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2/27/2025
Good afternoon and welcome to Compass Diversified's fourth quarter and full year 2024 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 1-1 on your touchtone phone. At this time, I would now like to turn the conference over to Cody Slaw of Gateway Group for introductions and the reading of the Safe Harbor Statement. Mr. Slaw, you may now begin the conference.
Thank you, and welcome to Compass Diversified's fourth quarter and full year 2024 conference call. Representing the company today are Elias Sabo, Cody's CEO, Stephen Keller, Cody's CFO, and Pat Massarello, COO of Compass Group Management. Before we begin, I'd like to point out that the Q4 and full year 2024 press release, including the financial tables and non-GAAP financial measure reconciliations, for subsidiary adjusted EBITDA, adjusted EBITDA, adjusted earnings, and pro forma net sales are available at the investor relations section on the company's website at compassdiversified.com. The company also filed its Form 10-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 2024 and references to 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 COTI 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 four 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 31st, 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 to U.S. tariff and import-export 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 Cody and our subsidiary companies. Except as required by law, Cody 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.
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 Cody. 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 Honey Pot, 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 Lifephone, 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&A activity, we continued to focus on improving our capital structure. For the full year 2024, we raised more than $115 million 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 Commons 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 discuss 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 fee, 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 Cody and our subsidiaries. Looking ahead, we remain cautiously optimistic about Cody's prospects for 2025. The Cody 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 risks for 2025. We are monitoring the situation closely, but believe that our subsidiaries have taken the right step 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&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 continued to perform well and exceeded our expectations. 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 forma revenues grow double digits and pro forma adjusted EBITDA increased by greater than 27% versus prior year. This is despite the one-time impact of an approximately $12 million write-down of inventory at 5.11 related to PFAS regulations. Excluding this impact, our pro forma 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 million, 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 billion 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 2025. 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, 5.11 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 Lifephone. We're very excited about this acquisition as we believe it significantly bolsters Altor's operations and strategically positions it in the faster growing segments of the market as demand for temperature control 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've 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 disruptions, 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 will provide more details on Cody's consolidated performance in Q4 and the outlook for 2025.
Thank you, Pat. Before we begin, I would like to remind you that we sold our Ergobaby subsidiary in late 2024 for an enterprise value of $104 million. 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 $620.3 million, representing an increase of about 13.8% over the prior year. Normalizing for the impact of the honeypot acquisition, our growth hormone 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 Lifoam further accelerated 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 $11.9 million, which is down versus Q4 of 2023 when we recorded a large gain on the sale of our Marucci business. Adjusted EBITDA in the quarter was $118 million, representing a 29% increase over the same period of 2023. While a year-over-year performance benefited from the acquisitions of the Honey Pot and Light Foam, 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 corner. It is important to note that our adjusted EBITDA includes a one-time charge of $11.8 million 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 costs and corporate management fees are $22.7 million in the quarter. Adjusted earnings in the quarter were $46.6 million, which is up 34% versus Q4 of 2023. Turning to our cash flow, in the fourth quarter, we generated $9 million 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 million in the quarter. In terms of capital expenditures, we invested $22.9 million in the quarter, an increase of $6 million 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 million in cash and approximately $490 million available on our revolver. As discussed at our investor day in early January, we further raised $300 million in an incremental term loan A. We funded $200 million of this facility immediately and have an additional $100 million available to us via six-month delay draw. Our total leverage ratio declined to 3.58 times at the end of the quarter. It is important to note that the calculation of our leverage ratio includes greater than $20 million of one-time costs associated with the 511 PFAS write-off and the facility move at honor. Excluding these one-time non-recurring costs, our leverage ratio would be significantly below our 3.5 times target, actually closer to 3.4 times. We remain focused on the leveraging 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 and $610 million. We expect our branded consumer vertical to deliver adjusted EBITDA between $440 and $465 million. Adjusted EBITDA for our industrial vertical is expected to be between $130 million and $145 million for the full year. On a consolidated basis, we expect our adjusted EBITDA to be between $480 million and $520 million, inclusive of corporate cost of management fees. Our full-year adjusted earnings are expected to be between $170 million and $190 million. Our capex in 2025 is expected to be between $80 to $90 million, driven by growth investments at Lagonda, as well as other businesses. We also make some productivity-related investments at Altor. Obviously, our outlook does not include the impact of any potential acquisitions or divestitures, and it assumes no significant impact on tariffs and or trade war. With that, I will now turn the call back over to Elias.
