Compass Diversified Holdings

Good afternoon and welcome to Compass Diversified's fourth quarter 2020 conference call. Today's call is being recorded. All lines have been placed on mute. If you would like to ask a question at the end of the prepared remarks, please press the star key, then the number one on your touchtone phone. At this time, I would like to turn the conference over to Matt Berkowitz of the IGB Group for introductions and the reading of the Safe Harbor Statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified's fourth quarter 2020 conference call. Representing the company today are Elias Sabo, Cody's CEO, Ryan Fockingham, Cody's CFO, and Pat Massarello, COO of Compass Group Management. Before we begin, I would like to point out that the Q4 2020 press release, including the financial tables and non-GAAP financial measure reconciliation, are available at the investor relations section on the company's website at www.compassdiversified.com. The company also filed its Form 10-K with the SEC today after the market closed, which includes reconciliations of non-GAAP financial measures discussed on this call and is also available at the investor relations section of our website. Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income and the company's financial filings. The company does not provide a reconciliation of its full year expected 2021 adjusted EBITDA or 2021 payout ratio because certain significant reconciling information is not available without unreasonable effort. 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 future performance of CODI and its subsidiaries. Words such as believes, expects, plans, projects, 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, 2020, as well as in other SEC filings. In particular, the domestic and global economic environment, as currently impacted by the COVID-19 pandemic, has a significant impact on our subsidiary companies. Except as required by law, COTI undertakes no obligations to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. At this time, I would like to turn the call over to Elias Sabo.

Good afternoon. Thank you all for your time, and welcome to our fourth quarter earnings conference call. Before discussing our results, I would like to take a brief moment to acknowledge the extraordinary efforts of our employees as we navigated through the unprecedented challenges of COVID-19. Despite working remotely for most of the past year, our employees executed at an extremely high level and delivered results far in excess of our expectations. During the year, we successfully completed two transformational acquisitions, raised debt and equity capital at attractive rates to solidify our balance sheet, appointed two CEOs at our subsidiary companies, and produced financial results that not only exceeded our expectations, but also produced organic growth on a pro forma basis over 2019. Most importantly, we were able to achieve these accomplishments without faltering on our unwavering commitment to our team, prioritizing employee health and safety. Despite the challenges brought on by the pandemic, I am pleased to report that our fourth quarter results dramatically exceeded our expectations. including BOA and Marucci, as if we owned them from January 1st, 2019, pro forma consolidated revenue grew by 11% and adjusted EBITDA grew by 9% over prior year's quarter. For the full year ended December 31st, 2020, pro forma consolidated revenue grew by 2.5% and adjusted EBITDA grew by 2% over 2019. With respect to our previous guidance range of $270 million to $280 million, which at our investor day we communicated that we expected to be at the high end of the range, we are pleased to report that we significantly exceeded the high end of the range with consolidated pro forma adjusted subsidiary EBITDA of over $290 million. These results are a testament to our strategy of acquiring industry-leading niche companies and then actively managing them by working closely and supporting our subsidiary management teams to enhance value for our stakeholders. Our subsidiary management teams moved swiftly upon the onset of COVID-19, creating a safe and healthy workplace for our associates while taking the necessary action to reduce discretionary costs. As the impact of the pandemic started to become more apparent, our management teams were nimble and reacted quickly to pivot and take advantage of opportunities in their respective markets. As you know, each Cody subsidiary faced unique challenges, with some experiencing large declines in end market demand, while others experienced rapid and unanticipated increases. An environment this volatile required skillful navigation by our teams, and I am extremely pleased to report that our subsidiary management team and their employees delivered above and beyond. Their tremendous efforts and continued focus during 2020 helped enable us to navigate the pandemic in a position of strength. Although last year was difficult for everyone to endure, the crisis highlighted the advantages of our permanent capital model as we execute our private equity-like strategy. While most private equity firms were largely sitting on the sidelines with limited access to capital, we enjoyed open access to the capital markets, as evidenced by our capital raise in May 2020. With our balance sheet strong, we were able to acquire two world-class niche consumer businesses at attractive valuations. Very few others were able to make that same kind of impact. Our permanent capital business model is fundamentally advantaged against our peer set as we have the freedom to divest opportunistically, like we did in 2019, with almost $1 billion in enterprise value in these divestitures, and then aggressively deploy in times of market dislocation, like we did in 2020, acquiring almost $700 million in new businesses. As we've mentioned throughout the year, the acquisitions of Marucci and Boa have transformed our portfolio and raised our core growth rate substantially. The performance of these businesses since our acquisition vividly demonstrates this growth leveraging. Marucci, in the six months from July 1, 2020, to December 31, 2020, as compared to the same period last year, has experienced approximately 20% revenue growth and 70% EBITDA growth, despite youth sports and various levels of restrictions around the country. Similarly, BOLA experienced revenue growth of 2.5% and EBITDA growth of 29%, substantially above expectations for the fourth quarter and compared to the same period last year. These two stellar companies possess all the attributes we look for in branded consumer acquisition candidates, highly aspirational brands, premium product positioning, and proven and extraordinarily talented leadership. As I mentioned, our subsidiary management teams performed to their best this year, and CEO Kurt Ainsworth at Marucci and Sean Neville at BOA were no different. We have a strategy that has long proven that companies with characteristics like these will be positioned for accelerated growth for years to come. We enter 2021 with significant momentum at our back. Our consumer businesses on a pro forma basis grew at a remarkable level of greater than 40% over the back half of 2020. And early in 2021, we continue to see well above trend growth in this segment. While our industrial businesses suffered in 2020 due to reduced end market demand, we believe our growth rate will turn back positive in this segment as soon as the second quarter, with comparable quarters becoming much easier. For us to achieve this type of performance in a dislocated market highlights the substantial benefits of our diversification strategy in lowering our financial volatility. Based on these trends, for 2021, we expect to produce consolidated subsidiary adjusted EBITDA of between $305 million and $325 million, representing growth of 5% to 12%, and a payout ratio of between 80% and 70%. Before turning the call over to Pat to review our subsidiary results, I want to take a minute to discuss our strategy for 2021 and beyond. we believe we have created a fundamentally better way to execute a private equity like strategy. Core to that is our permanent capital structure, which allows us the freedom to acquire and opportunistically divest businesses without deference to timeline. As management has proven over the past few years, we have the financial flexibility to act based on opportunities that arise relative to current market conditions. And as you know, Our management is committed to staying in alignment with our stakeholders at all levels of our organization and its subsidiaries, as evidenced by waiving millions of dollars in management fees over the past few years. Of the utmost strategic importance is the relentless pursuit of a lower cost of capital. Over the past few years, we have made major strides in reducing our weighted average cost of capital by including preferred equity and unsecured bonds in our capital structure. We believe there are numerous opportunities to continue to lower our cost of capital and further enhance our competitive advantage in the marketplace. As Ryan will mention later in his section, we will continue to evaluate the merits and risks of a potential change in our tax structure from a pass-through entity to a C corporation. We are still too early in our evaluation process to provide insight. However, any decision will be predicated on our desire to achieve the lowest cost of capital possible for our shareholders because we believe that is what will deliver the greatest level of long-term shareholder value. With that, I will now turn the call over to Pat.

