Good afternoon, and welcome to Compass Diversified's Q1 2022 conference call. Today's call is being recorded. All lines have been placed on mute. If you would like to ask a question at the end of the prepared remarks, please press the * key, then the number 1 on your touchtone phone. 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.
Thank you, and welcome to Compass Diversified's Q1 2022 conference call. Representing the companies today are Elias Sabo, CODI CEO, Ryan Faulkingham, CODI CFO, and Pat Maciariello, COO of Compass Group Management. Before we begin, I would like to point out that the Q1 2022 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 compassdiversified.com. The company also filed its Form 10-Q with the SEC today after the market closed, which includes reconciliations of non-GAAP financial measures discussed on this call, including adjusted EBITDA and cash available for distribution, 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 2022 Adjusted Earnings or Adjusted EBITDA because certain significant reconciling information is not available without unreasonable efforts. Throughout this call, we will refer to Compass Diversified as Cody or the company. Now allow me to read the following safe harbor statement. During this conference call, we may make certain forward-looking statements, including statements with regard to the future performance of Cody and its subsidiaries and statements related to the impact of Cody's updated tax structure and the impact and expected timing of acquisitions and dispositions. 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-Q as filed with the SEC for the quarter ending March 31, 2022, as well as in other SEC filings. In particular, the domestic and global economic environment as currently impacted by the COVID-19 pandemic and the related supply chain and labor disruptions has a significant impact on our subsidiary companies. Except as required by law, Cody 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, everyone, and thanks for joining us today on our Q1 2022 conference call. I'm pleased to report that we carried last year's momentum into the Q1 of the year, where we recorded our fifth consecutive quarter of record results that is enabling us to raise our 2022 outlook. We're extremely pleased with these results, and I want to acknowledge and thank our management teams and employees. They continue to put forth an extraordinary effort that we believe will generate sustainable long-term value for our shareholders. In our last earnings call, we discussed our strong execution against a tough macro environment, and this quarter was certainly no different. Supply chain constraints, inflationary pressures, and the lack of labor were all rising headwinds our companies had to navigate in the quarter.
Our ability to execute on our strategy despite these constraints is a testament to the strength of our management teams and the quality of the companies we own. During the quarter, we delivered double-digit sales growth in both our branded consumer and niche industrial businesses. Importantly, our fastest-growing business, BOA Technology, continued to perform above expectations as revenue and Adjusted EBITDA growth continued to accelerate. In fact, BOA Technology's $25 million of Adjusted EBITDA in the Q1 represents the highest EBITDA-producing quarter a CODI business has ever reported. As we have said on prior calls, BOA Technology's unique combination of disruptive technology, strong intellectual property, relatively low penetration in a very large addressable market, when combined with an extraordinary management team, has led to performance that is significantly stronger than expected when we acquired the business a year and a half ago.
One component of the growth story to keep in mind for the Q1 , however, is the elongation of the supply chain. It's conceivable some of this quarter's demand reflects pull forward from future quarters. With only 5% penetration in the addressable market, we remain quite optimistic that BOA's long-term growth story remains intact. Lugano continues to perform significantly ahead of our expectations. As mentioned on our Q4 call, we have seen the historical relationship between inventory investment and highly profitable revenue growth pay dividends. We were excited our investment translated into almost 50% pro forma adjusted EBITDA growth.
We will plan on putting more capital in this business as this correlation is expected to continue. Overall, we did an extraordinary job posting year-over-year growth while preserving margins. In the Q1 , we had only 100 basis points of margin degradation despite unprecedented supply chain and inflationary conditions. Though we anticipate the economic headwinds that impacted our margins could persist in the short term, we believe that the quality of all our subsidiaries' competitive positioning allows us, in a more stable inflationary environment, to be able to fully recoup all of that margin. With that, I will now turn the call over to Pat.
Thanks, Elias. On a combined basis, revenue and EBITDA in both our branded consumer and our niche industrial businesses grew meaningfully and exceeded our expectations. As Elias mentioned, our businesses performed admirably throughout the continued supply chain and inflation headwinds. These headwinds led margins and EBITDA performance to lag revenue growth slightly. While we are working through appropriate cost and pricing actions at each business to address the modest margin compression, these actions often take time to implement and may not be reflected in our financial performance in the short term. Our management team partners at each of our businesses continue to execute for their customers and employees, and I remain very proud to work with each of them. Now to our subsidiary results. I'll begin with our niche industrial businesses.
