Compass Diversified (CODI) Earnings Call Transcript & Summary

Thank you, everybody. [Break]

Welcome, everyone. So I think this is the first Investor Day that we've done outside of New York City other than broadcasting during COVID online. So welcome to beautiful Southern California. Weather is probably a little bit better for most people that aren't from here. So hopefully, you get a little bit of time to enjoy it. So today -- my name is Elias Sabo, I'm CEO of Compass Diversified. With me are Ryan Faulkingham, our CFO; Pat Maciariello, our COO; and Zoe Koskinas, our Head of ESG. They'll all be presenting with me throughout the presentation and available for Q&A. I think most of you know who we are and what we do. We own a collection of niche middle market businesses. Today, we own 9, about to go to 10 as we announced the acquisition of the Honeypot Company yesterday. With Honeypot, it will create 7 companies within the branded consumer space, 3 in the industrial space. We did about $2.2 billion of revenue last year, 20%, roughly EBITDA margins, generates about $450 million of EBITDA. So today, what we're going to take you through is really to contrast what we do with what we get considered to do, which is traditional private equity. And there are a lot of differences in how we execute our strategy versus traditional private equity, and we're going to compare and contrast that throughout the day. The reason that we get compared to private equity often is because of the type of assets that we buy. And so when you invest in Compass, you are getting access to small middle market companies that typically you would not be able to get access to as public investors. They're too small. They lack the infrastructure and the scale, the management depth, the systems in order to be qualified candidates for public investors. However, these companies typically occupy and the companies that we look for occupy really interesting niches. And they can be very defensible. They can have low market share and use market share growth as a way to accelerate growth in shareholder return. And really, the only way that you could access these type of companies historically is either through BDCs, if you wanted to principally do it through debt, and then you have a fixed investment that you're going to get back or you could do it through the private channels and traditional private equity. And so that channel for traditional private equity, the way that it's modeled is these are relatively short-term partnerships, 10 years typically in length. You have 5 years to put money to work. You then have 10 years in total in order to exit. And it really shapes all of your decisions. First, you're required to put money to work. You can't be patient and disciplined because you have a short commitment period. But the bigger problem that plagues private equity is that they don't have the time horizons to invest in innovation and growth. The typical model with which the traditional business has worked has been we buy a business, we're going to sell it in a couple of years. We're going to put a lot of leverage on it. And if Federal Reserve is continuing to lower interest rates and multiples are going higher, we're just going to be able to benefit by virtue of multiple arbitrage. And we don't really have to do much other than really starve our companies of the capital they need to grow and trim expenses in order to create greater margin. So by contrast, what do we do? We buy the same types of businesses, but we are a buyer and builder of these companies. And so in our model, we don't have pressure to put money to work. Before the Honey Pot, we didn't do a new acquisition in 18 months. We didn't find companies that met our strict criteria. So we can sit on the sideline because we don't have a gun to our head in order to put money to work. But the biggest difference is we're going to invest in the infrastructure of our companies. I'm not going to go through everything we do. Our senior team up here is going to walk through what we do once we own a business. I will tell you, it is bespoke because not every business looks the same and what it requires is different. But because we have an unlimited time horizon under which we're going to own these businesses, our approach is to come in and help these become great companies. These are typically really good businesses. They've got great competitive differentiators, but they're lacking in certain elements, and they can benefit from the human capital that we have at the corporate level as well as the access to capital that we have. So I want to walk through and compare some of the areas where we create real value through differentiation. And if you were looking at a company as do we, the first thing that we always ask and in the investment committee, what is this company's competitive moat? How is this company going to be able to sustain that moat and be able to deliver excess return beyond the industry. So that same lens should be focused on us. What is our competitive moat? Well, the biggest moat that we can have is our cost of capital advantage. And if you think about it simply, we're financing today a $0.5 billion business that is uncorrelated, diversified by virtue of having 10 different businesses in there. We believe that will grow to 15 and maybe more over time. And diversification will only grow. And so if you compare financing a $500 million business to compare it to a $50 million single asset, single industry risk company there's going to be a wide gap in the financing cost between those 2 businesses. Now a little later, we'll talk about where we stand today, that gap has never been greater. But just the structure of what we do creates an arbitrage because we're financing a company 10x larger. We can get access to products like bonds or preferred equity. Things that you would not be able to get. So not only is the spread on our cost lower than what it would be if we were doing single asset financing per tranche of debt security or nonparticipating security. It's also the breadth of products we can get is much greater. And so what does cost of capital enable us to do? It allows us to buy the best businesses that are trading in the industries that we're looking at, investing in, in that year. Since we embarked on this strategy shift, look at the companies that we've acquired, Altor, Marucci, BOA, Lugano, PrimaLoft and now Honey Pot. These are some of the best profile companies that we've ever owned in our history, very demonstrable competitive moats, great growth rates, disrupting their industries. These businesses can only be bought if you have a cost of capital that allows you to compete for these because these are the most attractive assets that everybody is looking for. And so our cost of capital declines over the years and the advantage that we've created comes full circle in allowing us to buy the types of businesses that are going to create the best opportunities for our shareholders on a risk-adjusted basis. Our second in large differentiator is the permanent capital base that we have. What we always talk about internally is we match the duration of our capital to the duration of our opportunity. Now look, none of us can tell you whether we're going to hold the company for a year or for 20 years. We just don't know upfront. Somebody could emerge out of the blue that's going to pay you an extraordinary price for a business. Well, we're fiduciaries on your behalf. We should sell it. That's 3 months after we buy a company or 16 years after we buy a company. That's what we need to do. At the same time, these companies typically have not had institutional capital. So you just heard Moti. It's always difficult for me to get up after one of the company speaks and it's all exciting, you see product. But Moti is an incredible entrepreneur, built this business with his wife on his blood, sweat and tears, but there is a point where institutional capital is required to come in. As he said, nobody wants to be doubling down with their own capital every time. So a lot of strategic decisions that you're making are easier to make when you have institutional capital. But because we are typically the first or second institutional capital in, it means there's a lot of opportunity for these companies to be built into even better businesses, through systems, through processes that are created, through augmentation of management. And the team will talk about that, but it takes time to do this. This isn't something that generally can be done in a 2- or 3-year window like traditional private equity is executing. Now if you're talking about financing in the big brand names like Blackstone and some of those where they're buying multibillion-dollar businesses, those companies have probably already gone through this part of the life cycle and have had institutional capital. What we're talking about is being on the small end of that market, where we're buying $30 million, $40 million EBITDA businesses, not $1 billion EBITDA businesses. And they really do require investment and investment requires time. The last area that I'll talk about is our people. And we started this business originally in 1998, I was one of the founders pre-dating the IPO in 2006, and we've built really an extraordinary team of individuals that can execute this strategy. Unlike traditional private equity, our talent is very unique. Traditional private equity is not business building. And so the managerial and the strategic ownership skills that one needs when you're going to buy a business and own it for a decade or 2 decades is very different than if you're just going to trade a business and finance it and create an arbitrage by having that ownership. So our individuals need a combination of transactional experience. Typically that they gain in investment banking and sort of a consulting skill set. And it's a very unique person, and it is a very long and steep learning curve when you come into our organization. And so when you have a unique job requirement, not everybody is going to be able to index against that. So you have a smaller pool of candidates you can even approach. And the learning curve is really high. Those -- that is when turnover costs you the most. And so if you look at our organization and for all of those of you that can come over to our office today, when we walk through, I think you'll get a sense of our culture of what we do for our employees of how we put everything as an employee-first organization. What it leads to is a lack of turnover. We've had over 95% retention in the last 5 years. And we've talked about this in terms of our diversity, our inclusion. We have, over the years, hired our staff based on the most competent person gets the job. Now I know ESG has sort of come in focus, out of focus. It's like a political football that goes back and forth depending on which debate you're going to listen to, Republican or Democrat. But the truth is a lot of the values that lie within ESG, those are the same things that we have been doing for years and years. We are not trying to fit a diversity mix just because it's in vogue to talk about that. We hire the best people. What has it resulted in? Basically, our organization is 50-50 between men, women, people who have underrepresented class. In the last few years, that has gained momentum. 2/3 of our hires were females are underrepresented in the last year. We now have 3 female Board members. So you'd say, why does this even matter? It matters because diversity of thought adds value to all of our processes. I think differently than Pat or Zoe or Raj or Phoebe or Rachel, and as a collective, we are going to have a better outcome if we all are able to weigh in with our diverse backgrounds in the way that we're approaching, whether it's the initial investment, the opportunity that we have or how we're going to manage that company going forward. I'm going to turn it over now to Pat, and he and the team are going to walk through some of the things that we do in our businesses once we own one.