Thanks, Elias. Before I begin on our subsidiary results, I want to touch generally on the year. Over the course of 2020, as well as during the fourth quarter. Our branded consumer businesses benefited from an increased demand in outdoor categories and, as a result, experienced strong sales and earnings growth. Our niche industrial businesses exceeded our mid-year expectations as a group. Those sales and earnings continue to face headwinds predominantly driven by pandemic-related travel slowdowns and uncertainty. Now on to our subsidiary results. I'll begin with our niche industrial businesses. For the full year, revenues declined by 5.6% and EBITDA decreased by 18.3% versus 2019. For the fourth quarter of 2020, revenues increased by 4.7% and EBITDA declined by 23.8% versus the comparable period in 2019. For the year, revenue at advanced circuits declined by 3% and EBITDA by 9.1% versus 2019. The fourth quarter was challenging for advanced circuits, as uncertainty surrounding defense budgets following the results of the presidential election caused a reduction in customer demand for circuit boards used in research and development projects. We have seen these trends stabilize somewhat beginning in the middle of January, and the company's bookings have shown considerable improvement in the period since then. We anticipate ACI's results in 2021 will be in line with those in 2020. Arnold Magnetic EBITDA declined to $9.3 million in 2020, as compared to $15.4 million in 2019. Arnold's performance for the year was impacted partially by reduced activity in the aerospace and oil and gas-related segments of the economy, as well as severance and related charges associated with this decreased activity. While revenue for the year declined by 17.5%, Trade bookings were approximately flat as the company is benefiting from longer-term defense-related orders. While headwinds in the aerospace market will continue in 2021, we do believe Arnold will show growth in revenue and EBITDA in a year as the effects of the pandemic begin to lift. We recently rebranded foam fabricators as Altor Solutions to better reflect the company's diversified packaging platform. Altor Solutions grew EBITDA by 6.8% in 2020. This is partially attributable to the performance in its core business, and it's also attributable to benefits from the bolt-on acquisition of Polyphone Corporation midway through the year, which has driven strong top-line growth as demand for protective packaging and temperature management solutions continue to increase. We continue to see solid demand at Altor Solutions in 2021 and are encouraged by the company's strong project pipeline. The Sterno Group's 2020 EBITDA declined by 27.8% versus 2019 to 49.5 million. Demand for the company's core chafing fuel lines decreased significantly in the fourth quarter given the substantial reduction in holiday banquets and large gatherings. We expect this segment to slowly improve in mid to late 2021 as large portions of our population are vaccinated and business and leisure travel begin to show signs of recovery. Company's consumer business continued to experience elevated demand for its line of wax and essential oil products. The product mix had a slightly negative impact on margins during the fourth quarter. We anticipate Sterno's results in 2021 will be in line with 2020. Now turning to our branded consumer businesses, which continue to benefit from ongoing consumer demand in outdoor categories. Our results are presented as if we owned Marucci and Boa from January 1st, 2019. For the year, revenue increased by 9.1%, and EBITDA by 22.1% versus 2019. In 2020, our branded consumer businesses contributed over 60% of our pro forma consolidated subsidiary EBITDA. And in the fourth quarter of 2020, EBITDA at these businesses increased by 42.5%. BOA's full-year 2020 EBITDA increased by 10.3% on roughly flat revenue. In the fourth quarter, BOA's EBITDA increased by 29% versus the comparable period in 2019 to $9.1 million, exceeding our expectations. BOA experienced strong demand across several of its categories and continues to innovate in partnership with its customers. This quarter, we were excited by the publication of results stemming from the company's multi-year research partnership with the University of Denver. Athletes in this study showed meaningful improvements in agility and speed, and those wearing shoes with the tri-panel or wire-wrapped BOA closers showed performance improvements of between 3% and 9%. The study's findings were reported in multiple relevant publications. We remain impressed with the BOA team and the company's technology applications, and we are optimistic about the company's future. Virgo Baby's 2020 EBITDA declined to $15.6 million versus $21.3 million in 2019. Fourth quarter revenue and EBITDA were impacted negatively as the company repurchased inventory of its Tula brand from an international distributor as the company refocuses that brand towards its historic direct-to-consumer roots. International orders have returned to more normal pre-pandemic levels for the first quarter of 2021, though further European or Asian lockdowns could have a negative impact. Ergobaby launched its heirloom carrier in the fourth quarter and results exceeded our expectations. The heirloom is unique to the market, knit from post-consumer recycled polyester, and demonstrates our commitment to sustainability. Ergo has several additional product launches scheduled for the remainder of 2021, which we believe will have a meaningful impact on the company's performance and will produce year-over-year revenue and EBITDA growth. LibertySafe's EBITDA increased to $19 million in 2020 from $10.9 million in 2019. Liberty's strong... Continued performance in the fourth quarter was driven by both dealer sales and sales for traditional big box customers. End market demand as well as bookings remain robust in 2021, and much of the company's production capacity remains filled into the second quarter of this year. Marucci finished 2020 with EBITDA of $13.8 million, down just 3.1% from 2019. Revenue and EBITDA in the fourth quarter were up 12.7% and 63.8% respectively, as the company continues to benefit from the launch of its Cat9 line of bats, strong sell-throughs for its products, and gains in shelf space at key accounts. We believe that Marucci's exceptional 2020 financial performance, in a year that experienced reductions and stoppages of baseball seasons nationwide, speaks to both the power of the brand and the quality of the company's leadership team and employees. The first quarter of the year typically represents a seasonally larger portion of the company's revenue and EBITDA, given channel partners are shipped goods in advance of spring baseball seasons. This year, we are confident that Marucci is well positioned in advance of the spring season, and we believe the company will benefit from what is expected to be a much more stable spring baseball season. Velocity Outdoors EBITDA increased substantially in 2020, up 83.2% from the year-ago period. Velocity's performance was better than expected as investments made over the last several years came to fruition and continued consumer interest in outdoor activities drove demand for the company's products. Though challenges in part of the company's supply chain remain, the Velocity team continues to adeptly handle the heightened levels of demand and take market share. Current bookings and sell-through at Velocity remain strong for 2021, driven by growing participation rates and innovative new product introductions. Finally, 5.11's full-year EBITDA increased by 16.5% in 2020 and by almost 20% in the fourth quarter versus Q419. Despite reduced traffic in the company's retail stores due to the pandemic, 5.11's direct-to-consumer business as a whole significantly exceeded our expectations in 2020. In addition, the company took significant steps in the fourth quarter to enhance its omnichannel retail experience as it enabled ship-from-store capabilities in the vast majority of its 73 retail locations and shipped a significant portion of online orders from stores during the holiday season. We continue to believe that the 5.11 brand resonates strongly with its customers and that the company has even greater opportunities ahead. Before I turn the call over to Ryan, I would once again just like to recognize the extraordinary work of our subsidiary company management teams and all of our employees in 2020. Last year created management challenges and obstacles that no one could have envisioned 12 months ago. Throughout the year, our teams demonstrated skill, leadership, and dogged determination, and we are proud to work with each of them. I will now turn the call over to Ryan for his comments on our financial results. Thank you, Pat.