For the Q1 of 2022, revenues increased by 19.5% and adjusted EBITDA by 9.4% versus the Q1 of 2021. Arnold and Outdoor both posted meaningful revenue and adjusted EBITDA growth in the quarter, driven by solid execution and stronger-than-expected demand. Outdoor's margins declined somewhat due to higher raw material costs, but we expect that most of these costs will be passed through contractually later this year. At Sterno, demand for our catering products grew significantly throughout the quarter and into Q2 as leisure travel and conventions continued to return domestically. Sterno's scented wax products, however, saw a reduction in demand from an abnormally strong Q1 in 2021, which was likely partially driven by federal stimulus payments in that period. Turning to our consumer businesses.
For the Q1 of 2022, revenues increased by 14% and adjusted EBITDA increased by 13% compared to Q1 2021. Demand for BOA's performance fit system continued to exceed our expectations. The company's revenue increased by over 55% in the quarter, and it delivered a company record $25 million of quarterly EBITDA. Similarly, Lugano grew pro forma adjusted EBITDA by over 46%. As stated, we are seeing a direct correlation at Lugano between inventory purchases and revenue. We believe the team at Lugano has created a better business model to serve the needs of their clients. We will continue to support Lugano as they grow and open new salons in the back half of the year, which will continue to require intelligent investments and relatively liquid inventory.
Also in the quarter, Marucci made a series of strategic decisions to air freight in significant product to retail partners to gain shelf space in both new and existing product categories. This led to strong revenue growth, though impacted margins in Q1. We believe this decision will have a significant long-term benefits for the company. Marucci will have a tough comparison in the Q2 as the company had several product launches in Q2 2021. We are excited and optimistic, however, about the much-anticipated launch of the CatX in the Q3 and believe it should lead to favorable comparisons in that period. Turning to Velocity. As anticipated, we experienced a return to pre-pandemic demand levels in the company's airgun business in Q1.
We believe we will have another difficult comparison in the Q2 of this year as the company continued to replenish retail inventory levels in Q2 of 2021, but we'll be comparing the post-pandemic demand patterns in the back half of 2022. As a whole, we are pleased with the performance of our businesses in the Q1 and remain optimistic about the remainder of the year. I will now turn the call over to Ryan for his comments on our financial results.
Thank you, Pat. Before I get into our financial performance, I wanted to make a few comments regarding Advanced Circuits. Last quarter, we indicated that the closing of the ACI sale remained on track and was expected to occur early in the Q2 . Per the terms of the merger agreement, the merger of ACI and Tempo is subject to and conditioned upon a concurrent business combination between Tempo and ACE Convergence Acquisition Corp, which is a SPAC. Earlier this week, ACE announced that the previously scheduled shareholder meeting to approve the Tempo-ACE business combination has been postponed to allow ACE additional time to revise and finalize its financing arrangements. As a result of the announcement, we will not be taking any further questions related to the ACI transaction.
Moving to our consolidated financial results for the quarter ended March 31, 2022, I'll limit my comments largely to the overall results for Cody, 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 31, 2022 was $510 and a half million, up 25% compared to $408.6 million for the prior year period. This year-over-year increase primarily reflects the company's acquisition of Lugano Diamonds in September 2021, as well as a strong double-digit growth from BOA, Marucci Sports, and Outdoor Solutions.
Consolidated net income for the quarter ended March 31, 2022 was $29.7 million, a 35% increase compared to $22 million in the prior year-ago quarter. As introduced last quarter, adjusted earnings, a non-GAAP financial metric, will allow investors to assess our operating performance in a more meaningful and transparent way. Adjusted earnings for the quarter ended March 31, 2022 was $36 million, up $9.9 million, or 38%, from the year ago quarter. Our adjusted earnings generated during the quarter were above our expectations, primarily due to the strong performance across our consumer and industrial businesses on a combined basis. Turning to our balance sheet, as of March 31, 2022, we had approximately $97.3 million in cash, zero drawn down on our revolver, and our leverage was approximately 3x.
We have substantial liquidity, and as previously communicated, we have the ability to upsize our revolver capacity by an additional $250 million. With this liquidity and capital, we continue to be well-positioned 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. During the Q1 of 2022, we used $33.5 million of cash flow from operations, primarily a result of our strategic investment in inventory at Lugano. In addition, certain of our subsidiaries saw an increase in inventory in transit as a result of the port and trucking delays.
As we've mentioned before, we believe a significant strategic advantage of our business model is that with our strong balance sheet and access to capital, we can sustainably invest in our subsidiaries for the long term. In today's challenging supply chain environment, ensuring our subsidiaries have adequate inventory to meet their demand levels is crucial in accelerating their competitive advantages by solidifying strong customer relationships. It's important to note that when the supply chain challenges abate, the strategic investments we've made in inventory will convert to cash. Finally, turning to capital expenditures. During the Q1 of 2022, we spent $10.4 million of capital expenditures for our existing businesses compared to $7.3 million in the prior year period. The increase was primarily a result of the continued retail store expansion at our 5.11 subsidiary.