Sure. Thanks, Elias. So first, let's talk about strategy development. When we partner with a company and partner with the management team, we ask them all to provide at some point, first and foremost, just a 5-year strategic plan, what's this business going to look like in 5 years? How is it going to get there? It may not be day 1. These businesses are often going through a lot after an acquisition is announced. But at some point, we're going to ask them to put that rigor down pen to paper and work with us to do that. We also create very specific independent boards at each of our subsidiaries. And these boards, it's not just about reporting numbers, it's about fleshing out strategy on a quarterly basis. And it's about creating resources for our executive teams to go to if they need to talk about their strategic problems or strategic issues that they may be having at the time. We also populate that board with outside directors that know stuff that, quite frankly, we don't know and have expertise that we clearly don't have. At Lugano, for example, we have the former CEO of Tiffany's on our Board. We have the former Chairman of the Robb Report. So people who can add something really material. And then we just have constant sort of strategy discussions with our executive teams. And this is an every day. This is not every quarter. This is -- we come in thinking strategy first. We come in and thinking strategy second. And our team internally will discuss that constantly to see if there's ideas we can bring back. And then we oftentimes are sounding boards. If Moti has a question or a thought in his mind on how to move strategically, he'll call Raj perhaps or he'll call me, and we'll discuss that. Long-term capital investment. Elias touched on this, but it's very important in our business. If you're in a traditional fund and you're getting close to when you're going to exit the investment, you're not going to put in place a new ERP, even if that's the right thing to do for the company, even if that's the right sort of medium and long-term ROI, you're not going to do it because it's a cost that you'll incur and you won't get -- you get very little of the benefit. For us, we look at each of our businesses as if we're going to own them forever and we invest as if we're going to own them forever. And so maybe we kind of stretch that sort of return on investment period a little bit, maybe it's got a 2-year payback. But I can tell you, you all want us to do those investments. Those are things like opening up our retail stores, which was a strategic shift that we helped with at the Board as well. At 5.11, which we now have sort of 120 full 3 retail stores and that's driving a great portion of our revenue. It's things like investing in high-density interconnect boards at Advanced Circuits which is really sort of getting into the sweet growth spot of the industry when other parts of the industry were stagnating. It's things like building out our advanced customer care capabilities at 5.11, right, where we have to -- as we're growing so fast in DTC, we have to match the service of the best DTC businesses out there. And that takes investment. It's things like ERP implementation, not just at 5.11, but recently at Altor. It's things like plant rationalization at Altor, which may not pay back overnight. But if you get that right, we'll reduce shipping costs, which is such a major component of the cost of our product there. And lastly -- or the last one I'll discuss is on sort of personnel additions and optimizations. Look, we have 25-year history and 25 years of collective relationships, and we've worked with a lot of great executives. And we're able to call on them, and we have a lot of great resources for additional personnel. And we're able to call on them when needed for help. I think as we enter a business, sometimes there's no changes needed. Sometimes you acquire a business with a world-class management team, and there's very few changes and you just sort of -- you learn -- in every example, you learn from them, but here you just kind of sit back is the wrong word, but discuss strategy and work on some of the other stuff and learn from them. Other places like Lugano, we have a world-class leadership team, but there are some additions perhaps that could help in its growth trajectory, and we've made those, and we worked closely with their Head of Human Capital to work on those. And other places, like most recently at Altor, we need to hire or we think it would help the company to hire whole new teams, and we go ahead and we make that decision. And in this case, it's done wonders for the business. The point is, over our history, I think we've learned what businesses need at what point in their growth trajectory, if they need augmentation, if they need financial help, if they need processes, et cetera, and we're able to add that and to work with our companies to do that for them. Zoe, I'll give it over to you.

