Compass Diversified - Q3 2024

Executive Summary

• Q3 delivered double-digit sales growth and a new quarterly record Adjusted EBITDA of $114.0M; consolidated net sales rose 11.8% to $582.6M and income from continuing operations was $31.5M versus a loss in Q3 2023.
• Management raised FY24 guidance: consolidated Subsidiary Adjusted EBITDA to $510–$525M, consolidated Adjusted EBITDA to $420–$435M, and Adjusted Earnings to $155–$165M; Branded Consumer lifted to $390–$400M and Industrial to $120–$125M.
• Liquidity strong: $71.9M cash, ~$486.6M revolver availability, term loans $377.5M, senior notes $1.3B; $100M common share repurchase program authorized on Oct 16 and quarterly distribution of $0.25 paid Oct 24.
• Near-term catalysts: Investor & Analyst Day on Jan 16, 2025; integration of Altor’s Lifoam acquisition (approx. $7M integration costs over 5–6 quarters) and continued Lugano expansion (Chicago Gold Coast planned for early 2025).

What Went Well and What Went Wrong

• What Went Well

  • “Adjusted EBITDA grew by over 25% vs. Q3’23 to $114 million, a new quarterly record,” driven by Branded Consumer (Lugano, BOA, PrimaLoft, Honey Pot) and margin expansion at key subsidiaries.
  • FY24 guidance raised across consolidated and segment metrics, reflecting momentum and stable CODI Momentum Index (1.04 at end of last week) supporting outlook into 2025.
  • Strategic actions: $100M buyback authorization and Altor’s acquisition of Lifoam to accelerate cold-chain strategy; management emphasized confidence and intrinsic undervaluation.

• What Went Wrong

  • Industrial headwinds persisted; Outdoor Solutions (Altor) faced challenges at cold-chain distribution partners; integration costs expected (~$7M over 5–6 quarters) to extract synergies from Lifoam.
  • Elevated corporate costs due to a CFO transition caused a sequential increase (+$1.8M vs. Q2) though excluding non-recurring items, costs were down YoY and sequentially.
  • Operating cash flow usage of $29M in Q3 driven by Lugano’s rapid inventory investment (~$60M) to support growth; capex up to $15.6M including Arnold’s plant relocation with Q4 onetime move costs expected (~$7M) excluding capital investments.

Transcript

Operator (participant)

At this time, I would like to send a conference call over to Cody Slach of Gateway Group for introductions and the reading of the Safe Harbor Statement. Mr. Slaw, you may begin the conference.

Cody Slach (Senior Managing Director)

Thank you, and welcome to Compass Diversified's Q3 2024 conference call. Representing the company today are Elias Sabo, Cody's CEO, Stephen Keller, Cody's CFO, and Pat Maciariello, COO of Compass Group Management. Before we begin, I would like to point out that the Q3 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 in 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. Unless otherwise noted, references in these remarks to company-specific financial measures relate to the Q3 of 2024, and references to period-to-period increases or decreases in financial metrics are year-over-year. Throughout this call, we will refer to Compass Diversified as Cody or the Company. Now, allow me to read the following Safe Harbor Statement.

During this conference call, we may make certain forward-looking statements, including statements with regard to the expectations related to the future performance of Cody and its subsidiaries, the impact and expected timing of acquisitions and divestitures, and future operational plans. Words such as believes, expects, anticipates, plans, projects, should, and future, and 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 31st, 2023, as well as in other SEC filings.

In particular, the domestic and global political and economic environment, disruption in the global supply chain, labor disruptions, inflation, risks associated with the company generally due to natural disasters or social, civil, and political unrest, and changing interest rates all may have a significant impact on Cody and our subsidiary companies. Except as required by law, Cody 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.

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Good afternoon, everyone, and thanks for joining us today. Today, I am pleased to announce we delivered another strong quarter. In Q3, we saw our combined revenue grow double digits and our adjusted EBITDA grow by over 25% versus the Q3 of 2023. In fact, our Q3 adjusted EBITDA of $114 million represents a new quarterly record for Cody and is a byproduct of our strong business model and our long-term value creation strategy. Based on performance to date, we are raising our full-year guidance for 2024, and we believe we are well positioned into 2025. Before I hand it over to Pat and Stephen to provide more details about both our Q3 performance and our full-year outlook, I wanted to take this opportunity to provide a little more color on both our strategy and our current operating environment.