Despite our excellent performance in the Q1 , we remain in uncertain times, driven by market and interest rate volatility, the unexpected GDP contraction that was recently reported, inflationary pressures causing commodity prices to rise, and labor market shortages. However, as a result of our company's strong performance in the Q1 that exceeded our expectations, we are raising our 2022 full year consolidated subsidiary adjusted EBITDA outlook to between $410 million and $430 million, a $10 million increase in the bottom and the top end of the range. Further, we are raising our 2022 full year adjusted earnings outlook to between $120 million and $135 million. Moving to CapEx. For the full year of 2022, we continue to anticipate total capital expenditure spend of between $70 million and $80 million.
While this is a large increase from 2021, we believe these investments will have short payback periods and provide strong returns on invested capital. The 2022 capital expenditure spend will primarily be at Lugano for new retail salons and at 5.11 as we continue to increase its retail store count from its current 88 stores. We believe our companies are positioned extremely well, even better than before, and have the utmost confidence in our management teams to continue to drive strong results that ultimately create long-term sustainable value for our shareholders. With that, I will now turn the call back over to Elias.
Thank you, Ryan. I would like to close by briefly providing an update on the M&A market, CODI's corporate initiatives, and discussing our go-forward growth strategy. Beginning with the overall M&A market. Activity remains depressed as potential sellers are choosing to delay processes given the economic headwinds and the macro backdrop. We anticipate activity to remain depressed in the Q2 as these headwinds persist, followed by a gradual uptick in activity in the back half of the year if these headwinds start to moderate. As a brief update on one of our primary corporate initiatives, we are aggressively enhancing and institutionalizing our ESG practices. As we have stated in the past, we believe sound and well-implemented ESG practices not only can be beneficial to society and our environment, but also contribute to the management of risk and enhance long-term returns.
In this regard, I am excited to share our progress today. By way of background, our ESG strategies will focus on initiatives such as diversity, equity, and inclusion of people and thought, health and well-being of our customers and employees, attracting and retaining the best talent, environmental considerations, transparency, and continuing to be a trusted partner with investors, businesses, and communities. Fundamentally, CODI's ESG strategy is a primary business decision that will be anchored throughout the corporate ethos in order to directly enhance CODI's purpose of building sound and sustainable businesses, culminating in strong shareholder returns. Along these lines, we have begun to directly link and implement our ESG practices into our portfolio companies, vertically integrating and aligning these strategies throughout the organization.
These ESG parameters will become an important factor in managing risk, reducing the cost of capital, and expanding multiples at all of our companies. Additionally, diversity continues to stay front of mind during our hiring process, and we have recently added three talented diverse hires to our team. We believe diversity of people and thought introduces new perspectives, skills, and approaches to problem-solving that enhances the company's strategic and operating capabilities. We are pleased with our progress to date and feel confident that we can continue to expand on these efforts. In conclusion, it was a great quarter for CODI. Relative to our expectations, our performance was outstanding. In this backdrop, the fact that gross domestic product contracted 1.4% and we grew revenue and Adjusted EBITDA by double digits is an incredible effort.
I'd like to give thanks and recognition to all of our management teams and employees. With that, operator, please open up the lines for Q&A.
Certainly. As a reminder, to ask a question, you will need to press * one on your telephone keypad, and to withdraw your question, press the pound key. Again, that will be * one on your telephone keypad to ask a question. We have the first question comes from the line of Matt Koranda of ROTH Capital. Your line is now open. You may ask your question.
Hey, guys. Good afternoon. Nice job on the quarter. Just maybe starting out with one thematic, and then I'll follow up with maybe one or two on the segments. Just in terms of the consumer businesses, you guys have a lot of, you know, diversity in your consumer segment, if you will. Any takeaways that you guys have on consumer behavior sort of through the arc of the Q1 and maybe through the last month here? Just any changes that you've noticed in terms of behavior on the high or the low end as consumers kind of respond to the inflationary environment, the public market volatility, or the Ukraine-Russia conflict?
Yeah, Matt, it's, you know, kind of we obviously are monitoring trends throughout our entire portfolio and, you know, even in our industrial business where some of the end products may make its way into, you know, kind of the consumer markets. I would say in general, we were surprised by the strength of consumer spending, you know, pretty much across the board in the Q1 . Really with the exception, as Pat mentioned, of Sterno, where our scented wax products, you know, benefited greatly from some of the pandemic conditions, people staying at home, and, you know, I think that drove a significant increase in demand for that product, and that saw some weakness. Now, I would also say one conclusion, you know, we could draw is that also goes through the mass channel principally.
