Compass Diversified Holdings
NYSE:CODI
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Compass Diversified Holdings
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Good afternoon and welcome to Compass Diversified’s Fourth Quarter 2020 Conference Call. Today’s call is being recorded. All lines have been placed on mute. [Operator Instructions]
At this time, I would like to turn the conference over to Matt Berkowitz of the IGB Group for introductions and the reading of the Safe Harbor statement. Please go ahead, sir.
Thank you, and welcome to Compass Diversified’s fourth quarter 2020 conference call. Representing the company today are; Elias Sabo, CODI’s CEO; Ryan Faulkingham, CODI’s CFO; and Pat Maciariello, COO of Compass Group Management.
Before we begin, I would like to point out that the Q4 2020 press release including the financial tables and non-GAAP financial measure reconciliations are available at the Investor Relations section on the company’s website at www.compassdiversified.com. The company also filed its Form 10-K with the SEC today after the market close, which includes reconciliations of non-GAAP financial measures discussed on this call and is also available at the Investor Relations section of our website.
Please note that references to EBITDA and the following discussions referred to adjusted EBITDA is reconciled to net income in the company’s financial filings. The company does not provide a reconciliation of its full year expected 2021 adjusted EBITDA or 2021 payout ratio, because certain significant reconciling information is not available without unreasonable efforts. Throughout this call, we will refer to Compass Diversified as CODI or the company.
Now allow me to read the following Safe Harbor statement. During this conference call, we may make certain forward-looking statements, including statements with regard to the future performance of CODI and its subsidiaries. Words such as believes, expects, plans, projects and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions.
Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements. And some of these factors are enumerated in the Risk Factor discussion in the Form 10-K as filed with the SEC for the year ended December 31, 2020, as well as in other SEC filings.
In particular, the domestic and global economic environment, as currently impacted by the COVID-19 pandemic has a significant impact on our subsidiary company. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
At this time, I would like to turn the call over to Elias Sabo.
Good afternoon. Thank you all for your time, and welcome to our fourth quarter earnings conference call. Before discussing our results, I would like to take a brief moment to acknowledge the extraordinary efforts of our employees as we navigated through the unprecedented challenges of COVID-19. Despite working remotely for most of the past year, our employees executed at an extremely high level, and delivered results far in excess of our expectations.
During the year, we successfully completed two transformational acquisitions, raise debt and equity capital at attractive rates to solidify our balance sheet, appointed two CEOs at our subsidiary companies and produced financial results that not only exceeded our expectations, but also produced organic growth on a pro forma basis over 2019. Most importantly, we’re able to achieve these accomplishments without faltering on our unwavering commitment to our team, prioritizing employee health and safety.
Despite the challenges brought on by the pandemic, I am pleased to report that our fourth quarter results dramatically exceeded our expectations, including BOA and Marucci, as if we own them from January 1st, 2019, pro forma consolidated revenue grew by 11% and adjusted EBITDA grew by 9% over prior years’ quarter. For the full year ended December 31st, 2020, pro forma consolidated revenue grew by 2.5% and adjusted EBITDA grew by 2% over 2019. With respect to our previous guidance range of $270 million to $280 million, which are at our Investor Day, we communicated that we expect it to be at the high end of the range. We are pleased to report that we significantly exceeded the high end of the range, with consolidated pro forma adjusted subsidiary EBITDA of over $290 million.
These results are a testament to our strategy of acquiring industry-leading niche companies and then actively managing them by working closely and supporting our subsidiary management teams to enhance value for our stakeholders. Our subsidiary management teams move swiftly upon the onset of COVID-19, creating a safe and healthy workplace for our associates, while taking the necessary action to reduce discretionary costs. As the impact of the pandemic started to become more apparent, our management teams were nimble and reacted quickly to pivot and take advantage of opportunities in their respective markets.
As you know, each CODI’s subsidiary faced unique challenges, with some experiencing large declines in end market demand, while others experienced rapid and unanticipated increases. An environment this volatile required skillful navigation by our teams, and I am extremely pleased to report that our subsidiary management teams and their employees delivered above and beyond their tremendous efforts and continued focus during the 2020 during 2020 help enable us to navigate the pandemic in a position of strength.
Although last year was difficult for everyone to endure, the crisis highlighted the advantages of our permanent capital model as we execute our private equity like strategy. While most private equity firms were largely sitting on the sidelines, with limited access to capital, we enjoyed open access to the capital markets, as evidenced by our capital raise in May 2020. With our balance sheet strong, we are able to acquire two world-class, niche consumer businesses at attractive valuations. Very few others were able to make that same kind of impact.
Our permanent capital business model is fundamentally advantaged against our peers set, as we have the freedom to divest opportunistically, like we did in 2019, with almost $1 billion in enterprise value in these divestitures and then aggressively deploy in times of market dislocation, like we did in 2020, acquiring almost $700 million in new businesses.
