Participants

Cody Slach; Investor Relations; Gateway Group

Elias Sabo; Director; Compass Diversified Holdings

Patrick Maciariello; COO; Compass Diversified Holdings

Ryan Faulkingham; Chief Financial Officer, Co-Compliance Officer; Compass Diversified Holdings

Larry Solow; Analyst; CJS Securities

Marc Feldman; Analyst; William Blair

Derek Sommers; Analyst; Jefferies

Matthew Koranda; Analyst; Roth MKM

Robert Dodd; Analyst; Raymond James

Matt Howlett; Analyst; B. Riley Securities

Presentation

Operator

Good afternoon, and welcome to Compass Diversified first-quarter 2024 conference call. (Operator Isntructions) At this time, I would like to turn the conference over to Cody Slach of Gateway Group for introductions and the reading of the Safe Harbor statement. Please go ahead, sir.

Cody Slach

Thank you, and welcome to Compass Diversified first-quarter 2024 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'd like to point out that the Q1 2024 press release, including the financial tables and non-GAAP financial measure, reconciliations for subsidiary, 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.
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 call, we may make certain forward-looking statements, including statements with regard to the expectations related to the future performance of CODI and its subsidiaries, the impact, and expected timing of acquisitions and divestitures, and future operational plans, such as ESG initiatives. Words such as: believes, expects, anticipates, plans, projects, should, 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, 2023, as well as in other SEC filings.
In particular, the domestic and global economic environment, supply chain, labor disruptions, inflation, and changing interest rates, all may have a significant impact on CODI and our subsidiary companies. Except as required by law, CODI 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

Good afternoon, everyone, and thanks for joining us today. I am pleased to report yet another strong quarter of results. We once again exceeded our expectations. Our success in this first quarter can be attributed to our deliberate focus on owning and managing, a growing number of innovative and disruptive businesses that have industry-leading growth potential. This strategy, not only reduces financial volatility, but also accelerate our annual core growth rate.
As we saw this past quarter, the diversification of our subsidiaries mean that of a few of our companies lagging growth, others may be able to compensate resulting in a more consistent and reliable growth engine. This quarter, we saw the strongest performance from our branded consumer vertical, which reported 11% growth in pro-forma revenue, and 22% growth in pro-forma adjusted EBITDA.
Pat and Ryan will, of course, go into greater detail. But I will tell you Lugano produced another quarter of remarkable results, and the company currently shows no signs of slowing down. With the opening of its new London salon earlier this week, we believe international expansion will be a huge opportunity for this business.
You will remember we were expecting both BOA and PrimaLoft to rebound against the inventory destocking headwinds of the past of the recent past, and we believe they are now through the worst of it. I am pleased to announce BOA had a great first quarter better than expected. While prime Aloft continued to see revenue and adjusted EBITDA declines in Q1, they saw bookings growth in the first quarter which provides confidence they will return to growth in the second quarter.
The Honeypot company for business we only acquired in the first quarter of this year is already integrated with a newly appointed world-class Board of Directors, and we are seeing significant gains in shelf space across key retail partners. Additionally, point of sale data remains robust, reflecting strong consumer demand for the Honeypot company's better-for-you products, thanks to the strong performances at Lugano by law and the acquisition of the Honeypot company. Adjusted earnings for this quarter were above our expectations and up significantly over Q1 of last year.
I'd also like to briefly discuss the divestiture of Crossmann, the air gun division of Velocity Outdoor to Daisy outdoor products. We are grateful for his contributions to velocity, outdoor and Cody, and I want to thank the entire Crosman team for their dedication over the years. Velocity Outdoor continues to be a subsidiary specializing in archery and hunting apparel, and we are excited by its planned product launches in the coming years. This opportunistic divestiture of Crossmann also aligns with our strategic focus of adding value through the management of innovative and disruptive companies that are poised to outpace industry growth rates. We believe Crosman sale to Daisy a recognized industry veteran in the Aragon space, positions it well for future success despite our outperformance in the quarter, continued elevated inflation, delayed rate cuts and heightened geopolitical risks, all combined to create a weakening macroeconomic backdrop, which has negatively affected our industrial verticals across our three industrial businesses, we saw a slight decline in both revenues and adjusted EBITDA in Q1. However, we remain confident in the positioning of these businesses and anticipate our industrial vertical could possibly see modest growth later this year.
All in all, I am extremely pleased with our first quarter. This is our strategic repositioning and action. Despite a mixed economic environment, we delivered a strong first quarter. Both our results for the quarter and our outlook for the rest of the year demonstrate that owning and managing a diversified group of companies with a growing share of disruptive high-growth businesses is the right strategy and we believe positions our business for sustained outperformance. We believe across our branded consumer vertical inventories are now more balanced and we expect the headwinds suffered in 2023 to turn into tailwinds for the remainder of the year. We also believe through company LED innovation, our industrial vertical could see another year of modest growth in 2024 and is positioned well for 2020.
Combining our first quarter performance with our forward momentum, we are feeling bullish about the rest of the year. So we are raising our full year adjusted earnings outlook, which Ryan will detail for you in just a few minutes.
With that, I will now turn the call over to Pat. And last, as a reminder, throughout this presentation, when we discuss pro forma results, it will be as if we own the Honeypot company as of January first, 2023.