I think if you thought about, you know, kind of consumer stratification, it feels that the, you know, kind of more affluent customer right now is continuing to spend. You know, if I was venturing a guess, you know, wage gains are offsetting for that consumer, you know, their basket of goods and how they measure inflation. Yet, on the lower end of the spectrum with, you know, sort of the more mass products and lower price points, you know, my sense is inflation is eating away at purchasing power. If somebody's making a decision to buy eggs or milk, you know, or buy a, you know, kind of a consumer discretionary product, you know, clearly staples become the thing that they purchase.
I think we are starting to, you know, see initial signs of erosion for, you know, sort of more of the mass consumer, and the lower price point items as inflation is, you know, quite problematic in eroding purchasing power there. You know, as you know, most of our consumer businesses, you know, are more enthusiast, you know, type brands, and they, you know, tend to skew towards the higher-end consumer, the more affluent consumer. We just have not seen a real weakening of demand there. In fact, as we run forward through April, you know, I would say we continue to see really good, strong demand, you know, across most of the consumer portfolio. You know, we have not seen weakening yet.
I think some of the market volatility that we're starting to see right now could eventually play into that. You know, it has not manifested yet into any of the real-time data that we're seeing.
Okay. Super clear and helpful. Thank you. Then maybe just on segment one, I mean, BOA putting up pretty stunning growth and margins to boot. Just was curious if you guys. I mean, you can't really quantify pull forward there, but I'm wondering how much is your sense that has pulled forward some revenue from like the, you know, the lower OEMs that may be a little bit nervous about supply chain disruption versus sort of just core growth and share take for that business?
All right, Matt, this is Pat, and thanks. It's a good question and one we spend a lot of time thinking. I can tell you, demand is broad at BOA. It's in, you know, many channels, and we think it's strong and, you know, we can see into the Q2, and we think it's sustainable. I can tell you there might be some, you know, pull forward if you think about what is there on the ocean, another month, another 45 days, right? That there wasn't sort of, you know, a year and a half ago. If you think of that as sort of a small headwind, but we think we're gonna perform very well, you know, despite that. We think much of the demand, most of the demand, is real.
Excellent. Maybe I'll just sneak one in on Marucci as well. I was just curious about in that segment, where do you think you're taking the most share? You mentioned kind of using air freight strategically to kind of fill customers and then win shelf space. Just curious, like in which categories maybe that you think you're winning the most share there. Then do the costs essentially go away in the near term, or are we gonna kind of continue to use that as a tool to continue to take share?
Answering your second question first. We'll selectively use it as a tool, but they should mitigate. As we look ahead, a lot more of, kind of what we have planned in Q3, Q4 sales, you know, is not using expedited freight. Going back to your first question, we're, you know, we're trying to grow in a lot of categories and some of that airfreight that we spent helped us do that this quarter. Be that, you know, gloves, be that bags, be that fast pitch softball. You know, we think that Marucci is a disruptive brand, that really has the potential to expand into additional adjacencies, within baseball, within softball, and maybe beyond. That's the opportunity we took in Q1.
Okay, excellent. I'll leave it there, guys. Thank you.
Thank you.
Thank you. We have the next question comes from the line of Cristopher Kennedy of William Blair. Your line is now open. You may ask your question.
Thank you and good afternoon, and thanks for taking the question. Can you give a little bit more details on Lugano, just 'cause we don't have the history with the business? Are we kind of at a normalized run rate, or how should we think about that going forward?
I mean, I think Q2 or Q1, excuse me, is seasonally a bit high. You know, we have a location in Aspen that is, you know, a heavy Q1. All that being said, the business has seen a noticeable uptick in sort of run rate. I would say, you know, can you say you can multiply Q4? No. Or excuse me, Q1 by four to get to our current run rate? No. But the business has seen significant growth in underlying demand. You know, we see that continuing.
Okay, great. Elias, appreciate your comments on, you know, potential acquisitions in the space. I assume you're mostly referring to platform deals, but can you talk about add-on opportunities?
Yeah, sure, Chris. I mean, you know, platforms certainly have been slow in the beginning of the year given all the headwinds and, you know. I think a couple of things are clearly occurring there. You've got earnings degradation for the vast majority of companies. I mean, you know, we were able to buck this trend, but for most companies dealing with supply chain in the inflationary environment, you know, is causing their earnings to, you know, take a hit. You know, generally, sellers don't wanna be in the market in those conditions. If you couple that with the multiple compression and just the risk off sentiment that you're seeing in the public markets, that clearly factors its way through to private markets.