As we mentioned throughout the year, the acquisitions of Marucci and BOA have transformed our portfolio and raised our core growth rates substantially. The performance of these businesses since our acquisition vividly demonstrates this growth leveraging. Marucci in the six months from July 1st, 2020 to December 31st, 2020, as compared to the same period last year, has experienced approximately 20% revenue growth and 70% EBITDA growth. Despite youth sports in various levels of restrictions around the country. Similarly, BOA experienced revenue growth of 2.5% and EBITDA growth of 29%, substantially above expectations for the fourth quarter and compared to the same period last year.
These two stellar companies possess all the attributes we look for in branded consumer acquisition candidates, highly aspirational brands, premium product positioning, and proven and extraordinarily talented leadership. As I mentioned, our subsidiary management teams performed to their best this year, and CEO, Kurt Ainsworth at Marucci and Shawn Neville at BOA were no different. We have a strategy that has long proven that companies with characteristics like these will be positioned for accelerated growth for years to come.
We enter 2021 with significant momentum at our back. Our consumer businesses on a pro forma basis grew at a remarkable level of greater than 40% over the back half of 2020, and early in 2021, we continue to see well above trend growth in this segment. While our industrial businesses suffered in 2020 due to reduced end market demand, we believe our growth rate will turn back positive in this segment as soon as the second quarter with comparable quarters becoming much easier. For us to achieve this type of performance in a dislocated market highlights the substantial benefits of our diversification strategy and lowering our financial volatility.
Based on these trends, for 2021, we expect to produce consolidated subsidiary adjusted EBITDA of between $305 million and $325 million, representing growth of 5% to 12%, and a payout ratio of between 80% and 70%. Before turning the call over to Pat to review our subsidiary results, I want to take a minute to discuss our strategy for 2021 and beyond.
We believe we have created a fundamentally better way to execute a private equity like strategy. Core to that is our permanent capital structure, which allows us the freedom to acquire and opportunistically divest businesses without deference to timelines. As management has proven over the past few years, we have the financial flexibility to act based on opportunities that arise, relative to current market conditions. And as you know, our management is committed to staying in alignment with our stakeholders at all levels of our organization and its subsidiaries, as evidenced by waiving millions of dollars in management fees over the past few years.
Of the utmost strategic importance is the relentless pursuit of a lower cost of capital. Over the past few years, we have made major strides in reducing our weighted average cost to capital by including preferred equity and unsecured bonds in our capital structure. We believe there are numerous opportunities to continue to lower our cost to capital and further enhance our competitive advantage in the marketplace.
As Ryan will mention later in his section, we will continue to evaluate the merits and risks of a potential change in our tax structure from a pass-through entity to a C Corporation. We are still too early in our evaluation process to provide insight. However, any decision will be predicated on our desire to achieve the lowest cost of capital possible for our shareholders, because we believe that is what will deliver the greatest level of long-term shareholder value.
With that, I will now turn the call over to Pat.
Thanks, Elias. Before I begin on our subsidiary results, I want to touch generally on the year. Over the course of 2020, as well as during the fourth quarter, our Branded Consumer businesses benefited from an increased demand in outdoor categories and, as a result, experienced strong sales and earnings growth. Our Niche Industrial businesses exceeded our midyear expectations as a Group. Those sales and earnings continue to face headwinds predominantly driven by pandemic related travel slowdowns and uncertainty.
Now on to our subsidiary results. I’ll begin with our Niche Industrial businesses. For the full year, revenues declined by 5.6% and EBITDA decreased by 18.3% versus 2019. For the fourth quarter of 2020, revenues increased by 4.7% and EBITDA declined by 23.8% versus the comparable period in 2019.
For the year, revenue at Advanced Circuits declined by 3% and EBITDA by 9.1% versus 2019. The fourth quarter was challenging for Advanced Circuits, as uncertainty surrounding defense budgets, following the results of the Presidential election caused the reduction in customer demand for circuit boards used in research and development projects. We have seen these trends stabilize somewhat beginning in the middle of January, and the company’s bookings have shown considerable improvement in the period since then. We anticipate ACI’s results in 2021 will be in line with those in 2020.
Arnold Magnetics’ EBITDA declined to $9.3 million in 2020 as compared to $15.4 million in 2019. Arnold’s performance for the year was impacted partially by reduced activity in the aerospace and oil and gas related segments of the economy, as well as severance and related charges associated with a decrease this decreased activity. While revenue for the year declined by 17.5%, trade bookings were approximately flat as the company is benefiting from longer-term defense related orders. While headwinds in the aerospace market will continue in 2021, we do believe Arnold will show growth in revenue and EBITDA in the year as the effects of the pandemic begin to lift.