Patrick Maciariello

I am pleased to report on another successful quarter. On a combined basis, revenue and pro forma adjusted EBITDA grew by 4% and 15%, respectively in the quarter. Legato once again was a significant driver of our growth, growing revenue and EBITDA by 61% and 83% respectively. We continue to see positive trends throughout our business within our industrial vertical for the fourth first quarter of 2020 for revenues decreased by 10% and adjusted EBITDA decreased by 3% versus Q1 2023. Arno continued to grow revenue in the quarter, though experienced higher SG&A costs due to increased sales and marketing expenses and the timing of certain professional services fees. Bookings for the quarter significantly outpaced revenues and we believe the Company remains poised for a solid 2024 and continues to build upon its long-term project pipeline.
At outdoor, revenue declined slightly as we experienced churn on projects with a couple of our larger customer pipeline of new products is robust, however, and we believe the Company will return to revenue growth in the back half of this year.
We also know that outdoor continues to increase margins in the face of revenue headwinds, and we remain confident in the business and the team. Sterno grew adjusted EBITDA slightly in the quarter as the strength of a company's foodservice division offset slightly weaker demand levels and incentive wax division.
Turning to our branded consumer vertical, for the first quarter of 2024 pro forma revenues increased by 11% and pro forma adjusted EBITDA increased by 22% versus Q1 2023. As Elias mentioned, clearly the strongest performer in the quarter remained Lugano. We saw growth in each salon and geography and benefiting significantly from investments made in our flagship salon to Newport Beach and Palm. This week, the Company opened its long awaited London slot. And though early by all accounts, the opening has been a success and we look forward to expanding the data model internationally.
Last quarter, we touch specifically on two of our businesses further up the supply chain, BOA and PrimaLoft and how order patterns were normalizing as their respective channels.
Clear at that point, it appeared that bol was perhaps a bit more than a quarter ahead of prime locked in clearing the inventory headwinds in their supply chains and returning to growth. We are pleased to report that BOA grew revenues and adjusted EBITDA by 13% and 15%, respectively in the first quarter of 2024. In addition, bookings outpaced revenue growth, which supports our expectations of a strong 2024 at Primo, though revenue and adjusted EBITDA continued to decline in Q1 of 2024. We did see solid double-digit bookings growth in the quarter, which gives us increased confidence as we enter the second quarter.
Touching on our newest business, the Honeypot company, it performed in line with expectations as revenues were approximately flat and adjusted EBITDA declined slightly in the first quarter of 2024 on a pro forma basis, consistent with our understanding at the time of the transaction, the Company had one large promotional events at retail in February of 2023 that did not repeat in the same magnitude this quarter. In addition, the Company continued to add infrastructure, including headcount and a dedicated distribution center to support its growth, which pressured adjusted EBITDA margin slightly. Importantly, though, the company grew point-of-sales for its core products in almost all its retail partners and added shelf space for new products with several partners so far this year. We remain excited about the Honeypot company and expect a solid year in 2024. Five 11 was approximately flat in revenue and up slightly and adjusted EBITDA in the first quarter of 2020 for strong revenue growth in professional in the professional channel offset both market related and self-induced challenges in our DTC channel, we have seen improvement in these areas subsequent to quarter end. And we believe the five 11 management team is taking the right actions and the Company is on solid footing as a whole we were very pleased with the first quarter and have confidence in our increased outlook for the full year.
I will now turn the call over to Ryan for additional comments on our financial results.

