Compass Diversified Holdings (CODI) Q1 2024 Earnings Call Transcript

Good afternoon, and welcome to Compass Diversified First Quarter 2024 Conference Call. Today's call is being recorded. Operator Instructions. 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 2024 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'd like to point out that the Q1 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-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 2024 adjusted earnings, adjusted EBITDA or subsidiary 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 expectations related to the future performance of CODI and its subsidiaries, the impact and expected timing of acquisitions and divestitures and future operational plans such as ESG initiatives. 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 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, 2023, as well as in other SEC filings. In particular, the domestic and global economic environment, supply chain, labor disruptions, inflation and changing 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 because 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. I'm pleased to report yet another strong quarter of results. We once again exceeded our expectations. Our success in this first quarter can be attributed to our deliberate focus on owning and managing a growing number of innovative and disruptive businesses that have industry-leading growth potential. This strategy not only reduces financial volatility but also accelerates our annual core growth rate. As we saw this past quarter, the diversification of our subsidiaries means that if a few of our companies lag in growth, others may be able to compensate, resulting in a more consistent and reliable growth engine. This quarter, we saw the strongest performance from our branded consumer vertical, which reported 11% growth in pro forma revenue and 22% growth in pro forma adjusted EBITDA. Pat and Ryan will, of course, go into greater detail, but I will tell you, Lugano produced another quarter of remarkable results, and the company currently shows no signs of slowing down. With the opening of its new London salon earlier this week, we believe international expansion will be a huge opportunity for this business. You will remember, we were expecting both BOA and PrimaLoft to rebound against the inventory destocking headwinds of the recent past, and we believe they are now through the worst of it. I am pleased to announce BOA had a great first quarter, better than expected. While PrimaLoft continued to see revenue and adjusted EBITDA declines in Q1, they saw bookings growth in the first quarter, which provides confidence they will return to growth in the second quarter. The Honey Pot Company, a business we only acquired in the first quarter of this year, is already integrated with a newly appointed world-class Board of Directors, and we are seeing significant gains in shelf space across key retail partners. Additionally, point-of-sale data remains robust, reflecting strong consumer demand for The Honey Pot Company's better-for-you products. Thanks to the strong performances that Lugano, BOA and the acquisition of The Honey Pot Company, adjusted earnings for this quarter were above our expectations and up significantly over Q1 of last year. I'd also like to briefly discuss the divestiture of Crosman, the air gun division of Velocity Outdoor to Daisy outdoor products. We are grateful for its contributions to Velocity Outdoor and CODI, and I want to thank the entire Crosman team for their dedication over the years. Velocity Outdoor continues to be a subsidiary, specializing in archery and hunting apparel, and we are excited by its planned product launches in the coming years. This opportunistic divestiture of Crosman also aligns with our strategic focus of adding value through the management of innovative and disruptive companies that are poised to outpace industry growth rates. We believe Crosman's sale to Daisy, a recognized industry veteran in the air gun space, positions it well for future success. Despite our outperformance in the quarter, continued elevated inflation, delayed rate cuts and heightened geopolitical risks, all combined to create a weakening macroeconomic backdrop, which has negatively affected our industrial vertical. Across our three industrial businesses, we saw a slight decline in both revenues and adjusted EBITDA in Q1. However, we remain confident in the positioning of these businesses and anticipate our industrial vertical could possibly see modest growth later this year. All in all, I am extremely pleased with our first quarter. This is our strategic repositioning in action. Despite a mixed economic environment, we delivered a strong first quarter. Both our results for the quarter and our outlook for the rest of the year demonstrate that owning and managing a diversified group of companies with a growing share of disruptive, high-growth businesses is the right strategy and we believe positions our business for sustained outperformance. We believe across our branded consumer vertical, inventories are now more balanced, and we expect the headwinds suffered in 2023 to turn into tailwinds for the remainder of the year. We also believe through company-led innovation, our industrial vertical could see another year of modest growth in 2024 and is positioned well for 2025. Combining our first quarter performance with our forward momentum, we are feeling bullish about the rest of the year, so we are raising our full year adjusted earnings outlook, which Ryan will detail for you in just a few minutes. With that, I will now turn the call over to Pat.