You know, for kind of the deals that we're looking at that also are, you know, competitors would be tapping into the bond market in order to provide financing. You know, I think we all know the bond market is really struggling right now and generally not open for business. You know, as a result, I think, you know, investment bankers are telling their clients and sellers are seeing that now is not an opportune time. Now, we do think the first half of the year, you know, Q2 looks like it's gonna be equally as weak. Hopefully, it starts to ease as the year goes on, but that's gonna be, you know, predicated on market conditions. In terms of add-ons, you know, we're working a number of add-ons.
These are a little bit different in that, you know, these are generally direct negotiated transactions where we're coming up with a list of, you know, potential companies that would benefit, you know, our subsidiaries, and we continue to work through that. I would tell you that sellers of those businesses are not immune to the same factors that are happening, you know, broadly in the marketplace and what's happening in the platform side. I think, you know, unless we're willing to give credit for some of the pro forma, you know, kind of adjustments that, you know, sellers would be looking for around normalizing earnings when the supply chain starts to normalize itself, it makes, you know, doing transactions more difficult today. That doesn't mean that there's not a robust pipeline and that we're not pursuing them.
I think it just means that it's a little bit more difficult to transact in this market. You know, I would say our views and our expectations are muted right now in terms of M&A, and I would, you know, suggest that, you know, kinda we think this is gonna be probably a tough year. That doesn't mean that we're not out pounding the, you know, the pavement and working extraordinarily hard to generate M&A opportunities. You know, if you went back and you thought in 2020, you know, we probably could have sang the same tune on our Q1 earnings call when we were dealing with a pandemic, and why would companies wanna come to market in these times? Yet we acquired two businesses that were extraordinary.
I don't wanna paint a dire picture that it isn't gonna be possible. You know, the truth is, when we're in these times in our business model with committed financing and permanent capital, this is really where we shine. When our peers are not able to, you know, gain access to the financing that they need to transact. This is generally where we're able to come in and, you know, acquire, you know, businesses that we think are top quality businesses, and typically not in as competitive an environment. You know, we're out there working really hard and trying to find new opportunities, and I think if we can find some, we'll be in a really, advantaged position relative to our competitors. But the overall M&A environment remains muted both for platforms and add-ons.
Great. Appreciate the color. Thanks, guys.
Thank you. The next question comes from the line of Robert Dodd of Raymond James. Your line is now open. You may ask your question.
Hi, guys, and congratulations on the quarter and the margin performance. Great as well. Kind of following on actually to that question, I mean, I understand, I mean, tough environment, multiples are down, et cetera. How long do you think the environment needs to remain volatile, disrupted, et cetera, before sellers potentially become like a little bit motivated? Are you maybe willing to accept a little bit of a lower multiple when, you know, maybe they have capital needs, you have capital, et cetera? I mean, how long would it need to go on before that would really shift in your favor?
Yeah, Robert, it's a. You know, that's a tough question to answer. I mean, I think, you know, you gotta if we look back at history, there is some amount of time where, you know, a seller needs to readjust expectations, and it's difficult. You know, I always say asset prices are sticky on the downside, right? And so when you have a expectation that, you know, the private market is delivering, you know, multiples of whatever X, and now it's 80% of X or 70% of X, you know, mentally getting comfortable with that is difficult. And I think it ultimately becomes really a case-by-case decision. You know, there are some companies that have to transact. You know, think of, you know, the competitors that we're typically dealing with in traditional private equity. Well, a lot of them have fund life.
If you're at the end of a fund life, you're gonna have to sell your business regardless, right? There's generational changes, you know, of assets, you know, where you have, you know, maybe a founder that wants to, you know, kinda get all of their, you know, ducks in a row as they're starting to do some estate planning. There can be specific things that generate deal flow. As you know, though, that generally just means that you're sorta looking amongst a smaller funnel, because it's just not as wide open as it's historically been. You know, my sense is it's gonna take the better part.
If markets stay volatile like this, you know, multiples in the public markets continue to contract as they have, you know, it's probably gonna take the better part of this year for, you know, price expectations to readjust. Then I think there is a point where you just have to, you know, kind of, give in and say, "This is the new environment that we're working in, and here is the value that, you know, we should expect to receive and we would be happy transacting at." I can tell you it's not three months, and it's, you know, likely not six months. There needs to be a, you know, kinda setting in process that happens. Now, we do remain, you know, kinda hopeful that, the, you know, kinda back half of the year gets a little better and that 2023 is meaningfully better.
You know, some of that is gonna be predicated on market conditions starting to ease a bit.