Ryan Faulkingham

Thank you, Pat. Moving to our consolidated financial results for the quarter ended March 31st, 2024. I will limit my comments largely to the overall results for CODI since the individual subsidiary results are detailed in our Form 10 Q that was filed with the SEC earlier today.
On a consolidated basis, revenue for the quarter ended March 31st, 2024 was $524.3 million, up 8% compared to $483.9 million for the prior year period. This increase was primarily a result of the Honeypot company and strong growth at Lugano and BOA, which was partially offset by lower revenue at Sterno alter and velocity consolidated net income for the first quarter of 2024 was $5.8 million compared to net income of $109.6 million in the prior year first quarter of 2024 included an $8 million goodwill impairment charge at our Velocity Outdoor subsidiary. Net income in 2023 included a $98 million gain on the sale of advanced circuit. Adjusted EBITDA in the first quarter was $94.8 million, up 28% compared to 74.1 million in the prior year. The increase was due to the acquisition of Honeypot company and strong growth at Lugano and BOA included in adjusted EBITDA in the first quarter of 2024 and 2023 were management fees and corporate costs of 21.4 million and $19.4 million, respectively. Adjusted earnings for the first quarter were above our expectations coming in at 34.3 million. This was up significantly from $19.8 million in the prior year quarter due to strong performances at Lugano and Vela So now moving to our 2024 guidance. As a result of the strong performance in the first quarter and our expectations for the remainder of the year, we are raising our subsidiary adjusted EBITDA guidance by $10 million. However, with the sale of Crossmann, we are reducing our guidance by a similar amount. Thus, our full year 2020 for subsidiary adjusted EBITDA is consistent with what we provided on our last earnings call of between 480,000,520 million dollars despite the sale of crossing subsidiary. Adjusted EBITDA range for our industrial vertical remains 125 to $135 million. The subsidiary adjusted EBITDA range for our branded consumer vertical remains 355,000,385 million. We expect full year 2024 adjusted EBITDA to be between 390,000,430 million. This range factors in an expected 86 million in corporate level overhead and management fees in 2024. This compares to $341 million in adjusted EBITDA in 2023.
Now onto adjusted earnings with the paydown of revolver debt outstanding of approximately $60 million, which includes proceeds from the sale of Crossmann, we are increasing our full year 2020 for adjusted earnings guidance range by $3 million and expected to be between 148,000,163 million at the midpoint of this range and assuming the same share count at March 31st, 2024 of 75.3 million shares, we expect to earn $2.7 in adjusted earnings per common share in 2024. A note for investors and analysts, the Crossmann sale will not be recorded as discontinued operations. And thus, we expect we will record a relatively small financial statement impact from the sale in the second quarter. We plan to offset any positive or negative impact from the sale in our adjusted earnings calculation in the second quarter and for the full year of 2024.
Turning to our balance sheet. As of March 31st, 2024 we had approximately 64.7 million in cash, approximately 552 million available on our revolver. And our total leverage ratio was 3.84 times our leverage at the end of the quarter was lower than we anticipated as a result of strong operating performance. We used our proceeds from the sale of Crossmann to pay down revolver debt outstanding. And thus, absent any acquisitions in Q2, we expect our total leverage ratio to decline in the second quarter. We have substantial liquidity, and as previously communicated, we have the ability to upsize our revolver capacity by an additional 250 million. With our liquidity and capital, we stand ready and able to provide our subsidiaries with the financial support they need invest in subsidiary growth opportunities and act on compelling acquisition opportunities as they present themselves.
Turning now to cash flow provided by operations during the first quarter of 2024, we used 13 million of cash flow from operations were gonna use $65 million in cash flow from operations to support its continued extraordinary growth outside of Lugano our subsidiaries produced 52 million in cash flow from operations in the first quarter, allowing us to reduce our leverage as stated earlier.
And finally, turning to capital expenditures during the first quarter of 2024, we incurred 7.7 million of CapEx at our existing subsidiaries compared to $14.9 million in the prior year period. The decrease was primarily a result of a decline in five 11 store rollouts in 2024. For the full year of 2024, we anticipate total CapEx of between 50,000,060 million dollars. We continue to see strong returns on invested capital at several of our gross subsidiaries and believe they will have short payback periods.
Capital expenditures in 2024 will primarily be at Lugano for new retail salons.
With that, I will now turn the call back over two allies.