Thanks, Elias. As a reminder, throughout this presentation, when we discuss pro forma results, it will be as if we own The Honey Pot Company as of January 1, 2023. I'm pleased to report on another successful quarter. On a combined basis, revenue and pro forma adjusted EBITDA grew by 4% and 15%, respectively, in the quarter. Though Lugano once again was a significant driver of our growth, growing revenue and EBITDA by 61% and 83%, respectively, we continue to see positive trends throughout our business. Within our industrial vertical, for the first quarter of 2024, revenues decreased by 10% and adjusted EBITDA decreased by 3% versus Q1 2023. Arnold continued to grow revenue in the quarter though experienced higher SG&A costs due to increased sales and marketing expenses and the timing of certain professional services fees. Bookings for the quarter significantly outpaced revenues, and we believe the company remains poised for a solid 2024 and continues to build upon its long-term project pipeline. At Altor, revenue declined slightly as we experienced churn in projects with a couple of our larger customers. The pipeline of new products is robust, however, and we believe the company will return to revenue growth in the back half of this year. We also note that Altor continues to increase margins in the face of revenue headwinds, and we remain confident in the business and the team. Sterno grew adjusted EBITDA slightly in the quarter as the strength of the company's foodservice division offset slightly weaker demand levels in its scented wax division. Turning to our branded consumer vertical. For the first quarter of 2024, pro forma revenues increased by 11% and pro forma adjusted EBITDA increased by 22% versus Q1 2023. As Elias mentioned, clearly, the strongest performer in the quarter remains Lugano. We saw growth in each salon and geography and benefited significantly from investments made in our flagship salons in Newport Beach and Palm Beach. This week, the company opened its long-awaited London salon. And though early, by all accounts, the opening has been a success, and we look forward to expanding the Lugano model internationally. Last quarter, we touched specifically on two of our businesses furthest up the supply chain, BOA and PrimaLoft, and how order patterns were normalizing as their respective channels cleared. At that point, it appeared that BOA was perhaps a bit more than a quarter ahead of PrimaLoft in clearing the inventory headwinds in their supply chains and returning to growth. We are pleased to report that BOA grew revenues and adjusted EBITDA by 13% and 15%, respectively, in the first quarter of 2024. In addition, bookings outpaced revenue growth, which supports our expectations of a strong 2024. At PrimaLoft, though revenue and adjusted EBITDA continued to decline in Q1 of 2024, we did see solid double-digit bookings growth in the quarter, which gives us increased confidence as we enter the second quarter. Touching on our newest business, The Honey Pot Company. It performed in line with expectations as revenues were approximately flat and adjusted EBITDA declined slightly in the first quarter of 2024 on a pro forma basis. Consistent with our understanding at the time of the transaction, the company had one large promotional event at retail in February of 2023 that did not repeat in the same magnitude this quarter. In addition, the company continued to add infrastructure, including head count and a dedicated distribution center to support its growth, which pressured adjusted EBITDA margin slightly. Importantly, though, the company grew point of sale for its core products in almost all its retail partners and added shelf space for new products with several partners so far this year. We remain excited about The Honey Pot Company and expect a solid year in 2024. 5.11 was approximately flat in revenue and up slightly in adjusted EBITDA in the first quarter of 2024. Strong revenue growth in the professional channel offset both market-related and self-induced challenges in our DTC channels. We've seen improvement in these areas subsequent to quarter end, and we believe the 5.11 management team is taking the right actions, and the company is on solid footing. As a whole, we were very pleased with the first quarter and have confidence in our increased outlook for the full year. I will now turn the call over to Ryan for additional comments on our financial results.

