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Edited Transcript of CODI earnings conference call or presentation 3-Aug-17 1:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Compass Diversified Holdings Earnings Call

Westport Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Compass Diversified Holdings earnings conference call or presentation Thursday, August 3, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan B. Offenberg

Compass Diversified Holdings LLC - Partner, CEO & Executive Director

* Elias Sabo

* Ryan J. Faulkingham

Compass Diversified Holdings LLC - Executive VP, CFO & Co-Compliance Officer

* Scott Eckstein

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Conference Call Participants

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* Brian Hogan

* Douglas Robert Mewhirter

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Kyle M. Joseph

Jefferies LLC, Research Division - Equity Analyst

* Larry Solow

* Robert James Dodd

Raymond James & Associates, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning and welcome to Compass Diversified Holdings 2017 Second Quarter Conference Call. Today's call is being recorded. All lines have been placed on mute. (Operator Instructions).

At this time, I would like to turn the conference over to Scott Eckstein of the IGP Group for introductions and the reading of the safe harbor statement. Please go ahead, sir.

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Scott Eckstein, [2]

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Thank you and welcome to Compass Diversified Holdings Second Quarter 2017 Conference Call. Representing the company today are Alan Offenberg, Chief Executive Officer; Ryan Faulkingham, Chief Financial Officer and Elias Sabo, a founding partner of Compass Group management.

Before we begin, I would like to point out that this second quarter press release including the financial tables and non-GAAP financial measure reconciliations are available on the company's website at www.compassdiversifiedholdings.com. The company also filed its Form 10-Q with the SEC last night, which includes reconciliations of non-GAAP financial measures discussed on this call.

Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as a reconciled in the company's financial filings. Throughout this call, we will refer to Compass Diversified Holdings as CODI or the company.

Now allow me to read the following safe harbor statement. During this conference call, we may make certain forward-looking statements, including statements with regard to the future performance of CODI. Words such as believes, expects, projects and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factor discussion in the Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2016, as well as in other SEC filings.

In particular, the domestic and global economic environment has a significant impact on our subsidiary companies. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

At this time, I'd like to turn the call over to Alan Offenberg.

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [3]

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Good morning. Thank you all for your time and welcome to our second quarter 2017 earnings conference call. We are pleased with the second quarter performance of our niche leading businesses, which continue to generate stable free cash flow.

Before I discuss our second quarter performance, I would like to highlight our success with acquisitions. In June, we completed the platform acquisition of Crosman Corporation, as the world's leading designer, manufacturer and marketer of airguns, archery products, optics and related accessories. Crosman is a strong addition to CODI's family of middle market companies. CODI previously owned a majority stake in Crosman and divested the business in 2007. So we are very familiar with the company and its management team.

Like our previous platform acquisitions, Crosman possesses the key characteristics that we look for in all our subsidiaries, including a commanding industry position, an extensive product portfolio with iconic brands offering multiple revenue streams, growing cash flows, a seasoned management team and compelling growth products -- prospects.

The acquisition of Crosman represents our second platform acquisition in the last 9 months, bringing CODI's current number of niche industrial and brand consumer businesses to 9. We look forward to working with Crosman's management team to solidify the company's leading position in airguns and to gain additional market share in archery products. An integral part of Crosman's growth strategy is expanding into attractive adjacent markets.

Following the end of the second quarter, Crosman acquired the commercial business of LaserMax, a leading designer and manufacturer of firearm mounted laser aiming devices. With this strategic acquisition, Crosman has expanded its outdoor recreation market presence with a complementary premium brand, extending its reach to a wider range of new customers across retail channels. This transaction also creates new cross-selling opportunities with Crosman's current big box retail and international customers. We are excited to work with Crosman in exploring these cross-selling synergies, offering outdoor enthusiasts a more expensive product array featuring LaserMax's innovative laser solutions.

Aside from acquisitions, during the quarter, CODI also completed an offering of 4 million preferred shares, generating $ 100 million in gross proceeds. In addition to increasing our liquidity, this transaction has diversified our capital structure, giving CODI access to a wider range of investors throughout the capital markets. This new structure also lowers our cost of capital to facilitate our continued growth without diluting our common shareholders.

Now, let's talk about our year-to-date results. During the first half of 2017, our middle market niche industrial and branded consumer businesses generated stable levels of earnings that were consistent with our expectations. In particular, our Ergobaby, Manitoba Harvest and 5.11 subsidiaries each showed double-digit EBITDA growth for the first 6 months of 2017 compared with the prior year. In our niche industrial businesses we experience combined revenue growth for the first half of 2017 of 7.9% on a year-over-year basis, including notable increases at our Sterno products and Clean Earth subsidiaries.

Clean Earth continues to benefit from the accretive add-on acquisitions the company has completed over the last 12 months, producing an 18.4% year-over-year revenue increase. Sterno products generated revenue and EBITDA increases of 9.2% and 4.9% respectively as that continues to benefit from the acquisition of Northern International completed in January of 2016.

Our branded consumer companies produced solid results during the first half of the year with a combined revenue increase of 6.5% and EBITDA growth of 13.4% compared with the first 6 months of 2016 on a pro forma basis for the acquisitions of 5.11 and Crosman. As we mentioned on our last conference call, a large national outdoor retailer filed for bankruptcy protection during the first quarter and this has impacted our Liberty and 5.11 subsidiaries. Even with this impact for the first 6 months of 2017, 5.11 reported revenue and EBITDA year-over-year growth on a pro forma basis of 13.4% and 45.9% respectively. We also had solid performance from Ergobaby, which increased revenue 10% and EBITDA 10.4% compared to the prior year period.

For the 3 months ended June 30, 2017, CODI generated cash flow available for distribution in reinvestment, which we refer to as cash flow or CAD of $25.5 million, which was in line with our expectations. For the second quarter, we paid a cash distribution of $ 0.36 per share, representing a current yield of approximately 8.3%. This marks a significant milestone for CODI as it brings cumulative distributions paid to $ 15.36 per share since our initial public offering in May of 2006, which is in excess of our full IPO price. These achievements reflect the solid cash flow generation of our subsidiaries and our commitment to providing consistent distributions to our shareholders, which we have never reduced even during the financial crisis.