Cody Slach

Thank you, Ryan. I would like to close by recognizing a significant ESG milestone. And also by giving you a brief update on our view of the current M&A market on the ESG front, I am proud to announce that earlier this week, we released our inaugural sustainability report. The report provides insight into how we manage ESG, both at coding and at our subsidiaries. It outlines our ESG framework and the actions we have taken designed to bring about social and environmental benefits. This report underscores our belief that ESG is an ongoing commitment, and we are dedicated to achieving substantial deliberate progress. You can view the report on our website to learn more about our vision and our progress to date. We have made significant strides over the last few years, and this progress wouldn't have been possible without the engagement of our Board, our leadership team and most importantly, the participation of our employees, both at CODI and at our subsidiaries. Our goal remains to make improvements that align with our company values and create strong financial returns for our stakeholders.
I would like to thank our head of ESGZ. Coquina and her team for their passion and all the work they've put in to get us to this point.
When it comes to the M&A market, we feel the level of optimism that we have not felt in years, we continue to see an improvement in the quality of businesses coming to market. We also see our competitors continue to struggle with leveraged buyout financing, specifically when it comes to branded consumer businesses. This only creates more opportunities for us when debt markets are weak for single-asset buyouts, our competitive advantage grows. We believe today's market landscape allows our competitive advantage to Shankh setting the stage for consummating M&A at more attractive valuations, which, of course, leads to improved shareholder returns. We remain steadfast in our efforts to identify, acquire and manage disruptive and innovative companies. And as Ryan mentioned, our strong liquidity position enables us to act on acquisition opportunities and also invest in our subsidiaries to further build upon our track record of delivering growth for our shareholders.
While I have tremendous confidence in our strategy and our competitive advantages, I'd also like to take a minute to recognize our employees who deliver these outstanding results day in and day out. Thank you to our subsidiary management teams and employees and to the entire Cody team for your hard work executing this growth strategy.
With that, operator, please open the lines for Q&A.

Question and Answer Session

Operator

(Operator Isntructions)
Larry Solow, CJS Securities.

Larry Solow

I guess first question on just Elias, just sort of following up on your I appreciate the commentary on the M&A market, and it sounds like, yes, you sound very enthusiastic there. So I'm just curious on.
Yes, what would your leverage still relatively not sort of at the higher end?
I think of the range you'd like it to be at on. What's your what's your appetite at these levels and maybe the sale of Crossmann? Maybe other other are things in the wings there that you might be able to do also to improve that leverage lower. So you can see maybe even more aggressive sounds like opportunity.

Cody Slach

And so Larry, as you know, yes. Yes, sure.

Elias Sabo

So you know, and I think we mentioned this on the last call, there is the ability to consummate acquisitions and we're comfortable bringing our leverage up higher than where it is today. And the reason we're comfortable is, frankly what we've demonstrated here in the first quarter and in the fourth quarter and what we expect is going to continue not only this year, but well into 25 and beyond. We've repositioned the Company to just have a dramatically faster growth rate and our ability to create cash flow in the leverage is really strong.
Now and so, you know, I think the Company profile allows it to handle more leverage temporarily temporarily because the earnings growth profile is so strong and our cash flow profile. And remember in Ghana, we used $65 million of cash, but it delivered 83% growth in EBITDA. Outside of that, our business delivered north of 50 million free cash flow from operations. And I do think you have to separate Lugano out given the extraordinary growth rate and the returns on invested capital there. So we look at kind of how the Company is positioned today and with and as you mentioned, the sale of Crosman, which the proceeds of which will go to delever even further, we feel that we have a very strong on deleveraging trend that's coming not only in the second quarter but beyond and as a result of that is going to open up more capacity now to the other part of your question. We have been since the end of 2018 when I took over and Pat became COO, you know, we've been kind of moving the portfolio around and creating a much higher percentage of businesses that are more disruptive and innovative and can materially outgrow their core growth rates. The sale of Crosman is an extension of that, but that is not yet in. So I would say there are other assets in the portfolio which are not growing at the level or expected to that, we will continue to make some divestitures and so we feel that there's adequate sources of capital that will be coming in both through continued portfolio repositioning as well as growth in the portfolio, free cash flow generation and then lastly, kind of when we can find opportunities to run the common and preferred ATM, and I appreciate all that color.

