Compass Diversified Holdings (CODI) 2007 Q4 法說會逐字稿

Good morning, welcome to the Compass Diversified Holdings 2007 fourth quarter and year end conference call. Today's call is being recorded. At this time all lines have been placed on mute. (OPERATOR INSTRUCTIONS). At this time I would like to turn the call over to Nick Rust for introductions and the reading of the Safe Harbor statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified Holdings 2007 fourth quarter and year end conference call. Representing the company today are Joe Massoud, CEO and Jim Bottiglieri, CFO. I would first like to point out that the Q4 press release including the financial tables is available at www.Compassdiversifiedholdings.com. In addition, management expects to file a form 10-K for the year ended December 31, 2007 with the SEC by the end of the week. Please note that this presentation we will refer to Compass Diversified Holdings as CODI for the Company. Before I turn the floor over to Joe for his opening remarks allow me to read the following Safe Harbor statement.

During this conference call we will make statements that contain certain forward-looking statements including statements with regards to the future performance of the company and each of its businesses. Words such believes, expects, projects and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to inherent (inaudible) in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements. Some of these factors are enumerated in the risk factors discussed in the form 10-K compiled by the company with the Securities and Exchange Commission for the year ended December 31, 2007 and other filings with the Securities and Exchange Commission. The company 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 now like to turn the call over to Joe Massoud for his opening remarks.

Thank you. Good morning, everyone. And welcome to today's earnings conference call. During this call we would like to accomplish a few things. In addition to discussing our operating results for the quarter and year, we will also review our recent acquisition activity. Before that, however, given the current volatility in the public market we would like to use this opportunity to distribute broadly some very important facts. So let us make the following points very clear regarding Compass Diversified Holdings or CODI.

Number one, as you'll hear in more detail, CODI's cash available for distribution increased significantly from 2006 to 2007. On a per-share basis fourth quarter to fourth quarter that increase was 17% from $0.48 to $0.56. Unlike most participants in the broadly defined financial industry and unlike many private equity firms who receive much coverage in the press, we had an excellent fourth quarter and an excellent 2007.

Number two, in 2007 and since inception we've had a distribution coverage in excess of 1.3 times. This provides us with three things; A] the ability to reinvest in our business without raising outside capital; B] significant defensive and downside protection to that distribution if necessary; and C] additional room for growth of the distribution subject to the Board's decision on that matter. We expect to continue to have significant coverage over our distribution in 2008 notwithstanding the state of the economy.

Number three, since our May 2006 IPO we have increased our distribution level by 24%. It has always been and continues to be the stated intention of our Board to provide regularly increasing distributions to our shareholders over time.

Number four, we currently have no liquidity concerns whatsoever. In fact, at our current leverage of less than two times debt to EBITDA we are substantially underlevered.

Number five, as a result we continue to have significant availability to make accretive acquisitions or add-on platform acquisitions with our existing committed debt facility.

Number six, we believe the current environment is extraordinarily fertile for those few acquirers, including us who currently have the ability to finance acquisitions without outside financing. Our acquisitions of Fox Factory and Staffmark in January was a direct result of our structural capabilities. Furthermore, our experience in the last recession in 2000 and 2002 was that this environment was extremely fertile for us from both an operating point of view as our companies picked up market share and customers from weaker or more leveraged competitors and also from a new acquisition perspective, as we became one of the few sources of available capital in the market. We are beginning to see this current environment unfold similarly.

The current state of the market also appears to have led some investors to attempt to group companies and their respective prospects. In our case I think this might be a mistake; in particular I have seen our stock trade generally with the yield based specialty finance companies or asset managers despite the fact that our company is simply a group of eight easy to understand manufacturing distribution and service businesses, each serving a particular niche in which it is leader.

For example, we are not a business development company. This means we are not broadly exposed to credits across a number of companies for which we have varying degrees of knowledge. To reiterate, we control eight niche leading healthy businesses and are excited about the prospects of each and every one of them. As a result we control our own destiny; we are not owners of some tranche of security which is behind another lender or dependent on the efforts of a private equity firm to do the right thing. We and the subsidiary management teams are in the driver's seat.

