Compass Diversified Holdings (CODI) Q1 2023 Earnings Call Transcript

Good afternoon, and welcome to Compass Diversified's First Quarter 2023 Conference call. Today's call is being recorded. All lines have been placed on mute. At this time, I would like to turn the conference over to Cody Slach of Gateway Group for introductions and the reading of the Safe Harbor statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified's first quarter 2023 conference call. Representing the company today are Elias Sabo, CODI's CEO; Ryan Faulkingham, CODI's CFO; and Pat Maciariello, COO of Compass Group Management. Before we begin, I would like to point out that the Q1 2023 press release including the financial tables and non-GAAP financial measure reconciliations for 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-Q 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 and 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 2023 adjusted earnings, or adjusted EBITDA because certain significant reconciling information is not available without unreasonable efforts. 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 call, we may make certain forward-looking statements, including statements with regard to the future performance of CODI and its subsidiaries, the impact and expected timing of acquisitions, and future operational plans, such as ESG initiatives. Words such as believes, expects, anticipates, plans, projects, and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factor discussion in the Form 10-K, as filed with the SEC for the year ended December 31, 2022, as well as in other SEC filings. In particular, the domestic and global economic environment, supply chain, labor disruptions, inflation, and rising interest rates 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 as a result of new information future events or otherwise. At this time, I would like to turn the call over to Elias Sabo.

Good afternoon, everyone, and thanks for joining us today. We are pleased to report financial results that significantly exceeded our expectations. The strength and durability of our diversified group of subsidiaries was evidenced again in the first quarter, as we delivered growth in both, revenue and consolidated subsidiary adjusted EBITDA on a pro forma basis. This is an extraordinary accomplishment, amidst the backdrop of broad and unique macroeconomic challenges. And as a result, we are raising our full year outlook for both subsidiary adjusted EBITDA and adjusted earnings. I think the obvious question is, how are we able to achieve this? Well, it's no different than what we've said in the past, but perhaps this quarter it's more apparent. Our strategy of assembling a highly-diversified group of companies that reach a broad set of end markets, reach a wide set of consumer demographics and have a strong underlying core growth rate, drove the results we reported today. This is highly intentional and can be traced back to 2018, when we made a concerted strategic shift to transform our business towards higher-quality, higher-growth assets. I'd like to recognize our amazing group of companies and colleagues for allowing us to deliver these strong results today. But despite this, the headwinds we overcame in Q1 are still very much out there and cloud our near-term outlook. Similar to our remarks on our fourth quarter call, some of our branded consumer subsidiaries with exposure to wholesale continue to experience significant inventory destocking headwinds. As a reminder, in the first half of 2022, we benefited from extremely high demand from customers, who needed our product to help manage their own supply chain issues. With the pandemic winding down and some retailers reckoning with the fact that they over-ordered, it has created a whipsaw effect, until inventory is rightsized. Until this happens, our growth in these businesses will be constrained. But fortunately, it is a unique event that we expect to start correcting in the second half of the year. Take BOA for example. This subsidiary is executing at an extremely high level and continues to take market share. Our products are on some of the strongest selling SKUs for our brand partners and we continue to accelerate the number of new SKUs we are gaining placement on, but the current rate of destocking is so high, that it's actually outpacing the market share gains we are experiencing from product sell-through and SKU count growth. This is obviously a unique phenomenon. And once we get beyond this current inventory destocking cycle, we would expect a significant snapback in revenue growth and profitability. We are also seeing the same broad trends at PrimaLoft, given its similar position in the supply chain. Taking together with BOA, these represent two of our strongest and fastest-growing businesses. They represent our businesses with some of the best value propositions, competitive differentiation, margins and free cash flow generation. So the fact that they're getting pulled down by an unusual phenomenon and we are still reporting consolidated growth, ties back to the incredible performance our diversified business model facilitates. Outside of these two subsidiaries, we delivered an astounding 15% organic growth in adjusted EBITDA. The majority of our remaining subsidiaries are performing extremely well. This gives us confidence that once the inventory destocking headwinds subside with BOA and PrimaLoft reverting back to normalized growth rates that our overall business will again show strong growth. Before turning the call over to Pat, I'd like to summarize our performance and outlook. While we had an outstanding first quarter that was stronger than anticipated, we expect the negative effects of inventory destocking and other market headwinds to suppress earnings in Q2. End demand for the majority of our goods and services remain strong. However, we experienced some moderation in end market sales as the quarter progressed and April has continued that trend. Notwithstanding a modest slowing, the most affluent consumer continues to spend as evidenced by the incredible performance at Lugano. And as you are aware, we sell the majority of our goods at our consumer businesses to the more affluent consumer, which positions us well during this time of economic uncertainty. Notwithstanding the headwinds we expect to encounter in Q2, the strength of our subsidiaries gives us confidence we will deliver growth in the second half of 2023 leading to growth for the full year. With that I will now turn the call over to Pat.