Larry Solow

And just the second point, just on the sort of the outlook, it sounds like maybe the macro, I think obviously, interest rates are staying out longer than, I guess some had hoped on. So maybe from a macro level, things are slightly worse for you guys, but it sounds like you have some specific offshoots at a bunch of companies that are basically offsetting that all in. And then you have the Ghana which is still kicking in to gas there. And that's why the guidance is going up. Is that kind of a good way to sort of summarize the outlook in a broad brush?

Elias Sabo

Yes.
I mean, we all saw a Q1 GDP came in kind of disappointing with inflation, you know, increasing a little bit.
So I think that was kind of needs to be taken into consideration. And frankly, we're seeing it a little bit in our industrial businesses.
There is a little bit of weakness, but over 70% of our EBITDA comes from consumer and we are seeing that same weakness there, Larry, I mean, the consumer remains on very strong and resilient.

Cody Slach

Now clearly, depending where the consumer is, the more inflation is impacted consumer spending patterns a little lower. And remember, we skew towards the upper end consumer globally for the vast majority of our portfolio.
And then we do have things that were massive headwinds last year like these inventory destocking that had all of our consumer businesses and caused sell-in to be far below sell through given that headwind is dissipating. So there's a factor that's sort of unique two are either kind of group of subsidiaries right now that give us confidence that, you know, we're more likely to be surprising going forward on the upside than we are the other way for kind of.

Larry Solow

Great kind of appreciate the color.

Operator

Mark Feldman, William Blair.

Ryan Faulkingham

Guys.

Marc Feldman

Thanks for taking the question. I guess now my first one, can you talk about, you know, any initiatives that you had at velocity. Also, you guys came off of a demand surge during COVID. And you are obviously saw the inventory destocking trends that you saw at Primo off and BOA as well. So can you talk about any initiatives to work through that going forward now that we have sold off the Crossmann division?

Patrick Maciariello

Sure.

Ryan Faulkingham

Initiative.

Patrick Maciariello

Yes.

Ryan Faulkingham

I mean, I would say that in short, it's a focus on technology and new product development. I think if you look at the artery side, we have some exciting new technologies coming out that we think could help accelerate sales in 25. And then if you look at the Company's subsidiary, that King is just really on trend on hunting apparel business, some of the easier continue to take market share granted from a small base. And so we're excited about both those.

Patrick Maciariello

Great.

Marc Feldman

Thank you for that. And then another one also on the stocking here and so it's great to hear with the double-digit growth of bookings with Prime Aloft. But can you just talk about timing of when we can actually see those convert to revenue?
I know, there's seasonality both in West ordering and when those have to be done by the team and the actual results for the year.

Ryan Faulkingham

So we believe we'll grow in the second quarter in front of us, and we believe we'll grow top line and we believe we'll grow that EBITDA. The quarter's bookings are not fully in yet, but I would just say all signs are pointing to growth as soon as this.

Marc Feldman

Great, thanks for taking the questions.

Cody Slach

Thank you.

Operator

Derek Sommers, Jefferies.

Derek Sommers

Hey, good afternoon, everyone. Just on the industrial segment on the revenue decline, is that more of a price story or a unit or part of the story and then kind of EBITDA margins held up a little bit better. They know what's happening on the expense side P&L too, and have those hold up a little bit better?

Ryan Faulkingham

Yes. So I'd say on the revenue first quantity, it is a little bit of hope on the on the external side, we did see some pressure in our wax melt business, which is predominantly sort of a middle income and below on purchaser.
And then I think your second question, as it relates to margins and margin improvement. We've our management teams are doing a good job we mentioned before, and we've touched on the new management team outdoor, which continues to drive efficiency gains on. We have a strong management team now on external that Sterno and as well as we have at Arnold, they just had some got caught with the timing of some expenses this quarter, as I mentioned on that some professional services and marketing expenses.
Got it.