Despite ongoing economic and geopolitical uncertainty, the North American consumer, especially the more affluent consumer, appears to be holding up well. We are encouraged by recent interest rate cuts and the continued slowing of inflation over the last several quarters. We think this supports a stable outlook for the economy. Obviously, geopolitical uncertainties driven by the U.S. election and conflicts in the Middle East and Russia create some incremental risks that we are monitoring and will manage as required. We believe that our diverse mix of businesses provides us with useful insights into the underlying market outlook. In order to better gauge both the economic outlook and the strength of our businesses, we have recently developed a proprietary indicator that we call the Cody Momentum Index.

This index uses data from our subsidiaries, including the last 12 weeks of both bookings and sales, to help us identify shifts in market sentiment. At the start of the year, we saw a momentum index of 1.02, and as of the end of last week, we had a momentum index of 1.04. We believe this reading is consistent with a stable economic outlook for Q4 and into 2025. As I mentioned, our positive results this past quarter demonstrate the strength of our business model and our long-term strategy. Innovation and disruption are at the heart of Cody, and over the last few years, we have begun to codify our goal of owning and actively managing companies that demonstrate our innovative and disruptive spirit. These are high-growth, middle-market companies with a sustainable competitive advantage that are poised to gain share in attractive markets.

Partnering with and empowering our subsidiary management teams to realize their vision is a key part of our value creation strategy. We don't just provide capital. We provide strategic and active support and a long-term orientation. We work with our management teams to ensure that our businesses have the right strategy, processes, and talent as they drive outsource growth through innovation, superior execution, and a focus on the long term. I am proud to note that just yesterday, we were awarded Inc. Magazine's Founder-Friendly Investor Award, a testament to our collaborative and bespoke approach to working with our businesses and management teams. Our collaboration with our businesses goes well beyond traditional value drivers. For example, the work of our internal audit team often happens outside the spotlight but creates tremendous value. As you know, we typically acquire middle-market companies that have varying levels of financial processes and controls in place.

Our internal audit team works very closely with our subsidiaries to systematically review and improve our subsidiaries' financial processes and controls, creating both better outcomes and more confidence. This positions our businesses to scale and ultimately drives exceptional value for all stakeholders. Consistent with our long-term strategy, in the Q3, we raised more than $17 million of preferred stock capital. We plan to continue to raise capital through the issuance of preferred stock, as we believe this lowers our long-term cost of capital while maximizing our financial flexibility. We also continue to focus on opportunities for capital deployment. Our goal is to be active but disciplined as we look for the type of companies we want to own and manage.

While the M&A market remains somewhat muted, we continue to cultivate relationships with founders, entrepreneurs, bankers, and private equity companies in order to position us to buy great Cody-like companies at appropriate prices. We are confident that we can be the buyer of choice for innovative businesses that have strong business models and need long-term capital as well as strategic and active support to unlock value. In the meantime, we continue to invest in our subsidiaries. On October 1st, Altor completed the acquisition of Lifoam. This addition accelerates Altor's long-term strategy, expands its capabilities, and we expect will support faster growth as Altor partners with its customers to bring advanced cold-chain packaging solutions to the market. Each of our businesses continues to explore inorganic opportunities to drive long-term value creation, and we stand ready to support their growth.

Lastly, on October 16th, we announced a new $100 million repurchase program that authorizes us to opportunistically repurchase common shares throughout the balance of 2024 and beyond, subject to extension of the program by our board. This program indicates that we do not believe our current share price reflects the intrinsic value of our business, and it further indicates our confidence in Cody's strategic plan and our continued growth prospects. Our performance in the quarter was not an accident. It is the direct result of the execution of our strategy. I want to take a moment to thank the outstanding team here at Cody who worked tirelessly to bring our vision to life.

I also want to thank our subsidiary management teams and employees for their hard work fostering innovation, driving exceptional results, and exceeding expectations. With that, I will now turn the call over to Pat.