Thank you, Pat. Moving to our consolidated financial results for the quarter ended March 31, 2024. 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. On a consolidated basis, revenue for the quarter ended March 31, 2024, was $524.3 million, up 8% compared to $483.9 million for the prior year period. This increase was primarily a result of The Honey Pot Company and strong growth at Lugano and BOA, which was partially offset by lower revenue at Sterno, Altor and Velocity. Consolidated net income for the first quarter of 2024 was $5.8 million compared to net income of $109.6 million in the prior year. The first quarter of 2024 included an $8 million goodwill impairment charge at our Velocity Outdoor subsidiary. Net income in 2023 included a $98 million gain on the sale of Advanced Circuits. Adjusted EBITDA in the first quarter was $94.8 million, up 28% compared to $74.1 million in the prior year. The increase was due to the acquisition of The Honey Pot Company and strong growth at Lugano and BOA. Included in adjusted EBITDA in the first quarter of 2024 and 2023 were management fees and corporate costs of $21.4 million and $19.4 million, respectively. Adjusted earnings for the first quarter were above our expectations, coming in at $34.3 million. This is up significantly from $19.8 million in the prior year quarter due to strong performances at Lugano and BOA. So now moving to our 2024 guidance. As a result of the strong performance in the first quarter and our expectations for the remainder of the year, we are raising our subsidiary adjusted EBITDA guidance by $10 million. However, with the sale of Crosman, we are reducing our guidance by a similar amount. Thus, our full year 2024 subsidiary adjusted EBITDA is consistent with what we provided on our last earnings call of between $480 million and $520 million despite the sale of Crosman. The subsidiary adjusted EBITDA range for our industrial vertical remains $125 million to $135 million. The subsidiary adjusted EBITDA range for our branded consumer vertical remains $355 million to $385 million. We expect full year 2024 adjusted EBITDA to be between $390 million and $430 million. This range factors in an expected $86 million in corporate-level overhead and management fees in 2024. This compares to $341 million in adjusted EBITDA in 2023. Now on to adjusted earnings. With the paydown of revolver debt outstanding of approximately $60 million, which includes proceeds from the sale of Crosman, we are increasing our full year 2024 adjusted earnings guidance range by $3 million and expect it to be between $148 million and $163 million. At the midpoint of this range and assuming the same share count at March 31, 2024, of 75.3 million shares, we expect to earn $2.07 in adjusted earnings per common share in 2024. A note for investors and analysts, the Crosman sale will not be recorded as discontinued operations, and thus, we expect we will record a relatively small financial statement impact from the sale in the second quarter; we plan to offset any positive or negative impact from the sale in our adjusted earnings calculation in the second quarter and for the full year of 2024. Turning to our balance sheet. As of March 31, 2024, we had approximately $64.7 million in cash, approximately $552 million available on our revolver, and our total leverage ratio was 3.84x. Our leverage at the end of the quarter was lower than we anticipated as a result of strong operating performance. We used our proceeds from the sale of Crosman to pay down revolver debt outstanding, and thus, absent any acquisitions in Q2, we expect our total leverage ratio to decline in the second quarter. We have substantial liquidity. And as previously communicated, we have the ability to upsize our revolver capacity by an additional $250 million. 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 2024, we used $13 million of cash flow from operations. Lugano used $65 million in cash flow from operations to support its continued extraordinary growth. Outside of Lugano, our subsidiaries produced $52 million in cash flow from operations in the first quarter, allowing us to reduce our leverage, as stated earlier. And finally, turning to capital expenditures. During the first quarter of 2024, we incurred $7.7 million of CapEx at our existing subsidiaries compared to $14.9 million in the prior year period. The decrease was primarily a result of a decline in 5.11 store rollouts in 2024. For the full year of 2024, we anticipate total CapEx of between $50 million and $60 million. We continue to see strong returns on invested capital at several of our growth subsidiaries and believe they will have short payback periods. Capital expenditures in 2024 will primarily be at Lugano for new retail salons. With that, I will now turn the call back over to Elias.