Thanks, Elias. Throughout this presentation when we discuss pro forma results, it will be as if we owned PrimaLoft, from January 1, 2022. On a combined basis revenue and EBITDA grew slightly and exceeded our expectations. As Elias discussed, the widely-reported supply chain disruptions in 2021 and 2022 created elevated inventory levels in multiple areas and in the quarter, led to order patterns that often differed materially from end customer demand. Despite this challenging backdrop, our management teams and employees continue to perform with agility and skill. Now, on to our subsidiary results. I'll begin with our niche industrial businesses. For the first quarter of 2023, revenues were approximately flat and adjusted EBITDA increased by 19% versus the first quarter of 2022. Each of our niche industrial businesses expanded margins in the quarter and in aggregate adjusted EBITDA margins expanded by over 250 basis points. In the first quarter, Arnold showed solid growth in revenue and EBITDA and bookings once again exceeded shipments. Margins expanded partially due to more positive sales mix, as the company continues to provide more technologically advanced solutions to their customers. Outdoor's revenue declined slightly in the quarter, as some of its more cyclical end markets faced headwinds. Adjusted EBITDA increased by almost 11% however, as raw material prices declined and management continued to work to gain efficiencies. As a reminder, Terry Moody, Outdoor's CEO, led a planned management transition a bit less than a year ago and we are very pleased by the early progress made by him and his team. At Sterno, demand for catering products continued to revert back to pre-pandemic levels, driving growth in the company's foodservice segment. Sterno's scented wax and oil business continued its solid performance as well and costs at the combined business were well managed in the quarter. Turning to our consumer businesses. For the first quarter of 2023, revenues increased by 2% and adjusted EBITDA declined by 5%, as excess inventory in the supply chains at BOA, PrimaLoft and Velocity offset strong growth at Lugano, Marucci and 5.11. Though BOA showed a decline in EBITDA versus a record Q1 2022, we remain very confident in the company's market share, SKU counts and product positioning. Put simply, in many segments our sell-in was less than our sell-through. As we have discussed, we believe this trend will continue in the second quarter before rebounding in the back half of the calendar year. The team there continues to manage effectively and we continue to expect full year 2023 EBITDA performance above 2021 levels. We were encouraged recently by the prelaunch of Alpine boots incorporating BOA's technology as well as the company's partnership with Under Armour on their new slip speed line of training shoes. Marucci had an exceptional quarter, as revenue grew by 12% and EBITDA grew by over 25% when compared to the strong Q1 2022. The company benefited from exceptional sell-throughs of its CATX line of bats introduced last year and experienced strong growth in non-bat categories including fielding gloves, bags and helmets, all showing significant growth in the quarter. Also significant air freight investments incurred in Q1 2022 to maintain and grow shelf space did not recur in Q1 2023 and the company operated efficiently. Lugano once again had a strong quarter as revenues and adjusted EBITDA grew by 36% and 38% respectively. The company saw strong growth in multiple salons including Newport Beach, Palm Beach and its newly-opened Houston salon. Subsequent to quarter end, Lugano officially opened its Washington D.C. salon along with its exclusive Priv membership club and Newport Beach. The company is currently building out its Greenwich, Connecticut location with a target completion date in the third quarter of this year. Lugano was also targeting a second flagship location similar to the company's Newport Beach salon and potentially its first international salon in early 2024. Similar to Lugano, 5.11 had a strong first quarter with revenue and adjusted EBITDA growing by 20% and 22% respectively. Despite broad retail pressures in the US, the company once again benefited from strength in its diverse sales channels and end markets as professional sales both domestically and internationally led its growth. Additionally, the team at 5.11 did an excellent job in the quarter operating effectively and efficiently and we're able to gain leverage as adjusted EBITDA growth outpaced revenue growth. PrimaLoft showed a slight decline in both revenue and EBITDA, as customers continue to pull down their target inventory levels. While financial performance to date has not fully met our expectations at the time of acquisition, we believe the company is taking market share. And given where it sits in the supply chain and the impact of inventory rebalancing, we believe it is outperforming its competitors. The company's project pipeline for 2024 is as broad as ever and we remain bullish about PrimaLoft's financial prospects following inventory stabilization in the supply chain. Touching briefly on Velocity. Point-of-sale activity has slowed following strong performance during and immediately post-pandemic. In addition, retail partners in both of the company segments have sought to further reduce inventory levels. Though it is our belief that on a sequential basis quarterly performance will improve as we move through the year, we continue to examine additional options to rightsize parts of Velocity's cost structure to better reflect current demand patterns. As a whole, we were very pleased with the performance of our businesses in the first quarter. I will now turn the call over to Ryan for his comments on our financial results.