As a result of the cash flow accretive platform acquisition of Crosman in the second quarter and the add-on acquisitions for Clean Earth and Crosman completed this year, we continue to expect that CAD will exceed our distribution for the full year 2017. To summarize, during the first 6 months of 2017, our current businesses continued to generate consistent free cash flow. Additionally, we capitalized on market opportunities to complete the platform acquisition of Crosman. In the same period, we reinvested in our subsidiaries continued growth with the add-on acquisition of LaserMax's Commercial business by Crosman as well as the add-on acquisition of AERC by Clean Earth earlier this year. We also added a new component to our capital structure that is non-dilutive to common shareholders while generating net proceeds of approximately $ 97 million. With CODI's enhanced capital structure and over $ 500 million of liquidity available to us, we are well positioned to pursue attractive platform and add-on acquisitions that generate strong cash flows and support our ability to provide consistent cash distributions to our shareholders.

I'll now turn the call over to Elias to review the quarterly performance of our current group of subsidiaries.

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Elias Sabo, [4]

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Thank you, Alan. I will begin by reviewing our niche industrial businesses, which include Advanced Circuits, Arnold Magnetics, Clean Earth and Sterno Products. For the second quarter, our niche industrial businesses reported a combined revenue increase of 3.7% as compared to the year earlier period, while EBITDA declined 5.8% during the time frame. The combined EBITDA margin declined to 17.7% for the quarter ended June 30, 2017, compared to 19.5% in the prior year quarter.

Advanced Circuits posted solid second quarter result, that were consistent with management's expectations. Revenue rose 3.5% on a year-over-year basis, while EBITDA increased 10.2%, due to higher printed circuit board sale, offset slightly by a decrease in assembly sales. Second quarter EBITDA margin for this subsidiary rose to 31.7%, an increase of 200 basis points compared to 29.7% in the year ago period, reflecting the current sales mix.

Arnold Magnetics results were in line with our expectations with the second quarter. Revenues were down 7.2% year-over-year, reflecting lower domestic sales in aerospace and defense and PMAG, as well as decreased international sales volume. EBITDA declined by 27.3% during the quarter compared to the prior year. Arnold's management team continues to invest in operational and productivity improvements to the business and we are quite pleased with the progress they have made. However, this has adversely impacted current period earning. We continue to believe in Arnold's strong competitive advantages and ability to reach our long-term expectation.

Clean Earth generated solid sales growth in the second quarter, as revenue rose 14% compared to the prior year mainly due to increases in contaminated soil volume and contributions from add-on acquisition. Clean Earth's second quarter EBITDA declined by 13.1%, while EBITDA margin decreased by 5.1%, primarily due to lower dredge material volume as well as higher back-end costs at some of our soil facility. Clean Earth continues to perform in line with our expectations. However, dredge material volumes are at historic lows distorting financial performance and masking the benefit realized in our other lines of business and our acquisition strategy.

Sterno's result for the second quarter were essentially flat versus the prior year and in line with management's expectation. Year-over-year revenue increased by 1.3%, while EBITDA increased by approximately 1.8%. EBITDA margins were consistent with the prior year period, even taking into consideration increased raw material prices. Sterno continues to invest in productivity enhancements to increase manufacturing efficiencies and we are pleased with our continuing progress in these areas.

Next, I will turn to our branded consumer businesses, which include Liberty Safe, ERGObaby and Manitoba Harvest, Crosman and 5.11 Tactical. Please note that the revenue and EBITDA numbers I provide for 5.11 and Crosman will be on a pro forma basis as these businesses were acquired on January 1, 2016. Our branded consumer businesses generated solid results for the second quarter of 2017, consistent with our expectations. Combined revenue increased 5.7% on a year-over-year basis, while EBITDA increased 21% compared with the prior year.

During the second quarter, revenue and EBITDA at our Liberty Safe subsidiary decreased approximately 10.5% and 15.7% respectively compared to the same period in 2016. This was due to lower sales in the non-dealer channel, primarily related to the large outdoor retailer that filed for bankruptcy mentioned earlier by Alan. We also saw slightly softer market conditions in the dealer channel during the quarter, which we believe could be attributable to the change in presidential administration and the softening of concerns related to firearms legislation.

As a result, we believe our revenue and EBITDA for the second half of 2017 maybe lower than previously communicated. Results for ERGObaby met our expectations during the second quarter of 2017. Revenue for the quarter rose 5.1% on a year-over-year basis, reflecting strong international carrier sales and contributions from Baby Tula, offset by lower sales of infant travel business.

As discussed previously in 2016, we decided to wind down the Orbit Baby business and as a result, the loss of those revenues will impact revenue comparisons throughout 2017. EBITDA increased 11.1% compared to the prior year, as the company continues to benefit from improved margin based on channel mix. As we mentioned in the past, ERGObaby is rolling out several new products this year and we expect to see the benefits of these products in the back half of 2017.

Manitoba Harvest produced solid second quarter results. During the quarter revenues rose 5.9% on a year-over-year basis, exceeding our expectations. Manitoba experienced strong growth in branded hemp product, due to the successful efforts to increase the supply of organic count. Offsetting the branded growth was lower international ingredient sales due to excess supply in one of our international market, as we discussed on our first quarter conference call. This mix shift resulted in substantial EBITDA growth during the second quarter. Most importantly, we are pleased with our efforts to bolstered the company's operational capability.

Since the start of the year, we have opened a new U.S. headquarters in Minneapolis, recruited a new CFO, a new Head of Marketing and a new Head of sales. With our executive management team now in place, we are looking forward to growing our investment to raise awareness and educate the U.S. consumer on the nutritional benefits of hemp-based goods. A s we have mentioned from the onset of this investment, it is possible that EBITDA could decrease in the near term as we invest for the long-term success of this company.