Thank you, Ryan. I would like to close by recognizing a significant ESG milestone and also by giving you a brief update on our view of the current M&A market. On the ESG front, I am proud to announce that earlier this week, we released our inaugural sustainability report. The report provides insight into how we manage ESG both at CODI and at our subsidiaries. It outlines our ESG framework and the actions we have taken, designed to bring about social and environmental benefits. This report underscores our belief that ESG is an ongoing commitment, and we are dedicated to achieving substantial deliberate progress. You can view the report on our website to learn more about our vision and our progress to date. We have made significant strides over the last few years, and this progress wouldn't have been possible without the engagement of our Board, our leadership team and, most importantly, the participation of our employees, both at CODI and at our subsidiaries. Our goal remains to make improvements that align with our company values and create strong financial returns for our stakeholders. I would like to thank our Head of ESG, Zoe Koskinas, and her team for their passion and all the work they have put in to get us to this point. When it comes to the M&A market, we feel a level of optimism that we have not felt in years. We continue to see an improvement in the quality of businesses coming to market. We also see our competitors continue to struggle with leverage buyout financing, specifically when it comes to branded consumer businesses. This only creates more opportunities for us. When debt markets are weak for single asset buyouts, our competitive advantage grows. We believe today's market landscape allows our competitive advantage to shine, setting the stage for consummating M&A at more attractive valuations, which, of course, leads to improved shareholder returns. We remain steadfast in our efforts to identify, acquire and manage disruptive and innovative companies. And as Ryan mentioned, our strong liquidity position enables us to act on acquisition opportunities and also invest in our subsidiaries to further build upon our track record of delivering growth for our shareholders. While I have tremendous confidence in our strategy and our competitive advantages, I'd also like to take a minute to recognize our employees who deliver these outstanding results day in and day out. Thank you to our subsidiary management teams and employees and to the entire CODI team for your hard work executing this growth strategy. With that, operator, please open the lines for Q&A.

Operator Instructions. And our first question comes from Larry Solow from CJS Securities.

Great. I guess my first question is for Elias. I appreciate your insights on the M&A market, and you seem quite enthusiastic about it. I'm curious about your leverage, which appears to be on the higher end of your target range. What is your appetite at these levels? Additionally, regarding the sale of Crosman, are there any other potential actions you might consider to lower that leverage and perhaps become even more aggressive? It seems like there are opportunities emerging.

Yes, we're comfortable with the idea of pursuing acquisitions and allowing our leverage to increase beyond its current level. This confidence is backed by our strong performance in the first quarter and last quarter, which we anticipate will continue throughout this year and into 2025 and beyond. We've repositioned the company for significantly faster growth, and our cash flow generation and ability to reduce leverage is very robust at this point. The company can temporarily manage higher leverage due to its strong earnings growth and cash flow. For instance, while Lugano utilized $65 million in cash, it achieved an 83% increase in EBITDA. Apart from that, our business generated over $50 million in free cash flow from operations. It's important to isolate Lugano because of its exceptional growth and returns on invested capital. Considering our current company positioning and the sale of Crosman, which will further enhance our deleveraging efforts, we expect a strong trend of reducing leverage in the upcoming quarters. This will also provide us with additional capacity. Since I took over in 2018 and Pat became COO, we have been restructuring our portfolio to focus on more disruptive and innovative businesses capable of significantly outpacing their core growth rates. The Crosman sale is part of this strategy, which is ongoing, and we plan to continue divesting other assets that are not meeting expected growth levels. We believe there are sufficient capital sources emerging from our portfolio adjustments and cash flow generation, along with opportunities to manage the common and preferred ATMs as they arise.

Thank you for the insights. Regarding the outlook, it appears that the macroeconomic environment, specifically interest rates, are remaining elevated for longer than anticipated. This may indicate a challenging scenario at a macro level for your companies. However, it seems that certain segments within your companies are performing well enough to counterbalance those challenges. Additionally, Lugano continues to perform exceptionally well, which is contributing to the improved guidance. Would you say this is an accurate overview of the outlook in general terms?