Thanks, Pat. So if we think about how ESG plays into building better businesses, we made that to take a look at the ESG landscape right now. And that may be a bit confusing or a bit scary, but what that is showing is that a lot of companies took ESG and got caught in the political crossfire that is happening. Some may have went too fast, too soon, created some pretty lofty ESG goals and weren't able to deliver on that. And that caused confusion and that caused mistrust. Then there were companies who had no conviction in ESG, didn't do anything, lost market share and lost their competitive advantage. And that caused a lack of direction. And so we have been steadfast in the way that we view ESG. It hasn't changed. It's been consistent, and we believe that ESG adds good business merits. And that's been part of our DNA since inception before ESG was even called ESG. And so if you look at our capital structure, by nature, it is responsible investing. If you take private equity, they buy lower growth businesses, they over-leverage those businesses to get a return. What we do is we go after companies that have high growth, we don't overleverage them. So there's safer investment opportunities, and they're able to weather the economic downturns that are happening. And so if we're thinking about long-term growth, what does that mean? Well, it means -- it certainly means that you can't deliver on long-term growth in these short time periods that typical private equity has. And so what we have to our advantage is that we have unlimited time frames. We have forever. And so what can you do with forever? Well, you can do anything you want. So what do we do? So we take governance, we take good governance. And what's important about that is that the G is the foundation for the E, the environmental, and the S, the social. And so we're able to implement things like SOX. We're able to implement good ESG robust programs because buyers want those things. They're willing to pay higher multiples for those things. And we know that to be true because we pay higher multiples for those companies. And what that means is that we believe the opportunity cost for not doing ESG is very substantial because of what I'm saying right now, we can demand higher multiples, and it reduces our cost of capital. And so if we think about our companies, I'm going to provide some of these examples of how we do this. And so we don't rely on financial alchemy like typical private equity. So what our companies do is that Marucci, for example, we just sold them. We've got a great financial return, but that also came with employee engagement, community engagement and their employee well-being. If we look at Altor. Altor has a very strong management team who are sitting in a sleepy industry, which they've recognized and they're willing to innovate on a sustainable product based on their consumer demand and they're about -- they will capture that market, and they will be the leader in that market. PrimaLoft, a very unique business in that with their product, they're able to partner with household name brands and they're able to push those household name brands sustainability message and commitments forward. Brands like Nike, they wouldn't be able to do it with brands like PrimaLoft, we're not a competitor, we're a partner, and we're pushing it forward. And that uniquely places PrimaLoft in their market. If we look at the Honey Pot, we look at BOA, fantastic companies with really strong management teams who will say that they've partnered with us based on our values. We're able to work with great businesses because they want to work with us. And finally, Lugano. This is the space that we're standing in, sitting in, sharing in right now. This is a social space by nature. This has been set up for their high-end clientele who are demanding community, who are demanding a mission beyond what they're doing every single day. And this is what we're here for. This is what it's all about, and we're sitting in it right now.

Thank you, Zoe. So quality of earnings, look, we're all -- we're a public company, of course, and you all expect financial reporting processes and controls that are effective. So that's really what the finance team at Compass is focused on. It's all about raising the quality of earnings that these companies are producing. So we've got a team of 16 people within the finance group. We have 7 people that are accounting and tax experts providing guidance to subsidiaries. But we also have a team of 9 internal auditors, right? Every one of our subsidiaries are Sarbanes-Oxley compliant, that's a significant investment in time and energy and resources to get these businesses there, but that's what our teams are doing day in and day out. Pat referenced ERP implementations, which is a significant investment in that. And certainly, the financial reporting capabilities out of that ERP but also KPIs, right? Pat and his team are looking at KPIs that some of these businesses haven't considered, but we're looking at that daily, weekly, monthly, ERPs are incredibly important to that. And in the end, it's about as Moti mentioned earlier, it's about scalability, right? Do we have the processes, the controls in place to take a business like Lugano from $30 million to $110 million of EBITDA in 2.5 years, that's high growth, and you have to have the capability to handle that scalability. So that's really what the team is working day in and out to do.