Crosman our newest subsidiary, performed as expected in the month of June, during the time it was under our ownership. For the second quarter, on a pro forma basis, revenue was up 4.7% compared with the prior year, primarily due to growth in archery products. Crosman's performance since joining the CODI family has been in line with our expectations and we are excited about its growth potential as Crosman continues to be a leader in the (inaudible) industry, while increasing its market share in archery.

Lastly, 5.11 continued to demonstrate strong performance during the second quarter consistent with our expectations. On our pro forma basis, revenue increased tp 11.3% for the second quarter compared to the previous year, while EBITDA increased by 35.9%. EBITDA was positively impacted by the timing of the direct-to-agency order and further growth in higher margin distribution channels, including retail and e-commerce. I'd like to remind everybody that the timing of direct-to-agency orders is difficult to predict and they can have a strong quarter-to-quarter impact on 5.11 financial result.

Retail revenues also grew on a year-over-year basis due to 8 new retail store openings since June, 2016. This brings 5.11 store counts in 12 as of June 30, 2017. As we've discussed on previous calls, we continue to invest capital to support 5.11 long-term growth as the company continues to increase it's consumer market presence.

I'd now like to turn the call over to Ryan, to add his comments on our financial results.

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Ryan J. Faulkingham, Compass Diversified Holdings LLC - Executive VP, CFO & Co-Compliance Officer [5]

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Thank you, Elias. Today, I will discuss our consolidated financial results for the quarter ended June 30, 2017. I will limit my comments largely to the overall results for our company since the individual subsidiary results are detailed in our Form 10-Q, that was filed with the SEC yesterday.

On a consolidated basis, revenue for the quarter ended June 30, 2017 was $ 307.4 million, up approximately 44% compared to $ 214.2 million for the prior year period. This year-over-year increase reflects notable revenue growth in our Clean Earth, Sterno and ERGObaby subsidiaries due primarily to the contributions from our add-on acquisitions as well as the revenue contribution by Crosman and 5.11. Net loss for the quarter ended June 30, 2017 was $ 2.7 million as compared to net income of $ 19.4 million for the quarter ended June 30, 2016. During the second quarter of 2016, CODI realized a net gain of $ 18.9 million related to the equity investment in our former subsidiary's Fox Factory Holding. During the first quarter of 2017, we sold our remaining Fox shares in the Secondary Public Offering.

Cash flow available for distribution or reinvestment, which we refer to as CAD for the quarter ended June 30, 2017 was $ 25.5 million compared to $ 15.6 million in the prior year period. Second quarter CAD was in line with our expectations, reflecting solid performance from our leading middle market businesses. As a result of our 2017 earnings expectations for each of our subsidiaries and the accretive acquisitions we completed in 2016 and year-to-date, including Crosman and LaserMax, we continue to expect CAD will exceed our distribution for the full year 2017.

Turning now to the balance sheet, we had approximately $ 39.3 million in cash and cash equivalents and net working capital of $ 286.2 million as of June 30 of 2017. We had $ 562.8 million outstanding on our current debt facility and $ 3.7 million in outstanding borrowings under our revolving credit facility as of June 30, 2017. We have no significant debt maturities until 2019. In addition, we had net borrowing availability of $ 544.6 million under our revolving credit facility at quarter's end.

As Alan mentioned during the second quarter, CODI completed a public offering of 4 million of its 7.25% Series A Preferred Shares for a total net proceeds of approximately $ 97 million, which we used to repay a portion of the outstanding balance on our revolving credit facility. Our first preferred distribution will be in the fourth quarter of 2017.

Turning now to capital expenditures, during the second quarter of 2017, we incurred $ 4.3 million of maintenance capital expenditures, compared to $ 6 million in the prior year period. The decrease was primarily due to lower maintenance CapEx spend at Advanced Circuits and Clean Earth compared to the previous year, offset by the addition of CapEx spend at 5.11 and Crosman. Second quarter maintenance CapEx was slightly lower than anticipated and we expect to realize a portion of this spend throughout the balance of 2017 as we reinvest in our subsidiaries long-term growth.

For the full year 2017, including the addition of Crosman, we anticipate incurring maintenance CapEx in the range of $ 20 million to $ 25 million and growth CapEx in the range of $ 25 million to $30 million. As previously discussed, the 2017 growth CapEx spend will be concentrated at 5.11 including the installation of a new ERP system, moving into a larger and more efficient warehouse and continued growth in our direct- to-consumer channel. In addition, we anticipate further growth CapEx spend at Manitoba Harvest to continue improving operational efficiency and our access to organic hemp supply.

With that I will now turn the call back over to Alan.

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [6]

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Thanks, Ryan. In conclusion, during the second quarter, our niche leading businesses generated consistent free cash flow that was in line with our expectations. We also continue to use our strong balance sheet to capitalize on attractive accretive acquisitions, including the platform acquisition of Crosman as well as add-on acquisitions to reinvest in the growth of our subsidiaries. Also during the quarter, we completed a preferred share offering, which increased our liquidity and improved our capital structure without diluting common shareholders.

I'd like to finish by commenting briefly on M&A activity. During the second quarter, middle market deal flow remains competitive, as it has been for the past several quarters. Valuation levels remain elevated due to the availability of debt capital with favorable terms and financial and strategic buyer seeking to deploy available equity capital. As we move through the balance of 2017, our focus remains on pursuing attractive platform and add-on acquisition opportunities to drive increased cash flow. As always, our team will remain disciplined in deploying capital. With over $ 500 million of available liquidity, we remain confident in our ability to continue executing on our investment strategy, while providing consistent distributions to our shareholders.

This concludes our opening remarks, and we'll be happy to take any questions you may have. Operator, please open the phone lines.

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Questions and Answers

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Operator [1]

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(Operator Instructions). And your first question comes from the line of Larry Solow of CJS Securities.

