Prepared remarks
Good afternoon, and welcome to Compass Diversified's Fourth Quarter and Full Year 2024 Conference Call. Today's call is being recorded. At this time, I would now like to turn the conference over to Cody Slach of Gateway Group for introductions and the reading of the safe harbor statement. Mr. Slach, 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, CODI's CEO; Stephen Keller, CODI's CFO; and Pat Maciariello, 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 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 effort. Unless otherwise noted, references in these remarks to company-specific financial metrics related 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 CODI and its subsidiaries, the impact and expected timing of acquisitions and divestitures and future operational plans. Words such as believes, expects, anticipates, plans, projects, should and future or similar expressions are intended to identify forward-looking statements.
These points are subject to 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, 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 in the U.S. tariffs 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 CODI and our subsidiary companies. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements whether because of new information, future events or otherwise. At this time, I would like to turn the call over to Elias Sabo.
Thank you, Cody. Good afternoon, and welcome to Compass Diversified's Fourth Quarter Earnings Call. I am 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 Stephen 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 CODI. 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 Lifoam, 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 continue 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 reduce 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 CODI common stock in the fourth quarter. While our preference remains to use our capital to fund our long-term strategic plan, the large discount between our share price and what we believe to be the intrinsic value of our shares encouraged us to return capital to shareholders. As we move forward, we will continue to look for ways to drive shareholder value and expect to reinvest in our businesses to accelerate earnings growth while also looking for efficient ways to return capital to shareholders. Consistent with our goal of driving shareholder value, earlier this year, we revised our management services agreement.
While we discussed this in detail during our Investor Day, I want to reiterate it here as we believe this will have a meaningful impact on our shareholders. The key changes include implementing a sliding scale for base management fees, introducing an incentive management fee, eliminating integration services fees on acquisitions and excluding excess cash from the management fee calculation. Collectively, these changes will significantly reduce long-term costs for shareholders, further align management compensation with shareholder interest, increase oversight from 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 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 CODI and our subsidiaries. Looking ahead, we remain cautiously optimistic about CODI's prospects for 2025. The CODI Momentum Index, our proprietary gauge of economic activity based on booking and sales activities from our subsidiaries, currently reads 1.06. While this is a slight decline from year-end levels, it remains consistent with a stable outlook.
Although we have observed a modest slowdown in economic activity in recent weeks, we continue to expect resilience and growth in the economy throughout 2025. Consumer spending remains steady, with higher-income consumers standing out as a key driver. Given our portfolio is focused on innovative and differentiated solutions, many of which ultimately cater to more affluent consumers, we believe our businesses are well positioned to outperform the broader market. Obviously, geopolitical uncertainty driven by tariffs and the potential for a trade war create incremental risk for 2025. We are monitoring the situation closely, but believe that our subsidiaries have taken the right steps to diversify our supply chain and limit risk. We believe that our subsidiaries are positioned as well or better than our competition, and we expect to be able to successfully navigate the evolving tariff landscape.
Our focus remains on acquiring and managing high-quality companies for long-term success. We are committed to identifying, owning and actively supporting strong businesses with innovative and sustainable business models. Guided by our buy, build and grow philosophy, we seek to create lasting value for all stakeholders. While M&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 the 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, Honey Pot 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 Lifoam. 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-controlled packaging grows due to emerging drugs and drug development. The integration is progressing well, and we anticipate it will drive meaningful synergies over the next several quarters. Overall, our industrial subsidiaries continue to make progress, and while there have been challenges, we believe performance in this segment will improve as we move through 2025. Before wrapping up, I want to take a moment to address the evolving tariff landscape.
While the situation remains fluid, we believe we are well positioned to navigate any potential challenges that may arise. Over the past few years, we have 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 as or better than those of our competitors. 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'll provide more details on CODI'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 13.8% over the prior year. Normalizing for the impact of the Honey Pot acquisition, our pro forma 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 Honey Pot 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 in 2023. While our year-over-year performance benefited from the acquisitions of the Honey Pot and Lifoam, growth in our adjusted EBITDA was primarily driven by strong operational performance across most of our subsidiaries, with Lugano, BOA, PrimaLoft and Sterno all significantly expanding adjusted EBITDA margins in the quarter. It is important to note that 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 incremental term loan A. We funded $200 million of this facility immediately and have an additional $100 million available to us via a 6-month delayed draw. Our total leverage ratio declined to 3.58x at the end of the quarter. It's important to note that the calculation of our leverage ratio includes greater than $20 million of one-time costs associated with the 5.11 PFAS write-off and the facility move at Arnold.