So I'm going to take you through a couple of case studies. I mean really what the team does when we come into our companies and why we are successful in getting increased multiples on exit is we're reducing the risk of these companies, whether it's the financial risk because we have better controls in place, whether it's the environmental and people risk and governance risk because we have ESG programs in place. Whether it's just the monitoring and the human capital, these risk-reducing activities pay back through multiple increases when we sell business. And that's one of the things that the intensive effort that we put in place ultimately yields back to our shareholders. So I'm going to give you one example of a company we currently own, and then I'm going to walk through one that we have divested. So with Altor, you just heard Pat and Zoe talk about some of the initiatives we've had. When we acquired the business, we really liked its competitive positioning, and it was acquired for a price that really allowed us to get a pretty good return, 10.7% cash-on-cash yield upon acquisition. But what we knew and as Pat and Zoe have mentioned, this is a relatively sleepy industry that's lacked any type of innovation. And so in the process of our ownership, we have replaced the entire C-suite. And we brought in an extraordinary management team that we were able to match to the opportunity of this company. What they and we both believe and what is being executed on is taking a company that has not been known for good environmental stewardship and moving that to a much better place of environmental stewardship. And we're doing that by using now recyclable polymers that we now have 4 year -- not recyclable, I'm sorry, degraded -- biodegradable polymers. We now within 4 years, have the ability to provide products to our customers that fully biodegrade in 4 years. That is a huge benefit to the environment from an industry that has never historically been considered environmentally friendly. And we are moving towards having a fully circular system. This deepens the competitive moat of the business. And as Zoe mentioned, we pay more for companies that are good environmental stewards and have good social programs. Why do we do it? Because that's what consumers want today. When Zoe talks about Nike or Patagonia working with PrimaLoft, it's because that's what their consumers are demanding. And that is becoming a bigger and bigger trend. And the football can be get thrown back and forth politically on ESG, but it's what the consumer demands that you get your return from. And so this company has embarked on that, and it's deepening its economic moat. So what has happened through the efforts that we've put forth? We've acquired about $75 million worth of add-on acquisitions, pretty attractive prices, and now in the LTM period through September, we've increased that cash on cash yield to 13.5%. And now there's a slide in the back that you can take a look. And if I was going to venture a guess, and Ryan will talk a little bit about our Q4 and next year anticipation, I would bet that number will go up pretty significantly here in the fourth quarter. So just to give you a sense of where our capital is in our balance sheet, and what does that mean to equity. If we deliver a 13.5% return from the cash flows of the business, you pay roughly 2% in management fees and about 50 basis points in overhead cost. So that brings your 13.5% down to 11% net of what sits up at corporate. Today, we're financing 56% of our business with nonparticipating securities. So that's senior debt that's term debt in the senior facility, that's bonds, that's preferred. That 56% comes in at an average of 3.1% -- I'm sorry, 6.1%. 50% of 6 is 3. I think I was going in the -- sorry, at 6.1%. So when you run that math, the cash yield to equity today is in the 17%, 18% range. That's without the benefit of multiple increase or enterprise value increase. In this business, when we bought it, did $30 million of EBITDA. Today, it does more than $50 million. So I think we all know that there's going to be huge value increase in enterprise value. But yet you're getting along the way, a 17.5% return to equity today, just based on our capital and based on the cash flow yield we recognized from this business. A business that many of you are familiar with because it came public with us in 2006, Advanced Circuits. And we just sold it in January of 2023. It's the longest hold we've ever had of a business. And I don't really need to talk about everything we did in the business. Think this company is a great example of having a permanent capital model. And so this is a circuit board industry. Probably a lot of you in here would be like, oh, circuit boards. They were hot at one point and they all went offshore, and we all lost a lot of money in it. And so a lot of people have that same kind of history investing in this industry. And as a result, industry -- investment fled the industry for years and years and years. And so this was a great business. It had -- it was very stable. It had high margins, had incredible free cash flow, but yet investment capital wasn't coming into the industry. We can't make investment capital come in. So over those -- those years, we invested. We did some add-on acquisitions. We invested in some capabilities. But ultimately, investment came back to the industry. When that happened, our permanent capital model allowed us to hold the business long enough to be able to sell when investment came back and realize for this industry, a premium multiple. So what did that yield? Now I'm going to tell you, over 16.5 years, when you see an IRR up there, generally, those numbers are a lot smaller than 20% because that is a huge multiple of return on money that you get when you compound 20% over 16.5 years, as we all know. So it was a phenomenal return. That number is a gross unleveraged rate of return. So what does that mean? That's every cash flow that has gone into the business from the parent, every cash flow that has come up to the parent, including acquisition price and divestiture price. It is pre-management fees. It is pre-corporate overhead load and it's pre-carried interest. And so we have in our -- on our website, in our financial history slide, we have every company we've ever invested in up on that website. You can go through and you can check every single cash flow from every single company. Matt, I think you've done this work at one point when you initiated coverage. Thank you. And you can look at what returns we've created on a gross unleveraged basis. Transparency is one of the hallmarks of our business. And so whether it's reporting in 10-Qs and 10-Ks or providing all of this detail, you have everything you need to be able to figure out how we perform. And so we may have run the numbers as Matt did. And if you took the 14 exits that we've achieved since coming public, it is remarkably close to that 19.7% on a pool basis. So let's go back to what I was saying about the cash-on-cash equity yield because the same analysis can get done on exited investments that we've made. So if you earn a 19% return and you pay 2.5% between management fees and corporate overhead, that gets you to a net return in this case of 17.2% because it started at 19.7%. And if you put the same capital structure in place against that return, now this is a theoretical analysis because we did not have that capital structure over the entire ownership of Advanced Circuits. But if you did that, that yields almost a 30% return to equity, pre carried interest, fully loaded for everything else. And so if you believe that we can continue to execute as we have since coming public over the last 17 years and that our capital costs are going to remain, granted, they've gone up a little bit right now as the Fed has changed, then you can make your own assumptions as to what we can underwrite and deliver, but the math produces sort of high 20s to 30% equity returns if we are able to continue to do that. And I will say one thing. We all know capital costs have gone up. But yet the decline in purchase price multiples in the businesses we acquire has come down faster then our rise in capital costs. So this equation should only get better and not worse based on where we stand today. And we'll, later in the presentation, just talk about the competitive dynamic and why that exists. So those are all internal analyses to determine how we create value. But look, we get it. You guys all get measured on how we compare to our benchmark. We have beaten our benchmark since we came public. We came public in May of 2006. We beat our benchmark by 30% over that 12-year period. But look, what's happened since we've had our strategy shift. Since lowering our cost of capital, since buying better businesses, we've been able to almost double in 5 years what the index has been able to do. It is a real testament to the shift in strategy and how this new competitive moat we've established around cost of capital is delivering for our shareholders. And Ryan will now walk through our financial update and guidance.