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Larry Solow, [2]

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I was wondering if you guys could maybe Elias just on the Clean Earth, I know you said you're sort of in line with your expectations and I realize that the dredging piece has been down and out for 2 to 3 years now. But the business as a whole has been somewhat flat, because of that dredging even with some of the acquisitions you've made last couple years. Do you still expect -- we were actually expecting it to have a little pop this year out of that mid-30s range, maybe closer to $ 40 million, I know you don't guide specifically on the EBITDA up for holding, but can you just sort of give us maybe a little qualitative outlook with or without dredging and where we stand?

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Elias Sabo, [3]

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Sure. I think Larry your observations are right on track and consistent with how we're looking at this. The dredge market is particularly challenging for the company because they can't control when these projects begin and when they're executed upon. And so I think we all entered the year believing that the opportunities for dredge would be increased this year, but for many of the same reasons that we've talked about historically whether it's a bureaucracy, whether it's weather, whether it's other factors that could just impact either the disbursement of funds to consummate or to begin and then ultimately consummate those projects, just hasn't come together as the company and we expected. And it's certainly not for any reason attributable to the company's activities. We don't believe there is any change in the market share dynamics of the business and the industry as it relates to the Clean Earth's position.

And so I think that to get a little bit more -- sticking to the qualitative side of it, but addressing some more of the quantitative assets of your question, believe that to the extent a dredging projects can get started, call it here within the next few months or something that could lead to a bump in that segment of the business in the back half of the year, then I think that the numbers that you're talking about are certainly achievable this year. And I think that even without that I'm not going to suggest that we're going to hit the numbers you threw out there, what I do think that we can begin to approach that level with just a good solid half. And I think that's consistent with where we've led you historically.

I think we certainly hoped that had dredging been a more active piece of the business that we could have been in a position at this time of year to guide you through a higher number, but given where dredge is throughout this year-to-date, we certainly don't feel comfortable doing that. And so we remain extremely confident in Clean Earth's ability to grow. The management team is doing an incredible job. I can assure you that they are not pleased that the dredging market has not come together and also that they've had -- despite some of the revenue growth in the other aspects of the business that the higher end back -- higher back-end costs on some of the soil projects has also hurt their EBITDA this year. But the good news is, as those are things that are fixable and the company is either fixing them or fixed them past, so we don't believe that they are long-term impact to the company's profitability. But this will from time-to-time present it self in the normal course of Clean Earth business.

So agreed everything you said. I hope that gives you a little bit more color towards our outlook for Clean Earth, but it is I would say, if not our lumpiest business, its amongst our lumpiest businesses and mix as you can see with dredge being a smaller part of the business right here, mix can also have a pretty meaningful impact on their margins, even with the growing revenue profile. So we are incredibly optimistic and confident in their ability to continue to grow. The dd-on acquisitions have been great. We think there may be more opportunities for them to continue to grow via acquisition. And there will be a time when this company is hitting on all cylinders, on all segments of their business and when they do, I think we're all going to be very, very happy.

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Larry Solow, [4]

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Just quickly Ergobaby, had a good quarter, nice balance from Q1 and I realize quarter is a lumpy, but just specifically I know you had a couple of new products that are pending, I have those now -- are those on the market or any update there?

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [5]

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Yes, sure, Larry. So Ergo, we thought had a solid quarter, International was very strong and part of that strength is being driven by the introduction of our newest product under our Ergobaby line, which is called our omni and that's due to -- we have the U.S. market here in the third quarter. So that is very strongly kind of on-target and if anything maybe even a little head of our schedule. And then Baby Tula also had a couple of product launches that have already occurred in the second quarter. So we feel pretty good about the product launch cadence here and then we have some products that we'll be launching right at the end of the year that should hopefully give us the momentum in a new category coming into 2018.

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Larry Solow, [6]

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And if I could just lastly, just on Crosman, could you maybe just give us a 45-second minute just comparing the company today to sort of what it was when you sold it 10 years ago?

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [7]

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Sure. I think that Crosman has changed over the years and what's similar is the continued leadership position that they've had in the airgun industry and related accessories. They are and have been the leader in that space for quite some time and that leadership position remains intact today as it was years ago. I would say that the largest difference that we see in the business is a change in their product mix to now include the archery side of the business, where they have grown meaningfully in the last couple of years, where we think there continues to be opportunity. So when we sold the business, their primary lines of business were their airgun business and their soft air business.

Now, while the soft air remains a component of their business, it's a much smaller part of their business than it was 10 years ago, whereas archery has now grown to be a much larger presence and my recollection is that they had a small piece of Archery back then 10 years ago that would have been -- it was immaterial relative to their overall business. So now we believe that they are on a firm ground in terms of having two real long-term -- long -- viable businesses in the long-term, whereas soft air is not quite as popular as it was all those years ago. So the airgun business and the archery business represent two major outdoor product categories where Crosman has -- and the airgun business, again the leadership position in the archery business are rapidly growing in emerging presence in the industry.

There's a -- also in the last 10 years they've added some management talent to their team, some areas of expertise that just -- as they've grown and matured as a business that they've added. So we're really pleased with the expansion of the team, as well as the increase with that expansion added talent to the management team that is really very impressive. And I don't say that to the detriment of the company's management team that we had 10 years ago, they were also fantastic, but with time they just been able to add some additional numbers to that team that didn't exist previously. And I would say that those are -- and with that I should say, the diversification within their customer base is also a meaningful change. They had a very large #1 customer that is probably identifiable and I would say that while that still remains a large customer and a great customer, the concentration with that one customer has come down meaningfully since the last time we owned the business.

So we are just feeling really great about their opportunities for all the reasons I just described, but I would say, I probably went over your 45 seconds to a minute, so my apologies, but I do think all of those items are relevant when considering how the business has changed today versus when we sold it 10 years ago.

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Operator [8]

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Your next question comes from the line of Kyle Joseph from Jefferies.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [9]

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Ryan, just a quick question to make sure a modeling question for you. I think you said the first preferred distribution wouldn'd be until the fourth quarter, are those going to be semi-annually or on a quarterly basis going forward?