Yes, we found Q1 GDP to be somewhat disappointing, especially with a slight increase in inflation. This is something we need to consider. We're observing some weakness in our industrial businesses, but over 70% of our EBITDA comes from the consumer sector, where we are not experiencing the same level of weakness. The consumer remains robust and resilient. However, depending on the consumer's situation, higher inflation has affected spending patterns somewhat. It's important to note that our portfolio primarily targets the upper-end consumer globally. Additionally, we faced significant challenges last year, such as inventory destocking in our consumer businesses, leading to low sell-in compared to sell-through. That headwind is now decreasing. Currently, there are factors specific to our subsidiaries that give us confidence that we are more likely to see positive surprises in the future rather than the opposite.

And our next question comes from Mark Feldman from William Blair.

Can you discuss any initiatives at Velocity to address the demand surge you experienced during COVID, especially in light of the inventory destocking trends seen at PrimaLoft and BOA? What are your plans to manage this now that you have sold off the Crosman division?

Sure. Initiative, yes, I mean I would say, in short, it's a focus on technology and new product development. I think if you look at the archery side, we have some exciting new technologies coming out that we think could help accelerate sales in '25. And then if you look, the company's subsidiary, Kings, is just a really on-trend hunting apparel business that each year continues to take market share, granted from a small base. So we're excited about both of those businesses.

Great. And then another one also on destocking here. So it's great to hear with the double-digit growth of bookings with PrimaLoft, but can you just talk about timing of when we can actually see those convert to revenue? I know there's seasonality built in with ordering, and when those have to be done by to see it in the actual results for the year?

So we believe we'll grow in the second quarter at PrimaLoft. We believe we'll grow top line, and we believe we'll grow EBITDA. The quarter's bookings are not fully in yet, but I would just say all signs are pointing to growth as soon as this quarter.

And our next question comes from Derek Sommers from Jefferies.

Just on the industrial segment on the revenue decline, is that more of a price story or a unit or quantity story? And then kind of EBITDA margins held up a little bit better there. What's happening on the expense side of the P&L to have those hold up a little bit better?

I would say the decline in revenue is due to a combination of factors. For our Sterno segment, we experienced some challenges in our wax-melt business, which mainly affects middle-income consumers. Regarding margins, our management teams are performing well. We've previously talked about the new management at Altor, which is successfully improving efficiency. Sterno has a competent management team too, while Arnold faced timing issues this quarter with some expenses related to professional services and marketing.

Got it. Regarding the London store rollout in Lugano, do you expect it will take about 12 months to become fully operational? What is the timeline for implementation?

I think our stores take some time to become optimized. However, I believe they will begin generating sales and driving revenue as soon as this week. We have high expectations for this particular store in Mayfair, which is located in a prime area and is beautifully designed. They are implementing a lot of promotional activities, so we are confident it will positively affect revenue almost immediately.

And our next question comes from Matt Koranda from ROTH MKM.

I'm curious about the decision to only carve out Crosman from the Velocity segment rather than divesting the entire segment. Are we waiting for improvements at Ravin and the other subsidiaries? Also, I would like to understand your approach to future acquisitions. It seems that you're open to making acquisitions first and then potentially selling off certain assets to reduce leverage, rather than needing to wait for divestitures before pursuing acquisitions. Could you clarify that for us?