Okay. Thank you, Elias. Good morning, everybody. It's still morning. So I've got a lot to cover here, and I'll try to keep us on pace. I want to leave enough time for Q&A. So I'll move relatively quickly. But first, fourth quarter update. And I'll cut to the chase here. We expect a very good close out to 2023. We expect a very strong fourth quarter. I'll get to that here shortly, but two items in the fourth quarter of note. One is we did a BOA recapitalization in the fourth quarter. That's a very normal course. A lot of our businesses are high free cash flow, right? We own the debt with them. It's intercompany, they pay that back, we'll re-lever the business. It's a great way to continue to incent our management teams long term. Because they are as equity owners in the business, they take a dividend, we don't as management, up at CODI, but the executives at the subsidiaries do allows us to continue to own that business long term. So we did have that in the fourth quarter for BOA. It produced a few million of compensation expense as a result of the way that was structured, that will be an add back to adjusted EBITDA in the fourth quarter. Second is PrimaLoft. You're all aware, you've heard us comment shortly after that acquisition, there's a significant inventory destocking headwind that we did not see in diligence, and that's put a lot of pressure on that business' earnings. And as a result, GAAP requires you to assess whether you have an impairment. That analysis is a fourth quarter event. We don't have an estimate of that, but just as an update. So fourth quarter guidance, as you can see here on this slide, if you recall at the end of the third quarter earnings, we provided a full year update, that full year update in subsidiary adjusted EBITDA implied a range of $105 million to $120 million for the fourth quarter. In that was our Marucci estimate for the fourth quarter of $10 million, in that guidance. So ex that revised guidance would be $95 million to $110 million. And I'm very happy to report that we expect to exceed that $110 million of subsidiary adjusted EBITDA in the fourth quarter. And so I know you all will go back and do that math, but it is a greater than 20% increase over fourth quarter last year ex Marucci. So very strong close to the year. So I do want to get right to an update on our full year outlook. I'll start off on the left of the slide, which is 2023. Again, having to update for a number of events that have occurred last time we've had an earnings call, but the subsidiary adjusted EBITDA guidance for 2023 that we provided on our third quarter earnings call was $450 million to $465 million. In that estimate was the Marucci estimate of adjusted EBITDA for the full year of $50 million. And then you heard yesterday on our teach-in call that the Honey Pot TTM December 2023 adjusted EBITDA is $29 million. That equates to a range ex-Marucci plus the Honey Pot of $428 million to $444 million of a subsidiary adjusted EBITDA for 2023. So looking now at 2024, we're very excited to announce the subsidiary adjusted EBITDA range inclusive of the Honey Pot of $480 million to $520 million for 2024 subsidiary adjusted EBITDA. So when we compare that against 2023, I just told you that we expect to have a really strong fourth quarter. So we're -- from that high end of that range, that's a 12.6% increase against 2023. So 2024 is expected to be a really strong year. So to take a step back on guidance, I know there's been confusion on subsidiary adjusted EBITDA versus adjusted EBITDA. Does it include a corporate? Does it exclude corporate? So this year, we will be coming to market with 3 different guidance numbers. First will be subsidiary adjusted EBITDA, which is this range. Next will be adjusted EBITDA that will be less management fees and less corporate. So we'll provide that number, and then we'll continue to provide adjusted earnings, which we have the last few years. So there'll be 3 adjusted EBITDA and adjusted earnings we're still working on. Our subsidiaries are rolling those budgets up real time. So we'll provide that as part of our fourth earnings call. Okay. So real quick. I bet if I pulled this group, most wouldn't realize that in the last 4 years and 9 months, we've created over $600 million of net income. So this business generates net income long term, and I thought that was an interesting chat to show everybody. So next few slides, we're going to touch on some non-GAAP measures. So we have a number of reconciliations in the appendix. But these non-GAAP metrics, we think, are an important way to think about us, to value us. We continually talk about adjusted EBITDA. A lot of you do some of the parts work, some of the parts analysis, so we want you to have adjusted EBITDA by business because then I know you all can think about what the multiple of that business is and come up with a sum of parts valuation. So that's an important part of the story. And what we wanted to talk here on this slide about is we've talked about the shift in strategy in 2018, right, lowering the cost of capital, moving away from low-multiple, low-growth businesses into high-growth, high-multiple businesses. We've been talking about that growth rates and the increase but haven't been able to financially provide that information. So this effort is there's a lot of pro forma data here. So there's a lot of information before our ownership of some of these companies. That comes from management estimates prior to our ownership, and we have reconciliations in the appendix. But on the left is the growth rate of companies that we owned at 12/31/2018. So some of you who have been around us a while, recognize Manitoba Harvest and Clean Earth, some of these other businesses, but that 4-year CAGR adjusted EBITDA growth rate was 4.7%. And we've always talked about that group of companies being kind of GDP plus type growth, and that's evidenced here. So to be honest, though, and you can see the footnote, we've removed Sterno and Velocity from these calculations because both those companies in this time period had significant add-on acquisitions. You recall Ravin, it's about $100 million purchase price for imports. It's a few hundred million. So those accelerate that growth rate to above 7%, but that was not really representative of the growth rate back then. And if you think about Velocity and Sterno's performance since then, it's been kind of flattish, right? So we felt like pulling them out of this analysis was a better reflection of true growth rates back then. On the right are the new companies as of 12/31. Now we've taken Marucci out because that business has been divested. We've added in Honey Pot. But if you pro forma back as if we own those businesses at the beginning of January 1 of '19, and in the appendix is Honey Pot's historical information that we obtained from their management team, but it's a significant acceleration in growth rate to over 14%. I think the natural question here is then well have you taken on more risk, right? Where is your balance sheet risk at this point? And what's interesting is that at 12/31/2018, our leverage ratio was 3.96x at 9/30, it was 4.03x. So it was very, very similar leverage levels, yet we've really accelerated the growth rates of the business. So we've talked about our $1 billion of subsidiary adjusted EBITDA. The punchline is that is still achievable. We still believe in that. And what we've tried to do here is subsidiary EBITDA by businesses that we've owned, but what we've removed is pro forma. So nothing before we've owned these businesses. So from the day we've owned them on the adjusted EBITDA that fell in the year. But we've also included the businesses that we sold that year. So for example, in the 2019 number, we sold Clean Earth at the end of June of 2019. We've included the EBITDA that Clean Earth generated up until the sale date. So it's meant to replicate how much adjusted EBITDA fell in that time period under our ownership, okay? That's what these numbers represent. And we felt like that was a good way to think about what's the growth rate getting to $1 billion. And if you look at the CAGR over the past couple of years, it's a 12.5% growth rate of that subsidiary adjusted EBITDA falling in that year. So that mathematically calculates an $838 million amount, still short of the $1 billion but it's on track. And that shortfall we'll get through acquisitions. So the question is, how are we going to fund those? And a big component of how we'll fund that and we've been talking about this a few years is the retained cash. So retained cash calculation here is it's preworking capital cash flow, but after all common distributions, all preferred distributions and all CapEx. It's kind of what's left over to invest in either of the businesses we own or future add-on acquisitions, future platforms acquisitions. Past few years and 9 months, that's over $175 million number. Now that's continuing to increase, that's continuing to accelerate. And I'll talk to the reasons why here shortly. So managing our leverage with that retained cash is important. You've seen this slide before, if you went back another 5 years from this slide to the left, you'd still see the same thing, which is conservatively managing our balance sheet. If we get to kind of 4x, a little over 4x, we seek at ways to delever the balance sheet. We've done that through preferred issuances. We've done that through common equity issuances. And of course, from time to time, we'll opportunistically divest businesses. And most recently, over all the way on the right, you can see our leverage at 9/30 was a little over 4x. As I mentioned earlier, we've sold Marucci. We also bid a private placement for net $74 million in the fourth quarter and an estimate of our leverage at year-end is 3.1. So the question on, well, what's our leverage pro forma for Honey Pot? I can tell you that calculates to about 3.7x. So still below 4x. Slightly above our financial policy. Our financial policy is still 3 to 3.5x. That has not changed, but that's pro forma for the Honey Pot. So adjusted earnings, we've been talking about in the past that we anticipate gaining operating leverage on adjusted earnings as adjusted EBITDA gross because the delta are mostly fixed cost. We have management fees, we have some overhead. That continues to happen. That continues to perform as we'd expect. The challenge entering 2023, of course, was rising rates, right? Since December of 2022, it's been a 350 basis point rise. That's been a headwind to adjusted earnings. It's been a headwind to cash flow. Yet we've still had very strong performance in adjusted earnings. So as we think about the future, obviously, we've got higher growth rates of adjusted EBITDA we just talked about, that will accelerate adjusted earnings. We no longer have the headwind, we don't believe in rising rates. If anything, they should at least remain flat, maybe even come down and provide a tailwind. But the other item that I think might be lost is this strategy shift to low growth, low multiple to high-growth, high multiple, that's come at a financing cost, right? If you think about same EBITDA business is going to be more expensive to acquire, but yet you get higher growth rate, funding that has -- is in adjusted earnings early, right? The cost of that comes early pre-growth. So that rotation into faster-growing businesses is yet to come in adjusted earnings. And then without the headwind of rising rates, there's a further acceleration. So the business is beginning to generate really strong earnings and cash flow as we've rotated just about 70% to 80% of our EBITDA is now kind of double-digit growth rates or at least high single digit. So that's really going to add a lot of growth here. And then finally, touch on balance sheet before I turn it back over to Elias. As you all know, a lot has happened since September 30, right? We no longer have a revolver outstanding because we paid that down with Marucci proceeds. We do still have our Term Loan A outstanding because we saw very good clarity on some deals, and certainly, we closed on the Honey Pot. But I do want to reiterate the center of this slide, which is what had been very fortuitous placement of really powerful cost of capital in 2 bonds placed a few years ago, but at 5% and 5.25% not due until 2029 and 2032, that's really the cost of capital advantage Elias and the team have been highlighting that's going to carry on for many years. So I'll turn it over back to Elias here to talk about 2024.