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Ryan J. Faulkingham, Compass Diversified Holdings LLC - Executive VP, CFO & Co-Compliance Officer [10]

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So they're going to be on a quarterly basis on the 30th of January, April, July and October, I think I got those right. But first payment will be October 30th, so we will not have a payment in Q3. This will be a deduction to our cash flow available for distribution, that's how we are going to treat it, so the CAD number we'll talk about in the future will be essentially CAD available to common shareholders. So the October 30th payment is an extended accrual period. So it's going to be about $ 2.4 million as opposed to the normal quarterly payment going forward, which would be about $ 1.8 million, again 7.25% on that $ 100 million.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [11]

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And then maybe for Elias, so we have a couple quarters data from 5.11 and Crosman, we just had the one, can you give us an idea of sort of the seasonality in those two businesses?

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Elias Sabo, [12]

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So, I'll start with 5.11, Kyle and I think the business does historically have some more back-end seasonality, really because of few factors; one in the professional segment, it feels like everybody wants to spend whatever their budgets are, department-by-department and I think in a lot of contracting with day and logo and Federal government, you end up finding that if they use it or lose it, and so typically it gives you [an active] some kind of upward seasonality to the first quarter.

And the consumer side of the business, we clearly see a more back-end loaded revenue opportunity, clearly as the holiday shopping generally tends to put more revenues in our fourth quarter. So, we would point you to their -- on the base business there should be some back-end seasonality. Now, all of that being said and Ryan highlighted this as did I, the thing that can distort the financials of 5.11 clearly is the direct-to-agency business. Just to remind everyone needs are where we contract typically with International, government and they can be very large orders. So that can have some pretty large revenue distortion, but to be true to your point, there is back-end cyclicality or seasonality, I'm sorry that we should expect out of 5.11.

And Alan, I'll let you answer on the Crosman.

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [13]

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Sure. Thanks, Elias. Kyle, what we see with Crosman is due to hunting season and holiday season, I would say the second half of the calendar year is where you would expect to see a greater proportion of Crosman's revenues. We'll let our experience play out, but to give you some general -- very general guidance, it might be more of a 60% to 65-ish percent second half of the year versus the first half of the year. But again, I don't want you to get to tied to those comments, because within emerging archery business, with the new optics business, we really want to see under our ownership going forward, how that plays out. But to give you -- that's a general sense though of historically and in the last few years at a very macro level what their seasonality looks like.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [14]

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And I think just in the context of your CAD covering the dividend well in the second quarter, can you just sort of update -- can you update us on your philosophy about capital retention versus dividend increases at this point?

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [15]

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Yes, sure. Just as a reminder, our board is responsible for setting our distribution policy. But we have been working and continue to work towards a strategy of building our cash available for distribution to exceed our distribution in a way that is -- I'm lean towards the word material, but the way I define that is in the way that removes what we as a management team perceive to be a concerned in the marketplace about the sustainability of our distribution. Despite the fact that we have such a rich history of paying it, of earning it and never reducing it.

We think a lot of that misconception in our opinion is attributable to -- in some ways, our definition of CAD, because it exclude the gains on the realized investments that we've had over the years. And so, because when you look at that number, if you include the gains, there's quite a sizable gap, but because of the -- whether it's a quarterly dip here or there below, one of our analysts who I won't call out by name, but it was a great observation on one of our non-deal roadshows explained to Ryan and I that we don't "screen" well.

And so what we want to do in our strategy is to grow that distribution to a level, where hopefully concerns about the ability for us to sustain it or eliminated or at least meaningfully quiet it, because we think that will lead to capital appreciation for our shareholders. And we're trying to deliver on what we believe to be both an income and growth story. And we think the income story is pretty well understood. We think the growth story is something that we need to do a better job of not only communicating but also demonstrating via our financials.

And so that's what we're going to try to do and to the extent that we can work to achieve that type of returns for our shareholders that include both capital appreciation and our distribution. We believe that will be something that our shareholders respond to very well. I think that, we remain absolutely committed to our distribution as we have been for some time and we continue to be operating with that same level of commitment. However, I do think our first goal is to raise that level of distribution, as I described before, we would consider a raising of our distribution. But again, the board sets that policy. Our working model right now is commitment to that distribution and growth of our CAD relative to that distribution.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [16]

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That's helpful and I think that's a good way to think about it. Thanks for answer my questions and congratulations on a good quarter.

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Operator [17]

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Your next question comes from the line of Doug Mewhirter from SunTrust. Your line is open.

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Douglas Robert Mewhirter, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [18]

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Most of my question have been answered. First practically speaking, what's the level of dry powder. I mean -- I know that you have, it's easy to do math on your -- how much having your credit facility and cash and that sort of thing. I know you like to operate within certain leverage, limits consolidated EBITDA leverage limits. But in terms of looking for your next platform application -- acquisition, what -- how big are you comfortable going on that next platform acquisition?

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Ryan J. Faulkingham, Compass Diversified Holdings LLC - Executive VP, CFO & Co-Compliance Officer [19]

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Yes, sure Doug. This is Ryan. So, as you're aware, within our existing credit facility, we have what we call our acquisition spike, which allows us to move our leverage above our typical 3.5x level up to 4x in a quarter. Now, today we're down just below 2.6x, so pretty low -- low levered. We do have a lot of available capital on our revolver. The use of all of that is of course dependent on the multiples we pay for businesses and how much EBITDA credit we get. We are always going to be or not always -- today we will be leverage constrained. However, assuming reasonable multiples, a $ 500 million business is doable today. If we were to pay double-digit multiple that might be north of 10x or even 11x or 12x, we probably won't be able to get to $ 500 million business. So it all really is multiple-driven, but today I can comfortably say we have $ 500 million available to us to deploy into the company.

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Douglas Robert Mewhirter, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [20]

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Second might be hard to answer or I would like to try to sort of tease out what in this quarter, what the true sort of organic growth is? And actually you can even apply it on a pro forma basis for 5.11, because I know there's been a few both on bolt-on acquisitions year-over-year? I'm just trying to get understand is that sort of a mid-single digit revenue, maybe a little higher in the EBITDA in terms of true organic trajectory?