Pat Maciariello (COO and Partner)

Thanks, Elias. To reiterate, it was another successful quarter, and our businesses continued to exceed our expectations. Over the last few quarters, our confidence in our companies has increased, and we believe we have the right approach in place to exceed our 2024 goals and set us up for a strong 2025. I will start with our branded consumer segment, where for the year-to-date period, pro forma revenues increased by 10.3% and pro forma adjusted EBITDA increased by 27% versus the prior year period. Our consumer vertical continues to surpass our expectations, and growth is particularly strong in areas where we serve the most affluent customers. Lugano and BOA posted exceptional quarters, and PrimaLoft and The Honeypot Company also performed very well.

We believe growth will continue to be strong in each of these businesses, though at Honeypot, we believe there may be some lumpiness on a quarterly basis as we continue to invest in the brand to solidify its position in the market and drive long-term share growth. Within our industrial segment, on a year-to-date basis, revenues declined by 4% and Adjusted EBITDA declined by 6.1%, respectively. The decline in the quarter was driven primarily by headwinds at Altor Solutions, which continues to face challenges at several of its cold-chain distribution partners. We believe Altor is now offering a solution that can address the changing needs of the industry, and we believe that performance at Altor will stabilize and the company will return to growth in the midterm.

In addition, we are very optimistic about the opportunities presented by Altor's recently completed acquisition of Lifoam.

We are expecting approximately $7 million in integration costs over the next five to Q6 as the company extracts what we believe will be considerable synergies from the transaction. Arnold had another strong quarter, and we believe it will finish 2024 with solid performance. Included in this quarter's results were approximately $900,000 of one-time move costs as the company transitioned its Illinois operations to a new state-of-the-art location to better facilitate growth. In Q4, we expect these costs to total approximately $7 million, excluding capital investments, as the company completes this strategic transition. For both Altor and Arnold, we intend to call out these specific one-time costs over the next several quarters to provide a better perspective of core business performance.

Once again, we are very pleased with our performance this quarter, and we are excited to close out 2024 and continue to grow in 2025.

I will now turn the call over to Stephen so he can provide more specifics about Cody's consolidated financial performance in the quarter and outlook for the full year.

Stephen Keller (Senior VP)

Thank you, Pat. In the Q3, we delivered consolidated net sales of $582.6 million, representing an increase of 11.8% over the prior year. Normalizing for the impact of acquisitions, our pro forma sales grew 6.6% in the quarter. As mentioned, growth in the quarter was primarily driven by our branded consumer businesses, with Lugano, BOA, PrimaLoft, and Honeypot all delivering double-digit growth. This growth was partially offset by the divestiture of Velocity's Crosman airgun business, as well as more modest growth in our industrial businesses. Our consolidated net income in the Q3 was $31.5 million, which compares favorably to net loss of $3.8 million we recorded in Q3 of 2023. Adjusted EBITDA in the quarter was $114 million, representing a 28% increase over the same period in 2023.

While our year-over-year performance benefited from the acquisition of Honeypot, growth in our Adjusted EBITDA was primarily driven by strong operational performance across most of our subsidiaries, with Lugano, BOA, PrimaLoft, and Arnold all significantly expanding Adjusted EBITDA margins in the quarter. Corporate costs and management fees were $22.7 million in the quarter. This represents an increase of greater than $2 million over the prior year and a sequential increase of $1.8 million from Q2 of 2024. This increase was driven primarily by one-time costs associated with our recent CFO transition. Excluding these non-recurring costs, total corporate costs and management fees were down both year-over-year and sequentially. Adjusted earnings in the quarter were $48.7 million, which represents a 65% increase over Q3 of 2023. Turning to our cash flow, in the Q3, we used $29 million of consolidated cash flow from operations.