Thank you, Pat. Moving to our consolidated financial results for the quarter ended March 31, 2023. I will limit my comments largely to the overall results for CODI, since the individual subsidiary results are detailed in our Form 10-Q that was filed with the SEC earlier today. As a reminder, our sale of Advanced Circuits occurred in the first quarter of 2023 and therefore was reclassified to discontinued operations in our first quarter 10-Q. Now to our quarterly consolidated results. On a consolidated basis, revenue for the quarter ended March 31, 2023 was $542.2 million, up 6% compared to $510.5 million for the prior year period. This year-over-year increase primarily reflects our acquisition of PrimaLoft during the third quarter of 2022. Consolidated net income for the first quarter was $109.6 million compared to net income of $29.7 million in the prior year. The increase was primarily due to the $98 million gain on the sale of Advanced Circuits in the first quarter offset by an increase in interest expense as a result of financing the PrimaLoft acquisition and rising interest rates. Adjusted EBITDA in the first quarter was $91.9 million, up 11% compared to $83.2 million in the first quarter of last year. The increase was due to the benefit of the PrimaLoft acquisition. Adjusted earnings for the first quarter were above our expectations at $33.2 million, down from $36 million in the prior year quarter. The decline was primarily a result of higher interest expense. Now on to our financial outlook. As a result of the strong performance in the first quarter relative to our expectations, we are increasing our adjusted EBITDA and adjusted earnings estimates. For the full year 2023, we expect consolidated subsidiary adjusted EBITDA to range between $430 million and $460 million, an increase of $10 million at the bottom end of our initial range. For the full year 2023, we expect adjusted earnings to range between $110 million and $135 million, an increase of $5 million at the bottom end of our initial range. As Elias and Pat have covered, this outlook expects a challenging second quarter given the headwinds discussed and assumes a mid single-digit percentage decline in adjusted EBITDA sequentially and then a reacceleration in the second half of the year. Turning to our balance sheet. As of March 31, 2023, we had approximately $53.7 million in cash, approximately $590 million available on our revolver and our leverage was 3.87 times. We have substantial liquidity. And as previously communicated we have the ability to upsize our revolver capacity by an additional $250 million. During the quarter, we used the net proceeds from the sale of Advanced Circuits to repay our revolver balance, therefore, reducing our leverage levels. In addition, subsequent to quarter end, we used approximately $20 million to fund Marucci's add-on acquisition of Baum Bat. With our liquidity and capital, we stand ready and able to provide our subsidiaries with the financial support they need, invest in subsidiary growth opportunities and act on compelling acquisition opportunities as they present themselves. Turning now to cash flow provided by operations. During the first quarter of 2023, we received $15.5 million of cash flow from operations, primarily a result of strong operating performance. We used $31.5 million in working capital during the first quarter of 2023, a substantial decrease from $95.7 million in the prior year quarter when we needed to support many of our businesses' inventory levels as a result of supply chain disruptions. Lugano will continue to require working capital investments. However, we expect to produce strong consolidated cash conversion in 2023 for our remaining subsidiaries in total. Also of note during the quarter, the manager waived 50% of the management fee owed by the company in respect to PrimaLoft. And finally turning to CapEx. During the first quarter of 2023, we incurred $16.1 million of capital expenditures at our existing subsidiaries compared to $10.4 million in the prior year period. The increase was primarily a result of the timing of retail build-outs at Lugano and 5.11 to support their continued growth. For the full year of 2023, we anticipate total CapEx spend of between $60 million and $70 million. We continue to see strong returns on invested capital at several of our growth subsidiaries, and believe they will have short payback periods. The 2023 capital expenditure spend will primarily be at Lugano for new retail salons and at 5.11 as we continue to increase its retail store count from its current 118 stores. With that, I will now turn the call back over to Elias.