Moving to our consolidated financial results for the quarter ended December 31st, 2020, I will limit my comments largely to the overall results for our company since the individual subsidiary results are detailed in our Form 10-K that was filed with the SEC earlier today. On a consolidated basis, revenue for the quarter ended December 31st, 2020 was $474.8 million, up 22.7%. compared to $387 million for the prior year period. This year-over-year increase primarily reflects our acquisitions of Marucci and BOA during 2020. Excluding these recent acquisitions, our revenue increased by more than 10%, driven by strong sales growth at our branded consumer subsidiaries, Velocity Outdoor, 5.11, and Liberty, which offset declines in sales at Arnold, Ergo, and ACI. Consolidated net income for the quarter ended December 31st, 2020 was 8.8 million compared to 5.4 million in the prior year. CAD for the quarter ended December 31st, 2020 was 36 million, up 20% from 30 million in the prior year period. Our CAD that we generated during the quarter was significantly above our expectations, primarily due to our strong fourth quarter EBITDA increase as compared to the prior year. Other factors impacting RCAD and Q4 compared to the prior year include slightly lower CapEx spend, an increase in cash taxes, and higher preferred share distributions as a result of our Series C issuance in November of 2019. On a full-year basis, RCAD substantially exceeded our distribution. Our payout ratio for fiscal year 2020 was 82%, and our CAD increased 6% over the prior year. Turning to our balance sheet, As of December 31st, 2020, we had over $70 million in cash, approximately $290 million available on a revolver, and our leverage was 3.1 times. We have substantial liquidity, and as previously communicated, we have the ability to upsize our revolver capacity by an additional $250 million. We stand ready and able to provide our subsidiaries with the financial support they need, invest in subsidiary growth opportunities, as well as act on compelling investment opportunities as they present themselves. Turning now to capital expenditures, during the fourth quarter of 2020, we incurred $6.7 million of maintenance CapEx of our existing businesses compared to $7.2 million in the prior year period. During the fourth quarter of 2020, we continued to invest in growth capital, spending $4 million in the quarter, primarily related to 5.11's long-term growth objectives. Growth CapEx in the prior year quarter was $5.7 million. Turning to our expectations for 2021, As a reminder, our quarterly operating and cash flow results can vary materially based on factors such as the timing of shipments of large orders or the timing of certain investments made before or after quarter end. Elias provided adjusted EBITDA guidance and our payout ratio expectations for the full year of 2021. I'd like to now provide guidance on CapEx and cash taxes. For maintenance CapEx, our estimate of spend for the full year of 2021 is between $20 million and $25 million. For growth CapEx, our estimate of spend for the full year of 2021 is between 12 million and 16 million, primarily at 511. For cash taxes, we expect full year 2021 cash taxes to be approximately 9% of our subsidiary's total adjusted EBITDA. As a reminder, our cash taxes as a percentage of EBITDA can vary significantly from quarter to quarter. As Elias mentioned earlier, we are continuing to explore a change in our tax structure, including the possibility of electing to be taxed as a C corporation. We are evaluating the costs and benefits of such a change, as well as the implications of current and future tax law, corporate law, and potential impacts of such a change on our access to the capital markets, distribution policy, corporate debt ratings, cost of capital, amongst many other considerations. We will provide updates as appropriate as we move along in this process. With that, I will now turn the call back over to Elias.