We recently rebranded Foam Fabricators as Outdoor Solutions, to better reflect the company’s diversified packaging platform. Outdoor Solutions grew EBITDA by 6.8% in 2020. This is partially attributable to the performance in its core business. And it’s also attributable to benefits from the bolt-on acquisition of Polyfoam Corporation midway through the year, which has driven strong top line growth as demand for protective packaging and temperature management solutions continued to increase. We continue to see solid demand at Outdoor Solutions in 2021 and are encouraged by the company’s strong project pipeline.
The Sterno Group’s 2020 EBITDA declined by 27.8% versus 2019 to $49.5 million. Demand for the company’s core chafing fuel lines decreased significantly in the fourth quarter. Given the substantial reduction in holiday banquets and large gatherings. We expect this segment to slowly improve in mid-to-late 2021 as large portions of our population are vaccinated and business and leisure travel begin to show signs of recovery.
Company’s consumer business continued to experience elevated demand for its line of wax and essential oil products. The product mix had a slightly negative impact on margins during the fourth quarter. We anticipate Sterno’s results in 2021 will be in line with 2020.
Now turning to our Branded Consumer businesses which continue to benefit from ongoing consumer demand and outdoor categories. Our results are presented as if we own Marucci and BOA from January 1st, 2019. For the year, revenue increased by 9.1% and EBITDA by 22.1% versus 2019. In 2020, our Branded Consumer businesses contributed over 60% of our pro forma consolidated subsidy or EBITDA and in the fourth quarter of 2020, EBITDA at these businesses increased by 42.5%.
BOA’s full year 2020 EBITDA increased by 10.3% on a roughly flat revenue. In the fourth quarter BOA’s EBITDA increased by 29% versus the comparable period in 2019 to $9.1 million, exceeding our expectations. BOA experienced strong demand across several of its categories and continues to innovate in partnership with its customers. This quarter, we are excited by that – we were excited by the publication of results stemming from the company’s multiyear research partnership with the University of Denver.
Athletes in this study showed meaningful improvement in agility and speed, and those wearing shoes with the Tri-Panel or Y-Wrap BOA closures showed performance improvements of between 3% and 9%. The study’s findings were reported in multiple relevant publications. We remain impressed with the BOA team and the company’s technology applications and we’re optimistic about the company’s future.
Ergobaby’s 2020 EBITDA declined to $15.6 million versus $21.3 million in 2019. Fourth quarter revenue and EBITDA were impacting – impacted negatively as the company repurchased inventory of its Tula brand from an international distributor, as the company refocuses that brand towards this historic direct-to-consumer routes.
International orders have returned to more normal pre-pandemic levels for the first quarter of 2021, though further European or Asian lockdowns could have a negative impact. Ergobaby launches heirloom carrier in the fourth quarter and results exceeded our expectations. The heirloom is unique to the market, knit from post-consumer recycled polyester and demonstrates our commitment to sustainability. Ergo has several additional product launches scheduled for the remainder of 2021, which we believe will have a meaningful impact on the company’s performance and will produce year-over-year revenue and EBITDA growth.
Liberty Safe’s EBITDA increased to $19 million in 2020 from $10.9 million in 2019. Liberty’s strong continued performance in the fourth quarter was driven by both dealer sales and sales for traditional big box customers. End market demand as well as bookings remain robust in 2021, and much of the company’s production capacity remains filled in the second quarter of this year.
Marucci finished 2020 with EBITDA of $13.8 million, down just 3.1% from 2019, revenue and EBITDA in the fourth quarter were up 12.7% and 63.8%, respectively. As the company continues to benefit from the launch of its CAT9 line of bats, strong sell throughs for its products and gains in shelf space at key accounts. We believe that Marucci’s exceptional 2020 financial performance and a year that experienced reductions and stoppages of baseball seasons nationwide speaks to both the power of the brand and the quality of the company’s leadership team and employees.
The first quarter of the year typically represents a seasonally larger portion of the company’s revenue and EBITDA, given channel partners are shipped goods in advance of spring baseball seasons. This year, we are confident that Marucci is well positioned to in advance of the spring season, and we believe the company will benefit from what is expected to be a much more stable spring baseball season.
Velocity Outdoor’s EBITDA increased substantially in 2020, up 83.2% from the year ago period. Velocity’s performance was better than expected as investments made over the last several years came to fruition, and continued consumer interest in outdoor activities drove demand for the company’s products. Though challenges and part of the company’s supply chain remained. The Velocity team continues to definitely handle the heightened levels of demand and take market share.