Thank you, Ryan. I'd like to close by briefly providing an update on the M&A market and our strategic initiatives. In terms of M&A, not much has changed since we last spoke in March. Deal activity remained suppressed well below historic levels, and we continue to believe activity in the second half of 2023 will improve as economic headwinds moderate. On the ESG front, we continue to advance our key initiatives and execute our strategy. During the quarter, we had a variety of achievements throughout our organization that I would like to highlight. Reflective of CODI's commitment to creating a positive impact for people and planet, we are thrilled to be awarded the silver badge from Catalyst 2030, an organization that partners with corporations to achieve the 2030 sustainable development goals, outlined by the United Nations. We were awarded the silver badge in recognition of our work with social enterprises and the way we've actively used our purchasing power, to partner with organizations with clearly defined social goals. Looking at our companies. Last month, BOA released their annual sustainability and social responsibility impact report, which outlines their future goals to significantly reduce their carbon footprint and create a more inclusive environment, with equitable opportunities. Arnold Magnetic Technologies announced its partnership with Cyclic Materials, a pioneer in developing more sustainable domestic supply chains for rare earth elements. Arnold and Cyclic will work together to develop a rare earth recycling program, creating an unprecedented circular supply chain for rare earth materials. I am proud of the progress CODI and our subsidiaries have made against our ESG framework, and we look forward to continuing on this path. In conclusion, we're proud of our first quarter results, which are a testament to the successful execution of our strategy. The fact that we were able to generate organic growth in revenue and EBITDA, amongst such a challenging operating environment, speaks volumes to the quality of CODI's subsidiaries, the benefit of diversification amongst industries and the accelerated pace of our core growth rate. With that, operator, please open up the lines for Q&A.

Your first question comes from the line of Larry Solow from CGS Securities. Please go ahead.

Thank you. Good evening or good afternoon, everyone. I want to start with a question about the recent observations. It seems like the year began very strongly, even better than we anticipated. However, I'm trying to understand the slight drop we experienced, which appears to be in the mid-single digits, whether in millions or percentage terms. Could this be attributed to a combination of increased inventory drawdowns or perhaps a longer duration into Q2 than we originally expected, along with some level of end market slowdown? Regarding the end market slowdown, are there specific businesses impacted? It appears that most of the larger businesses are still performing well aside from inventory drawdowns. I'm looking for more clarification on where you're observing this additional end market slowdown.