Derek Sommers

And then just to pivot to Ghana on the London store rollout, kind of what's the do you guys expect like a 12-month runway to get this now fully kind of operational in a good spot or kind of what's the gap time line for implementation?
So to speak there.

Ryan Faulkingham

I mean, I think our stores, our salons usually take some time to get up to sort of, you know, as to become amplified. I would say it is going to have sales and be a driver of sales, though, as soon as this week is a good story that we have a lot of expectations on mix right there on may say, break there and Mayfair is in a great location. It's beautiful on the doing a lot of promotion around it. So we're confident it's going to have a positive impact on revenue almost immediately.

Derek Sommers

Got it. And that's all for me.

Marc Feldman

Thank you.

Operator

Matt Koranda, Rod MKM.

Matthew Koranda

Thanks for taking the questions. I guess on the Crossmann portfolio action, I'm curious why only carve out Crossmann, why not just sort of divest of the entire Velocity segment? Are we waiting for some improvement at Raven and the other subsidiaries there? And I just wanted to understand just on on sort of your posture toward acquisitions going forward. It sounds a lot like we'd be comfortable making acquisitions first and then selling down certain assets to drop leverage. Not necessarily. We don't necessarily need to wait for divestitures as a gating item to get to the acquisitive stuff. So maybe just put a finer point on that for us, if you could as well.

Elias Sabo

Yes, Matt. So with velocity. I would say the air gun business was performing, okay? And we just felt that it made sense and there was a natural buyer out there where combining the businesses both which the industry has created some excess capacity over the last few years of declines, it kind of makes sense that those businesses would be combined. And I think Daisy, I have a great asset, and we'll be able to create a lot of efficiencies out of putting those businesses together. And so I think there's more value to be created by separating the two businesses and having the Aerocan business kind of be sold offers in terms of what is left and why not having sold the whole thing?
We think what Tom remains as Pat said, has some really exciting new technology that's coming on next year and has the potential to really reinvigorate the category and provide some substantial upside growth in kind of 25 and 26. And so I think it makes more sense given that's kind of consistent with what we like in our businesses, you know, kind of highly innovative businesses that can drive kind of category growth. And we're going to we expect to see that here in velocity next year. And so I think there's a better path to maximizing value out of the overall velocity as a by having split the business up and kind of doing it as we are right now. And I think it's very much consistent with our strategy and frankly, I think it is consistent along what our ESG strategy is as well to move on from that asset.
With respect to your second question and leverage the answer, simply is yes, we're comfortable taking on leverage now more than we have to fund an acquisition and there could be the deleveraging activities that will happen after that anywhere from selling under the ATM to potential further divestitures. You know, those are all there. And so the timing doesn't need to be, you know, fund on the ATMs or divest an asset in order to acquire. If we find a great $0.5 billion Act, you know, on acquisition opportunity, we're going to execute it and we feel very comfortable with where our leverage is now, especially pro forma for the sale of the Crossmann business and repayment of those proceeds towards debt reduction. And so we're very comfortable now going out and doing an acquisition and again, you know, Matt, on given the strength of the business, given the kind of some growth in earnings that we are really confident about, especially in Q2, but really more so for the rest of the year and how the how it looks into 25. And we're just comfortable having a little bit more leverage right now. And so the timing of kind of the portfolio repositioning is a little bit less relevant.

Ryan Faulkingham

Now.
We're not going to go haywire and go outside of kind of reasonable parameters, but bringing our leverage up another half a turn or three-quarters of a turn for a temporary period would not distress us given all the signs we're seeing of growth and deleveraging in our business.

Matthew Koranda

Okay.
Super clear. And appreciate all the detail. I guess on I guess on the Legato front, obviously was not an issue this quarter to lap some pretty big two year sort of stack comps there. But just wondering as we progress through this year and why the confidence level is so high that we sort of continue to see the large growth rate that Legato has been on for the last several quarters, maybe just unpacking out the drivers of that growth, but a little bit more clearly for us would be helpful how much is related to kind of salon expansion and some of the international expansion that you're alluding to versus just kind of like-for-like growth at existing salons and maybe AOV growth, that would just be helpful.
To hear a little bit more on that.