Our cash usage was primarily driven by the extraordinary growth at Lugano, where we used around $60 million in cash in the quarter to support this highly profitable, fast-growing business. Outside of Lugano, our other subsidiaries generated greater than $30 million in operating cash. In terms of capital expenditures, we invested $15.6 million in the quarter, an increase of $5.7 million over the prior year period. Increase in capital investments was related to growth investments in our consumer businesses, as well as a plant relocation at Arnold, which Pat discussed earlier. Our balance sheet is strong, and we ended the Q3 with $71.9 million in cash and greater than $480 million available on our revolver. Our total leverage ratio declined modestly to 3.68 in the quarter.

It is important to note that subsequent to the end of the quarter, we deployed approximately $140 million of cash to close the Lifoam acquisition. Overall, we maintain substantial liquidity and have the ability to increase our borrowings by an additional $250 million. We believe we are well-positioned to both fund the growth of our subsidiaries as well as act on attractive acquisitions as they become available. Turning to our full-year outlook, as Elias mentioned earlier, based on our strong Q3 performance and the momentum we see across our businesses, we are raising our full-year guidance. We now expect our consolidated pro forma subsidiary adjusted EBITDA to be between $510 and $525 million. This is inclusive of Honeypot as if it was owned from January 1st, 2024.

Increase in our full-year guidance will primarily come from an increase in our branded consumer vertical, which we now expect to deliver Adjusted EBITDA between $390 million and $400 million. Adjusted EBITDA for our industrial vertical is now expected to be between $120 million and $125 million for the full year. On a consolidated basis, we expect our Adjusted EBITDA to be between $420 million and $435 million, inclusive of corporate costs and management fees of around $90 million. Our full-year Adjusted Earnings are expected to be between $155 million and $165 million. Obviously, this outlook does not include the impact of any potential acquisitions or divestitures. With that, I will now turn the call back over to Elias.

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Thank you, Stephen. Before turning it over to the Q&A portion of the call, I'd like to highlight that we will be hosting our Investor and Analyst Day in New York City on January 16th, 2025, where we will be showcasing our diverse subsidiary businesses and will share more about our strategic positioning and our playbook for driving long-term shareholder returns. You can expect more details in the coming weeks, and I look forward to seeing all of you there. With that, operator, please open the lines for Q&A.

Operator (participant)

Thank you. At this time, I would like to remind everyone in order to ask a question, please press star 11 on your telephone keypad and wait for your name to be announced. Listen by Willie Compalde, Kenny Rafter. Your first question comes from the line of Larry Solow from CJS Securities. Your line is now open.

Lawrence Solow (CFA Partner)

Great. Thank you. Good afternoon or good evening, everybody. I guess first question, just on the guidance, narrow it up and then raise a little bit as well. It looks like on the industrial piece, just tweaked upwards a little bit. I guess that's primarily for the Lifoam acquisition. And then on the branded side, is that mostly Lugano or any thoughts on that?

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Yeah, Larry, good afternoon. It's Elias. On the consumer side, it's a little bit broader than Lugano. I would say the guide includes BOA performing better than anticipated. Honeypot had a really strong Q3. We do anticipate investing substantially in marketing in the Q4, but it's still going to expect it to deliver year-over-year growth. So that is kind of on track and where we expect. PrimaLoft is turned and doing a little better than expectations. So it's broader than just Lugano, and your point on industrial is correct. That is due to Lifoam.

Lawrence Solow (CFA Partner)

Gotcha. And I like that Lifoam. I like the momentum index. I usually kind of ask you a question in those words, and you've kind of quantified it now, which is kind of fun. I guess the question I have is one or two, and then it was tilted a little bit up now. I guess, was there somewhat of a downturn at some point? Has that kind of just trending in the last few weeks? Has that number in the last couple of months kind of shifted a little bit back up? Maybe that's a little bit of semantics, but just curious if there's been any movement in between January 1st and recent.

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Yeah, Larry, it's interesting because on the consumer side, it's held relatively stable throughout the year, which I think indicates what we were talking about. The consumer, especially the more affluent consumer that we touch, has held up remarkably well. We have seen a little bouncing around on the industrial. I would say there was a general trending down over the first six months of the year, six, seven months. Somehow miraculously, in August and September, we saw that take almost a V-shaped turn back up, and then the industrial business has sort of weakened back a little bit. And so it's gyrated a little bit around. It did correlate to a lot of the better economic readings we saw over that time in late Q3. It has ticked down a little bit in October.