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Ryan J. Faulkingham, Compass Diversified Holdings LLC - Executive VP, CFO & Co-Compliance Officer [21]

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Yes, just to confirm Dough, you mean mean specifically 5.11 or consolidated all the companies.

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Douglas Robert Mewhirter, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [22]

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Consolidated or 5.11 too, if you have that. Sort of, although 5.11 -- again it's at all organic if you do on a pro forma basis. Trying to ex-out the effects of the bolt-on acquisitions, which I know I've had a benefit, but it can sometimes obscure the underlying growth of the business?

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Ryan J. Faulkingham, Compass Diversified Holdings LLC - Executive VP, CFO & Co-Compliance Officer [23]

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Yes, that's right, I mean if you think about Clean Earth in particular, the dredge business being down has pretty much entirely been offset by our add-ons. So in that context, we've obviously provided a nice benefit to Clean Earth from a financial performance period over period, but they still grew double-digit top line.

Right, so I think if you look across our subsidiaries, some of our businesses like Sterno, kind of flattish, [HDI] has been flat in the last past couple quarters but saw a nice increase this quarter. So I think blended in with some -- Arnold was down, I think Liberty was down, I would say mid single digit across the portfolio of companies seems to me to be about right. We had some solid double-digit growth at 5.11, of course it's a bigger business, our Ergo had a nice quarter.

So I feel like kind of mid single-digit deals right today. I'd tell you though if as Alan mentioned, if we saw a rebound in dredge over the next couple of quarters, I mean some continued growth in some of these larger businesses we own, I think that could probably creep up, but that deal is right today.

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Operator [24]

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(Operator Instructions). Your next question comes from the line of Brian Hogan of William Blair.

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Brian Hogan, [25]

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First question regards to the pipeline, you commented earlier about the (inaudible) environment, but can you just characterize your pipeline versus historically? Is it fuller, less, valuation wise...

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [26]

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I would say that, in terms of the opportunities reviewed a year to date, particularly in the quarter, I would say that those levels are reasonably consistent what I -- on a year-over-year basis. The last couple years, middle market transaction volume based on a number of deals. It has been again reasonably steady year-over-year, maybe slightly up a little bit, but on balance, it's been, it's been pretty consistent. And I wouldn't classify it in the context of history as the most robust middle-market M&A market that we've seen. However, consistent I wouldn't say it's any worse or any better. We are pleased with the quality -- with the quality of some of the opportunities that we're looking at. So there are some exciting things, but I really -- I hesitate to tell you it's anything other than consistent with both year-over-year and kind of the last, at least 6 to 8 quarters.

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Brian Hogan, [27]

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And then the mix of that is it add-ons perform [inaudible] healthy mix -- a mix?

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [28]

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I would say a healthy mix. Some of our companies, as you know have been active in the add-on space and we -- for the companies where that makes sense we continue to pursue those opportunities. They've worked out generally quite well for us and would be platforms -- same thing. So I would say that the mix remains, I would say consistent again with prior periods.

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Brian Hogan, [29]

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Shifting to individual company performances, particularly on Crosman -- revenue was up 5% in the second quarter, 1% year-to-date and Ryan, I think you said that 60, 40 back-end loaded thereabouts? I guess what I mean. Question is longer term, what is the appropriate revenue growth rate? I know you're looking to do, add-on acquisitions there too, so I mean ex add-ons what do you think the long-term growth is?

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Ryan J. Faulkingham, Compass Diversified Holdings LLC - Executive VP, CFO & Co-Compliance Officer [30]

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Yes, look I think that it could certainly depend on new product introductions and as you said, if I simplify by taking out add-on, I think that in the airgun market, the leadership position as I mentioned has been longstanding, it's a relatively mature market, so I think a low-to- mid single-digit growth in that category is appropriate.

I think that over the longer term, I think archery probably migrates to that level, because it's also a somewhat mature industry, although there are some changes in the use of certain bows for certain types of hunting that could lead to some broader category growth as some seasons are either expanded or incorporated into the use of those bows for the first time. So it's a little bit hard to predict, but right now Crosman is outperforming the category growth given their new product introductions and their emerging presence within that marketplace.

So in the near-term and I'm not so sure how long I could predict that, but to get high single digits, even maybe low-double digits in archery for a short year or maybe 2 period of time is possible. I don't know -- I don't want you to anchor on that too hard, because I don't know if it's going to be definitively deliverable, but it's certainly possible given the ramp up in the business that they've seen. But again, it's also a mature category, so I think mid-single digit growth in the archery space over an extended, call it 5 year or so period of time would probably -- would be our expectation. And hopefully, we can do better in both, but one of the things we love about Crosman and companies like Crosman are their strength in their brands, strength of their products, the market positions that they have and if anything -- a nice steady, consistent, growing -- revenue growing cash flow business is really what we think we have here with some upside to do better than that with new product introductions, add-on acquisitions, et cetera.

So I would not -- if you were to look at our group as a whole and there are some that are kind of flat, there are some that are double-digit grower and there are some that are more in the middle, I think Crosman falls more into that middle slot if you want to group it simply like that.

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Brian Hogan, [31]

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And then you already did one add-on at Crosman, is that category that is right for add-ons or is that just kind of one-off?

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [32]

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No, we believe it's right. Crosman already has an optics category within their business and it's not a giant part of their business, but they have been in for quite a few years, and I think that the ability to add a premium brand in the LaserMax brand is going to not only enhance their existing business, but give them true opportunity to pursue certain lines of business as an accessory products of firearms that they have not been able to try to pursue historically given that the nature of their current optics business was little bit more on the value side of the business, whereas, we think we can certainly bring LaserMax products into that part of the business. LaserMax also has the opportunity to be part of a higher-end more premium brand segment for Crosman. So we think it adds nicely to their existing optics business and ideally will propel that business to be a much more meaningful business line for the company going forward.

