Release Date: February 27, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Compass Diversified Holdings (NYSE:CODI) achieved double-digit sales growth and increased adjusted EBITDA by more than 30% for the full year 2024.
• The company strategically acquired H1ypot and Life Foam, expanding its presence in the feminine hygiene and cold chain sectors, respectively.
• CODI raised over $115 million in preferred equity, helping to deleverage its balance sheet and reduce the overall weighted average cost of capital.
• The company implemented changes to its management services agreement to reduce long-term costs for shareholders and align management compensation with shareholder interests.
• Lugano, a subsidiary, delivered exceptional results with annual sales growth of more than 50% and a 76.4% increase in adjusted EBITDA.

Negative Points

• The company faced a one-time impact of a $12 million inventory write-down at 5.11 due to PFAS regulations.
• CODI's industrial businesses experienced flat sales and a modest decline in adjusted EBITDA as they focused on repositioning for the long term.
• The geopolitical uncertainty, including tariffs and potential trade wars, poses incremental risks for 2025.
• The company anticipates significant cost increases due to the opening of three new Lugano salons in 2025, which may temporarily dilute margins.
• Despite improvements, the overall market for mergers and acquisitions remains subdued, affecting CODI's ability to acquire new businesses.

Q & A Highlights

• Warning! GuruFocus has detected 5 Warning Signs with CODI.

Q: Can you provide insights into the growth expectations for the branded segment, particularly regarding Lugano's contribution? A: Elias Sabo, CEO: While Lugano is expected to continue its rapid growth, we forecast more modest growth rates. However, if Lugano meets or exceeds past growth rates, it could significantly contribute to the high end of our guidance range for the branded segment.

Q: Regarding the $11 million charge related to 5.11's inventory write-down, how does this affect the company's performance? A: Pat Massarello, COO: Excluding the write-down, 5.11's adjusted EBITDA would have been higher, indicating that the company performed well despite challenges. We are focusing on reinvigorating direct-to-consumer marketing, a brand refresh, and new product introductions to drive growth in 2025.

Q: How is Compass Diversified preparing for potential tariff impacts, and how do you view your subsidiaries' exposure compared to competitors? A: Pat Massarello, COO: We've been diversifying our supply chains geographically over the past few years to mitigate tariff impacts. While not completely immune, we believe our subsidiaries are well-positioned compared to competitors, with some even benefiting from domestic production advantages.

Q: What is the outlook for M&A activity in 2025, and how does it compare to previous years? A: Elias Sabo, CEO: The M&A market is slightly improving compared to the past few years. We expect activity to pick up, and with our strong portfolio and balance sheet, we are well-positioned to pursue acquisitions that align with our strategic vision of innovation and disruption.

Q: Can you elaborate on Lugano's strong EBITDA margins in Q4 and the expectations for 2025? A: Elias Sabo, CEO: Lugano's strong margins were driven by operational leverage, reduced wholesale revenue, and improved sourcing. However, with three new salons opening in 2025, we anticipate some margin dilution initially, but the business continues to execute exceptionally well.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.