Thank you for the question, Larry. Q1 was a strong quarter for us. A few months ago, we indicated that we might see a decline in the high single digits to low double digits, but we actually performed much better across nearly all areas. Our business did experience some of the expected weakness from inventory destocking, which remains significant. Overall, our performance has been solid. As we look to Q2, we're taking a more conservative approach in our outlook due to the macro environment. We're observing some concerning data trends, such as job openings hitting two-year lows and issues within the regional banking sector. Therefore, we want to exercise caution. Our guidance for Q2 reflects this caution, but we aren't seeing any major slowdowns. For instance, the 5.11 direct-to-consumer business is experiencing a slight slowdown, though it's not concerning at this point. Our industrial portfolio, which had incredible growth in Q1, has now slowed to good growth, indicating a slight decrease in new orders. However, we are seeing some easing of inflationary pressures, which is improving margins, particularly within our industrial sector. While there is a general unease due to macroeconomic headlines, we don't anticipate materially weaker results going forward. Regarding the inventory destocking, it is proceeding as expected and should last through Q2. We're seeing some positive signs with good booking weeks, especially in areas heavily affected by destocking like BOA and PrimaLoft. Overall, while we feel confident about achieving our annual targets, we remain mindful of the current economic climate and choose to be cautious.

Yes, that's fair. I wanted to ask you about Lugano, but let's focus on 5.11. The businesses have performed exceptionally well over the past couple of years during COVID, while many other power businesses have struggled in recent quarters. They've continued to grow. Could you provide an update on DTC, which has been a significant growth driver? Is that still growing, albeit at a slower pace? Also, please share any details on new store opening plans for 5.11.

Yes. So, I'd say our DTC comps remain positive in Q1 of this year and that's sort of all the color we typically give on comps Larry. This is Pat by the way. But I think that's a positive sign. A lot of the strength came from our professional business. Selling into law enforcement agencies was a very good business for the company in the first quarter. And again, unlike a lot of consumer brands out there this diversified strategy really provides for consistency of earnings at 5.11 and that paid off. As it relates to the new store, we have, call it, between 10 and 20 new stores planned to be opened this year a little bit less than last year, but we are continuing to open them because the economics are just continue to be very compelling.

Got you. If I could ask one more question about Lugano. With the rapid growth there, I believe you opened two new salons last year. Is the growth primarily driven by the salon openings? There must be a limit to how many you can open. I'm just trying to get more insight into the growth trajectory, which has been impressive moving forward. I believe it will continue, but I’d appreciate any thoughts on this.

Yes, the growth is partially due to the openings of new salons. It's also influenced by increases in the average order size, which continues to rise significantly. We're also acquiring a substantial number of new customers, many of whom do not come from salons. Some may be from our equestrian operations or other partnerships and events. It's not as straightforward as calculating growth from store openings alone; the situation is more complex. In short, the growth is coming from various sources.

Yes. No, that’s fair enough. Thanks Pat. Appreciate it.

Thank you. Your next question comes from the line of Cris Kennedy from William Blair. Please go ahead.

Yes. Good afternoon, and thanks for taking the question. Elias, given what you just talked about on the macro side, talk about your confidence in the visibility for the snapback in the second half for BOA and PrimaLoft.