Thank you, Ryan. I would like to close by briefly discussing M&A activity and our go-forward growth strategy. As I mentioned earlier, we took prescient steps in 2019 to prepare for the unexpected in 2020. Those decisions and our unique permanent capital structure positioned us to not only weather the storm, but to also proactively execute on our growth strategy in a volatile year. Heading into 2021, we continue to have the balance sheet strength to support our companies as they operate in these unpredictable conditions. We remain confident in our subsidiaries and the respective management teams as they have successfully pivoted their businesses as appropriate during the pandemic to maintain and even grow their market positions. As we look to the future, we're optimistic that our subsidiaries are well positioned to continue to gain additional market share and look forward to continuing to support their growth in the months and years to come. As for Cody, we will continue to seek both platform and add-on acquisitions, as we believe that there are compelling opportunities for us to generate long-term shareholder value given continued market dislocations in 2021. In addition, we will continue to invest in and enhance our subsidiary companies' competitive positioning, which includes supporting them as they build and grow their digital transformation strategies. Our differentiated strategy has set us apart for more than a decade, and it remains consistent. In 2021, we remain intensely focused on executing our proven and disciplined acquisition strategy, improving our operating performance of our companies, opportunistically divesting, enhancing our commitment to ESG initiatives across our portfolio, and creating long-term shareholder value. With that, operator, please open up the lines for questions and answers.