Furthermore, we have not been distributing 90 to 150% of our annual cash flow in the past as I've seen rumored that some of the yield based specialty finance companies have done. We have maintained a substantial coverage of our distribution providing significantly more scrutiny to our security to our distribution rate as well as potential for growth. We expect to continue to have a significant cushion in 2008 despite the current economy. Importantly, our financial statements are tremendously transparent.

As investors you know how each of these businesses is doing and can track their individual progress as well as our overall result. There is no guesswork as to how much cash flow we are actually earning. We deliver the cash available for distribution calculation in our financial statements and provide company by company analyses. As noted earlier we are not overleveraged. Much of the recent press highlights private equity firms that have gotten into trouble acquiring similar businesses to those we own. These transactions are substantially more leveraged and therefore more risk to change more risk changes in the economy. Furthermore we are proud of our average acquisition multiple which we believe has been materially lower than those of comparable companies sold to private equity firms over time. This is largely due to our business model which allows us the luxury of patience, both on the acquisition ultimate exit side.

We are also not regulatory constrained in our ability to raise capital. And to reiterate, we have current capacity to consummate additional accretive acquisitions. Another distinction is that unlike business development companies or even the private equity asset managers that trade publicly, our ability to generate cash flow and growth is not dependent on transactions. We expect our cash flow to grow organically and we not have assets that are nationally shrinking like loans that amortize, prepay or cease to perform or funds that we manage with finite lives. At the end of the call we will be happy to elaborate further on any of these differences if you would like.

Turning to an overview of our specific performance I am very pleased to report strong performance in each of our current portfolio diverse businesses. As evidence of this performance and the growth of our company, as I said before, our CAD in the fourth quarter was $0.56 per share as compared to $0.48. As a result of our CAD growth, the Board of Directors increased our quarterly cash distribution to shareholders in the third quarter of 2007 to $0.325 per share, which was an 8% increase over the rate for the second quarter and a 24% increase over the original rate. The Board will continue to evaluate the distribution on a quarterly basis with the intent of increasing the distribution over the long-term as we grow our current businesses and make accretive acquisitions.

Our performance in 2007 was built upon the favorable results of our portfolio of businesses as well as the strength of our acquisition activities. Each of our businesses performed in line with our expectation and met not only with their financial goals for the year, but also critical strategic objectives. On the acquisition front we completed three new acquisitions, each of which were accretive to our shareholders. Halo Branded Solutions, Aeroglide Corporation and American Furniture Manufacturing. Each of these companies brings to CODI a strong operating platform and a highly competent management team.

In addition to the ability to complete these acquisitions in a very difficult credit environment validated the strength of our permanent capital platform. Since the beginning of the year we have completed two significant transactions. On January 4 we acquired our eighth subsidiary business in Fox Factory Inc., a leading designer, manufacturer and marketer of high-end suspension product for mountain bikes, all-terrain vehicles, snowmobiles and other off-road vehicles. The Fox acquisition is performing extremely well for us and is expected to show revenue and cash flow growth in 2008 and will be accretive to us in 2008 and well beyond.

In addition to its current strong performance, the further opportunities available to Fox management and CODI shareholders are present in both the revenue and profit margin side of the business. We are excited about the platform and we believe that the current environment was an important facilitator to our ability to be the successful acquirer in this case at the valuation at which we were able to acquire it.

On January 23 CODI capitalized CBS Personnel's acquisition of Staffmark Investment LLC. We believe the addition of Staffmark will enhance CBS Personnel's market geographic and product diversity as well as increase its density and ability to serve customers in many of its key markets. The Company now has over 400 branches in 35 states. Integration plans have been developed, and the integration is well underway. Our team in CBS is taking a best of breed approach optimizing the senior and mid-level management teams that both entities brought to the table. There will be a limited number of branch closings and in those cases only where there is significant geographic overlap. As a result of this approach, we did not expect to suffer significant customer losses from the merger and are pleased to report that this goal is well in hand.

