Marc Feldman: Hey, guys. Thanks for taking the questions here. So, just a question with some of the recent management changes. I know you’ve had changes at 5.11 and PrimaLoft. Can you just talk to any major changes and strategies at both of those companies or priorities, with PrimaLoft, obviously, there’s a lot of interest in expanding into newer verticals and new products. So, just any update you can provide?
Elias Sabo: Sure. I mean, at PrimaLoft, it’s a couple of things. It’s stayed the course. It’s got a great business, a great IP. I think we probably would like to invest in brand at PrimaLoft a little bit more and bring forth a little bit more of what PrimaLoft provides to the end user and Anne Cavassa’s experience there is very strong and so we’re excited to have her. At 5.11, Troy Brown, who of very high positions at Zumiez for many years, along with many other businesses like that and relevant businesses, is really, we believe a very strong at operational excellence and he’ll be working with Francisco Morales there as Francisco understands brand and product development and will stay on as Executive Chairman. And Troy, we just believe is very strong at driving operational efficiencies and at delivering for the end customer in a DTC environment and we think that combination will really yield tremendous benefits.
Marc Feldman: Got it. Appreciate that. And then, I guess, one other question as it relates to the consumer brands, you talked about 5.11 and Boa inventory destocking. But I guess, one other subsidiary that would be impacted would be Velocity. So, if you could just talk about trends there and anything else that you’re foreseeing and then, any changes and strategies with that business going forward?
Elias Sabo: Yeah. It’s a tough, I mean, it’s two or three businesses. But in the — archery is — in the archery side, we’ve seen some of that same destocking and/or some inventory reduction levels that have hit the business. I’d say we’re excited about the new products that we’re coming out with this year in archery and we think it will be really, they’ll be well received later in the year by customers. On the sort of more Crossman side, it just continues to have slightly weaker or weaker POS than we would hope, really driven by a lot of buying kind of during the pandemic era and so a lack of replenishment really needed. So, we’re working every day to right the course there. But that’s also one of the benefits of having a diversified business of 10 companies, right? And so, but we’re, we continue to be focused and working every day there.
Marc Feldman: Great. Thanks for taking my questions.
Operator: Your next question comes from Robert Dodd of Raymond James. Your line is already open.
Robert Dodd: Hi, guys. On back — almost back to Larry’s question, on the leverage question, I mean, when would it be realistic for you to be entering the healthcare vertical? I mean, you said you’d be willing to take up leverage a little bit, but healthcare businesses do tend to go for pretty high multiples. I mean, next-gen, which is probably a different scale than you’re looking at and we went for 30 times EBITDA. So, with that dynamic, if the leverage did go up to the mid-4s, would you be then out of the acquisition market for maybe a couple of years to grow EBITDA to get leveraged down into your 3, 3.5 target range or what’s the thought there on making acquisition now potentially reducing your ability to take incremental opportunities, unless you make a sale, obviously, but that’s a different, that’s a question?
Elias Sabo: Yeah. Robert, I would say, one, we’re not paying 30 times EBITDA for a business. So, that’s off the table. I think that the businesses we’re looking at are trading at a premium to where the kind of innovative and disruptive consumers’ businesses are trading right now, call it, if those are in the 12 times, 13 times, 14 times range, good, innovative healthcare businesses that have real good kind of moats around them, are probably a 20% premium to that, just to give kind of a some type of kind of baseline. So, I think, if we were to do a deal today in healthcare, it’s going to bring us temporarily probably to kind of mid-4s maybe or depending on the size of the deal, again, it’s — we’d have to figure out how big the company is.
If it’s a $50 million EBITDA company, it’s going to bring the leverage up more than if it’s a $20 million or $30 million EBITDA company and so a little bit of that is fluid. I will tell you that, we have been, over the last few years, opportunistically divesting some businesses. That’s not going to stop. And so, part of our commentary in our script is we are trying to move away from businesses that grow in line with their industry. And look, we own some great businesses that grew in line with their industry and we still have some in our portfolio. And a lot of times, they’re really niche businesses, they’re niche kind of industries that they’re in, they’re market share leaders, probably great good cash flow. But we’ve really moved to want to own companies more like Boa and PrimaLoft and Lugano and Marucci, which we had a huge kind of transaction and sale on recently.
So, those are the companies that we’ve been consciously moving towards. And at the same time, we’ve been making a concerted effort to sort of get rid of some of the companies that grow kind of with their industry. So, I think, there — we will always be looking at making those portfolio changes. And as we kind of gear up and buy another business, whether it’s in healthcare or consumer, there’s probably going to be a couple more divestitures over the next 12 months to 24 months that helps to bring leverage down. And because the companies that we’re growing and are more core in our portfolio are growing at such a higher growth rate, we feel real conviction that our leverage comes down pretty dramatically just through free cash flow generation and through growth in the portfolio.
