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spk03: during the first half year at least, what's your ability to acquire larger size assets? Would you be willing to go up to five times plus or how do you look at that? Maybe you might entertain the idea of selling some of your smaller subsidiaries.
spk06: Yeah, Larry, I would say, and thank you for the question and good afternoon, I would say the acquisition market is better. I don't know that I'd refer to it as a lot better. It's clearly not 2021 when we were seeing deals, you know, kind of at a very high level and some good quality companies that were coming. But, you know, compared to 22 and 23, you know, we often say it's hard to fall off the floor. And I think 23 sort of kind of represented the floor. So it's clearly a pickup. And, you know, not only are we seeing a pickup in the number of deals, but we're also seeing some quality companies come through as well. So, you know, that bodes well. Regarding your question, I think, you know, right now we're at 3.7 times leverage. It's a little bit outside of our, you know, kind of leverage window. As Ryan mentioned in his commentary, it could float up a little bit. It's not going to be a material floating up in the beginning of the first half of the year. And then it will come down. It's partly just the funding of inventory growth at Lugano. So, you know, we're opening a London on. So we expect really strong growth. So I would say because of both the cash flow, you know, kind of generation power of the company, as well as the growth and the expected deleveraging back down into our financial policy target range, which, you know, goes to kind of three and a half times at the high end, you know, we still feel comfortable doing a deal. And yeah, we could push leverage up into the fours, you know, kind of temporarily here at the beginning of the year. But then we expect it to fall, you know, kind of back down below that. Obviously, it's dependent on size of deal. It's dependent on multiple that we pay. And so it's a little hard to be precise until we have something, you know, kind of in our site. I would tell you, we will not take our leverage to five times. And so that's off the table. But could it go over four times to consummate a deal the size of the honey pot or a little bigger? Absolutely. And given the confidence that we have in our earnings trajectory right now, and the cash flow producing, you know, power of this business, we are absolutely comfortable with that. And the fact that our deleveraging post and acquisition will bring us back in line to where we need to be.
spk03: I appreciate that call. And then just the second question, maybe a two part question, just on the inventory headwinds of 23. And it feels like maybe those are certainly subsiding significantly, right? And you mentioned maybe even in terms of tailwind in 24. Can you just discuss sort of specifically, you know, Goa and Primaloft, I think were the two, you know, bigger brands that were kind of impacted and sort of the underlying trends that brought those businesses, maybe a little more color there. And the upside to guidance, perhaps that you mentioned, would that be kind of maybe if the inventory actually did turn into a tailwind?
spk06: Yeah, so I'm going to let Pat speak specifically to some of the trends we're seeing at Goa and Primaloft and how that headwind, which we think sort of turned neutral in Q4, it was not a headwind nor a tailwind, how that will, you know, hopefully build into 24. But let me address the last part of that first, which is built into our guidance. We have not built a tailwind from inventory and sell in matching, sell through. We have not embedded that into our guidance. And that's why if there's one thing, you know, I would say to take from this call is it's just too early. We gave you three weeks ago a guidance range. It would be too early for us to increase that right now. And I think that would be irresponsible. However, if we were reissuing guidance today, we'd probably be more optimistic. And, you know, I think there are clear catalysts for, you know, kind of us to exceed the range here. And it could be material. And one of those catalysts could be inventory changes starting to become a tailwind where sell in just has to match sell through. Forget the fact that there could be inventory building again at some point, you know. We just want to get back to the point where inventories are no longer depleting, which has been sort of the constant theme over 23. So, you know, there's absolutely upside that is available for that. You know, I would tell you that we were a little bit shell shocked by kind of the depth of the inventory changes of 23. And so we've been hesitant to build that in. But we think that's some nice upside that could exist as we go forward. And I'll ask Pat to comment on your questions on both Primal Loss and BOA. Yeah,
spk07: so BOA is strengthening. And hey, Larry, and it's tough to kind of tease out, you know, what part of that is model count, what part of that is an easing of pressure, you know, model count growth, what part of that is an easing of these headwinds that we talked about and what part of it is just, you know, really strong execution by the management team. Clearly, there's aspects of each and I can't point you to kind of, you know, percentages, but I can tell you that collectively, those are each having, you know, each driving kind of bookings to be better than we saw on a year ago basis. Right. So at Primal Loss, I'd say the, you know, the language from customers is clearly that these headwinds are easing. The language from customers is clearly that, you know, we're going to have a more stable, solid 2024. However, you know, many of the brands are willing to chase the season, if you will, and not sort of order in advance. So there's just a little bit of a lag, but that's how I differentiate kind of those two, if that makes sense. It feels like the easing at FOA is a little bit ahead of the easing at Primal Loss.