Thank you, Stephen. 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&A portion of the call, I want to quickly reiterate what I think is at the core of what sets Cody 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 Cody, 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&A.
As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Larry Solo from 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, breaking out the team branded industrial, it looks like branded, you have growing like 15 to 20 percent, maybe a little bit less than 15, but around there. Can you just give us just like a, you know, I know you don't guide by holding, but Um, I know Lugano take, you know, from what you said at the analyst, they sound like that's still going to grow very rapidly. So, um, is that really driving the majority of that growth in branded, um, as you look at 25 or, you know, how should we kind of look at that?
Yeah, Larry, it's Elias. Um, and welcome. Good afternoon. I would say the, you know, 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 meets growth rates that 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.
That's fair. So it sounds like if you hit, you know, not to put words in your mouth, but as Lugano kind of does what, you know, continues to grow, it's probably hard to forecast that thing is going to grow 30%, 40% 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. I think that's a fair assumption. Okay. Yeah. And then specifically, I guess, just on 5-11, I want to ask a couple of things. I guess the PFAS, the charge, that $11 million charge, you're actually showing that in the $11 million EBITDA this quarter would actually have been $22 if we add back that charge, right? That's correct. That's correct. That's correct, Larry. Gotcha. And, Pat, what's the question? Closer to 12 million, but go ahead. Closer to 12, right, right, right. So, and, you know, with that add back, 511, even in a challenging year, actually, it was pretty fine. I think it actually even grew a little bit, driven more by the professional side. But without giving us, you know, numbers and what you think we're going to be in 25, but Just give us a little bit, you know, better look, you know, 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, you know, and what we should look for in 25 and 511.
Sure. So, Larry, this is Pat, but I think I would kind of focus on three things. We're sort of reinvigorating the DTC system. Right. Marketing is one and through sort of effect, 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 we'll 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 of them. Thanks, Pat.
Appreciate the call.
Thank you. One moment for our next question. Our next question comes from the line of Lance Vitanza from TD Cowan.
Thanks, guys. Great quarter. I have a couple 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.
Sure. So this battle, 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. You know, there was a Trump one and we were sort of made aware that these were you know, these were possibilities. At the same time, you know, there were also tensions with China, et cetera. So all of those things kind of, I would say it's several of our most, you know, single geography dependent subsidiaries, you know, we sort of mitigated and diversified our geographic supply chain or supply chain geographically, I should say, kind of over the last three or four years, right? It's not to say it's perfect. It's not to say we, you know, um, we're not exposed at all. Of course we are. Um, so, so that's number one, it's been a longterm, um, process at many of our subsidiary businesses, if that makes sense. Um, as far as how we think we'll handle, you know, we went company by company, we spent a long time sort of strategically, um, working with our CEOs, understanding tariff impacts at each business. And there are some benefits. There's some competitors of ours that, you know, may import when we produce domestically in several instances, right? And so, you know, I wouldn't say there's as many benefits as costs, 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. Thanks. That's helpful.
And then maybe, um, could you talk about, and maybe Elias, could you talk 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 12 months versus the prior 12 months? And here I'm thinking, you know, about macro factors on the one hand, sure, but also the specific dynamics of kind of where your platform companies are these days.