Thank you, Ryan. So quickly, and we'll get to Q&A here. Where do we stand today? And how does it look compared to where we've been historically? We talked a little bit earlier the current conditions and the change in monetary stance of our Federal Reserve has really favored us. And I know you'd say, well, guys are like a private equity kind of investor, how does that favor you. It's favored us because it's widened our competitive advantage. And historically, private equity buyers were able to use significant -- significantly greater levels of leverage. Today, leverage available for a single asset financing is more comparable to what our overall leverage is. But the big difference is today, the cost of that capital is 400 or 500 maybe even more basis points higher than what we're incurring. And so the delta in capital cost has widened as their leverages come down to us because they used to make it up by having more leverage and using less equity that's expensive could, on an absolute basis, allow our competitors to have a cost of capital that was close to ours or near ours, not on a risk-adjusted basis, but on an absolute basis. Today, even on an absolute basis, that doesn't exist. And so what it looks like most today to us is 2020. Now all of you would say, well, in 2020, we all were shopping on Amazon sitting behind our computers in our house because there was a pandemic raging in the background, and we all thought the economy was going to collapse. Clearly, those conditions don't exist today. In fact, the economy is holding up contrary to all the recession calls remarkably well, at least by what we're experiencing in our companies. And so what is similar to 2020 is the financing markets. In 2020, the financing markets were just catatonic. And it allowed us to swoop in and buy BOA and Marucci. One of those companies has already tripled. The other one has already doubled the EBITDA. That's going to be a great class of investment. The reason we were able to buy those businesses at the prices we did is because the competitive environment was basically nonexistent back there -- back then. I don't want to say it's nonexistent today, but it's a lot closer to what it was in 2020 than what it was in 2021. And our competitors, especially in the consumer market have pulled back dramatically and financing partners have pulled back dramatically. So that's how we can buy a company like the Honey Pot. We said this yesterday on the call, the Honey Pot is in the personal health and well-being space. It's an on-trend growth company in that space, like these companies have never traded for 13x EBITDA. And to be able to get a company at a value like that, that has historically traded high teens to mid-20s, like that's really -- that only exists when competitive dynamics are in place like we have right now. And we're seeing a pipeline of new opportunities that, frankly, we haven't seen in a couple of years. We benchmarked -- what we saw, and granted this is only one quarter, but it was representative of the year, what we saw in Q3 of '21 versus Q3 of '22 and Q3 of '23 and our deal volume in both of those years with increasing effort fell 50%. So 75% cumulatively down in the third quarter of this past year from where we were in '21. But in the fourth quarter, we saw deal activity really pick up, and we saw the quality of companies really improve materially, and that is continuing now, albeit only 2 weeks into 2024, but what we're hearing is more and more is coming and we know some of the companies that are already in the pipeline and what's building. And so that combination gives us really optimism we haven't had in years that we are right now able to consummate M&A, more attractive valuations and better shareholder return prospects than what we've been able to identify in years past, coupled with an earnings trajectory in our business that really looks as good as it's ever looked. And I don't know that we've ever guided to double-digit growth, almost like, what, 12.5% like we are today, and we've been really conservative in our guidance. So I think it just demonstrates how much conviction we have in the growth in our business coming into '24. And when we marry that to the competitive advantage that's widened and the M&A market, and a strengthening pipeline, it makes us really bullish as we come into this year that we're going to be able to create significant shareholder value for all of our constituents. And so with that, that's the end of our presentation, and we will move to Q&A.