Current bookings and sell through at Velocity remains strong for 2021, driven by growing participation rates and innovative new product introductions. Finally, 5.11’s full year EBITDA increased by 16.5% in 2020, and by almost 20% in the fourth quarter versus Q419. Despite reduced traffic in the company’s retail stores due to the pandemic, 5.11’s direct-to-consumer business as a whole significantly exceeded our expectations in 2020. In addition, the company took significant steps in the fourth quarter to enhance its omnichannel retail experience as it enabled ship from store capabilities and the vast majority of its 73 retail locations and shift a significant portion of online orders from stores during the holiday season. We continue to believe that the 5.11 brand resonates strongly with its customers and that the company has even greater opportunities ahead.
Before I turn the call over to Ryan, I would once again just like to recognize the extraordinary work of our subsidiary company management teams and all of our employees in 2020. Last year created management challenges and obstacles that no one could have envisioned 12 months ago. Throughout the year, our team’s demonstrated skills, leadership and [indiscernible] determination, and we are proud to work with each of them.
I will now turn the call over to Ryan for his comments on our financial results.
Thank you, Pat. Moving to our consolidated financial results for the quarter ended December 31st, 2020, I will limit my comments largely to the overall results for our company since the individual subsidiary results are detailed in our Form 10-K that was filed with the SEC earlier today.
On a consolidated basis, revenue for the quarter ended December 31st, 2020 was $474.8 million, up 22.7% compared to $387 million for the prior year period. This year-over-year increase primarily reflects our acquisitions of Marucci and BOA during 2020. Excluding these recent acquisitions, our revenue increased by more than 10%, driven by strong sales growth at our Branded Consumer subsidiaries, Velocity Outdoor, 5.11 and Liberty which offset declines in sales at Arnold, Ergo and ACI.
Consolidated net income for the quarter ended December 31st, 2020 was $8.8 million, compared to $5.4 million in the prior year. CAD for the quarter ended December 31st, 2020 was $36 million, up 20% from $30 million in the prior year period. Our CAD that we generated during the quarter was significantly above our expectations, primarily due to our strong fourth quarter increase as compared to the prior year.
Other factors impacting our CAD and Q4 compared to the prior year, include slightly lower CapEx spend, an increase in cash taxes, and higher preferred share distributions as a result of our Series C issuance in November of 2019. On a full year basis, our CAD substantially exceeded our distribution. Our payout ratio for fiscal year of 2020 was 82% and our CAD increased 6% over the prior year.
Turning to our balance sheet. As of December 31st, 2020, we had over $70 million in cash, approximately $290 million available on a revolver. And our leverage was 3.1 times. We have substantial liquidity and as previously communicated, we have the ability to upsize our revolver capacity by an additional $250 million. We stand ready and able to provide our subsidiaries with the financial support they need, invest in subsidiary growth opportunities as well as act on compelling investment opportunities as they present themselves.
Turning now to capital expenditures. During the fourth quarter of 2020, we incurred $6.7 million of maintenance CapEx of our existing businesses, compared to $7.2 million in the prior year period. During the fourth quarter of 2020, we continued to invest in growth capital, spending $4 million in the quarter, primarily related to 5.11’s long-term growth objectives. Growth CapEx in the prior year quarter was $5.7 million.
Turning to our expectations for 2021. As a reminder, our quarterly operating and cash flow results can vary materially based on factors such as the timing of shipments of large orders or the timing of certain investments made before or after quarter end. Elias provided adjusted EBITDA guidance and our payout ratio expectations for the full year of 2021. I’d like to now provide guidance on CapEx and cash taxes.
For maintenance CapEx, our estimate of spend for the full year of 2021 is between $20 million and $25 million for growth CapEx our estimate of spend for the full year of 2021 is between $12 million and $16 million, primarily at 5.11. For cash taxes, we expect full year 2021 cash taxes to be approximately 9% of our subsidiaries’ total adjusted EBITDA. As a reminder, our cash taxes as a percentage of EBITDA can vary significantly from quarter-to-quarter.
As Elias mentioned earlier, we are continuing to explore a change in our tax structure, including the possibility of electing to be taxed as a C Corporation. We are evaluating the costs and benefits of such a change as well as the implications of current and future tax law, corporate law, and potential impacts of such a change on our access to the capital markets, distribution policy, corporate debt ratings, cost of capital, amongst many other considerations. We will provide updates as appropriate as we move along in this process.
With that, I will now turn the call back over to Elias.
Thank you, Ryan. I would like to close by briefly discussing M&A activity and our go-forward growth strategy. As I mentioned earlier, we took prescient steps in 2019 to prepare for the unexpected in 2020. Those decisions and our unique permanent capital structure positioned us to not only weather the storm, but to also proactively execute on our growth strategy in a volatile year. Heading into 2021, we continue to have the balance sheet strength to support our companies as they operate in these unpredictable conditions. We remain confident in our subsidiaries and their respective management teams, as they have successfully pivoted their businesses as appropriate during the pandemic, to maintain and even grow their market positions.