spk03: I appreciate the call. Thanks, Scott.
spk07: Thank you,
spk02: Larry. Your next question comes from Matt Coranda of ROTH MKM. Your line is already open.
spk08: Hey, guys, Mike Zabron, on from Matt. Maybe just starting with the 24 guide. I need to cut the industrial segment adjusted to get to the midpoint of 140. I guess just based on recent under performance relative to our expectations, I wanted to cut out of Sterno. But at the same time, we are facing two straight years of negative growth there. So I guess just, are we still expecting low to single digit growth in the industrial segment for 24? And maybe just give a bit more color on where we're seeing headwinds in the industrial segment and which, I guess, business we expect to be the heaviest drag in 2024.
spk09: Yeah, so I'll let maybe Pat touch on kind of the industrial drivers, but I you might be off on your numbers. So industrial for full year produced adjusted EBIT of 128.6. So the midpoint of our guidance that we provided implies kind of a 1, 2% growth as we think about 2024. I think we'd all agree that's a little bit conservative. As you mentioned, there's not a lot to cut here. Altor is performing well. Arnold's performing well. Same with Sterno. So I think we like there's upside to that midpoint. But Pat, do you want to provide any other, you know, kind of color on the industrial trends that you think will benefit 2024?
spk07: Yeah, I just don't know about the under performance external. I'm not seeing that. I mean, by our by our count and what we published, we grew sort of 11 to 12% there. And I don't I don't see, you know, I guess I can't answer your question because I don't agree with the basis of your question. If that makes sense, respectfully.
spk08: Yeah, no, sorry, just meant under performance relative to our numbers that we had in our model. But totally understand where you're coming from. Maybe just anything, anything stimulating growth in 2024 and kind of, yeah, just where we expect the growth in industrial to come from in 2024.
spk06: Yeah, so let me just give kind of a high level here. So we grew mid teens and on a consolidated basis in 23 over 22. That is far in excess of our core growth rate in industrials. And so I think we're all a little hesitant to get over our skis right now and say that you can back up an extraordinary year where you sort of triple your core growth rate and have not some payback that could happen from that. A lot of that is due to margin expansion that occurred in 23 as a result of commodity price deflation. And as we've been saying, we've passed a lot of that commodity deflation to our customers, which is why revenues were down slightly, but EBITDA grew so rapidly. So, you know, our industrial businesses performed exceedingly well in 23 and they entered 24 with really healthy backlogs. Now that said, you know, I think we're a little cautious, which is why we only guided to sort of, you know, kind of one, two percent growth here. And that's, you know, it's not really based on what we're seeing in numbers manifest right now. It's much more based on the fact that, you know, we came off of a really extraordinary year. You know, we don't know if that, you know, we'll get paid back some in 2024. But frankly, there's really no reason to expect that the company is not going to grow back at it or the industrial group isn't going to grow at its, you know, kind of normal longer term rate of mid single digit. I would say, you know, as Ryan mentioned, it is being conservative. And we think that's just kind of prudent given the macro outlook right now. I mean, remember, there are global tensions and wars that are happening, you know, kind of in Europe. And so, you know, you just have to be cognizant of, you know, kind of those threats that are out there. And we want to make sure that, you know, we are guiding appropriately. But I would say some upside exists to our guidance numbers. You know, specifically, Arnold is doing really well. You know, Sterno, as Pat said, you know, kind of grew double digits year over year. You know, it's we have decent expectations for them to grow again. And Altor is, you know, performing really well. And we have an exceptional management team there. So, there's like no real like issues that I could point to in any one of the companies other than to say, you know, again, when you've tripled sort of your core growth rate in a year, you're a little hesitant to go too far out on your skis in the following year. But there's no reason we should underperform our core growth rate of mid single digits this year.