Yes. Cris, thanks for the question, and good afternoon. I think you know the – I can't give you exact timing, right? And sort of Larry was kind of asking is it either deeper in terms of inventory kind of drawdown or is it going longer, a little bit of that is going to be hard for us to tell. I think one of the things that impacted both BOA and PrimaLoft was really this kind of zero COVID policy out of China, and I know we're beyond that now. But if you just think about how many of our brand partners get a material amount of their sales in the greater China market and having kind of a number of months, where Chinese consumers were on the sideline, it isn't just the product we sell to China-centric customers that then sell to the China market. It's brand partners globally that are sitting on significant inventory. Now with zero COVID being behind us, China reopening and consumption coming back I think that's going to clear inventory and clear the way for us to be able to snap back. I can't tell you whether it's Q3 Chris or it's Q4. I think we're getting through this inventory overhang kind of faster and on a very accelerated basis. But I feel confident in the snapback. I just don't know when the timing is going to be. And we won't – I won't give you specific numbers on how much. But I can tell you from our analysis we think there is a dramatically higher amount of sell-through than there is sell-in. And so at some point unless inventory goes to zero in the supply chain, which is obviously not possible, at some point we have to start to match our sell-through. And just given the delta between sell-in and sell-through right now that will provide a material jump in revenue and profitability. One I think that is probably far stronger than what any of us would be talking about, this isn't consistent with BOA's historical growth rate or PrimaLoft. Both of which have been north of 20% revenue growers over time. This is kind of a snapback that could be well in excess of that, given kind of the differential that exists right now between kind of sell-in and sell-through. I also would point everyone to the fact that we do measure the amount of additional SKUs that were going on and there has been no deceleration in the amount of SKU growth that we've had at both BOA and PrimaLoft. And so we are picking up massive amounts of share which just add to the fact that the snapback is going to be in our opinion really violent in a good way. And when it happens it's going to drive significant kind of revenue and earnings growth because it will at a minimum start to match what sell-through is. So I can't tell you the exact timing. I wish we had a crystal ball to be able to do it. I think we're largely working through some of the inventory issues. If you go to some of the larger companies, the largest footwear company in the world said, they thought by the end of their kind of second quarter which ends in May, they would largely be rightsized with inventory. I don't know that that's representative of every footwear company but I bet you that is representative of where the industry is going. So if I had to take a guess I think as we get through Q2, we probably start in Q3 getting some, kind of, orders to revert back to normal and then I think Q4 is going to look very strong for both of those businesses. But frankly that's more of trying to put together a mosaic from what you're hearing in the marketplace and it's not based on analytical data that we've got coming in right now. But I do think we can all anticipate the snapback is going to be very strong. And I think because this started in the fourth quarter really with PrimaLoft we started seeing this in the third quarter of 2022; in BOA we saw it in the fourth quarter of 2022 we're about ready at the back of this year to start entering some much easier comparisons. And I think as a result of that it's going to take some of that pressure on earnings off. And even if the snapback isn't until the fourth quarter or even the first quarter, we're just not going to have these severe headwinds because the comparison gets so much easier. So we feel very good that as we get to the second half of the year the portfolio will show and deliver growth and that's why we're very confident that we'll get growth for the whole year. But I can't predict with any exact certainty when the snapback will be at BOA and PrimaLoft, but I think it's going to be really strong and we're all going to feel really good when it happens.

No, I appreciate that. And then just a clarification on PrimaLoft not meeting your initial expectations is that primarily related to the inventory issue, or is there something more going on there? Thanks a lot, guys.

Yes. This is Pat. Their customer acquisitions have been at or above our expectations. Their sort of new technology rollouts has been at or above our expectations. It's just again the existing customers and existing SKUs the orders and the replan orders have been less than we expected due to what we perceive and what we're confident in our inventory issues in the supply chain.

Thank you. Your next question comes from Matt Koranda from Roth MKM. Please go ahead.

Hi, guys. It's Mike Zabran on for Matt. Just starting with Velocity. Both top-line growth and margins were under quite a bit of pressure in Q1 from the lower sell-in. But when are we expecting retailers to start stocking up for the summer quarters? What does that mean for overall seasonality throughout the year? In turn should we expect the typical 3Q seasonality in Velocity to be less aggressive this year given we're still seeing some caution from key retailers?

Yes there's a lot there. So let me unpack it a little. I'd say we think Q2 will be better than Q1 and Q3 will be better than Q2. So let me start with that sequentially, right? Within that we do believe we will see more sort of strength in the archery side than in the airgun side given those dynamics you talked about around hunting and gearing up for hunting if that makes sense. So Q1 was very weak. I would see Q1 as being a smaller percentage of the year than normal. Absent that we don't really have too much clarity.

