that with the customer base that we approach there.

Randy Binner, Analyst, B. Riley Securities: Okay, got it. Those comments are helpful. Thank you.

Conference Operator: Thank you. At this time, I would now like to turn the conference back over to Elias Sabo for closing remarks.

Elias Sabo, CEO, Compass Diversified: 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.

Conference Operator: This concludes Compass Diversified's conference call. Thank you and have a great day.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.