Very helpful. Thanks a lot on that one. On BOA, if I can, and you said it's broad-based strength, and that's obviously not a strength there. I mean, are there any. When it's broad-based, is it broad-based across all product types? I mean, obviously there's different levels of penetration, so you know, snow might
Yeah.
It might not be growing as fast, but geography, I mean, any areas that are doing exceptionally well?
It's across geographies. Maybe in this quarter there was a little bit of strength in Asia. That is the thing, right? BOA is a company whose revenue really sort of comes close to, as far as the breakout, matching GDP of the globe. It's a much more international business than certain of our other businesses. We have seen strong demand internationally. We've seen strong demand in Europe. We've seen strong demand in Asia. You know, it comes down to the fact, I think that the sort of performance fit, wrap, and BOA's technology just has a small penetration in overall footwear, right? I mean, I personally believe it's a lot better product than shoelaces, particularly for performance applications, and we have a lot of data that backs that up.
There's, you know, market share to be gained in a lot of segments, and that's what you're seeing, and we believe that's what you're gonna continue to see.
I appreciate that. If I can, one more, if I can, on Lugano, obviously also doing very well. I presume the inventory investment is correlated with the number of salons and growth, et cetera? Is it investing in the same level of inventory per salon, or are you growing inventory per salon as well?
It's both. You know, we're making opportunistic purchases that we can then convey value on to our end consumer that we have strong relationships with throughout the country. It's both of those. There's a certain level of inventory you need when you build a new salon, but we also see that sort of the more
You know, inventory we have, the more choices we have for our consumers, you know, the greater amount of activity we're able to see.
Yeah, Robert, I would just say, you know, when we acquired Lugano and we, you know, talked to you guys about this originally, you know, we said this is a highly disruptive business model, and they approach the industry, you know, in a fundamentally different way that disintermediates a lot of steps, you know, in the process, and they deliver a phenomenal value to their end customer as a result. You know, the demand in that business is really constrained by the amount of investment that we can make in it. You know, we had said, look, there's, you know, a real strong correlation between investing in inventory and having more product availability and revenue, profitable revenue growth in that business. You know, I think we obviously monitor this on a real-time basis and very closely.
What we've seen is that correlation continues to exist as we put more investment in the business. When you run the return on invested capital of putting this in, it is so high that, you know, our goal is to continue to pump capital in until that correlation would break down. The fact that it's not breaking down just means there's, you know, significant excess demand that is sitting there, you know, and it will be driven, you know, greater revenue and profitable revenue growth can be driven by further investment. You know, what we've experienced so far has been, you know, exceptional growth. The correlation, if anything, has actually gotten stronger under our ownership, not weaker.
As a result of that, you know, we plan on continuing to put significantly, you know, greater amounts of capital into, you know, our inventory here because we think demand is significantly greater than what we're currently satisfying. We think this is gonna be, you know, not only a big year in 2022, but we think we're setting this company up for multiple years of accelerated growth.
I appreciate that, Elias. Thank you.
Thank you. Again, if anyone would like to ask a question, you will need to press * one on the telephone keypad. Again, that will be *o ne on your telephone keypad to ask a question. Our next question comes from the line of Matthew Hollett of B. Riley. Your line is now open. You may ask your question.
Oh, hey, guys. Thanks for taking my questions. Congrats. What's the update on the healthcare vertical? I know you're in the market for the team. Just wanna get the update there.
Yeah, Matthew, thanks for the question. It's as we've said, we continue to look for the leader. We've got a couple of candidates in mind. We're not ready to make an announcement yet, but that does progress, and we think when we get the right leader, that will be something that we are able to launch. We remain confident that we will launch this effort sometime in 2022. We continue to progress along that, you know, you know, finding that right leader.
You know, I'll tell you, for us, you know, we continue to believe having someone with that domain expertise, who can come in and be able to guide that effort is, you know, incredibly important, you know, for us as we go forward and making sure that, you know, we're identifying the right assets, that, you know, kind of fit within our model. You know, we are progressing forward with that and, you know, I'm confident that in 2022 we'll be able to, you know, fully launch that effort.
Great. Okay. Look forward to that. On update or just on interest rates, and Cody, you did just a tremendous job refinancing the balance sheet. It's great. My question's around, you know, if the Fed does go to 300 basis points in short term, is there any at the portfolio company level, is there any impact that you could see? I know you structure things differently with your intercompany loans and the traditional LBO market. But just go over anything on if rates do when short-term rates go up significantly, what impact would be? Is that to your advantage? Just, you know, maybe walk me through that.