Yes, Matt. Regarding Velocity, I would say the air gun business has been performing adequately, and we identified a natural buyer. We are merging the businesses due to the industry's excess capacity created by recent declines, which makes this combination logical. I believe that Daisy has valuable assets, and by merging these businesses, we can achieve significant efficiencies. Therefore, I think there's more value in separating the two businesses and selling the air gun business first. As for what remains, as Pat mentioned, there are some exciting new technologies anticipated next year that could rejuvenate the category and offer substantial growth opportunities in 2025 and 2026. This aligns with our preference for highly innovative businesses that drive category growth, and we expect to see that with Velocity next year. I believe that separating the businesses is the best way to maximize value for the overall Velocity asset, and this approach is consistent with our strategy. Additionally, it aligns with our ESG strategy to move on from that asset. Concerning your second question about leverage, the answer is yes. We are comfortable taking on more leverage now than we have in the past to fund an acquisition. There will likely be deleveraging activities afterwards, such as selling under the ATMs or possible further divestitures. The timing doesn't have to be tied to ATMs or divestitures for us to make an acquisition. If we find an excellent $0.5 billion acquisition opportunity, we will pursue it. We feel confident about our current leverage situation, especially considering the pro forma impact of selling the Crosman business and using the proceeds for debt reduction. Thus, we are in a position to pursue acquisitions now. Given the strength of the business and the projected growth in earnings, particularly in Q2 and throughout the year into 2025, we feel comfortable increasing our leverage temporarily. The timing of the portfolio repositioning is less critical now. While we won't excessively increase our leverage, a temporary increase of half a turn or three-quarters of a turn would not concern us given the positive signs of growth and deleveraging in our business.

Okay. Super clear and appreciate all that detail, Elias. I guess on the Lugano front, obviously, it was not an issue this quarter to lap some pretty big two-year sort of stack comps there. But just wondering, as we progress through this year, why the confidence level is so high that we sort of continue to see the large growth rate that Lugano has been on for the last several quarters? Maybe just unpacking the drivers of that growth a little bit more clearly for us would be helpful, like how much is related to kind of salon expansion and some of the international expansion that you're alluding to versus just kind of like-for-like growth at existing salons and maybe AOV growth? It'd just be helpful to hear a little bit more on that.

Yes. Matt, there's a lot to discuss. Let me address it. First, the market penetration at Lugano is very low. We believe we're turning non-jewelry buyers into jewelry buyers, which makes the market penetration even lower. Second, we are making significant investments in inventory, and we're improving our ability to have the right pieces in the right places at the right times for sale. Third, we anticipate continued growth in some of the stores we have invested in over the last couple of years, such as the Palm Beach flagship and Newport Beach locations. Lastly, we expect geographic growth as well, particularly with the opening of the London salon. We are exploring additional cities, but I don’t anticipate any announcements until the fourth quarter at the earliest. It’s a mix of these factors, along with investing in the right products. I would also like to highlight that this is a disruptive business model that delivers significant value to customers through our efficient supply chain. We believe we can purchase effectively and pass that value onto the end customer.

Okay. Super. Can I sneak one more in just on Honey Pot since it's kind of newer? Just curious the growth drivers that you're seeing there. I think you guys alluded to kind of additional shelf space with some key retailers. Maybe just a little bit more on where you're seeing those shelf space gains, maybe in which product categories and which types of retailers you're seeing some gains there and just sort of the growth runway you see there.

Sure. So there's a couple of big-box retailers that sort of dominate the industry. We are strong with both of them, particularly one getting stronger. Outside of that, it's really growth in drug and grocery channels, which we've been under-indexed to historically. And then there are some new projects hitting the shelf now. We're very excited about sort of the new product pipeline in '25 and '26 as well.

And our next question comes from Robert Dodd from Raymond James.

Congratulations on a successful quarter. I'm curious about PrimaLoft. You mentioned bookings, and I understand it can be challenging to track the end consumer due to inventory issues. Do you know if the increase is coming from the same products that are recovering or if it's due to new products or client relationships? What factors are contributing to this turnaround? Is it mainly about clearing out inventory, or are there other influences involved?

No, we're adding to some products. A couple of products have been removed, but we're also bringing in new customers and securing new project wins, especially in the performance segment. Regarding later order patterns and what we're hearing from our brand partners, I can't provide specific data on that. However, in general, they indicate that the supply chain is getting better.