So it feels like there was a little bit of momentum maybe around interest rate cuts. Maybe that freed up some order flow that happened, especially on the industrial side of the economy. Now that feels like it's sort of reined back in a little bit.

Lawrence Solow (CFA Partner)

Gotcha. Okay, great. That's fun. Just one company-specific question, then I'll leave it up to someone else. Just on Lugano, sort of the highest of the high end in luxury and clearly another amazing quarter. I think this business has been incredible. Just do you see this continuing? And I guess my other specific question, has there been any hesitation or any impact? Thoughts on potential changes in capital gains tax? Does that potentially impact the business? And I guess a more broader question without getting too political, just across your businesses, does the election, could that have any impact on you guys on a kind of broad brush basis? And then I'll leave it at that. Thanks.

Pat Maciariello (COO and Partner)

Hey, Larry, it's Pat. I will start with just a little bit more color on Lugano, and then I'll let Elias handle the political question.

Lawrence Solow (CFA Partner)

Yeah.

Pat Maciariello (COO and Partner)

But I think the growth at Lugano continues to be broad. We don't anticipate potential changes in capital gains tax rates to have an effect. It continues to be broad geographically. The number of transactions, as well as the transaction size, continues to increase. And we continue to grow geographically. We just announced, and it's in several papers, that we'll be opening on the Gold Coast in Chicago. We have a great location there that we're excited about, and that will be sort of Q1, maybe spring of next year. And we're considering other locations. And the new locations are doing well. I mean, we're having pretty good success internationally after opening our London salon. So everything is kind of doing really well at Lugano, and we are excited to continue to invest in the business.

Elias, you want to touch on the election results?

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Yeah. I don't know that we have any insight other than to say how different policies could affect us. As you know, being selling consumer goods, we do import a lot of that product. Some of that product comes from Southeast Asia and some particularly out of China. If there are 10%-60% tariffs that get enacted on all of our trade partners, clearly that's going to create some level of disruption, Larry. There is no way that any company can absorb those kind of tariff increases. So my sense is this gets pushed through to additional pricing in the marketplace, is inflationary, and likely reduces consumption unless there's some tax decrease that can offset that increase in costs that are going to be pushed through. So I think that could be a potential that we are clearly looking at.

But other than that, I don't think there's been a lot of talk about policies outside of potential tariffs that would have too major of an impact on our operating companies.

Lawrence Solow (CFA Partner)

Got it. I appreciate that call. Thank you, everybody.

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Thank you.

Operator (participant)

Thank you. And again, as a reminder to ask a question, please press star 11. And the next question coming from the line of Matt Koranda from Roth MKM. Your line is now open.

Matt Koranda (Managing Director, Senior Research Analyst)

Hey, guys. Good evening. Just wanted to start off with Lugano. Maybe any way to unpack the kind of key drivers of growth there? I mean, it just continues to sort of defy expectations on the top line. And I have a question on the margins that I'll get to, but curious if maybe you could just parse out or help us understand qualitatively existing salon growth versus what you're seeing from the new salons in terms of contribution. Anything to call out on average order values that could be helping you there? Just kind of wanted to get a better sense of the drivers there.

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Sure. So I'm only going to say that all salons did increase year over year. I'm not going to kind of touch on kind of salon by salon or area by area where the growth was, but the organic salon or the existing salons continue to grow and perform really well. We do continue to see a march up in sort of our average transaction value, which is driving a decent chunk of growth. We also see an increase in our number of transactions per quarter, so it's a little of each, if that makes sense, and I'm sorry I can't be more in-depth than that, but it's a little of each, and really, it goes to we believe Lugano fundamentally has a different business model, and we believe it's disruptive.

I mean, we are offering more value to the consumers than are any of Lugano's competitors.

We believe that that's important whether you're dealing with people of any demographic, right? That's important for people of the highest demographic as well. We're creating long-term relationships, and we're really allowing them to look at jewelry as more of a store of wealth. We think it's a combination of all those things, right? Clearly, you see our investments in inventory. You need to have diamonds in order to sell diamonds, right? That's part of what we're doing as well. We're getting turns on that, and we're getting a very good return on our investment. It's really a combination of all of those, Matt.