In addition, we are confident in our internal projections for corporate cost synergies as well as the ability to optimize product offerings across our combined customer base. In terms of the effect of the economy on the combined CBS Staffmark business I have a couple comments. First, there is no doubt that the current softness is affecting the industry as a whole as well as our company specifically. Please keep in mind that we as a CODI management team and CBS management team have been together since 1999 and managed successfully through the 2000 to 2002 downturn which was a deep one in the staffing industry. We are aware of the impact of the economy and believe the timing and structure of the acquisition are ideal given the nature of cycles in this industry.

As a result of management's efforts and its dense geographic model, CBS outperformed its public industry peers in managing its revenues during that period of downturn. More recently CBS has again outperformed its public industry peers in terms of both revenue growth and operating margins in 2007, and we are optimistic this will continue over the course of 2008. In addition, bearing in mind where we stood in this economic cycle, this transaction was structured extremely defensively. In that it involved only approximately $80 million of cash, adding $18 million of 2007 EBITDA prior to any cost synergies.

In addition, we acquired substantial tax assets, which shield virtually all that cash flow from taxes so the transaction is materially accretive to cash available for distribution even in a down economy. In the short run we expect the combined entity to be better for CODI's cash flow generation capabilities than CBS would have been alone, particularly given the impact of the economy. We also expect in this downturn to repeat our strategy of the last downturn, rapidly adding customers in our core markets as our density allows us to continue to serve those customers even as other competitors close branches and exit those markets.

Beyond the current cycle we firmly believe in the long run a company this size in this industry should be very interesting for our shareholders to own at our embedded valuation. With those introductory comments complete I would like to turn the call over to Jim Bottiglieri to discuss our fourth quarter and year end financial results.

Thank you, Joe. Today I will review our financial results for the quarter and year ended December 31, 2007 including a review of the operating results of each of our subsidiary companies. On a consolidated basis revenue for the quarter and year ended December 31, 2007 were $208.1 million and $917.9 million, respectively. Net loss for the quarter was $3.4 million or approximately $0.11 per share. The net loss was primarily due to the recording of a $10 million minority interest expense associated with the $47 million ACI refinancing done in October 2007.

For the year ended December 31, 2007 net income was $40.4 million or $1.46 per share. Net income for 2007 includes a $36 million gain recorded from the sale of Crosman Acquisition Corporation on January 5, 2007. Turning now to results of our individual businesses.

Advanced Circuits. For the quarter ended December 31, 2007 Advanced Circuits revenue increased to $13.2 million compared to $11.6 million for the quarter ended December 31, 2006, largely due to increased sales in prototype and quick-turn production. Income from operations for the fourth quarter was $3.7 million compared to $1.8 million for the same period in 2006. The increase in operating income was largely due to operating profit resulting from the increase in sales and from lower non-cash charges associated with ACI's loan forgiveness program of approximately $1.4 million.

For the full year ended December 31, 2007 Advanced Circuits revenue increased to $52.3 million compared to $48.1 million in 2006 due largely to increased sales from prototype and quick-turn production. Income from operations in 2007 increased to $17.1 million compared to $12.6 million for 2006. This increase was principally due to the operating profit generated by higher sales in 2007 and from lower selling and general administrative expenses, mainly due to lower non-cash charges of approximately $3.5 million in fiscal 2007 associated with ACI's loan forgiveness program.

Aeroglide. For the quarter ended December 31, 2007 Aeroglide's revenues increased to $18.6 million compared to $14.3 million for the same period last year, principally due to increased machinery sales. Income from operations for the quarter ended December 31, 2007 was $2.4 million compared to income from operations of $2.3 million for the same period in 2006. The increase is attributable to the operating profit generated from the higher sales and was partially offset by increased amortization expense of $0.5 million due to amortization of intangibles recognized in connection with our purchase of Aeroglide in February 2007.