Got it. That's helpful. Moving to working capital specifically on inventory. How are we thinking about inventory about how the inventory balance should move throughout the year given the different puts and takes from store and salon build-out to 5.11 as well as further the caution we're seeing from key retailers around restocking?

Yes. So I think what you guys saw is at least in the cash flow statement or use of inventory in the first quarter and that was at really two businesses. That was 5.11 and Lugano and both of that really was to support the growth we saw exiting 2022 but also the first quarter. So as we progress through the year both inventory and working capital, we expect to come down for a majority of the businesses, the exception being Lugano, right? If we continue to see this type of growth, we will continue to support that business with inventory. Outside of them though, we should see a significant cash conversion amongst the other nine subsidiaries as the year progresses.

Got it. That's helpful. Last one for me guys. Just on the healthcare front, maybe just an update on where we stand in building out a team there. Has the appetite for a potential acquisition within 2023 changed at all? And maybe just speak to the relative size of the pipeline and how we feel about current private market valuation specifically in healthcare?

There are no significant updates since our last conference call. The team remains the same, led by Curt Roth, supported by our existing human capital. Staffing will stay as it is until we acquire one or two companies, at which point we will start expanding that segment from a human capital perspective. We are eager to make a deal and invest in healthcare assets. However, the M&A markets are still quite suppressed across all categories. Sellers are being very cautious, and the challenges in the banking sector aren't helping. The situation with regional banks going under and the rising cost of capital from investment-grade ratings to junk levels is detrimental to the M&A markets overall. This trend is likely to continue affecting all markets. That said, there have been a few healthcare deals that have surfaced recently, and surprisingly, pricing has been higher than expected despite significant increases in capital costs over the past year. Current pricing seems to align more with the conditions of the low-interest-rate environment of 2021 rather than reflecting the reality of today’s economy with a 5% federal funds rate. This indicates that there is still a significant amount of capital on the sidelines. When we consider the private markets, where we typically compete for these assets against private equity buyers, there has been a substantial amount of capital raised up until the last year or year and a half. Since private equity funds have relatively short timelines for deploying their capital, this creates pressure and urgency. Our business model allows us to be more patient and strategic in our investments, avoiding the moral hazard that often arises when firms feel they must invest or risk losing funds, which can lead to conflicting interests between investors and management teams. Currently, we are about a year and a half into the Fed's tightening cycle and the flat M&A markets have consumed a significant portion of the timeline available for private equity funds to invest. This scenario may lead to a sense of desperation in the market when limited assets are available. While private market pricing remains elevated, finding price discovery outside the healthcare sector has been challenging due to low activity. In healthcare, sellers might benefit from the current market conditions, as the prevailing overhang is pushing prices up. Even with financing challenges, some market participants appear to be optimistic about securing financing in the future, which is driving up prices in certain cases. This high pricing trend is something we've been managing over the last decade, not just a recent phenomenon, but it shows that pricing remains elevated for the few deals available in the market.

Very detail and helpful. Thanks guys. That’s all for me guys.

Thank you.

Your next question comes from Kyle Joseph from Jefferies. Please go ahead.

Hey. Thanks, Elias and Ryan. Just kind of a follow-up there. Obviously, you were focused on healthcare there. But CODI at least in COVID has kind of had a history of zigging when others zag. And you guys did two acquisitions during the pandemic which have obviously been very fruitful, but it sounds like prices have been stubbornly high. But so just thinking about rate, leverage and market dislocation in terms of your capital allocation strategy is now the environment where it's kind of a layer-on acquisition environment? It doesn't sound like there's a lot of platform acquisitions out there given the M&A, but just kind of thinking about how you guys are thinking about capital allocation in this given all the dislocation in the market?