Matt Koranda (Managing Director, Senior Research Analyst)

Yeah. Okay. No, that's fair. It sounds like balanced growth there. That's great. And then just on the incremental margins, I think historically you guys have spoken to $1 of growth gets you $0.30-plus of incremental margin on the EBITDA line at Lugano. Maybe this quarter was quite a bit in excess of that. I'm just curious if there was anything unique about the Q3 that drove the profitability there at Lugano or anything else to call out so we can understand sort of the incremental margins on a go-forward basis?

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Yeah. I mean, as we grow and as we get more scale and as we add more capabilities and more talent and management, we're clearly buying at least as effectively, if not more effectively, number one, and number two, I'm not sure if this quarter I would not want to take this quarter's margin to sort of straight line them over the next Q4, right? This could have been slightly higher than average, not materially, but slightly higher than we'd expect going forward, and I will just point out Q4, we think is going to be a great quarter. There are marketing events as well in Q4, but we think we'll grow well beyond any increase in costs.

Matt Koranda (Managing Director, Senior Research Analyst)

Okay. Gotcha. And then maybe just one broader question. It's sort of always asked on this call in some shape or fashion, but maybe Elias, just thoughts on the M&A landscape and what you're seeing in terms of deal flow these days. And then I noticed maybe Stephen, balance sheet maybe has a little bit less capacity in the near term to do something large given the Lifoam acquisition and then maybe the desire to deploy a little bit on the $100 million buyback, but maybe just talk about how we kind of balance sort of the desire to add to the portfolio versus the stock, which is seemingly very cheap right now.

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Yep. So Matt, remind me your first question again, and then I'll talk about your second question.

Matt Koranda (Managing Director, Senior Research Analyst)

Yeah. Elias, it was just, yeah. The first question was just M&A landscape and deal flow.

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Yeah. And then we'll talk about the balance sheet. So on the deal flow, it's been relatively muted, and it's been that way for a couple of years now. I know we sound like broken records. One of our, as we said in our script, we want to be active, but we're also going to be really disciplined here. And the types of companies that we're chasing down, which are consistent with what you've seen us buy coming out of COVID, right? Like BOA and PrimaLoft and Lugano, these are very innovative businesses. Their growth rates are much stronger. They generally have a lot of IP protection. Those companies, Matt, just have not been trading in the marketplace. And we're looking everywhere we can. We're trying to be catalysts with entrepreneurs, directly approaching them.

At first, we had obviously the rate environment and tight policy, which created a reduction in deal flow. We had the worry that you may have a recession that ends up hitting, and now everybody is getting comfortable with the soft or no landing. And that has really just made the M&A markets very weak. Now you have a presidential election that's coming up, and that's sort of frozen the markets completely on the M&A landscape. So we're hearing there are going to be a number of transactions that come forward after the election. I think regardless of the outcome, as long as it's a peaceful outcome and transition of power, I think that is going to free up a lot of deal flow. And we're hearing the bank pitch activity has been extremely strong.

So I think there's going to be more activity coming into 2025, but I just want to reiterate, we will be very disciplined to the types of companies that we want to buy. We think that the opportunity cost is much greater to act on something that's not consistent with our strategic mandate. In terms of the balance sheet, we continue to remain under four times leveraged. We're a little bit outside of the top end of our leverage parameter, which is three and a half. It's not materially outside of that. One of the things that has occurred over the last half a dozen years is we've moved from a portfolio that grew generally down at GDP or 0 to 3% to now a portfolio that is growing at kind of high single digit to this year, low double digit rates.

And I think that supports natural deleveraging better than we have ever had before. Depending on Lugano's growth rate, clearly, depending on its capital needs, that alters sort of the balance sheet equation. But we're now at a point where we're generating well north of $100 million of retained cash on an annual basis. And that's something that we can use to support whether it's the buyback, whether that's into M&A opportunities, supporting capital deployment into Lugano. Clearly, the growth of the business is a deleverager just because the denominator is getting larger in that equation.