In 2007 revenue increased to $64 million compared to $48.1 million for 2006 due predominantly to increased machinery sales. Income from operations for fiscal 2007 was $3.7 million compared to $6.1 million in 2006. This decrease was due to a $4.0 million dollar increased amortization expense due to amortization of intangibles recognized in connection with our purchase of Aeroglide which more than offset the operating income resulting from the increased sales level. Aeroglide continues to maintain a significant level of new machinery backlog.

American Furniture Manufacturing. For the quarter ended December 31, 2007 revenues decreased to $35.5 million compared to $40.6 million in the prior year quarter. Operating income was $2.1 million compared to $2.4 million for the fourth quarter of 2006. This decrease was due to lower sales, partially offset by higher gross profit margins due to raw material cost savings and improved labor efficiencies.

For the year, revenues in fiscal 2007 were $156.6 million compared to $165.4 million for the comparable prior year period primarily due to the soft retail climate in the furniture industry. Operating income was $10.9 million compared to $9.9 million for the comparable period in 2006. This increase in operating income was due to higher gross profit margins of 22.9% in fiscal 2007 versus 21.1% in fiscal 2006 resulting from the factors previously enumerated. Lower amortization expense of $400,000 also contributed to the increase in operating income.

In terms of an update on AFMs operations Mississippi as reported last month, American Furniture Manufacturer sustained a fire at its main production facility on the evening of February 12. In the four weeks since the fire the team at American Furniture has worked tirelessly to restore production capacity and vigorously responded to this challenge. In short order, production as we started at temporary facilities on restoring manufacturing capabilities to greater than 80% of pre fire levels. Since the fire we have carefully reviewed the situation and believe that this event will not materially impact American Furniture's ability to produce cash flow in the medium to long-term. In fact, we are encouraged by the positive response we have received from American Furniture's customers and continue to be enthusiastic about the future of this business.

Anodyne Medical Devices. For the quarter ended December 31, 2007 Anodyne's revenues increased to $14.7 million compared to $8.1 million for the same period last year, largely due to sales from new product rollouts and from inclusion of sales from PrimaTech, which was acquired subsequent to last year's quarter. Income from operations increased to $1.1 million compared to $0.6 million for the same period in 2006. The increase in operating income is largely due to the increased sales.

For the full year in 2007 revenue increased to $44.2 million compared to $23.4 million in 2006 due to sales from new product rollouts as well as inclusion of a full-year sales of Anatomic, which was acquired in October 2006 and a partial year's sales from PrimaTech acquired in fiscal 2007. The sales increase was also due to fiscal 2006 consisting of only 10.5 months as Anodyne began operations on February 15, 2006. Income from operations increased to $2.9 million compared to $0.3 million for the prior year. This increase in operating income is due to the increase in sales partially offset by higher amortization expense of approximately $0.6 million.

CBS Personnel. For the quarter ended December 31, 2007 CBS Personnel reported revenue of $148.2 million compared to $144.5 million for the same period last year, principally due to the inclusion of sales from the acquisition of SES, which was acquired in November 2006. Excluding SES, revenue declined quarter-over-quarter by approximately $3 million due principally to weaker economic conditions. We believe this percentage decrease is less than the decrease reported by most of the companies publicly traded peers, and further believe that this is evidence that CBS is gaining market share in markets in which it operates and is a further affirmation of CBS's dense operating model.

Income from operations decreased from $9.4 million for the fourth quarter of fiscal 2006 to $7.8 million for the fourth quarter of fiscal 2007. The positive impact on operating income resulting from the increase of sales was more than offset by lower profit margins resulting from a higher mix of lower margin light industrial accounts, resulting from both the SES acquisition which primarily provides light industrial staffing and from incremental growth in this sector.

For the full year 2007 CBS Personnel increased revenue to $569.9 million compared to $551.1 million due to the same factors that affected the results for the quarter. Income from operations decreased to $22.5 million in fiscal 2007 compared to $23.2 million in 2006. Operating income decreased largely due to the impact of a decline in gross profit margins to 18.5% in fiscal 2007 versus 19% in fiscal 2006 for the reasons explained above. The decrease in profit margins had a larger impact than the increase in sales.