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Brian Hogan, [33]

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Shifting to 5.11 -- kind of a similar question on revenue growth perspectives, up 13% about year-to-date. What is the longer-term growth of 5.11, I know you said it's kind of back-end loaded from a seasonality perspective, but it's kind of looking more of a longer term, obviously you're adding stores, mix and DTA sales are very lumpy, I understand that, just kind of going for longer-term steady state?

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [34]

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Yes, sure. So I think 5.11 would be in one of the higher categories as Alan said, if you kind of group into our categories, some are flattish to up a little, some are kind of up mid-single digits and some we expect to be growing high single-digits and into the double digits, I think 5. 11 would squarely be in that higher category. As part of the growth plan and opportunity for 5.11 is the consumer shift that are currently going on and that's kind of really broad. I mean it's an omnichannel retailer, which I know that we're probably get a lot of play, but 5.11 truly is we've got -- really strong e-commerce, we're growing our own direct-to-consumer retail network and we have really good consumer wholesale programs and partners.

And so, I think the consumer business -- coming off of what is relatively a small base today, have a lot of growth that can really lever up the overall growth of the business. The professional segment is much more mature, we kind of think about as a low-to-mid single-digit kind of growth business and so our view is this business should be a kind of a higher single-digit, lower double-digit revenue growth business as we continue to add to our consumer and to the extent what we're doing in the consumer market is successful. I think those revenue growth opportunities are more than achievable. Obviously, the caveat there is, if the consumer business doesn't grow as quickly as we think, clearly the professional business is kind of a slower growing and so, it could migrate down. But as we stand today, I think we would look at this as being kind of a much higher category of growth companies that we own.

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Brian Hogan, [35]

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Liberty, obviously a little bit of a disappointment there over the follow through of the bankruptcy impact on your customers there. Can you quantify the bankruptcy impact and then I guess bigger question is, would those sales go somewhere else? I know the environment is little soft, but can you explain the bankruptcy impact?

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Ryan J. Faulkingham, Compass Diversified Holdings LLC - Executive VP, CFO & Co-Compliance Officer [36]

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Yes, sure. So, Brian, this is Ryan. You recall in Q1, we recorded an accounts receivable reserves essentially for what we had in AR with that large national retailer that was a $1.4 million charge to directly to their earnings in Q1. Q2 has been impacted primarily on a year-over-year basis, because that customer really has not begun to repurchase. Now, there's been a lot of talk in the market about how many stores will remain open. So we remain confident that we'll get some sales in '17 with this customer, but it's going to be much less than prior year. The company continues to work very hard at broadening their distribution directly in the markets where these stores are closing and we think with that dealers -- the strong dealer network we have, we think we can offset some of that sales decline with that effort. But hard to quantify, because it's really hard to determine when they'll come out of the situation.

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [37]

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And one of the other things that is difficult to quantify, but certainly, I think a dynamic that the company faces with respect to this customer's bankruptcy is that many of the stores are liquidating. And again several will be reopened, but based on public commentary the smaller number of stores that will be reopened. So to the extent you've got liquidating stores with inventory in it, in markets that are served by other distribution outlets. There could be some pressure there because people might be looking for deals. We don't really know exactly how that's going to impact each region. So I would imagine that dynamic will probably play out through this year and through the end of the year, difficult to quantify. But until those stores are truly closed with door shut and no liquidation sales occurring and the new stores are opened, until that time it would be difficult for us to get a sense of what the -- call it, new run rate will be with that customer.

As it relates to -- and I think that also impact the other sales. I would say that if you could shut those doors immediately and it just be done, then I would theoretically hope that that demand in fact would be satisfied by whether it's another national player or a dealer within those same geographies. But time will tell. What we're hopeful that that's the case. Again as mentioned in some of our commentary what appears to be a meaningful lessening of concern over changes in firearm legislation, probably also has -- which certainly has historically led to a somewhat softer market for firearm sales and the resulting safe sales that typically correlate to that. So we'll have to see how it plays out. I think that one of the things that we take a lot of comfort in though is knowing or believing I should say, that Liberty has the same leadership position, market share et cetera, that has always had -- that it continues to bring new products to market that it states are of the highest quality that its consumers continue to believe it to be. We are the most trusted brand within the industry and so despite this performance so far to-date, we don't think that anything has occurred to alter our view on Liberty's ability to be a great long-term performer for us.

And hopefully sooner than later, once this works it way through the system to get back on track from a profitability and growth standpoint, but unfortunately, they can't control what happened with their customer, but they continue to do a spectacular job of controlling in overseeing the things that they can control. So, yes, it's a blip that they're not enjoying very much neither are we, but we think it's just that a shorter-term pressure point that hopefully will get through here sooner than later.

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Brian Hogan, [38]

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I appreciate the commentary. And then on the flip side Manitoba being stronger than anticipated, I guess one of -- you mentioned a strong trends here, maybe domestically in Canada. What in your Asian market, which is where the supply issue was, is that essentially worked through or is there still some pressure to be there?

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [39]

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Yes that market is still under pressure. I mean there was a massive amount of inventory build by the end of last year that ended up getting in the channel. Year-to-date we have virtually no sales in that market. What it also had the effect of doing is really depressing the price in that market and so, as you can imagine there is significantly less demand coming out of the market and kind of spot market pricing for the product today is extremely low. And so we would really need to see the market kind of clear the excess inventory, resume back to a certain level of demand where pricing starts to normalize and comes back to a level where we feel it's a good profitable market. We do think that will happen by the way, it's just taking a little longer. And I would say, as we've guided, we think 2017 for that market is probably going to be one that is not going to be overly strong and we'll have to minimize the type of sales.

On the other side, as you mentioned we are really encouraged by the branded sales. And outside of that market our ingredient sales were strong as well. So kind of the whole business performed pretty well in the second quarter absent one, kind of market that distorted the financial results down somewhat, but are -- one of the big thing that we've been working on that I think you've heard us now for the couple years that we go into this business talk about gaining greater access to organic supply and really working with the farm base in Canada, to convert over and [how], really good long-term supply convert over their conventional crops to organic crops. I think we've made substantial progress and we're starting to see the benefits [inaudible] continues to grow. I guess depending on kind of the weather, which can never predict, but it looks like what we have contracted coming in for the next year in organic, looks very positive as well.