Well, I think the -- for the webcast, they may want you to wait a second.

Larry Solow, CJS. Elias, you sound super confident in terms of the acquisition environment, lots of opportunities, it sounds like too. Can you just speak to sort of your leverage today sort of at the mid to higher end of your target, maybe just a little above that, even. Do you have -- what's your capital situation in terms of do you need to maybe sell another couple of business or 2? Or how do you kind of look at that? How do you balance that with some opportunities ahead of you?

Yes. So as Ryan mentioned, we expect to be about 3.7x pro forma for Honey Pot and the divestiture of Marucci. So I think that's a good starting point from which to kind of go from. Clearly, that's outside of our leverage range, right? We've said 3x to 3.5x. But Larry, just I want to be clear, that 3x to 3.5x was set back in 2018, and you've followed us for a long time, the portfolio looked a lot different back then. And when we were paying 7x, 8x, 9x maybe for a business, leveraging at 3.5x is 40%, 50% of the capital, right? Today, we're buying 12x, 13x, 15x businesses. But yet our leverage profile hasn't changed. The earnings growth rate has changed. The cash flow profile of the business has changed. We've gone from minus $35 million of cash flow preworking capital generation to $100 million now. And so some of the leverage, that leverage target, which we have not changed, and we don't plan on changing is today by comparison, extraordinarily conservative compared to where it was back in 2018. So today, yes, we are a little bit outside, and we have been outside. Partly, that's a function of the fact that the equity markets are so weak. We would love to raise capital and equity like we did in December in a private placement in order to fund the equity component of our transactions. But we have to be really judicious with that. Because today, we don't really like the price. Now if we can bring in a marquee investor and we can sell -- if we're selling it a little bit of a discount, but we're getting a massive discount on the acquisition we're buying, we're okay with that because that's going to more than offset it. And that's what happened with the investment we took in, in December, coupled with the acquisition of the Honey Pot. So now as we look at new opportunities, I think the same model could exist where we could look for larger chunks of equity capital in advance of a deal that we feel very confident in. That's one model. Second model is if the markets come back, we would obviously look at potential equity. We could look at selling businesses, right, as you identified. But we're more comfortable today bringing leverage a little higher than where we've been historically. And so if you said to me, would you do another Honey Pot size $400 million, $500 million deal today that would bring your leverage to slightly over 4x, we would absolutely do it. And it's not because we want to have more risk tolerance or we think that we're becoming a riskier company, it's because the conviction in the growth of the business is stronger than it's ever been, and our cash flow generation is stronger than it's ever been. So yes, you're right, the pipeline is a lot better, and we would be willing, absent bringing in some junior capital to take our leverage a little higher to execute against another great opportunity.

Just to follow-up on that, just on the guidance, just from a high level, without getting too specific. You mentioned sort of the economy. We know last year, you're somewhat concerned, but that was kind of waning your concern through the year as your companies seem to be sort of somewhat more immune at least to the general consumer. As you look out to '24, how do you view the economy impacting your -- some of your larger companies? And how does the inventory drawdowns of '23, how do you look at that as you look out into '24?

Yes. So for '24, as I started by saying a little earlier, the economy feels better than what we hear on TV every day and the financial press. Everyone wants to come in and say that we're heading into a recession. I don't know about you guys, but have there ever been a recession with under 4% unemployment? Like I think 70% of our economy is driven by consumption. People spend. Now granted, I get it, real wages have been down for years because of inflation, but people are employed and they spend under those circumstances. And so maybe call me someone who's bucking the trend that we think the economy is going into a recession, but employment still remains strong and spending is still holding up. And we're seeing it not only with the acceleration of growth we saw in the fourth quarter, but we're seeing it early thus far in 2024. Granted it's only a couple of weeks, but we're seeing it through bookings and other things. So our -- built into our expectations, which I think is sort of what you're trying to figure out is a very slow growth to slightly receding economy. So somewhere in that soft landing, maybe we grow minor or shrink percent to grow a couple of percent, somewhere in that kind of low growth. We don't want to get out over our skis in terms of kind of what the macro can deliver for us. Now what we haven't done in any of our company forecasting is assume that there's going to be a big snapback in inventory. And that should happen right? People were depleting inventories at a really rapid pace through '23. And even if you stop depleting and just hold sell-in to sell-through, you should have a pretty big snap back. That's a little bit riskier than what we would want to forecast because we want to be able to do what we've done historically, which is meet or beat and raise our expectations. And so we've taken a pretty conservative view here, Larry, that inventories generally in the system are not rebounding. In fact, they're probably continuing to dribble off a little bit, and it's the company's success in gaining market share as the primary growth drivers against a very muted economic expectation for the year. Kyle?

Yes. Thanks probably for Elias. Just want to get your thoughts on the competitive environment. I understand your advantage versus private equity. But then when I see you guys triple bag Marucci, I'm wondering why people don't replicate your strategy and just kind of your thoughts on the competitive environment there.

Yes. It's -- so our model is really different. And on the one hand, I think there's been a lot of private equity interest in what we do because the investment banks that kind of troll in that GP alt space, call us and talk to us a lot about other PE firms that are interested in how we created a private -- or a permanent capital model. The thing that makes it really difficult, Kyle, for other companies is they don't have assets that they can seed into a vehicle and the market doesn't really love blind pool vehicles, right? I mean we had packs that kind of grew and that became a tremendous wipe out of probably principally retail capital. But the market doesn't really like these blind pools that are raised. And most traditional limited partnerships have restrictions that do not allow you to exit in mass. Especially to essentially yourself if you're taking it public, right? And so it's very hard to do. Now who could do it? All the big brands. So you think of the KKRs and Carlyles and Blackstones. Their brand is so good, they could go out and raise billions of dollars of private capital or public capital. But for them, why would they? They could go raise Blackstone, I think, has $1 trillion. Why would they go raise $5 billion or $2 billion of public capital. So those that can do it have already gotten so much scale in the private markets to build and their brands that they don't want to do it. And those that would like to do it, don't have the brand to be able to actually do it. And so it's created this real conundrum where companies can't emulate our model. We would like nothing more than companies to do it because we recognize one of the biggest things that you guys suffer from is who do you compare us to. And there is not a class of us that is out there. So we would love to promote this, but it's just a much harder thing to get public than I think people appreciate.