Ryan Faulkingham

Yes, Matt, that's a lot to unpack. Let me take a let me take a shot at it. So first and foremost, I think you know, the market penetration is incredibly low as we go on particularly, we think we're on converting non jewelry buyers to on to jewelry buyers as well. So the market penetration when you include that it is even lower, right? Number one. Number two, we're investing significantly in inventory, as you can see. And as we've told you, and we're more and more getting the right pieces in the right places at the right time on to be sold. Number three, I think you will still see some maturation of some of the stores that we invested in in the last couple of years that DC, particularly on the Palm Beach on flagship salon, particularly Newport Beach. I think you'll still see continued growth there and that is those stores salons excuse me, just continue to mature. And then I'd say lastly, there will be geographic growth. Obviously, having a London salon now open will drive growth. There are a couple more areas of cities we're looking in on. So I wouldn't expect any announcements probably until the fourth quarter at the earliest. So I think it's a combination of all of the things you said plus, you know, investing in the right product. And I'll just remind you, you know, this is a disruptive business that's able to convey a lot of value to their customers through their disruptive supply chain as well, right? We believe we're able to buy very well and pass on that value to the end customer.
Okay.

Matthew Koranda

Super sneak one more in just on Honeypot since it's kind of newer. Just curious, the growth drivers that you're seeing there. I think you guys alluded to kind of additional shelf space with some key retailers. Maybe just a little bit more on where you're seeing those shelf space gains, maybe in which product categories and which types of retailers you're seeing some gains there and just sort of the growth runway you see there?

Cody Slach

Sure.

Ryan Faulkingham

So there's a couple of big box retailers that sort of dominate the industry. We are strong with both of them and particularly one getting stronger. Outside of that, it's really on growth in our drug and grocery channels, which we've been under-indexed to historically. And then there are some new product projects hitting the shelves. Now we're very excited about sort of the new product pipeline and 25 and 26 as well.

Matthew Koranda

Okay, great. I'll take the rest of my offline guys.

Operator

Robert Dodd, Raymond James.

Marc Feldman

Hi, guys, and congratulations on the quarter, all on Primo off of what has been said about the bookings, et cetera. It is and I know it's difficult to get see through to the end consumer imaging business inventory channel, like, but you know, the source of the business, is it the same products that are that are funding ramping back up or is this new SKU wins or new client relationships or any color at all on what's driving the turnaround? Is it just inventory clearing out or are there other factors at play on oil and gas? What manner.

Ryan Faulkingham

Now we're adding to on some products, a couple of products that rolled off, but we're also adding on, particularly in the performance segment, some new but some new customers and some new project wins as well. And then I would say, as far as it's also, it's just what we're hearing as far as you know, later later, order patterns, et cetera, it's just what we're hearing from our brand partners. And so I can't point to data specifically, we do that. But in general, they're saying that the supply chain is improving. Got it.

Marc Feldman

Thank you know, almost same question. But like a very strong quarter this quarter, it's been one that it's mix has been historically a lot of snow boots and seasonality and or so wanting to a boot, but you've been adding a lot of SKUs you've been adding, you know, we are trying to add new new product verticals. I mean how much is the new responsible for this rebound versus I don't want to call it old consolidated product from that of, but you said that the all the verticals versus newer verticals and SKUs driving how much was the competition?

Ryan Faulkingham

Boy, that's a that's a tough one to unpack. I actually have some data on this to say that it's roughly half and half. It feels we are growing our number of SKUs, but we're growing revenue at a faster rate than that. And so I think our SKUs are also taking market share.
Got it.

Marc Feldman

Thank you. And then last one, if I can on Lugano. I mean, obviously London is open now. Are you willing to articulate the ball mill filler line here or there on all the international locations that are since counted in process? Or is it still are you just not willing from M&A in terms of countries and cities not willing to name names, but are not yet in progress currently being got.

Ryan Faulkingham

Got it.

Marc Feldman

Thank you.

Robert Dodd

Matt Howlett, B. Riley Securities.

Derek Sommers

No, hey, guys. Thanks for taking my question. Just on the guidance, this inventory destocking and this headwind that's going to turn into a tailwind the guidance has not incorporated the snapback that we've that we've all discussed over the last few quarters that there could be that it can be a reacceleration at some point if this is really the end.