Halo Branded Solutions. For the quarter ended December 31, 2007 Halo's revenues increased to $51.9 million compared to $39.8 million for the same period last year principally due to acquisitions made since September 2006 and from increased sales to existing customers. Income from operations was approximately $5 million compared to approximately $3.1 million for the same period in 2006. The increase in income is largely attributable to increased sales partially offset by $0.6 million of amortization expense associated with the amortization of intangibles established in connection with our purchase of Halo in February 2007.

For the full year of 2007 Halo's revenues increased to $144.3 million compared to $115.6 million for 2006. Income from operations increased to $6.6 million compared to approximately $6.1 million in fiscal 2006. The increase in revenues was attributable to the full year impact of acquisitions consummated during 2006 and from Halo's 2007 acquisitions.

In combination these acquisitions contributed $22.3 million of the increase in sales. The increase in operating income was a result of the increase in sales being partially offset by $1.8 million of increased amortization expense.

Silvue Technologies Group. For the quarter ended December 31, 2007 excluding the sales and operating income from Silvue's Henderson, Nevada application facility that was shut down in 2006, revenue increased $6.1 million from $5.6 million in fiscal 2006. Income from operations was approximately $2.1 million in the fourth quarter of fiscal 2007 compared to $1.9 million for the same period in 2006.

For the year ended December 31, 2007 Silvue's revenues increased to $22.5 million compared to $21.3 million in 2006. The 2006 revenue numbers exclude $2.8 million of revenues from the Henderson facility. Income from operations was approximately $6.5 million compared to $5.9 million in 2006, again excluding the operating profit from the shutdown facility in 2006.

For the quarter and year ended December 31, 2007 CODI reported cash flow available for distribution of $17.7 million and $46.3 million, respectively. For the period from its initial public offering on May 16, 2006 through December 31, 2007 CODI reported cash flow available for distribution of $70 million and a coverage ratio of approximately 1.4 times on all distributions paid through January 30, 2008.

Turning to the balance sheet, we had $119.4 million in cash and cash equivalents, which was subsequently used to partially fund the purchases of Fox and Staffmark. We also had networking capital of $192.6 million as of December 31, 2007. Subject to borrowing based restrictions at December 31, 2007, CODI had $325 million in revolving loans available to be used to fund acquisition and working capital requirements. I will now the call back over to Joe.

Thanks, Jim. Looking forward to 2008 we see an economic environment that is uncertain, and we're planning accordingly. Notwithstanding this backdrop, and even with the impact of the economy uncertain of our businesses which are cyclical in nature, we are confident in the ability of each of our businesses to perform within their niche market and believe that overall 2008 will be a strong year for CODI in terms of cash flow generation.

The model was created to capitalize on the strength of the overall mix of businesses, and we believe it is playing itself out. We are also confident that our financing model in the current credit environment will allow us to consummate exciting and accretive acquisitions such as Fox racing shocks and Staffmark, both of which were acquired earlier this year.

Regarding our stock price, we are needless to say, disappointed. While not knowing exactly why our stock has moved in the direction it has, it does seem that we have been lumped into some extent in inappropriately with the financial sector broadly. Substantial material differences were noted at the beginning of the call. As an attempt to further educate the market, however, we are attempting to reignite our Investor Relations effort. I have been and will continue to speak to as many investors as possible as well as present at various conferences and talk to as many research analysts as possible.

We believe that 2006 and 2007 have been excellent years from an operating cash flow point of view for CODI and that we've rewarded our shareholders well through our substantial increases and distributions. We are also confident and excited about 2008 and beyond. However, we understand the part of having this reflect itself in our stock price is communication to a wider audience.