And so I get your concern and clearly that’s something we’re managing every day too, which is how much acquisition dry powder do we have? Where do we want to deploy it? What are the best opportunities? And when we get to a leverage level that sort of gets to — it’s at a point where we’re comfortable, but any more leverage would push us out of our comfort zone, then it really kind of dictates that we look at raising capital, selling some of the companies to continue the portfolio repositioning, those things are on the table. And look, historically, we’ve raised capital opportunistically in kind of interesting ways. The ATM has been used historically when the stock price reflects closer to fair value. We don’t feel that’s the case right now.
We’ve issued preferreds, which are non-dilutive. And so there are other components of capital that we think can become available to us that don’t necessarily dilute shareholder equity to the extent we have a great opportunity. Now, ultimately, we’re always balancing what is the cost of that capital versus what is the new opportunity that we’re bringing in. And if we can drive a significant enough discount on the upfront purchase price, we’re willing to pay a little bit more for our capital. And so it’s a balancing act right now. I can tell you that we feel firmly in the market for both healthcare and consumer businesses. We are comfortable taking our leverage up a little bit. But it’s hard for me to say, does the next deal then prevent us from being back in the acquisition market, because I don’t know what our leverage profile is going to look like upon that next deal and you all wouldn’t be privy to what we’re currently working on divestitures, too, until we get kind of those closed.
But this portfolio transformation that has been kind of a big undertaking of the entire management team since, I took over in 2018 is not going to stop until we get sort of the portfolio that we are looking for, which is, as I said, and you’re going to hear these words a lot, we’re looking for great, innovative, disruptive businesses and that’s, at some point, what we will own in our portfolio, we were not going to be owning companies that are more growing in line with their industries. That was sort of a legacy business model and we will transition this portfolio over from, so what we had in legacy to sort of the new vision and that’s going to free up capital to continue to deploy. I think, the other thing to keep in mind is that these businesses are generating faster levels of growth.
And so, our full expectation is, as we continue to execute on this, our growth rate is going to continue to pick up, our core growth rate and one should be more comfortable with a slightly higher level of leverage when you have better quality businesses with more defensibility around those companies, they have better growth profiles, longer term, because they’re able to take market share, not just grow in line with their industries.
Robert Dodd: That’s very helpful. Thank you. I appreciate all that color. Now, flipping it the other way, if I can, companies have been almost, to put air quotes around, too successful. I mean, Lugano, I mean, it looks on the back of the envelope for me, it looks like it could be as much as a third of consolidated subsidiaries next year, because it’s been so successful. At what point does it get too big, right? It’s very successful, it’s not growing in line with its industry, it’s massively outgrowing that. But at what point does it become too much or is there just no line at which it’s too much of a share of subsidiaries that are — that it becomes a concern for you that you don’t have the counter cyclicality, if it’s dominating everything and you enjoy the company?
Elias Sabo: Yeah. And it’s a great question, Robert. I mean, clearly, the D and CODI, and we keep talking about the benefits of diversification, start to slow down and we don’t really have those benefits, to the extent that one of our companies starts representing too large of a component of our overall earnings. It’s a valid question. And Lugano’s growth rate and sort of what Moti and Idit have built there, it is just truly phenomenal. It’s honestly one of the businesses that I’ve just never seen anything like it. I don’t think there’s many businesses that are as good as this company that are out there. And so on the one hand you kind of don’t want to let go. I think kind of rule number one in portfolio management theory, and we’re not stock traders, so this doesn’t really apply, but you kind of ride your winners and you get out your losers.
It’s — kind of that rule applies here a little bit. This is a business that, look, it’s got a massive TAM. It’s got huge market potential and opportunity. It’s got a visionary founder and leadership team and we have the capital to support its growth needs. So that argues for holding it and continuing to let that growth benefit our shareholders. On the other hand, there is a point where it becomes too big and it sort of overwhelms the system and so that’s something that we’re on the lookout for. I think if it becomes a third of our EBITDA, like you referenced, we’re going to have a really good year this year, because you’re talking about a business that’s going to generate kind of growth rates similar to 2023 and I promise you that is not built into our guidance at all.
I think if we’re getting there, it probably is something where if we’re looking at the end of 2024 and saying this company represents a third of EBITDA and it’s still growing at double the growth rate or triple the growth rate of our overall company, then we’re probably considering different options for financing the business and I think there are a plethora of opportunities where we could continue to kind of participate in the growth and — but not have it be all funded by us. So that will be explored sort of depending on how 2024 develops, but this is a really high-class problem for us to have, and your point is a good one, and I would tell you this is a — this is not a company that we look at and say we want this to represent 50% of our EBITDA.
So, if it continues to grow at historical growth rates, it’s going to be a really great 2024 and we’re going to evaluate kind of what that means going forward and how we would want to think about financing in that context the business as it goes forward.
Robert Dodd: Got it. Got it. Thank you, and yeah, it’s just been a really tremendous success, so it is a high-class company. Thanks.
Ryan Faulkingham: Thank you.
Elias Sabo: Thank you, Operator.
Operator: There are no…
Elias Sabo: 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.
Operator: Thank you. This concludes Compass Diversified’s conference call. Thank you and have a great day. You may now disconnect.