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. 21 was really a banner year. And then starting in 22, 23, and unfortunately now three years into 24 have been relatively muted years. 24 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 life foam as an acquisition into altor so we felt you know pretty good we were able to deploy call it up around a half a billion dollars of capital um which i think is you know kind of a reasonable expectation for us you know some years we can you know, 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, you know, kind of what is the impact of tariffs? And there's other federal policies that right now I think are having, you know, the effect of creating some uncertainty just generally in the economy. And that can quell M&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 leverages come down, you know, at 3.58, which is the actual number, you know, a little bit of that I think is misleading because we have some one-time costs that are obvious in there. So, you know, I'm going to quote the number of three, four, because that's kind of how we think about it. And our lenders, you know, 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, you know, 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, you know, economic, you know, kind of slowdown that's unanticipated right now, you know, 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.
Great. Thanks so much for your help.
Thank you. As a reminder, to ask a question, please press star 11 on your telephone. and wait for your name to be announced. To withdraw your question, please press star 11 again. Our next question comes from the line of Matt Corenda from 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 30% and 40% you guys spoken on in the past calls. Is there any call-outs to why this is so strong and any update on longer-term flow-through goals for your incremental revenues?
So we don't guide, again, company by company. You know, the strength this year was just driven by a strong market and the continued, you know, 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, you know, on almost every metric. And so while we don't guide again, and I'll say that again, specifically by company, you know, 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, you know, we'll once again have a good growth here at Lugano.
Got it. And then just on 511, if you could, now that Troy's had a year under the helm, what's the store growth strategy now, if you could provide any details on that?
We're going to likely, towards the end of this year, we'll likely launch a couple, a few 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.
Okay. I appreciate you guys answering the questions. Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Randy Binner from B. Reilly Securities.
Hey, thanks. I have a couple. They've kind of been addressed in different ways, so I might ask it just a little more directly, and that is that with Lugano, the even 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 that from an EBITDA margin perspective at Lugano this quarter, that that wouldn't necessarily be, you know, something at run rate in the model?
No, I would just say the, you know, you do get the benefit of operating leverage clearly. And when revenue growth, you know, accelerates, you would expect to have some, you know, 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 at an exceptional level. And that is on kind of buying. It's on gross margin that they're able to generate, which is directly generated. you know, attributable to buying, I would say our buying efforts and sourcing, you know, became quite a bit stronger over the course of 2025 and that flow through the margin. So there's nothing that I would, you know, look at and say was unusual. That being said, you know, we are opening three new salons in 2025 and we are going to have, you know, significant cost increases that come along with that. And before those salons come fully up to scale, there's going to be some margin, you know, kind of dilution that comes from that. So I would keep that in mind. It will be dollar, you know, gross profit and EBITDA accretive, but margins can come down a little bit, especially when we accelerate from a historical rate of, you know, one to two salon openings to three this year, that will have an even, you know, slightly more dilutive effect on gross margin percentage. But I would say, you know, the business just continues to execute at such an extraordinary level. You know, these are some of the things that happen. You find, you know, gross margin and profit upside when companies are executing this well.
All right. That's fantastic. And then if you cover this at Investor Day, I apologize, but I don't recall. The three new salons are being opened in what cities?
You know, at Chicago, we've announced we're going to let the company announce the other two.
Okay. Okay. So it's... Yeah, I was kind of thinking through your comment on the health of the high-end consumer. Is the regionality of that, and maybe that's not really a word, but we know Texas has done well. There's areas of the country that are... Is any of that changing with kind of the more economic noise so far this year, or is it just too early to tell?
Yeah, I mean, with respect to Lugano... This customer is... Yeah, so in that context, you have to understand this customer is a highly, highly affluent customer. Remember, our average ticket price approaches a half a million dollars. So when you're at that kind of level, you're dealing with a different customer set than the broad macro the 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.
Okay, got it. Those comments are helpful. Thank you.
Thank you. At this time, I would now like to turn the conference back over to Elias Sabo for closing remarks.
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 COTI. Thank you for your support.
This concludes Compass Diversified's conference call. Thank you, and have a great day.