Cody Slach

That is correct, Matt.

Matt Howlett

The guidance assumes sort of the same trajectory we're seeing right now in the first quarter, sort of the slow turning of the boat, if you will, and it, you know, kind of is improving and it feels like it's steadily improving, but it doesn't assume sort of a big snapback in a rebound and what we're hearing is that customers globally ever after having so much excess inventory are now just being extra cautious in auto and obviously the cost of carrying inventories a lot higher now where rates are. So I think that has a dampening effect on it.
But my sense is and just given what we know like if you look at Apollo, for example, and where we're getting more than 10% annual screw skew growth over the last few years. You can start to run the math and say, okay, you know, there should be a bigger rebound here and we probably haven't cleared all the inventory you know yet and have kind of had stabilization. So remember, these companies serve a lot of different end markets they're not synchronized by any means. And so maybe rather than a snapback, it's a slow constant build that happens, you know, from the beginning of this year into next year and it surprises by just continuing to build. But I would say does our forecast does that reflect that inventory have sort of that snapback in or any continued progressive increases, although it's likely that that probably will happen, which is why I say I think we're poised to surprise on the upside, not the other way around as the year unfolds.

Patrick Maciariello

Right.

Derek Sommers

And just take power, for example, I mean, normalized organic growth could be still something like 20 plus percent easily, right? When things get back to normalization, just talking out loud.

Matt Howlett

Yes, I mean, I think it's historically until we had some real craziness in the supply chain where we had massive over-ordering, which benefited their numbers in late 21 and early 22 and then destocking. So if you kind of clear all that noise, you know, Boeing has been sort of a 20% plus or minus top line grower over kind of the history now, you know, we don't sign up and say that's what we think the Company is going to deliver on. But it still has a lot of the same core attributes of relatively low market share, outstanding management, outstanding technology, great strategy and execution. And so still has all the elements in place, but we only get out over our skis. So we're not going to say that's kind of what we think its core growth rate is will be a little bit more modest than that. But look, those things still exist and it's been a 20% grower historically. And so I would expect it to continue to be a really strong grower that is above the portfolio average.

Robert Dodd

Got you.

Derek Sommers

Great. And then just one last one, if I may. I mean, look, Ghana was just an incredible investment, an incredible story. I don't know if you've done this in the history, but would you still look at it as something you could sell a minority interest bringing in a partner. It's been so big. You could use it some flexibility to buy another portfolio company and just but how should investors look at this? I mean, you have this at your hip pocket, this company is growing phenomenally throwing off cash. And what what can you tell us what you could do with it in oh eight, long term to create even more value than it already as shareholders?

Matt Howlett

Yes, I think those options exist now the problem becomes it gets a little bit more complex when you start bringing in third-party investors into our structure and you got to look at, you know, kind of then betting you're benefiting from how we structure our deals by being the lender and the equity, which clearly performs so good at Lugano, do you really want to cut off that strip on anymore?

Cody Slach

So the let's just suffice to say there's lots of opportunities. I think those opportunities create complexity.

Matt Howlett

And in general, we're trying to create a little bit more simplification so that we're an easier story to understand not harder on rate, but that clearly is a benefit. And I would say, you know, given the growth rate of Lugano and frankly, our forecast doesn't assume that it continues to grow at the pace that it has been on and there's upside, but it also manifests itself through far greater earnings per share. And so I would hope that, yes, there's creative financing opportunities. But obviously, as our earnings grow, that creates just direct financing opportunities in the business, whether that be on equity financings or whether that be in debt financing. But yes, it will give a plethora of options at having a company like this, which, you know, if you remember back, we had Fox Factory, which was an extraordinary investment for us, Lugano is an extraordinary investment. We've had a lot of them Bolla, you know, is in that same vein, but Lugano just based on it, your growth rate in math at this point on, you know, it is a little bit unique and, you know, we'll clearly think about what we can do to create even more incremental value from owning that asset.

Derek Sommers

I really appreciate it. Things like all.

Cody Slach

Thank you.

Robert Dodd

And thank you.
And I'm showing no further questions. I would now like to turn the call back over to Elias Sabo for closing remarks.

Cody Slach

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. Thank you for your support.

Robert Dodd

This concludes Compass.
Diversified conference call. Thank you and have a great day.