Yeah. So Kyle, I think one, you're right. We are looking more on add-on acquisitions and those generally tend to be much smaller. The competitiveness is typically a lot less and pricing comes in at much better price, at much better levels. And then obviously you have kind of either cost savings or revenue synergy opportunities that we look to extract. And kind of you can look at the most recent acquisition we made of Baum Bat into Marucci Sports. We think that's going to be a great opportunity to add that brand and a different technology and there's some real revenue synergies that exist. So we couldn't be more thrilled to acquire a company like that. But I would anticipate, we're going to see more bound-type kind of acquisitions not from just Marucci, but in terms of add-on acquisitions that have either good cost saving or synergy opportunities within our portfolio. I think you're also right that given the dearth of new platform opportunities that are out there trading, and when there is kind of one or two, they seem to fetch pricing that doesn't take into account the new elevated kind of borrowing cost that we have. I think it's probably a bit more of a stretch to think that we'll do a platform, although sometimes these things can come up and we can find one. And we think there is great value and we can move really quickly. So I don't want to rule it out, but I would just say from a probability-weighted basis, it's a bit less likely that we're going to find that. So when you think about capital allocation, I would say number one priority within our firm is to fund the kind of high-return opportunities within our portfolio and Lugano clearly kind of goes to the top of that list. You see that as we've been building inventory in the company, we've been generating and generated plus 30% growth rates in that company. I think there's a lot of runway to continue to invest there and have very high return on invested capital. 5.11 has been another company where by building out its store network, we've been able to get a very high return on invested capital. So that will clearly be priority number one. Priority number two will be to acquire companies principally add-ons because I think platforms will be a little bit harder to come by. And then our third capital allocation priority as you know right now is the buyback. And although our goal is to grow and we need capital to grow, so doing a buyback on top of returning capital through a dividend doesn't really feel like kind of consistent with our long-term growth plans. We are in a short-term period where these price levels are just extraordinarily disconnected from the reality of what our businesses are worth. And so, it makes more sense for us just to continue to buy back our stock and accrete value to our shareholders. And I said this on the last conference call and I'll reiterate it today. If someone is so short term-oriented to want to sell our stock because BOA and PrimaLoft are going through inventory destocking, then we'll happily buy it back for our shareholders, who are more long-term oriented and will accrete value because there will be a big snapback in both of those businesses and our growth rate will revert back to its historical averages. And so, for us, it's going to be a sacrifice, where we're going to sacrifice using capital to potentially even stock on our balance sheet for a future acquisition or do acquisitions now, because the best opportunity to accrete value for our shareholders is through execution of this buyback. And so, at some point, I think maybe the stock will react and come back and that will become less of an opportunity. But in the current environment with this current reality, that has to be a high capital allocation priority.

Got it. Very helpful. Thanks for answering my questions.

Thank you. Your next question comes from Sean-Paul Adams from Raymond James. Please go ahead.

Hi guys. It seems like you pretty much hit everything I had with BOA and PrimaLoft. Basically if I understand you guys correctly that you don't really know if this is going to continue past 2Q. So, adjusting run rate on that might be a little bit difficult. But as far as PrimaLoft goes have you guys seen any interest in any other regions?

Yes, we operate on a global scale. Our brand partners utilize contract manufacturers in Asia, and from there, they distribute their products worldwide. You can find the PrimaLoft brand on various snow gear and outerwear globally. Regarding your question about other regions, we are currently engaged in specific projects in Europe that could prove beneficial. Aside from that, our main operations are centered around our manufacturing partners in Asia, who deliver to our partners and end customers primarily in that region before the products are shipped worldwide. Does that clarify things?

Yes, to clarify, I meant that approximately 83% of the revenue was coming from Asia-Pacific, primarily due to the textile industry. However, I wasn't sure if you were seeing any interest in selling directly to anyone.

We can't track exactly where it ends up. The buyers are contracted from the brands, and there's a pass-through involved. That is where the revenue comes from, but that’s not necessarily where the consumer buys the product.

Thank you. There are no further questions at this time. I would now like to turn the conference back to over Mr. Elias. Please go ahead.

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's conference call. Thank you all and have an excellent day.