Yeah. You know, as you identified, we hit the market and probably timed it pretty well with, you know, the bonds that we, you know, issued last year. You know, kind of in hindsight, we were glad to get that duration into our balance sheet really at, you know, pretty much optimal timing. You know, we view that as a great asset that we have on our balance sheet. If you remember, you know, those are 8- and 10-year bonds respectively, so we've got, you know, long duration in our balance sheet. I would point out that we have no short-term debt, and so interest rate volatility today has zero impact on us.
Now, if we were to borrow into our revolver, that is a LIBOR-based or whatever, LIBOR, I guess, is phased out, but it's a, you know, kind of, an index plus a margin. As the index goes up, of course, that would be variable rate debt, but we have nothing drawn there, so our interest rate exposure at the parent is zero. Now, we use mostly floating rate debt as we lend to our subsidiaries in our structure. You know, what would happen theoretically, and I think, you know, it's probably more than theoretical in practice, is as the interest expense rises due to the fact that there is, you know, kind of a higher base rate that's being charged, right? The index has gone up.
That would have the net effect of lowering taxable income at the subsidiary level, and as a result, lowering the amount of tax burden that our companies have. Now offsetting that is that interest expense from the sub comes up to the interest income at the parent. Because the parent, absent a sale, generates a net loss in a normal year, you know, we think that the effect of rising interest rates will actually, in this case, because we were, you know, fortunate to lock in with long duration our interest rates last year at the parent, actually lower the tax expense holistically for the company and raise the amount of free cash flow production that we would be able to generate.
That's important given your new structure. I mean, you know, with your new conversion to C-Corp. I gotta assume that from a sort of strategic standpoint, you know, when you bid on these portfolio companies, certainly your structures has to be advantageous versus what's traditionally available in the leveraged loan market as rates rise.
Yeah, I think, well, I mean, as you know, I commented earlier, the types of companies that we're typically going after, you know, and especially the larger businesses, if they're, you know, kind of $500 million type businesses, plus or minus, you know, those are companies that largely would be trying to tap into the bond market, maybe the smaller end of the bond market. That market has completely been eviscerated. As you know, the leveraged loan market is, you know, pretty much on pause right now as well. Our structure, you know, we always say that, you know, our business shines in times like this. The higher the volatility, the more advantaged we are as a buyer. You know, we bring certainty to a process. We have committed financing.
If you're selling a business today, and you have to go out and rely on financing, you know, the reality is there's a bigger level of risk in that financing being able to come through today than there was a year ago. What is the value of the certainty we bring? It's greater today than it was a year ago, I know that. Putting a you know numerical number on that is always hard to do, and it's in the eyes of the seller how much risk they're willing to take. Our structure is absolutely advantaged from a financing standpoint in times of increased volatility and market uncertainty. Now, I could also say we just have an advantage structure in many other respects as well, even when market volatility isn't high.
You know, our permanent capital and our mentality of being long-term business builders is something that, you know, transcends through all types of market conditions, and it's a massive advantage to us, whether we sit in today's market or we sit in a market that was relatively robust from a financing standpoint a year ago. You know, it's why we think permanent capital is, you know, really, sort of what a lot of people would like to emulate, that are competing for these types of assets because it is so advantageous in terms of not only being able to win companies but being able to build businesses. Your point of having an exaggerated advantage in these times of, you know, market volatility is spot on.
Great. Thanks for that. Just for one further point on that revolver, I mean, clearly you got that at your hip pocket, the accordion feature well over $1 billion. I think you laid out the M&A environment pretty clearly to us. Is there a scenario where you could utilize that, you know, this year and going to it if there was just a tremendous opportunity? Just, you know, what should we expect on that revolver being drawn down this year, if at all?
Well, I think it's gonna be predicated on, you know, whether or not we can transact against a, you know, meaningful size platform acquisition as to whether we would borrow on that. In terms of cash flow, you know, you heard Pat and Ryan in our, you know, scripted comments already talk about the fact that we've made a significant investment in inventory in order to ease supply chain. Frankly, this is something that, with the strength of our balance sheet, is a huge advantage for us.
You see it in the results we were able to post in Q1, which were extraordinary in this backdrop, but that is somewhat predicated on the fact that, you know, we did do $1.3 billion of financing at roughly 5% last year in, you know, long duration financing and we're able to use, you know, I think the number is over the last six months, about $150 million to invest in inventory to take market share. That's not only gonna pay dividends in Q1, as you saw, and over the balance of 2022, but those share gains are gonna be here long after supply chains normalize. When supply chains normalize, as Ryan said, we expect to monetize a big part of that, you know, kind of inventory investment that we've made to get through these times.