As we look to the future, we are optimistic that our subsidiaries are well positioned to continue to gain additional market share, and look forward to continuing to support the growth in the months and years to come. As for CODI, we will continue to seek both platform and add on acquisitions, as we believe that there are compelling opportunities for us to generate long-term shareholder value, given continued market dislocations in 2021.
In addition, we will continue to invest in and enhance our subsidiary companies’ competitive positioning, which includes supporting them as they build and grow their digital transformation strategy. Our differentiated strategy has set us apart for more than a decade, and it remains consistent. In 2021, we remain intensely focused on executing our proven and disciplined acquisition strategy, improving our operating performance of our companies, opportunistically divesting, enhancing our commitment to ESG initiatives across our portfolio and creating long term shareholder value.
With that, operator, please open up the lines for questions-and-answers.
[Operator Instructions] Your first question is from the line of Larry Solow with CJS Securities.
Great, thanks. Good afternoon guys and congratulations on a really good year in a tough environment. I guess first question, just a couple on the subsidiaries themselves just on 5.11. It’s good to see returning to growth in the quarter in the top line. Really impressive with you know, the margin improvement in the year I think it was up like 170 bps or so and the revenue was relatively flat may be 12 percentage points. But just try to dive in a little bit more into that. Is that driven you know more by mix and more on online sales, productivity gains or maybe a little operating leverage in there? What sort of driving that margin improvement but I think, end of the year at you know, over 15%?
Hey, Larry, it’s Elias and good afternoon and thank you for your comments at the beginning. You know, with 5.11, I would say what, you know, is broadly not being seen by the market is the, you know, shift in the consumer and professional business, as you know, you know, a few years back, this was predominantly a professional business. Today, it’s migrated to, you know, be in North America, more of a consumer business, size wise. The professional business had quite a few challenges globally. You know, there was a lot of the social unrest caused police and other law enforcement budgets to be reduced. And so the pandemic has actually, you know, I think uniquely, you know, caused the professional side to be down, and that’s masking the really extraordinary results on the consumer side.
So as we’ve mixed shifted more towards consumer, clearly that has much higher gross margins. And because we have such a direct presence, you know, most of our consumer is direct-to-consumer, you know, the margins are substantially better than they are in a wholesale business. So most of it, I would say, is due to mixed shift, I won’t say the company also did an extraordinary job of moving quickly to ratchet costs down, you know, the retail side of our consumer business experienced far lower traffic as a result of the pandemic. So, the company did a great job of moving very quickly to retain profitability in the retail side, and I would say, just broadly, because of the uncertainty the company did great at controlling spend.
Now, you know, I will say that there’s, you know, a lot of opportunities for investment in this company. So as we look into 2021, you know, in the Consumer Business continues to grow really dramatically, I would say, you know, we would plan to bring back some of that expense, not necessarily deleveraging the margins, but we would plan to bring back expenses, you know, at least in line with revenue growth, because there is, you know, some good opportunities to really enhance the company’s growth rate, you know, over the long-term.
And it does sound like you plan to maybe accelerate them and go a little bit slow down in new store openings in 2020, though I think they did start to pick up again in the back half. But with your commentary on CapEx mostly going towards 5.11, I assume that’s for new stores?
Yeah, and you remember with our new stores that has multipurpose, one is clearly as a, you know, revenue. The second is, it really acts as a marketing in that trade region. But third, and most importantly, and Pat, you know, hit on this in his section, we now have more of a true omnichannel experience, and we’re able to ship from store, which we did a considerable amount of revenue from our e-comm was actually shipped from our stores. So it opens up a lot of capacity. So it works so integrated, Larry, on a, you know, from an omnichannel standpoint, that we think it’s important to continue with that. And, you know, frankly, with rents coming down, the economic model is still very strong. And so I would say, you know, our commitment to continuing to roll out the store network is as strong as it was pre-pandemic.
Got you. Okay and then just switching gears just on the C structure conversation, you know I think this often comes up and I know you guys that it’s a continuous process and evaluation for I mean you guys in for Compass. Is there anything, you know, from a high level different this time around? It does seem like perhaps maybe you’re not taking this more serious, but maybe moving more towards a potential switch and structure is, you know, have tax structures or tax laws changed at all? Perhaps under the Trump administration didn’t change or the Biden or something along those effects or anything that kind of may be different this time around?
Yeah, so I’m going to ask Ryan to give a little bit more detail, Larry. But I would just say, you know, kind of high level a couple things. One, the Trump tax law was negative to partnerships. And the tax law change, there was just one component of it. And therefore the differential between you know, and this is still early in our analysis, but the positive differential we had from being a pass through, has really materially come down based on a provision in that tax law that has changed. That’s number one.