At this time, I'd like to remind you, if you'd like to ask a question, it is starred in the number one. Your first question is from the line of Larry Salo with CJS Securities.

Great, thanks. Good afternoon, guys, and congratulations on a really good year in a tough environment. I guess the first question, just a couple on the subsidiaries themselves, just on 5-11, good to see returning to growth in the quarter on the top line. Really impressive with the margin improvement in the year. I think it was up like 170 bits or so, and revenue was relatively flat, up maybe a couple percentage points. But just trying to dive a little bit more into that. Is that driven by mix, more on online sales, productivity gains, or maybe a little bit of operating leverage in there? What's sort of driving that margin improvement to, I think, end of the year at over 15%?

Hey, Larry, it's Elias, and good afternoon, and thank you for your comments at the beginning. With 5.11, I would say what is broadly not being seen by the market is the shift in the consumer and professional business. As you know, a few years back, this was predominantly a professional business. Today, it's migrated to be in North America more of a consumer business size-wise. The professional business had quite a few challenges globally. There was a lot of the social unrest caused police and other law enforcement budgets to be reduced globally. and so the pandemic has actually you know i think uniquely um you know caused the professional side to be down um and that's masking the really extraordinary results on the consumer side so as we've mixed shifted more towards consumer Clearly, that has much higher gross margins. And because we have such a direct presence, most of our consumer is direct-to-consumer, the margins are substantially better than they are in a wholesale business. So most of it, I would say, is due to mix shift. I will say the company also did an extraordinary job of moving quickly to ratchet cost down. The retail side of our consumer business experienced far lower traffic as a result of the pandemic. So the company did a great job of moving very quickly to retain profitability. in the retail side. And I would say just broadly, because of the uncertainty, the company did great at controlling spend. Now, you know, I will say that there's, you know, a lot of opportunities for investment in this company. So as we look into 2021, you know, and the consumer business continues to grow really dramatically, I would say, you know, we would plan to bring back some of that expense, not necessarily deleveraging the margins, but we would plan to bring back expenses, you know, at least in line with revenue growth because there is, you know, some good opportunities to really enhance the company's growth rate, you know, over the long term.

And that's how you plan to maybe accelerate the slowdown in new store openings in 2020, although I think they did pick up again in the back half. But with your commentary on the CapEx mostly going towards 511, I assume that's for new stores?

Yeah, and you remember with our new stores that have multi-purpose, one is clearly as a revenue. The second is it really acts as a marketing in that trade region. But third and most importantly, and Pat hit on this in his section, We now have more of a true omni-channel experience, and we're able to ship from store, which we did a considerable amount of revenue from our e-comm was actually shipped from our stores. So it opens up a lot of capacity. So it works so integrated, Larry, from an omni-channel standpoint. that we think it's important to continue with that. And, you know, frankly, with rent coming down, the economic model is still very strong. And so I would say, you know, our commitment to continuing to roll out the store network is as strong as it was pre-pandemic.

Gotcha. Okay. And then just switching gears on the C structure conversation, you know, I think, you know, This often comes up, and I know you guys, it's a continuous process and evaluation for you guys and for Compass. Is there anything from a high level different this time around? It does seem like perhaps maybe you're not taking this more serious, but maybe moving more towards a potential switch in structure. Have tax structures or tax laws changed at all perhaps under the Trump administration and didn't change or the Biden or something along those effects or anything that kind of may be different this time around?