Before opening the call up to questions, let me once again reiterate that our model to grow cash flow per share consists of two fundamental strategies. Working with our management teams to grow our existing businesses and identifying attractive and accretive acquisition opportunities. We believe the future is bright for CODI on both fronts, and we are confident in our ability to execute against our strategy of consistently increasing our cash flow per share and our distribution to shareholders. Thank you for your time, and we would be happy to take any questions you may have. Operator, please open the phone lines for questions.

(OPERATOR INSTRUCTIONS) Larry Solow, CJ Securities.

Good morning. Could you just, Joe, elaborate a little more? There has been some concern over your distribution coverage. And I know you don't like to give specific guidance, but could you just like say, do you have some kind of worst-case downside baked into your assumptions, and what that would do to your coverage ratios in 2008?

We really don't.

Without giving exact numbers.

One, you're right, we don't give guidance and two, there is a variety -- when you say worst-case there are so many cases. I can tell you that as we torture our numbers on a company by company basis there is no case in which we don't have healthy, positive and healthy coverage of our distribution. My sense is that our best case is that the coverage is going to look like what it has looked like in the past depending upon what our board decides to do with the distribution in terms of potentially increasing it at some point during the year.

But from a worst-case point of view, sort of really taking a gloomy view of the economy at this current time we still see pretty healthy and positive coverage of the distribution. Jim, is there anything you would add to that?

No, I think under all scenarios that we ran is we at least covered the distribution completely.

We ran some pretty -- now I'm talking about and I am hesitant because I think we've tended to be in our past boast as Compass Diversified Holdings and prior among the more conservative and bearish groups that I know. I have a nickname internally as being a permabear because we always look at our companies and saying, what if this happens and what if that happens and what if it goes bad like this and what if it goes bad like that? And notwithstanding all those scenarios we still have a positive coverage. I think more realistically given what we are seeing in the environment I think our coverage will continue to be as healthy as it has been in the past.

Just to elaborate there has been probably some increased concern just that your most recent purchases are probably into more cyclical companies and obviously you see the economy. You know what's going on. Can you just discuss kind of your strategy?

I disagree with the premise. If the two most recent purchases have been Fox and Staffmark, I think in one case it is absolutely spot on and the other case it is not. Deal with the one that is not. In terms of Fox Factory what we are seeing is significant growth in the business. I understand it is a consumer disposal but given the company's global reach and its penetration into new markets and its increasing placement with its customers, we don't expect this company to suffer cyclically and haven't been seeing it suffer cyclically. So disagree with that notion on Fox.

On Staffmark, clearly staffing is a cyclical industry. I think the good news is if you look at the data as we track it, if some of the major public comps last year were down 4% to 8% I think our same-store that Jim just mentioned were down 2%; it reflects the model of the business. And also reflects the strength of our management team, which we think and have had comments from outside analyst who know the industry, we think it is literally the best management team we've met in the industry bar none did a great job from 2000 to 2002, outperformed over a 12 quarter period, the public comps in every single quarter. So while it is cyclical we think that our management team is the right team to manage through the cycle.

And if you look at the transaction structure, the transaction structure very specifically was made -- the sellers of that business had a long-term view on the growth potential and the opportunity associated with these two companies powerfully being together. And we are interested in owning equity of the combined business. We were also interested in having them take back equity because from an accretion point of view we were very concerned about putting cash out the door with its related cost in an environment in which earnings could go down.

So I will again point to the fact that this is a business that had 2007, $18 million of EBITDA. You know the industry, Larry, it is a virtually non CapEx industry. There is almost no tax paid at that level of cash flow, because of the tax asset that we also acquired. So you're talking about buying a business effectively buying its cash flow for four times, which gives you a lot of cushion to accretion. If the business stayed flat, this acquisition would be monstrously accretive. And even if it declines in the kind of 10 to 15 or even 20% range from a cash flow point of view it is still materially accretive.

So no doubt the company itself is cyclical. But there is also no doubt from anyone who cares to look at the transaction that it was structured in a way that virtually guarantees it will be accretive regardless of the economy. And given the tremendous revenue and cost synergies available from a combination, if you look out a couple years the combination of this business is going to be a very exciting one we think for CODI shareholders.