If I look at our business today, and I say, on the one hand, we have inventory investment that we made a huge investment in over the course of the last six months, likely we have enough inventory. I'm gonna exclude Lugano from that because I just went through the correlation of how Lugano's inventory investment drives really high Return on Invested Capital growth in that business. Let's separate that for a second. The remainder of the business, frankly, has adequate inventory, and if anything is likely to be monetizing over the balance of the year and into 2023. That's a cash flow positive. You also have our business, which we had said, you know, with the change in the corporate structure, is now a meaningful free cash flow, pre-working capital provider. We've got high free cash flow production that we're creating.
You've got working capital that should be a cash producer, not a cash user. Now against that, we have some elevated CapEx for 5.11 in Lugano, which we think is very high return CapEx, and we have investment in further inventory growth at Lugano, which is extremely high return on invested capital. The net of that should be positive free cash flow going forward. The use of the revolver really is, you know, a function of how much we can deploy into either add-ons or new platform acquisitions.
Yeah. Looks like a very Return on Invested Capital. I really appreciate it. Thank you.
Thank you.
Thank you. Next question comes from the line of Tim Long of Adirondack. Your line is now open. You may ask your question.
Thank you. I'm gonna try BOA again. Hopefully you can help me out. How much of the growth was, I guess, let's call it seasonal, you know, the obvious seasonal drivers. Second derivative, you know, how much of the growth was, call it existing product platforms, verticals, however you wanna describe it, and product extensions with existing customers and then maybe how much was brand new customers, I guess. I don't know if you can, you know, kind of parse it a little bit better.
Yeah. Tim, it's Elias. I guess, long time I haven't seen you. Hopefully, we'll reconnect at a conference here one of these days.
When I find managements that execute, I get out of the way.
Good. Maybe I don't wanna see you then at a future conference. You know, to your question, I would say, you know, we look at it a little bit differently. You know, when we acquired BOA, we had said, what are the things we really like about it? It's a disruptive technology that is, you know, for the most part, upending an industry that hadn't had innovation that came in a hundred years. It is a performance enhancement, so it's not just a convenience product. That really is, you know, kind of very important here, and we now have a lot of documentation around it. We work with a broad range of partners.
Within that, it's a global business, you know, where I think the U.S. is probably the smallest market in end market that we actually deliver product to. Then we couple that with, you know, one of the best, if not the best management team that I've ever worked with. I think that creates really explosive underlying organic opportunities. It's hard to parse out with all the different things that you said, but what I would say is, the market share of this business is around 5% of its addressable market. It's got incredible IP, you know, over 160 patents that we have globally issued. You know, it has really the elements that you would look for being able to drive, you know, sustainable long-term growth.
I would say that every year, we work with our brand partners to extend our technology on additional, you know, platforms that they have. That is an ongoing thing that we do year in and year out on. In addition to that, our management team has done an exceptional job of being able to get into new industry verticals, and each one of those are at different levels of their maturation. If you took snowboard where the company started, we have a very high level of market penetration. By definition, that means the opportunities and the growth rate in that business are gonna be less.
We have seeded markets, and if you call them verticals or whatever you wanna call them, you know, we've really had the management had the foresight to seed a lot of different verticals, and they are at different stages of their maturation process. What we see with this company is that, you know, it's sort of a little bit of everything that you said, except we're really not bringing a lot of new brand partners into the fold. We have so many outstanding opportunities with our brand partners to be able to expand on new platforms that they have.
Then, of course, when we get on those new platforms, you know, the ultimate thing that drives this business, and it's like in any consumer product, if we partner on a new platform, how is that product gonna do to the end consumer? What we find is that product does really well and takes market share in its own little area, you know, when we're on there. It's a little bit of everything that you said, probably not as much in terms of getting new brand partners because we have the brand partners that we wanna work with. Of course, there's probably some here or there that we add into the fold.
Mostly it's we're, you know, taking market share, you know, from a relatively small, you know, point right now with a disruptive technology and a, you know, outstanding management team and great IP position. You know, that we think those continue to be all the elements for, you know, making a company that has long-term sustainable growth opportunities.
Translation, it's very early innings and the runway is really long. You don't need to start dissecting this and that closely 'cause there's just a lot on the plate, a lot of opportunity. Keep up the good work.
Thanks. Yeah. Tim, you just said what it took me five minutes to say in ten seconds. Maybe I'll turn the call over to you on the next item.
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Yeah. No, that's 100% correct.
Super. Thanks.
Thank you. There are no further questions at this time. I would now like to turn the conference back over to Mr. Elias, sir.
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 continued support.
Ladies and gentlemen, that concludes today's conference call. Thank you all for participating. You may now disconnect.