spk08: Got it. Makes sense. Thank you for clarifying, Elias. Switching to the consumer side, at 511, given we're pausing store growth strategy this year, maybe just speak to where we're planning to deploy that capital at 511 and just help us level set growth expectations for 2024.
spk07: Sure. Sure. So, first kind of going backwards, we believe we will have another year of growth probably similar to this year outside of what we alluded to earlier that there might be some charges for the PFAS transition, right? So, we think we will have a growth level that's consistent with prior year's growth in 2024, if that makes sense. As far as where we're reallocating, I mean, we're trying to be best in class sort of in the DTC sector. So, we're trying to get better at customer service. You know, everybody's always trying to get better at customer service, but we're really trying to, you know, provide best in class experience to our customers online as well and drive that online business, if that makes sense. Secondarily, we're seeing, you know, we mentioned that we've mentioned some of the geopolitical tensions. Well, that drives our professional growth as well, and we're seeing strong growth in professional, and we believe we'll continue to see strong growth in professional.
spk08: Got it. That's all from you guys. Thank you. Thank
spk02: you. Your next question comes from Kyle Joseph of Jeffries. Your line is already open.
spk01: Hey, good afternoon, guys. Thanks for taking my questions. Ryan, obviously, the portfolio has evolved over the past couple of years, but can you just kind of refresh it? I think you touched on this in your commentary, but on the seasonality in terms of adjusted earnings?
spk09: Yeah, so seasonality adjusted earnings, it's, you know, I think if you look back at prior years, it's pretty representative. I mean, similar to what we said on cash flow is, you know, the first quarter is generally, first and second quarter are kind of generally slightly weaker than the third and fourth quarter because a lot of our businesses have, you know, momentum to close out the year, whether it be, you know, the outdoor season or the holiday season, etc. So, you know, no one business in particular, Lugano, obviously, is a pretty significant percentage of our business now. That business doesn't have a tremendous amount of seasonality given the fact that there's, you know, events or, you know, anniversaries or birthdays, etc., you know, all year, but they do tend to have a little bit more in the fourth quarter around the holiday season. People generally, I guess, you know, become gift-giving around that. So outside of that, I'd say, again, kind of, if I were modeling, I'd say roughly 60% back half, 40% front half is how I would think about it.
spk01: Yeah, helpful. And then in terms of adjusted earnings guidance, I think you talked about dollar per share basis being relatively flat year over year. So the headwinds there are just a higher share count and the tax rate, I think you mentioned, or anything else we should be thinking about? Because you get a due model for, you guys did really strong eBotagra.
spk09: Yeah, so Kyle, I mean, last year, it's always tough to compare adjusted earnings when you have a discontinued operations, right? So last year, we pulled out ACI and Marucci, right? So that lowers our adjusted earnings. So the way I would think about it is we had guided on the third quarter earnings call, adjusted earnings between 130, 140 million, roughly. I think if we had owned Marucci the whole fourth quarter, we certainly would have beat that guidance. But we see this year being up slightly to 2023. So I think there is growth in adjusted earnings. I think that the challenge that we have with respect to adjusted earnings is Lugano, because Lugano's growth carries with it less leverage of adjusted earnings because you've got, it's a taxpayer, number one. And number two, it's got a pretty high non-controlling interest shareholder, right? The management team owns north of 40% of the business. So that creates a pretty high level of non-controlling interest that lowers adjusted earnings. So we're going to have, as we've indicated, pretty substantial subsidiary adjusted EBITDA growth year over year, but not as high of adjusted earnings growth, given that most of our growth would be Lugano.