Number two, we would be looking at this really seriously anyway. And as I said in my commentary, our goal is to have the best cost to capital amongst the private equity peers that is looking at middle market you know, opportunities. And we think that, you know, when we always say to the guys, you know, we’re always looking at, you know, where is the economic moat of a business and how can it you know, continue to be deepened? You know, we think one of the economic moats around our business is our weighted average cost to capital, and it is materially lower now than what our, you know, peers are, especially on a risk adjusted basis.
Now look, if you’re going to have 90% leverage, then your whack is probably lower, but your chances of going out of business are pretty high. And so you know, when we risk adjust it, we think our whack is really low. We are continuing to look at all opportunities that we can lower our whack and changing to a C Corp for tax purposes has the potential in our opinion to lower our cost to capital. So it’s getting a really serious evaluation.
Now with that, Ryan, maybe you can just touch a little bit, you know, more granularly as kind of how we’re looking at this.
Yeah, sure. Hi, Larry. One other thing just on the taxes, of course, part of the consideration is, you know, Biden’s administration and what that does for taxes, and, you know, the early preliminary analysis on that is there’s, you know, it’s still, you know, net neutral and that it’s not that detrimental in terms of raising rates on corporate. So, you know, I think that’s kind of a positive sign. But certainly it is early in the process. You know, we believe we have the right partners assisting us in the analysis. You know, we’ve talked about the tax impact, I mean what’s the tax impact on shareholders? What’s the tax impact on the corporation that moves forward? You know, what’s the impact on our distribution policy? What’s the timing of it? And, of course, what’s the market impact of it? And, you know, all of that with the line of sight on reducing cost to capital as sort of the Paramount strategic rationale. So, you know, it’s moving along, it is a long process, for sure and we want to make sure that we’re thorough in the analysis.
And just lastly, just a quick follow-up on that. You mentioned, you know, a potential change in the distribution policy. Can you maybe elaborate on that a little?
Sure. Sure, Larry. I mean, part of the analysis is trying to, you know, consider what the tax impact across the system is. And today, our shareholders who are partners, you know, pay the tax on our distributions. So, our $1.44 per year goes out to shareholder. And a portion of that is the tax liability of the entity. And if we were a C Corp, then the C Corp would now have the tax liability.
So there has to be, you know, some analysis around, you know, what makes sense in terms of our distribution policy. And I think as Elias highlighted, you know, our core focus is on reducing our cost to capital. So we need to think about what the distribution policy is going forward now that we assume the tax liability, and how that impacts our cost to capital. So, you know, that’s kind of where we’re at. It’s still early in that process, but that is part of the analysis that we’re working on.
Got it. Okay, Great. I appreciate the color. Thanks, thanks again.
Sure, Larry. Thank you.
Your next question is from the line of Kyle Joseph with Jefferies.
Hey, good afternoon, guys. Let me echo my congratulations on a very strong finish to a turbulent year. I guess I’ll start out, you know, from a high level perspective, just thinking about 2020 and even into ‘21, the proliferation of SPACs. Can you give us a sense for, you know, the potential impacts on your business, whether positive or negative of the proliferation of SPACs? You know, admitting we don’t know how long this phenomenon will last, whether it’s temporary or whatnot, but just kind of near-term implications for the business?
Sure. Good afternoon, Kyle, it’s Elias. You know, I think the SPACs are generally not competitive for – with us, given what they’re focused on now, you know, what we see is a lot of the high profile ones, but they’re you know, really geared much more towards early stage, you know, companies that want a public, you know, a mechanism by which they can go public. So we’re seeing the EV space, the battery space for EVs, you know, the space right like with Virgin Galactic and, you know, I think you’re going to continue to see, you know, some of these companies that, frankly, we would have no interest and, you know, acquiring, you know, they’re, they’re pre-revenue in some cases, they’re clearly pre-cash flow. And so that doesn’t really fit in our model.
Generally, lower middle market companies like we’re acquiring are not ones that are, you know, highly desired by the, you know, kind of SPAC, you know, peer group right now. So we don’t really see competition from SPACs. You know, conversely, I would say, we don’t really see SPACS as a great exit opportunity for a lot of our companies either, because, you know, the dynamics of what they’re looking for, you know, much earlier stage sort of much more disruptive type companies. So, you know, my view is, it doesn’t really have that large of an impact one way or another on us.
But you’re, you know, there’s a broader point, I think beyond SPACs, which is, you know, there is a lot of capital that continues to be in the market. As we all know, the Federal Reserve continues and Central Banks around the world continue to be very aggressive with monetary policy. And that continues to push people to seek higher returns, you know, out the risk curve, ultimately, you know, we sit at the end of the risk curve, right in the private equity like space. And so there is a lot of capital that’s sitting there. And, you know, there, I would say, the, there are some opportunities that continue to be, you know, created, because there are still dislocations in certain segments of the market.