So I'm going to ask Ryan to give a little bit more detail, Larry, but I would just say kind of high-level a couple things. One, the Trump tax law was negative to partnerships. and the tax law change. There was just one component of it. And therefore, the differential between, you know, and this is still early in our analysis, but the positive differential we had from being a pass-through has really materially come down based on a provision in that tax law that has changed. That's number one. Number two, we would be looking at this really seriously anyway. And as I said in my commentary, our goal is to have the best cost of capital amongst the private equity peer set that is looking at middle market, you know, opportunities. And we think that, you know, when we always say to the guys, you know, we're always looking at, you know, where is the economic motive of business and how can it, you know, continue to be deepened? You know, we think one of the economic moats around our business is our weighted average cost of capital. And it is materially lower now than what our, you know, peers are, especially on a risk-adjusted basis. Now, look, if you're going to have 90% leverage, then your whack is probably lower, but your chances of going out of business are pretty high. And so, you know, when we risk-adjust it, we think our whack is really low. We are continuing to look at all opportunities that we can lower our WAC and changing to a C-Corp for tax purposes has the potential, in our opinion, to lower our cost of capital. So it's getting a really serious evaluation. Now, with that, Ryan, maybe you can just touch a little bit more granularly as kind of how we're looking at this.

Yeah, sure. Hi, Larry. One other thing just on the taxes, of course, part of the consideration is you know, Biden's administration and what that does for taxes. And, you know, the early preliminary analysis on that is there's, you know, it's still, you know, net neutral in that it's not that detrimental in terms of raising rates on corporate. So, you know, I think that's kind of a positive sign. But certainly it is early in the process. You know, we believe we have the right partners assisting us in the analysis process. We talked about the tax impact and what's the tax impact on shareholders, what's the tax impact on the corporation that moves forward, what's the impact on our distribution policy, what's the timing of it, and, of course, what's the market impact of it. And, you know, all of that with the line of sight on, you know, reducing cost of capital as sort of the paramount strategic rationale. So, you know, it's moving along. It is a long process for sure, and we want to make sure that we're thorough in the analysis.

And just lastly, just a quick follow-up on that. You mentioned, you know, a potential change in the distribution policy. Can you maybe elaborate on that a little?

Sure. Sure, Larry. I mean, part of the analysis is trying to, you know, consider what the tax impact across the system is. And today, our shareholders, who are partners, you know, pay the tax on our distribution. So our $1.44 per year goes out to shareholder, and a portion of that is the tax liability of the entity. And if we were a C-Corp, then the C Corp would now have the tax liability. So there has to be some analysis around you know, what makes sense in terms of our distribution policy. And I think as Elias highlighted, you know, our core focus is on reducing our cost of capital. So we need to think about what the distribution policy is going forward now that we assume the tax liability and how that impacts our cost of capital. So, you know, that's kind of where we're at. It's still early in that process, but that is part of the analysis that we're working on.

Got it. Okay, great. I appreciate that call. Thanks again.

Sure, Larry. Thank you. Your next question is from the line of Kyle Joseph with Jefferies.

Hey, good afternoon, guys. Let me echo my congratulations on a very strong finish to a turbulent year. I guess I'll start out, you know, from a high-level perspective, just thinking about 2020 and even into 21, the proliferation of SPACs. Can you give us a sense for you know, the potential impacts on your business, whether positive or negative, of the proliferation of SPACs, you know, admitting we don't know how long this phenomenon will last, whether it's temporary or whatnot, but just kind of near-term implications for the business?

Sure. Good afternoon, Kyle. It's Elias. You know, I think the SPACs are generally not competitive with us, given what they're focused on. Now, you know, what we see is a lot of the high-profile ones, but they're, you know, really geared much more towards early-stage, you know, companies that want a public, you know, a mechanism by which they can go public. So we're seeing the EV space, the battery space for EVs, you know, the space, right, like with Virgin, Galactic. And, you know, I think you're going to continue to see, you know, some of these companies that, frankly, we would have no interest in, you know, acquiring, you know, value. They're pre-revenue in some cases. They're clearly pre-cash flow. And so that doesn't really fit in our model. Generally, lower middle market companies like we're acquiring are not ones that are, you know, highly desired by the, you know, kind of SPAC you know, group right now. So we don't really see competition from SPACs. You know, conversely, I would say we don't really see SPACs as a great exit opportunity for a lot of our companies either because, you know, the dynamics of what they're looking for, you know, much earlier stage, sort of much more disruptive type companies. So, you know, my view is it doesn't really have that large of an impact one way or another on us. But, you know, there's a broader point, I think, beyond SPACs, which is, You know, there is a lot of capital that continues to be in the market. As we all know, the Federal Reserve continues and central banks around the world continue to be very aggressive with monetary policy. And that continues to push people to seek higher returns, you know, out the risk curve. Ultimately, you know, we sit at the end of the risk curve right in the private equity like space. And so there is a lot of capital that's sitting there. And I would say there are some opportunities that continue to be created because there are still dislocations in certain segments of the market. But broadly, we see asset prices returning back in 2021 to where they were pre-pandemic as the simple supply and demand of capital against assets. It's dictating that. And, you know, you can still get access to relatively cheap debt capital. In fact, maybe not relatively, historically cheap debt capital in many instances. So the, you know, competitive dynamic, not from SPACs, but just from private equity, you know, likely look more like it did pre-pandemic right now.