spk06: Yes, that makes sense. Yeah, but Kyle, just to point out, the tax rate differential is a significant drag coming into 2024. We had roughly 7% of adjusted EBITDA, subsidiary adjusted EBITDA, and we're modeling in 10% now. So if you take that 300 basis points on 500 million bucks, it's $15 million, it's 20 cents a share. So if you were at 223 versus 203, and that's just having the same tax rate, the adjusted earnings growth per share or an adjusted earnings would be commensurate to the adjusted EBITDA growth. And what Ryan has said is also true, when Lugano carries higher growth, it comes with lower adjusted EPS growth because of the minority interest and capital investment. But I just want to be very clear here that if the tax rate is to stay the same, we would expect to get some leverage on adjusted earnings and adjusted EPS from our adjusted subsidiary EBITDA.
spk01: I got it. No, that's very helpful. That makes it all make sense. Appreciate it, guys. Thanks for taking my questions.
spk06: Thank you. Thanks, Cal.
spk02: Your next question comes from Mark Feldman of William Blair. Your line is already open.
spk05: Hey, guys. Thanks for taking the questions here. So just a question with some of the recent management changes. I know you've had changes at 511 and Primal Off. Can
spk04: you
spk05: just talk to any major changes and strategies that both of those companies or priorities, you know, Primal Off, obviously, there's a lot of interest in expanding into newer verticals and new products. So just any update you can provide?
spk07: Sure. I mean, in Primal Off, it's a couple things. Stay the course. It's got a great business, a great IP. I think we probably would like to invest in branded Primal Off a little bit more and bring forth a little bit more of what Primal Off provides to the end user. And Ann Cavazza's experience there is very strong. And so we're excited to have her. At 511, Troy Brown, who have very high positions at Zoomies for many years, along with many other businesses like that, and relevant businesses, is really, we believe, you know, a very strong at operational excellence. And he'll be working with Francisco Morales there as Francisco understands brand and product development and will stay on as executive chairman. And Troy, you know, we just believe is very strong at driving operational efficiencies and at delivering for the end customer in a DTC environment. And we think that combination will really yield tremendous benefits.
spk05: Got
spk07: it.
spk05: Appreciate that. And then I guess, you know, one other question as it relates to the consumer brands, you know, you talked about 511 and BOA, inventory, de-stocking, but I guess, you know, one other subsidiary that would be impacted would be Velocity. So if you could just talk about trends there and anything else that you're foreseeing and then, you know, any changes and strategies with that business going forward?
spk07: Yeah, it's a tough, I mean, it's two or three businesses, but in the, you know, Archery is, and the Archery side, we've seen some of that same de-stocking and, or some, you know, some inventory reduction levels that have hit the business. I say we're excited about the new products that we're coming out with this year in Archery, and we think it will be really, they'll be well received later in the year by customers. On the sort of more crossman side, it just continues to have slightly weaker or weaker POS than we would hope, really driven by a lot of buying kind of during the pandemic era, and so a lack of replenishment really needed. So, you know, we're working every day to write the course there, but that's also one of the benefits of having diversified business of, you know, 10 companies, right? And so, but we continue to be focused and working every day there.
spk05: Great, thanks for taking my questions.
spk02: Your next question comes from Robert Dodd of Raymond James. Your line is already open.