But broadly, you know, we see asset prices returning back in 2021, to where they were pre-pandemic as, you know, the simple supply and demand of capital against assets indicating that and, you know, you can still get access to relatively cheap debt capital, in fact, maybe not relatively historically cheap debt capital in many instances. So the, you know, competitive dynamic, not from SPACs, but just from private equity, you know, likely look more like it did pretend on it right now.
Got it, makes a lot of sense. And then question for probably either Elias or Ryan, here. Just on seasonality, you know, kind of a couple years ago, where a customer there, the first quarter being the lowest in terms of CAD. But obviously, you had two portfolio sales and two portfolio acquisitions. So the portfolio’s evolved, and then 2020, you can obviously throw any seasonality out the window, but just, you know, and then I think you guys alluded to Marucci having kind of a strong first quarter. So just give us a sense for how the seasonality of the overall portfolio has evolved?
Yeah. And, Ryan, do you want to – I’ll kick it over to Ryan and let him talk about it. But it’s likely going to be less than what it’s been historically, largely, because Marucci does have their strongest earnings quarter in the first quarter. But Ryan, do you want to touch on that?
Sure. Yeah, no, that’s what Elias said is spot on, historically, our first quarter has been, you know, one of our lower cash flow generating quarters, and Marucci certainly offsets that, given their business and the sell in, you know, ahead of the baseball season, so that’ll, you know, help our first quarter overall. And, you know, BOA traditionally doesn’t have much seasonality, you know, their business can be a little lumpy, depending on when, you know, product gets sold in. So, but there’s really hard, it’s hard to assess seasonality on that business right now.
And you’re right. COVID certainly skews things a lot this year, just given as you say, you can throw it out the window. So I think 2021 maybe the back half may normalize a little bit. The first half, you know, could have some, you know, benefit to overall results, because, you know, COVID ending, but it’s you know, it’s hard to read that now. But by and large as we go forward thinking 2022, the business will be less seasonal overall.
Okay, and one last one for me. Apologies, Ryan, I missed it in your commentary, but remind us where leverage closed the year out? And how that would trend through ‘21 ex incremental acquisitions and give us a context of where that is in your overall target leveraged?
Yeah, sure. So it’s just under 3.1 times at the end of the year. So that is in line with, you know, financial policy. And, you know, it’s a comfortable place for us to be, you know, the good news is, we, as we exited 2020, we had a very high free cash flow year. And, you know, we were able to organically de-lever as we exited the year. And as we look at 2021’s expected performance again, assuming no acquisitions or divestitures. You know, we’ll have organic de-levering occur with that free cash flow generation. So it’s certainly, you know, starting to hum, I’d say, given that we now have 10 businesses and we’ve got, you know, more core growth occurring in the portfolio. So we should definitely reap the benefit on a leverage standpoint as we exit 2021.
Got it, very helpful. Thanks for taking my questions and congrats again on a very good year.
Thank you, Kyle.
Thanks, Kyle.
Your next question is from the line of Cris Kennedy with William Blair.
Hey, guys. Thanks for taking the questions and congrats on navigating at difficult time. I just wanted to dig in a little bit more on the momentum in Velocity. Is there a way to parse out kind of the internal initiative versus kind of the macro tailwinds towards outdoor? Thank you.
Pat?
Yeah, thanks. I think the short answer is no. But we see, you know, we do see – we are seeing shelf space gains we’re seeing, you know, a great reaction to our product introductions. And so we think we are taking market share, we believe strongly that we are outpacing the market. But other than that, we can’t pull it apart, you know, quantitatively.
Understood. And then just a broader question, you know, on the, I think, Elias at the Investor Day, you kind of talked about potentially, you know, looking into new verticals, whether it would be healthcare or FinTech or something to that effect. Can you just go a little bit more into that? That’d be great. Thanks a lot guys.
Yeah, so, you know, we continue, you know, and it really gets back to sort of the strategic look of our business. And as our cost to capital continues to come down, and our competitive advantages continue to grow. You know, we think the business is poised for, you know, a good, you know, kind of growth spurt here going forward.
You know, we’ve been developing our human capital internally. And, you know, I think our team right now is, you know, operating at a level that, you know, frankly, is better than we’ve had in any year. And look it’s evidenced by what we did last year, right, a couple of acquisitions, a couple of CEO transitions that we completed, you know, doing some capital raising, you know, those are all really positive in the financial results we delivered, I think, are a testament to, you know, the entire Group at the manager, who all performed at such an extraordinary level.