And we would expect that to continue not only in Q4, but into 2025 as well. So we're comfortable with where our leverage is given all of those dynamics, which frankly are in the best position this company's ever been in in terms of growth, cash flow before working capital investment, you name it.

In terms of where we are capacity-wise relative to our full revolver commitment, I'm very confident, and we talk with our financing partners all the time that there are available capital in different parts of the market, whether that be term loans. We have a Term Loan A outstanding right now. That is something available to tack onto. The Term Loan B market is available to us. So we have a lot of secured lending capacity that we can move around revolver and open up additional liquidity. We can enter into the bond market where we continue to trade extremely well relative to what our rating is. So we feel very good about our balance sheet and all of the capacity that we have.

Matt Koranda (Managing Director, Senior Research Analyst)

Okay. Thorough as always. Thank you. I'll leave it there.

Cody Slach (Senior Managing Director)

Thank you. And next question coming from the line of Matthew Hurwitz from Jefferies. The line is now open.

Matt Hurwitz (Managing Director and Head of Communications)

Hi guys. Great quarter. Could you talk about just the bullwhip and supply chain impact on various portfolio companies and when that might sort of unwind and become a tailwind just in terms of the destocking trend that we've seen?

Pat Maciariello (COO and Partner)

Sure. This is Pat. I don't know as to whether or not when it will become a tailwind per se, I will say, or if it will. I mean, sometimes you don't want to have too much of a tailwind from where you are now because that means you're overstocking at retail, and that sets you up for issues in the future. Portfolio-wide, we think we're kind of at equilibrium now, if that makes sense. We don't think we're overbuilding. We don't think we're kind of draining supply within the channel. Portfolio-wide, I would say we generally feel like we are in those sort of early supply chain businesses. We generally feel like we are sort of producing in a manner that's roughly equal to consumer demand.

Matt Hurwitz (Managing Director and Head of Communications)

Okay. That's helpful. Great. And then could you just talk about how you're thinking about the dividend at this point? Obviously, leverage has been fairly consistent, and you're out-earning it by a large margin, but just how you're thinking about dividend payments going forward.

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Yeah. As we've said publicly in the past, our board makes our decision on the dividend. We've paid a dividend since coming public every quarter that we've been public. And that is the current position of the company is that we are a dividend payer, and we will be unless there is some change in strategic plan, which is not being considered right now.

Matt Hurwitz (Managing Director and Head of Communications)

Okay. Helpful. Thanks very much.

Operator (participant)

Thank you. And the next question coming from the line of Robert Dodd from Raymond James. Your line is now open.

Robert Dodd (EGM - Finance and Commercial)

Hi guys. Congratulations. Going back to the M&A landscape kind of issue, I mean, maybe a Cody M&A Optimism Index question. I mean, rather than over the next quarter, because that has been very muted, I'm hearing the same thing, like pipelines are building, etc., but what's your level of optimism that over, say, the next 12 months, you think the market's going to be conducive to you finding the kind of deals you want? I mean, going into an auction process for a highly competitive healthcare company might not be ideal for you, right? Because that's not the kind of business approach you normally take. But what's your view on over an extended period, the market's going to be conducive to something happening?

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

We're very optimistic right now, Robert. We think the M&A markets, which have been subdued, as I said, for a couple of years, really can only stay there for so long. Eventually, people do need to move on. There's estate planning for entrepreneurs and tax planning that ends up occurring. There's private equity, the fund lives that end up coming into a kind of a situation for them. Or there's just the desire for them to exit so that they can have realizations to move forward.

So I think there is going to be a lot of forces for why sellers should be starting to come back into the market. Everybody has been really hesitant because nobody wants to bring an A-plus asset to market and be the first one with price discovery and fall flat on your face. So it's created a catatonic kind of seller market right now.

With interest rates coming down, that first 50 basis point move, I think helps. If the Fed is continuing to move monetary policy looser, that's going to help these types of assets. We're already seeing lending start to come back and the leverage multiples start to come back in the marketplace. So the ingredients are in place that give us a lot of optimism, Robert, that next year is going to be a pretty good bounce back, and we should be able to transact against a company of the ilk that we want to buy.