Got it. Makes a lot of sense. And then question for probably either Elias or Ryan here. Just on seasonality, a couple years ago, we were accustomed to the first quarter being the lowest in terms of CAD, but obviously you had two portfolio sales and two Portfolio acquisitions, so the portfolio has evolved, and then 2020 you can obviously throw any seasonality out the window. And I think you guys alluded to Marucci having kind of a strong first quarter, so just give us a sense for how the seasonality of the overall portfolio has evolved.

Yeah. And Ryan, I'll kick it over to Ryan and let him talk about it. But it's likely going to be less than what it's been historically, largely because Marucci does have their strongest earnings quarter in the first quarter. But Ryan, do you want to touch on that?

Sure. Yeah. No, that's what Elias said is spot on. Historically, our first quarter has been, you know, one of our lower cashflow generating quarters. And Marucci certainly offsets that given their business and the sell-in, you know, ahead of the baseball season. So that'll, you know, help our first quarter overall. And, you know, BOA traditionally doesn't have much seasonality. You know, their business can be a little lumpy depending on when, you know, product gets sold in. But it's hard to assess seasonality on that business right now. And you're right, COVID certainly skews things a lot this year. just given, as you say, you can throw it out the window. So I think 2021, maybe the back half may normalize a little bit. The first half could have some benefit to overall results because of COVID ending. But it's hard to read that now. But by and large, as we go forward, thinking 2022, the business will be less seasonal overall.

Okay, and one last one from me. Apologies, Ryan, I missed it in your commentary, but remind us where leverage closed the year out and how that would trend through 21X incremental acquisitions and give us a context of where that is in your overall target leverage zone.

Yeah, sure. So it's just under 3.1 times at the end of the year. So that is in line with financial policy, and it's a comfortable place for us to be. The good news is as we exited 2020, we had a very high free cash flow year, and we were able to organically de-lever as we exited the year, and as we look at 2021s, expected performance, again, assuming no acquisitions or divestitures, you know, we'll have organic de-levering occur with that free cash flow generation. So it's certainly, you know, starting to hum, I'd say, given that we now have 10 businesses and we've got, you know, more core growth occurring in the portfolio. So we should definitely reap the benefit on a leverage standpoint as we exit 2021.

Got it. Very helpful. Thanks for my questions and congrats again on a very good year. Thank you, Cal. Thanks, Cal.

Your next question is from the line of Chris Kennedy with William Blair.

Hey, guys. Thanks for taking the questions, and congrats on navigating a difficult time. I just wanted to dig in a little bit more on the momentum and velocity. Is there a way to parse out the internal initiatives versus the macro tailwinds towards outdoor? Thank you.

Cal? Yeah, thanks. I think the short answer is no. But we see, you know, we are seeing shelf space gains. We're seeing, you know, a great reaction to our product introductions. And so we think we are taking market share. We believe strongly that we are outpacing the market. But other than that, we can't pull it apart, you know, quantitatively.

Understood. And then just a broader question, I think, Elias, at the Investor Day, you kind of talked about potentially looking into new verticals, whether it be healthcare or fintech or something to that effect. Can you just go a little bit more into that? It'd be great. Thanks a lot, guys.