Now, that all being said, you know, we look at a lot of the stars aligning for growth, but we don’t have core expertise in some additional verticals. And so, you know, our ability to enter into new verticals is really predicated on us finding the right human capital, and bringing that aboard. You know, I think I mentioned that our Investor Day, don’t expect this to be something that is, you know, kind of a near-term 2021, you know, objective that we can execute against, it may be if we found the right person, my personal guess is, is longer than that, because we’re going to want to build around, you know, some talent that we bring into the organization.
So, we continue to recruit and get really high caliber individuals that are coming into the firm, and, you know, really all plays, I think, together, Cris, in terms of, you know, how we look at our kind of growth mandate going forward, but entering into new verticals, without bringing in some talent that has that domain expertise, we think would be all, you know, too risky. And so we’re going to just be more patient, wait till we find the right person, we will clearly announce that when we do to the marketplace, and then you know, from there, there’s, you know, some length of time until we would be active in that space. But that’s sort of the sequencing of it. You know, I would again, reiterate, I wouldn’t consider that a near-term objective. We would be fortunate if it is, but I don’t think it’s kind of near-term that we can execute against that.
Great, thanks a lot, guys. Take care.
Your next question is from the line of Matt Koranda with ROTH Capital Partner.
Hey, it’s Gus stepping on for Matt. Just want to talk, unpack, Marucci and Velocity’s EBITDA margins a little more. Those are pretty outstanding. Just wanted to see if you could talk more to what drove that? Thanks.
Yeah I’m going to ask Pat to, you know, comment on both Marucci and Velocity for you.
Yeah, I’d say if you kind of look annually, you know, we definitely had some reduced costs, I would look to be investing in both those businesses. I just think the opportunities in both those businesses are plentiful. All that being said, I don’t see EBITDA margins regressing significantly at either of them.
Got it. That’s helpful. And I guess just to wrap up. So with for Altor Solutions, I know that you guys were distributed across like dozen plus locations. Just any concerns with the weather – with Texas weather and being able to get the raw materials?
Sure. So, broadly speaking, you know, several of our plants were down for brief periods. They are now all back up and functioning, you know, at or close to full capacity. As it relates to raw materials, you know, we’re looking kind of through the supply chain back to sort of core styrene prices. There are some disruptions you know, we believe we’re in a good position versus our competitors. We believe any disruption will be somewhat minor. And as you know, we have price pass through mechanisms with a lot of our customers as well. So we don’t see any shortages. There may be raw material increases, because of the disruptions, which we think we’ll be able to handle them.
Hey, thanks guys.
Thank you.
Your next question is from the line of – I’m sorry, if I mispronounce the last name, Matt Tjaden with Raymond James.
Hey, all afternoon, and thanks for taking my questions. Just wanted a follow-up if I can. Any color you can give on where valuations are sitting now versus kind of pre-COVID levels? And then how are you thinking about positioning in 2021? Whether that’s net buyer, net neutral or net seller? Thanks.
Yeah, I’m going to let Pat just touch on valuations, because he’s seeing companies in the market on a daily basis. I would say, you know, with respect to our view on 2021, it’s a little hard to tell whether it will be a net divest or net, you know, kind of investor here. I would say over the next couple of years, because we believe we’re at the beginning parts of a cycle being a net investor is, you know, likely where we would like to be.
Although, as you know, along the way, we’re always open to opportunistic divestitures. And so, you know, whatever the market kind of gives us is what we were look at, you know, taking advantage of for our shareholders. And, you know, it’s hard for you really don’t comment on whether we’re going to divest a business or we’re going to acquire a business. But I would say, in general, we’re probably looking to, you know, be net investors over the next couple of years.
Pat, you know, any commentary on what you’re seeing in, you know, kind of asset valuations, both from an absolute standpoint and a multiple basis?
Yeah, I mean, I’d say the, you know, we’re back to pre-pandemic levels, if not above them, you know, the, our challenge some businesses have been sort of, you know, there’s been a change in consumer patterns that have permanently changed you know, the way consumers operate and work because of COVID. And so you can kind of capitalize those earnings. Other times, there’s things that you have to look forward to see what’s the, you know, 2021, 2022 EBITDA really going to be like before you put on multiples, and that’s sort of the process that I’d say the market is going through right now, if that makes sense. But in a sort of vacuum, average multiples are backup sort of above pre-pandemic levels. And then, you know, then it gets into the minutiae of business-to-business.
Great, that’s it for me. Appreciate the time.
Thank you.
I would now like to turn the call back over to Elias for closing remarks.
Great. Well, thank you, operator. As always, I’d like to thank everyone again for joining us on today’s call and for your continued interest in CODI. We look forward to sharing our progress with you in the future. That concludes our call. Thank you.
That does conclude today’s conference. Thank you for participating. You may now disconnect.