Robert Dodd (EGM - Finance and Commercial)

For that. And then I'll go to ask the Lugano question. I mean, on store openings next year, I mean, do you have any preliminary? I mean, it takes a while to open them, right? I mean, if you open one by the middle of next year, you've got to have a location already picked out, right? So what's kind of the any clues on how many you think might be open next year? And do you think you'll do a second international? I mean, London seems to be going quite well, but you couldn't sell internationally without having a salon, obviously. But do you think there's going to be more international footprint expansion and expand the potential customer base even further, right?

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Yeah. So the board of Lugano hasn't, and we haven't reviewed with them sort of the strategic plan for 2025. That being said, as you would expect us to and as you want us to, we always have irons in the fire. And there's several locations that we're evaluating not at any point in time, but lately. And there's several locations now. And one of the several is international, and more than one of the several are not. Is that a good sort of summary? I'd say there is room for growth. We've identified a lot of markets that we think are attractive and that this Lugano model would fit into.

And absent something happening, we would envision incremental store openings next year. Maybe two, if I had to guess. I mean, if you want me to roll out a number, right?

I mean, maybe two, probably.

Robert Dodd (EGM - Finance and Commercial)

Sure. Always run the number.

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Sure. Sure.

Robert Dodd (EGM - Finance and Commercial)

Good. Thank you.

Pat Maciariello (COO and Partner)

Thank you, Robert.

Operator (participant)

Thank you. And the next question coming from the line of Jonathan Everett from TD Cowen, your line is now open.

Hey, how are you? This is Jonathan on finance. Just one question for me. With the decreasing of rates, with it seems to be a good quarter in the rate guidance, how are you thinking about balancing the share buybacks, potentially acquisitions in 2025, as well as managing your debt? How do you prioritize it? Or does it change based on what's going on in the market at the time?

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

Yeah, Jonathan, this is Elias. Our capital allocation is fluid. Clearly, we would like to retain capital to proceed against our strategic plan, and as we've said many times to the market, a strategic goal within our strategic plan is to hit $1 billion of EBITDA, and we think that size and breadth of subsidiaries and end markets, all the diversity that comes from that, it continues with our quest to lower our cost of capital, so that is our strategic North Star that we constantly point to, and internally generated capital, as well as whatever we generate in the markets through capital raising and through divestitures, our first goal would be to prioritize acquisitions that align with our strategic vision. Now, that being said, we cannot be immune to the stock price.

And as our opinion of intrinsic value starts to deviate materially from the stock price, then it's incumbent upon us to put a floor in or at least use better capital allocation to buy back those shares because the return on that buyback is on a risk-adjusted basis better than what we think we can get in the market by deploying against our strategic plan. So I know that it doesn't give you an exact answer. It's fluid. Our priority is to follow our strategic plan. That being said, at this level of discount, we are willing to step in and use a buyback and support the share price at this type of return we think we would be getting on that capital that's being used.

I also want to point out one of the comments that I made in the script is that we raised $17 million of preferred capital in the Q3. We have also raised capital in the Q4. We don't disclose how much until the following. That's preferred capital we raised in the Q4 so far before the window was shut in October. We would anticipate, as long as that product is available to us at reasonable cost, which it is right now, that we would continue to raise that as a form of equity capital that can be used to either invest in Lugano. It could be used theoretically to buy back shares, right? Money is fungible.

So, wherever the highest return on invested capital is, I can tell you, in our opinion right now, nothing is as attractive as investing in Lugano because the returns that it gets are really exceptional. And so that raising preferred can be there. It can buy back our stock. It can be part of the acquisition capital that we have to go buy new companies that we view as a viable source or just general deleveraging. And so there is capital coming in the door through that means. And as M&A markets become more active for us on the acquisition side, we do think that there are some divestiture opportunities that we would continue to pursue as I continue to say we march against our strategic plan.

Got it. Thank you.

Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I would now like to send the conference call back over to Mr. Elias, sir.

Elias Sabo (CEO, Co-Founder and a member of Compass Diversified Board of Directors)

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 Cody.

Thank you for your support.