Last year, you guys said at the Investor Day, 8% to 10% subsidiary adjusted EBITDA growth, and now we're talking about 12.5%. So can you talk about the factors that have changed? And obviously, there has been a lot of corporate actions between now and then, but the factors that are driving that increase in confidence?

Yes. So remember, I'm going to point out it's 1 year growth. And 8% to 10% was what we called our core growth rate, but it's also been a function of the portfolio is changing. And so Advanced Circuits, great business that we sold in January of last year. That was a relatively no growth business. You sell that and you put Honey Pot in its stead, you're going to get a leveraging up of the growth rate. And so we still stick by the fact that our core growth rate is kind of high single digit, low double digit where what we talked about last year, I think some dynamics are driving that a little bit faster right now. But frankly, the portfolio composition continues to change, and it continues to leverage growth higher, not lower. And so maybe we are just in a different context. We don't want to get out over our skis and promise something that over the intermediate or longer term is harder to deliver. But I think your point is a great one in the activities in M&A that we consummated over 2023 have led to a fundamental leveraging up of our core growth versus where we were a year ago today.

Great. And then just a follow-up on that. When we're thinking about '24, how can we kind of break out the growth rates between consumer versus niche industrials? Obviously, puts and takes with the consumer and niche industrials is one good example of that. But...

Yes. Just kind of high level, I would say, our industrial business, which performed exceedingly well in 2023, double-digit growth, that's abnormal. This -- the industrial business is more sort of like the stuff we used to buy, right, back 2018 and prior. In fact, a lot of it, 2 of the 3 businesses, are pre-2018. Those businesses should be GDP plus. So if I were modeling it as 2 distinct verticals, I'd probably model it as a 3% to 5% grower in the industrial, and then I'd squeeze into what that develops out for consumer.

Elias, you sound a lot more excited about the M&A environment on the consumer front. But wondering if you could just clarify for us how you're thinking about the health care strategy and sort of the opportunities on that front as well from an end of this year?

Yes. And so I am really excited about consumer. And part of it is that competitive backdrop that I alluded to. I find it really funny. And there's such herd mentality in private equity that if you did bad in consumer over the last couple of years, maybe because of inventory stocking and change from the pandemic that everybody wants to vacate the space. By the way, that's the greatest time you should be putting money to work because now multiples are going to come down way faster than the risk-adjusted return profile going forward for the company. So consumer has that dynamic. And as we see great opportunities, I'd be absolutely stunned if we didn't transact more in consumer given that dynamic. Now I will tell you, we're working really hard in health care, but we're not the only ones that understand critical outsourced services to the health care industry is a really attractive segment. It's noncyclical. So who cares about the macroeconomic outlook in '24? Yes, financing costs are a little bit higher. But the problem is the PE herd sort of moved into that category as well and it's created pricing that's a real stretch. And so we're finding great opportunities. We're seeing companies, but we're staying disciplined. And so I can't tell you, Matt. Obviously, it's a strategic initiative. But for us, our strategy is determined in decades. It's not in quarters. And so whether we put a health care asset on the books in '24 or not, that isn't going to be whether it's a good decision to be in health care. And by the way, the manager is incurring the cost to fund the effort, right? So the shareholder doesn't even have to fund it. We're willing to do that because we know it's long term the right strategy for the business. But I can't tell you in '24, pricing dynamics in that industry, given how the herd has moved over to this market is going to yield an outcome or an opportunity that we can close on. We want to. Of course, we want a health care acquisition. We've been in the market now for a little over a year, and we haven't done one. Yes, we want to put something in the market. But our -- what we tell you and what we stay true to is we are going to be good, disciplined, patient providers of capital. And we are not going to overpay for the opportunity because there's some strategic rationale behind it. The opportunity has to fit within the framework of what our capital costs are and the adjusted rate of return that we're expecting for the risk that we're taking. And so I don't know whether we're going to find something in health care. But that's why having multiple verticals is so important because we can fluidly move across verticals to deploy capital and keep the M&A part of our business vibrant without compromising on our risk-adjusted return requirements that we have.

Yes. Derek Hewett of Bank of America. As the company continues to scale and scales towards that $1 billion of growth in EBITDA, how should we think about the evolution of the -- just the corporate structure? Will that change over time as the company continues to scale, kind of that internal versus external debate?

No. That succinct enough?

Yes.

No, I mean, in all honestly, Derek, we like our structure. And I talked about the longevity of our people, the retention of our people. It's what you're investing in because if we don't have the people that come in and out of the doors every day to do this strategy, we're not going to be able to execute it successfully. The truth is who we compete against when we're going and looking for talent, and we grow our talent base by 5% to 10% every year. We're competing against other private equity firms. So if we can't have a compensation opportunity and a model that mimics what's in the industry, we're not going to hire the talent that can execute this strategy 5, 10, 15 years into the future. So it's incredibly important to the underlying return that we can generate that we have this structure. Without this structure, we look like a corporate. And I'm not sure that the quality of people we could get under a traditional corporate to execute this type of strategy where you're both transactional and you're strategic and you have management as a skill set within that, it would just be very difficult for us to hire the talent we need in a different corporate structure than what we have. And over time, that would erode the returns, and we wouldn't be getting kind of almost 20% unleveraged gross rates of return on the exits that we're achieving.

So that's all we have time for. I wanted to make one announcement though. We do have transportation set up to 5.11. The cars are here behind you. For those of you that brought luggage, the luggage has been moved right out here to the exit versus in the salon. So that's where we'll be. And thank you. Appreciate it.

Thank you all. See you all at 5.11.