spk04: Hi guys, on, almost back to Larry's question, on the leverage question, I mean, when would it be realistic for you to be entering the healthcare vertical? I mean, you said you'd be willing to take up leverage a little bit, but healthcare businesses do tend to go for pretty high multiples. I mean, next year, which is probably a different scale than you're looking at, and we went for 30 times even times. So, with that dynamic, you know, if the leverage did go up to the mid-fours, would you be then out of the acquisition market for maybe a couple years to grow EBITDA to get the leverage down into your 3, 3.5 target range? Or what's the thought there on making an acquisition now, potentially reducing your ability to take incremental opportunities, unless you make a sale? Obviously, that's a different question. Yeah,
spk06: Robert, I would say, one, we're not paying 30 times EBITDA for a business. So, that's off the table. You know, I think that the businesses we're looking at are trading at, you know, a premium to where the, you know, kind of innovative and disruptive consumers businesses are trading right now. Call it, you know, those are in the 12, 13, 14 times range, you know, good, innovative healthcare businesses that have real good, you know, kind of moats around them, you know, are probably a 20% premium to that, just to give, you know, kind of some type of, you know, kind of baseline. So, I think, you know, if we were to do a deal today in healthcare, you know, it's going to bring us temporarily, probably to, you know, kind of mid-fours, maybe, or, you know, depending on the size of the deal, again, it's, you know, we'd have to figure out how big the company is. If it's a $50 million EBITDA company, it's going to bring the leverage up more than if it's a 20 or $30 million EBITDA company. And so, you know, a little bit of that is fluid. I will tell you that, you know, we have been, over the last few years, opportunistically divesting some businesses. That's not going to stop. And so, you know, part of our commentary and our script is we are trying to move away from businesses that grow in line with their industry. And look, we own some great businesses that grew in line with their industry, and we still have some in our portfolio. And a lot of times they're really niche businesses, they're niche, you know, kind of industries that they're in. They're market share leaders, probably create good cash flow. But, you know, we've really moved to want to own companies more like BOA and Primaloft and Lugano and, you know, Marucci, which we had a huge, you know, kind of, you know, transaction and sale on recently. So, you know, those are the companies that we've been consciously moving towards. And at the same time, we've been making a concerted effort to sort of get rid of some of the companies that grow, you know, kind of with their industry. So, you know, I think there, we will always be looking at making those portfolio changes. And as we, you know, kind of gear up and buy another business, whether it's in healthcare or there's probably going to be, you know, a couple more divestitures over the next 12 to, you know, 24 months that helps to bring leverage down. And because the companies that we're growing and are more core in our portfolio are growing at such a higher growth rate, you know, we feel real, a real conviction that our leverage comes down pretty dramatically just through free cash flow generation and through growth in the portfolio. And so, I get, you know, your concern and, you know, clearly that's something we're managing every day too, which is how much, you know, acquisition dry powder do we have? Where do we want to deploy it? What are the best opportunities? And when we get to a leverage level that sort of, you know, gets to, it's at a point where we're comfortable, but any more leverage would push us out of our comfort zone, then it really kind of, dictates that we look at raising capital, selling, you know, some of the companies to continue the portfolio repositioning, you know, those things are on the table. And look, historically, you know, we've raised capital opportunistically in, you know, kind of interesting ways. The ATM has been used historically when the stock price reflects closer to fair value. You know, we don't feel that's the case right now. We've issued preferreds, which are non-dilutive. And so, there are other components of capital that we think, you know, can become available to us that don't necessarily dilute shareholder, you know, equity to the extent we have a, you know, great opportunity. Now, ultimately, we're always balancing what is the cost of that capital versus what is the new opportunity that we're bringing in. And if we can drive a significant enough discount on the upfront purchase price, we're willing to pay a little bit more for our capital. And so, it's a balancing act right now. I could tell you that we feel, you know, firmly in the market for both healthcare and consumer businesses. We are comfortable taking our leverage up a little bit. But, you know, it's hard for me to say, does the next deal then prevent us from being back in the acquisition market? Because I don't know what our leverage profile is going to look like upon that next deal. And, you know, you all wouldn't be privy to what we're, you know, currently working on that divestitures to until we get, you know, kind of those closed. But, you know, this portfolio transformation that has been, you know, kind of a big undertaking of the entire management team since, you know, I took over in 2018 is not going to stop until we get sort of the portfolio that we are, you know, looking for, which is, you know, as I said, and you're going to hear these words a lot, we're looking for great innovative disruptive businesses. And that's at some point what we will own in our portfolio. We were not going to be owning companies that are more growing in line with their industries. That was sort of a legacy business model. And we will transition this portfolio over from, you know, so what we had in legacy to sort of the new vision. And that's going to free up capital to continue to deploy. I think, you know, the other thing to keep in mind is that these businesses are generating faster levels of growth. And so, you know, our full expectation is as we continue to execute on this, our growth rate is going to continue to pick up our core growth rate. And one should be more comfortable with a slightly higher level of leverage when you have better quality businesses with more defensibility around those companies. They have better growth profiles longer term because they're able to take market share, not just grow in line with their industries.