So we feel really good that we're doing the right things and as I mentioned, we now have an executive team. We built in the U.S. that we think can really start to push the needle and raising awareness in the education levels around hemp-based foods. If you remember that was kind of always the plan, it took a little longer than we anticipated as we wanted inaudible management team with a great inaudible worked with for a long time. And Bill Chiasson, he has just done a great job of building out our team and now we are really excited about kind of pumping from investment into that business to could start getting the U.S. business up to higher household penetration levels.

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Brian Hogan, [40]

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Sure. And then one last one, shift in to the Arnold, you said in line with expectations for the quarter. I mean, it seem you're encouraging early signs maybe the turnaround. How long they're going to take to get that business back into growing and profitable in the right direction?

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [41]

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I think that -- yes, with respect to Arnold, again the numbers as described today I take are certainly not necessarily inspire at this macro level. But I can tell you, that we as a team in the context of the last couple years of probably not felt as good about this business as we do right now. And that's why we're investing in the business to make the necessary changes to get the company onto the path that you just described. And again, that's why you see EBITDA level margins, I should say down relative to the decline in your top line. It's -- look, it's a lot of work and the reason it's a lot of work or amongst the reason it's a lot of work is, Arnold is a global company with facilities in several parts of the world, multiple product lines, multiple industries that they serve. The selling of Arnold products is a very technical sale. It's a long lead time and when you -- it's one thing to bring lean processes in productivity improvements to one facility. But when you've got to do it to 7, 8 or 9 of them, it just takes a longer. And so we are incredibly pleased with the progress of the management team. A couple of data points that I'll share with you kind of qualitatively because I'm not sure our level of disclosure here, but we're seeing contribution margins increase at Arnold. Now it's been, I want to say 2 to 3 quarters in a row. So I think that we consider that, now we consider it a trend. We've seen on-time delivery rising across the business. Again, not to the levels where management wanted to be, but still making meaningful progress.

And I think all of these operational improvements as well as organizational strengthening with responsibilities delegated to some pretty capable folks within the management team as well as some possible additions here and there, really positions the company as well as we've seen it. All that being said, I don't think you should expect any type of material changes in this calendar year. I'm hopeful that what you'll hear from us on our year-end/beginning of the new year call, where we start to talk to you about each of our companies and expectations for next year. I'm hopeful that we'll be talking about a year in 2018, where we start to see that trend line of growth and profitability trend upwards for Arnold in that year. But I think 2017 is still a year of building that foundation that will provide Arnold with the opportunity for the type of performance we believe it's capable of beginning in 2018. But we feel really good about it and the management team is doing a tremendous job.

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Operator [42]

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Your next question comes from the line of Robert Dodd of Raymond James.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [43]

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Hi guys, a lot of questions [inaudible]. And so, on when you talked about Crosman, obviously the opportunity to cross sale LaserMax into the Crosman channel, and that's a fairly obvious thing to try and do plus easy for me to say. More broadly, obviously you look at 5.11, then Liberty which both [sold into] Canada. You have a lot of -- when you look at 5.11, Liberty, Crosman many of these companies have kind of overlapping kind of customer bases -- overlapping sales expertise within those businesses, maybe different relationships? Can you give us a little kind of what's being done right now and I realize it's early to maximize the fact that those businesses together probably have incremental expertise and relationships that they could share to not just cross sell their own products, but others as well and is there synergistic value to all of those 3 together?

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [44]

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Yes, look, I think that what we do because we we agree with you that there are opportunities there. What we do really though Robert , in terms of how we oversee at our level, it's mostly about putting those leadership teams together and have them discuss it and figure out how they can create, what would hopefully be mutually beneficial relationships between the companies.

And so we don't necessarily get involved at that operational level, however, we see what you see and I think that the management teams of those companies see it. And we get together, obviously quarterly as a group for board meetings where these individuals can see each other. But they're in touch with each other pretty regularly if it makes sense. So we make the introductions, we really try to let them sort it out. I think the good news in the context of -- from a pure investment standpoint, we didn't acquire any of these companies with the notion of our valuation being reliant upon achieving synergies across our businesses. And so for us, it represents just incremental upside to the extent that they're successful in those efforts. But we agree they've a lot of the same trade shows, they've got consumers that perhaps on all or some of the products. So again, we definitely agree with your assessment that there should be opportunities there.

We're going to again try to lead the management teams to explore those opportunities and to the extent, they're there, I'm very confident that the management team will take advantage of those and reap the benefits of them. But time will tell, nothing imminent as you said particularly as it relates to Crosman's, since it's so new to the fold, but if we can make that happen and our teams can make that happen, again everybody would be excited about that. But the flip side is, you don't want to force it. You don't want to get these teams so distracted on figuring out, how to do something together, particularly if it's -- if it doesn't move a needle, because it always gets complicated. So there is that fine line there between doing something because it seems like it's novel or would be well received. But if it's going to generate $ 50,000 in sales, it probably isn't worth the effort to try that to bring all that stuff together.

But I can assure you with something that we and the teams of those respective companies are exploring and will continue to explore. Hopefully we'll be able to do something. We think it would be very interesting and nice if these companies could work together in that manner, but time will tell.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [45]

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Just one follow-up to Crosman. When Ryan, when you said earlier expect CAD will exceed the distribution for the full year. Just to be clear, that is the CAD after the preferred deduction in the fourth quarter?

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Ryan J. Faulkingham, Compass Diversified Holdings LLC - Executive VP, CFO & Co-Compliance Officer [46]

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That's correct.

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Operator [47]

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And there are no further questions at this time. I'll turn the call back over to management.

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Alan B. Offenberg, Compass Diversified Holdings LLC - Partner, CEO & Executive Director [48]

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Thanks , everybody, for joining us today on our call and for your continued interest in CODI. We look forward to sharing our progress with you in the future. Thanks.

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Operator [49]

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And this concludes today's conference call. You may now disconnect.