Understood. It’s a similar inquiry to the one about Bank of America, right? This quarter has shown significant strength. Historically, the product mix has leaned heavily towards snow boots and seasonal snowboarding footwear. However, you have been expanding your product offerings and introducing new categories. How much of this recovery can be attributed to these new additions compared to the existing product lines? What percentage do each contribute?

Boy, that's a tough one to unpack. And I actually have some data on this to say that it's roughly half-and-half, it feels. We are growing our number of SKUs, but we're growing revenue at a faster rate than that. And so I think our SKUs are also taking market share.

Got it. And then for the last question on Lugano, since London is now open, can you provide more details on whether there are international locations that have been explored, or are you not ready to disclose specific countries and cities?

Not willing to name names, but it has been scouted and is not yet in process. Currently being evaluated, yes.

And our next question comes from Matt Howlett from B. Riley Securities.

Just on the guidance, this inventory destocking, this headwind that's going to turn into a tailwind, the guidance has not incorporated the snapback that we've all discussed over the last few quarters that there could be a reacceleration at some point if this is really the end of it.

That is correct, Matt. The guidance assumes a similar trajectory to what we're experiencing now in the first quarter, indicating a gradual improvement. However, it does not anticipate a significant rebound. We're hearing that customers worldwide, after dealing with excess inventory, are now being particularly cautious, and the higher costs of carrying inventory at current rates add a dampening effect. Despite this, if we consider trends like those observed at BOA, where we've seen more than 10% annual SKU growth in recent years, it suggests a potential for a larger rebound, although we likely haven't fully cleared the inventory or reached stabilization yet. Keep in mind that these companies serve various end markets, which are not synchronized. Therefore, instead of a quick recovery, we might see a steady build-up from early this year into next year, possibly leading to unexpected growth. However, our forecast does not currently account for a snapback in inventories or significant progressive increases, even though it’s probable that such changes will occur. This is why I believe we are positioned to potentially exceed expectations as the year progresses.

Right. And just take BOA, for example. I mean normalized organic growth could be still something like 20-plus percent easily, right, when things get back to normalization. Just talking out loud.

Yes. I mean I think it's historically until we have some real craziness in the supply chain where we have massive over ordering, which benefited their numbers in late '21 and early '22, and then destocking. So if you kind of clear all that noise, BOA has been sort of a 20% plus or minus top line grower over kind of its history. Now we don't sign up and say that's what we think the company is going to deliver, but it still has a lot of the same core attributes of relatively low market share, outstanding management, outstanding technology, great strategy and execution. And so it still has all the elements in place. But we don't like to get out over our skis, so we're not going to say that's kind of what we think its core growth rate is. We'll be a little bit more modest than that. But look, those things still exist, and it's been a 20% grower historically. And so I would expect it to continue to be a really strong grower that is above the portfolio average.

Got you. Great. And then just one last question, if I may. Lugano is an incredible investment and an amazing story. I’m not sure if you've done this before, but would you consider selling a minority stake and bringing in a partner? It's such a significant asset that you could potentially use it to acquire another portfolio company. How should investors perceive this? You have this incredible growth company generating substantial cash. What can you share about what you might do with it long term to enhance its value even further for shareholders?

Yes, I believe there are options available. However, it can become complicated when we involve third-party investors in our structure. We need to consider whether they will benefit from our deal structures as both lenders and equity holders, particularly since this arrangement has performed well at Lugano. We must consider whether we want to limit that benefit. In general, there are many opportunities, but they also add complexity. We aim to simplify our story to make it easier to understand, rather than more complicated. Clearly, our growth at Lugano is beneficial, and while our forecast does not anticipate that growth continuing at its current pace, there is potential for upside. This growth could lead to significantly higher earnings per share and, as our earnings increase, it creates further financing opportunities, whether through equity or debt. This will indeed provide a range of options. Having a company like this—similar to past successful investments like Fox Factory—offers us substantial flexibility. Given Lugano's unique growth trajectory, we will explore how to maximize its value for our shareholders.

And I'm showing no further questions. I would now like to turn the call 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.