spk04: That's very helpful. Thank you. I appreciate all that, Colin. Now, flipping the other way, if I can, companies have been almost, put air quotes around, too successful. I mean, Legano, I mean, look, back of the envelope for me, it looks like it could be as much as a third of the people that have been affiliated with subsidiary Vicar next year because it's been so successful. At what point does it get too big? Like, it's very successful. It's not growing in line with its industry. It's massively outgrowing that. But at what point does it become too much or is there just no line at which it's too much of a share of subsidiary Vicar that it becomes a concern for you that you don't have to counter-siccicality if it's dominating everything and you're a jewelry company?
spk06: Yeah, it's a great question, Robert. I mean, clearly the D and Cody, and we keep talking about the benefits of diversification, start to slow down and we don't really have those benefits to the extent that one of our companies starts representing too large of a component of our all earnings. It's a valid question. And Legano's growth rate and sort of what Mody and Adit have built there, it is just truly phenomenal. It's honestly one of the businesses that, you know, I've just never seen anything like it. I don't think there's many businesses that are as good as this company that are out there. And so on the one hand, you know, you kind of don't want to let go. I think, you know, kind of rule number one in portfolio management theory, and we're not stock traders, so, you know, this doesn't really apply, but you kind of ride your winners and you get out of your losers. You know, it's, you know, kind of that rule applies here a little bit. You know, this is a business that, look, it's still got, it's got a massive PAM. It's got huge market potential and opportunity. It's got a visionary founder and leadership team, and we have the capital to support its growth needs. So that argues for holding it and continuing to, you know, let that growth, you know, benefit our shareholders. On the other hand, there is a point where it becomes too big and it sort of overwhelms the system. And so that's something that, you know, we're on the lookout for. I think if it becomes a third of our EBITDA like you referenced, we're going to have a really good year this year, because you're talking about, you know, a business that's going to generate kind of growth rates similar to 2023. And I promise you, that is not built into our guidance at all. I think if we're getting there, it probably is something where, you know, if we're looking at the end of 2024 and saying this company represents a third of EBITDA and it's still growing at double the growth rate or triple the growth rate of our overall company, then we're probably considering, you know, different options for financing the business. And I think there are a plethora of opportunities where we could continue to, you know, kind of participate in the growth and, you know, but not have it be, you know, all funded by us. So that will be explored sort of depending on how 2024 develops. But this is a really high class problem for us to have. And your point is a good one. And I would tell you, this is not a company that we look at and say, we want this to represent 50% of our EBITDA. So, you know, if it continues to grow at historical growth rates, it's going to be a really great 24. And we're going to evaluate, you know, kind of what that means going forward and how we would want to think about financing in that context, the business as it goes forward.
spk04: Got it. Got it. Thank you. And yeah, it's just been a tremendous success. So it is a high class problem. Thanks.
spk06: Thank you. Thank you, operator. As always, I'd like to thank everyone again for joining us on today's call and for your continued interest in coding. Thank you for your support.
spk02: Thank you. This concludes Compass Diversified's conference call. Thank you and have a great day. You may now disconnect.
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