Excluding these one-time nonrecurring costs, our leverage ratio would have been significantly below our 3.5x target, actually closer to 3.4x. We remain focused on deleveraging and believe that we are well positioned to both fund the growth of our subsidiaries as well as act on attractive acquisitions as they become available. Turning to our outlook for 2025, as Elias mentioned earlier, we see positive momentum across our businesses and are establishing our full-year guide as follows: we expect our consolidated subsidiary adjusted EBITDA to be between $570 million and $610 million. We expect our branded consumer vertical to deliver adjusted EBITDA between $440 million 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 costs and 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 million and $90 million, driven by growth investments at Lugano as well as other businesses. We also made some productivity-related investments at Altor. Obviously, our outlook does not include the impact of any potential acquisitions or divestitures and 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 CODI. 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 CODI 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 CODI, 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 horizon, 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.
Questions and answers
Our first question comes from Larry Solow from CJS Securities.
Thank you, everyone. It's encouraging to see a lot of consistency with what we discussed at the Analyst Day. My first question is about the guidance. Looking at the breakdown between branded and Industrial, it appears that branded is expected to grow around 15% to 20%, possibly just under 15%. Could you provide some insight? While I know you don't provide specific guidance by holding, based on what you mentioned at the Analyst Day, it seems like Lugano will continue to grow quickly. Is that expected to be the main contributor to the branded growth as we look towards '25? How should we approach that?
Yes, Larry, it's Elias and welcome, good afternoon. I would say that 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. It seems that if Lugano continues to grow, it might be challenging to predict that it will achieve growth of 30% or 40% annually. However, if it achieves something like 25% on an EBITDA basis, you could be at the higher end of your range, or even above that, at least on the branded side, even considering other factors.
I think that's a fair assumption.
Okay. I want to ask a couple of things specifically about 5.11. Regarding the PFAS charge, that $11 million charge indicates that the EBITDA this quarter would actually be $22 million if we add that charge back, correct?
That's correct. That's correct. That's correct. Closer to $12 million.
Closer to $12 million. Even with the add-back for 5.11, it remained relatively stable this year, and I believe it may have even seen a slight increase, primarily due to developments in the professional segment. While you can't provide specific numbers for what we can expect in 2025, could you share some insights into how things are improving under Troy's new leadership in the consumer segment? What initiatives have been implemented beyond the PFAS challenges, and what should we anticipate for 5.11 in 2025?
Sure. This is Pat. I would focus on three key areas. First, we're revitalizing our direct-to-consumer brand marketing with more effective execution. We’re looking forward to a brand refresh later this year that we believe will drive additional sales. Additionally, we have some exciting new products set to launch in Q3 that will help further enhance our direct-to-consumer strategy. These are the three main initiatives to watch for this year at 5.11, and I'm enthusiastic about each of them.
Our next question comes from the line of Lance Vitanza from TD Cowen.
Thanks, guys. Great quarter. I have a couple of questions, if I could. The first is going back to the tariffs, and I appreciate the prepared remarks. But could you talk a little bit more about what you've done to date versus what, if anything, still kind of remains a work-in-progress or perhaps work that remains ongoing? And then, I know this is tough to sort of talk about, but how do you feel about how your portfolio companies in the main are kind of exposed to tariffs versus the competitors of those platforms?
Sure. So this is Pat. I'll take a shot at it and then Elias can jump in. I would say, it's really been sort of a several year process as far as preparing our companies. There was a Trump 1, and we were sort of made aware that these were possibilities. At the same time, there were also tensions with China, etc. So all of those things kind of, I would say, it's several of our most single geography dependent subsidiaries, we sort of mitigated and diversified our geographic supply chain or supply chain geographically, I should say, kind of over the last three or four years, right? Not to say it's perfect, it's not to say we're not exposed at all. Of course, we are. So that's number one. It's been a long-term process at many of our subsidiary businesses, if that makes sense. As far as how we think we'll handle, we went company by company, we spent a long time sort of strategically working with our CEOs understanding tariff impact at each business. And there are some benefits. There are some competitors of ours that may import when we produce domestically in several instances, right? And so I wouldn't say there's as many benefits as 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.
That's helpful. Could you discuss the environment for buying and selling companies in 2025? Do you anticipate being more or less active over the next 12 months compared to the previous 12 months? I’m considering both macro factors and the specific dynamics of where your platform companies currently stand.