Yeah, so we continue, and it really gets back to sort of the strategic look of our business, and as our cost of capital continues to come down and our competitive advantages continue to grow, we think the business is poised for a good kind of growth spurt here going forward. We've been developing our human capital internally, and I think our team right now is operating at a level that, frankly, is better than we've had in any year. Look, it's evidenced by what we did last year, right? A couple of acquisitions, a couple of CEO transitions that we completed. you know, doing some capital raising, you know, those are all really positive. And the financial results we delivered, I think, are a testament to, you know, the entire group at the manager who all performed at such an extraordinary level. Now, that all being said, you know, we look at a lot of the stars aligning for growth, but we don't have core expertise and some additional verticals. And so, you know, our ability to enter into new verticals is really predicated on us finding the right human capital. and bringing that aboard. You know, I think I mentioned that our investor day, don't expect this to be something that is, you know, kind of a near term 2021, you know, objective that we can execute against. It may be if we found the right person, my personal guess is, is longer than that, because we're going to want to build around, you know, some talent that we bring into the organization. So We continue to recruit and get really high-caliber individuals that are coming into the firm. And it really all plays, I think, together, Chris, in terms of how we look at our kind of growth mandate going forward. But entering into new verticals without bringing in some talent that has that domain expertise we think would be too risky. And so we're going to just be more patient, wait until we find the right person, We will clearly announce that when we do to the marketplace. And then, you know, from there, there's, you know, some length of time until we would be active in that space. But that's sort of the sequencing of it. You know, I would, again, reiterate, I wouldn't consider that a near-term objective. We would be fortunate if it is, but I don't think it's kind of near-term that we can execute against that.

Great. Thanks a lot, guys. Take care.

Your next question is from the line of Matt Carando with Roth Capital Partner.

Hey, it's Gus stepping on for Matt. Just wanted to unpack Marucci and Velocity even at the margins a little more. Those are pretty outstanding. Just wanted to see if you could talk more to what you're about.

Yeah, I'm going to ask Pat to comment on both Marucci and Velocity for you.

Yeah, I'd say if you kind of look – Annually, you know, we definitely had some reduced costs. I would look to be investing in both those businesses. I just think the opportunities in both those businesses are plentiful. All that being said, I don't see EBITDA margins regressing significantly at either of them.

That's helpful. And I guess just to wrap up, so for Altra Solutions, I know that you guys are distributed across, like, a dozen-plus locations. Just any concerns with the weather, with Texas weather, and being able to get the raw materials?

Sure. So... Broadly speaking, you know, several of our plants were down for brief periods. They are now all back up and functioning, you know, at or close to full capacity. As it relates to raw materials, you know, we're looking kind of through the supply chain back to sort of coarse diurene prices. There are some disruptions. You know, we believe we're in a good position versus our competitors. somewhat minor. And as you know, we have price pass-through mechanisms with a lot of our customers as well. So we don't see any shortages. There may be raw material increases because of the disruptions, which we think we'll be able to handle that.

Great. Thanks, Dave. Thank you.

Your next question is from the line of, I'm sorry if I mispronounce the last name, Matt Paben with Raymond James.

Hey, all afternoon, and thanks for taking my questions. Just wanted to follow up if I can. Any color you can give on where valuations are sitting now versus kind of pre-COVID levels? And then how are you thinking about positioning in 2021, whether that's net buyer, net neutral, or net seller? Thanks.

I'm going to let Pat just touch on valuations, because he's seen companies in the market on a daily basis. I would say, with respect to our view on 2021, it's a little hard to tell whether we'll be a net investor or net investor here. I would say over the next couple of years, because we believe we're at the beginning parts of a cycle, being a net investor is, you know, likely where we would like to be. Although, as you know, along the way, we're always open to opportunistic divestitures. And so, you know, whatever the market kind of gives us is what we look at, you know, taking advantage of for our shareholders. And, you know, it's hard for, we really don't comment on whether we're going to divest a business or we're going to acquire a business. But I would say, in general, we're probably looking to you know, be net investors over the next couple of years. Pat, you know, any commentary on what you're seeing in, you know, kind of asset valuation, both from an absolute standpoint and a multiple basis?

Yeah, I mean, I'd say the, you know, we're back to pre-pandemic levels, if not above them. You know, our challenge, some businesses have been sort of, you know, there's been a change in consumer patterns that have permanently changed, you know, the way consumers operate and work because of COVID. And so you can kind of capitalize those earnings. Other times there's things that you have to look for to see what's the, you know, 2021, 2022, even if it's not really going to be like before you put on multiples. And that's sort of the process that I'd say the market is going through right now, if that makes sense. But in a sort of vacuum, average multiples are back up sort of above pre-pandemic levels. And then, you know, then it gets into the minutia of business to business. Great. That's it for me. I appreciate the time.

Thank you.

I'll now turn the call back over to Elias for closing remarks.

Great. Well, 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 Cody. We look forward to sharing our progress with you in the future. That concludes our call. Thank you.

That does conclude today's conference. Thank you for participating. You may now disconnect.