I would say that on a macro level, the market is showing slight improvement compared to the past few years. 2021 was an exceptional year, but since then, we have experienced more muted conditions in 2022, 2023, and now into 2024, which has shown some signs of recovery but still lacks the quality of innovation we are seeking in potential acquisitions. At the start of this year, we successfully closed on Honey Pot and Lifoam, allowing us to deploy about $0.5 billion of capital, which we see as a reasonable expectation, though we aim to exceed that as market conditions improve. There is currently some uncertainty in the economy due to tariffs and federal policies, which may impact M&A activity; however, we anticipate that activity may increase as we approach 2025. We are confident in our current portfolio, which has been realigned to better reflect our strategic focus on innovation and disruption, allowing us to outpace the markets in which our companies operate.
Our leverage has decreased to 3.58 times, although we consider it closer to 3.4 times after adjusting for certain one-time costs. A year ago, our leverage was at 4 times, so we feel good about our progress. The portfolio and individual companies are well-positioned against competitors, and unless there is an unexpected economic downturn, we are optimistic about their growth potential. Our balance sheet is solid, contributing to a favorable environment for pursuing acquisitions. With a slight uptick in available deals compared to the past couple of years, we expect to increase our acquisition activity in the coming months.
Our next question comes from the line of Matt Koranda 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 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?
We don't provide guidance on a company-by-company basis. The strong performance this year was driven by a robust market and the ongoing acceptance of what we consider to be a truly unique disruptive business model by consumers. This is evident in our average purchase size and repeat purchases, as well as nearly every metric. While we don't give specific guidance by company, we did mention that there is at least one large salon opening planned in Chicago, likely in the second quarter of this year, along with a couple of others in development for later in the year. We are confident that we will see good growth at Lugano once again.
Got it. And then just on 5.11, if you could, now that Troy has had a year under the helm, what's the store growth strategy now, if you could provide any details on that?
We are likely to launch a few stores with a different profile towards the end of this year. While we are not providing specifics about that profile at the moment, we plan to make some changes and conduct tests. Therefore, our retail strategy for 2025 focuses on testing and learning.
Our next question comes from the line of Randy Binner from B. Riley 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 EBITDA margin was at least quite a bit better than we thought it would be in the fourth quarter. And so setting aside kind of the revenue comments there, was there anything unusually good from an EBITDA margin perspective at Lugano this quarter that wouldn't necessarily be something that run rate in the model?
No, I would say that you do benefit from operating leverage. When revenue growth picks up, you would anticipate some margin improvement as a result. Additionally, we usually have a small amount of wholesale revenue, which was considerably less in the fourth quarter compared to previous periods, contributing to margin improvements. The team is executing exceptionally well, particularly in terms of buying and the gross margin they’re able to generate, which is directly related to their purchasing efforts. Our buying strategies and sourcing became significantly stronger throughout 2025, positively impacting margins. I wouldn’t flag anything as unusual. However, we are planning to open three new salons in 2025, which will bring considerable cost increases. Until those salons reach full capacity, we will experience some margin dilution. It's important to keep that in mind. While this will lead to dollar gross profit and EBITDA growth, margins may decrease slightly, especially as we ramp up from one or two salon openings to three this year, which could have a somewhat dilutive effect on the gross margin percentage. Nevertheless, the business continues to perform at an extraordinary level, leading to growth in gross margin and profit when execution is this strong.
All right. That's fair. And then if you covered this at Investor Day, I apologize, I don't recall, the three new salons are being opened in what cities?
At Chicago, we've announced. We're going to let the company announce the other two.
Okay. I was considering your comment on the health of the high-end consumer. Is there a regional aspect to that? We know Texas has performed well, but are there other areas in the country where things are changing due to the economic fluctuations we’ve seen this year? Or is it too early to determine?
Yes. Regarding Lugano, this customer is incredibly affluent. Our average ticket price is around $0.5 million, which means we are working with a different customer segment compared to the broader economy. Overall, we aren't seeing significant changes in affluent customers regionally. However, Lugano caters to a very economically sensitive customer base. They are likely to make purchases regardless of economic conditions. This clientele tends to buy based on personal preference rather than economic trends, and they are well insulated. Thus, I don't see notable differences from region to region or between international and US markets, but I do expect that to remain true for our customer base there.
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 CODI. Thank you for your support.
This concludes Compass Diversified conference call. Thank you, and have a great day.