So again, premise I would half disagree with because I don't think it applies to both acquisitions, but even in the case where it does apply it is more than just saying hey, you bought a staffing company -- we're going into a recession -- why did you do that. You have to think about how we structured it and you have to think about our history. We already have doubled the size of CBS once by doing the virtually identical thing and coming out of the last downturn. So this is a model we're pretty familiar with and to be blunt we're pretty confident about.

Could you just lastly, on American Furniture, which (inaudible) I guess in August.

Okay, so AFM is in August, interestingly I mean the problem in AFM is I would love to have gotten on the calls over the next couple quarters and said see, we told you it wasn't going to be really all that cyclical. Unfortunately I think right now we will just have to look at revenues because I think from an EBITDA point of view it is undoubtedly going to be somewhat lower this year because we missed several weeks of production and because we are a little inefficient and hopefully we will recoup that all in business interruption insurance but it will be hard to get a pure comp.

American Furniture Manufacturing, again I would tell you to look at a couple things; to not say this is furniture but to say what segment of the market does this serve. And in the promotional segment it is a market actually that has grown. I think it is probably one of the only furniture companies we've seen that has had double-digit growth over last -- in each of the last five years. It is a segment that is not currently under attack by foreign, by Asian competitors because in fact in the promotional segment, virtually all product is US assembled and US manufactured. Because the cost to assemble and deliver and sell the product is less than the cost to ship from Asia. You're talking about the extreme low end of the pricing of the furniture market.

And then you're talking about a business that is extraordinarily efficient and then you wrap that up in a bow and you realize we paid on a tax effective basis under five times cash flow. There was plenty of cushion in there. If the economy had an impact on the company we didn't conceive of a situation in which our multiple still would have been in excess of say 6.5 or 7 times cash flow. So in all these cyclical businesses, part of acquiring these businesses is to think about what you are paying in terms of midcycle earnings, and there are times when you buy companies whose earnings may go down in a cycle.

And again, I think that constitutes a minority of our companies but some of these companies exist. And if you pay the right multiple those are frequently the best transactions out there. And again its a reason why we don't distribute 99% of our cash flow or 100% of our cash flow, because I think we are aware of these industries and understand how they work and have built sufficient cushion. This is a long subject of discussion at each of our board meetings how do we think the prospects of the company could vary to the upside and downside and what does it mean for our distribution policy. Our decisions to increase distributions are not made lightly, and these factors are certainly discussed. So sorry for the long winded answer. Did I cover what you were asking out there, Larry?

Yes, you did, thanks. Appreciate it.

Vernon Plack, BB&T Capital Markets.

Jim, on the call several weeks ago we talked about Fox a little bit and you gave a revenue number I think for '07 or around $105 million. There was no real discussion regarding operating income or EBITDA. Any other guidance that you could provide for us there in terms of what we could expect out of Fox?

We did give the multiple that we bought the business at.

You did do that, yes.

We do think that the business is going to be growing, so that multiple that we paid will be lower than what we are projecting for next year's EBITDA. But I think you can use that multiple as a guidance.

Okay, and Joe I know last year in May you gave a CAD per-share estimate of $1.62 to $1.82. That was in May. I know that you haven't a given a CAD estimate this year, but can we expect this year's number to be higher or lower based on what you're seeing in this type of economy?

I think it is too early, when you say based upon what you're seeing -- I think that is a tricky question. Our hope, and some of it has to do with acquisitions we've done and different things. Our hope -- and we have no reason to dispel the hope currently, is that it will be a higher number than last year but I have no -- again, we are very -- are trying very hard. I am sure very every public company does -- we are trying very hard to be straightforward and accurately convey information to all our shareholders simultaneously that is kind of appropriate so they can think about their investment decision. I don't exactly know whether the length of this downturn is two quarters or four quarters and whether we're going to have kind of a labor tail. There's a lot of theories out there; so our hope, which currently we have no reason to dispel is that CAD per-share would be higher in '08 than in '07. But there are, if talk about a forward-looking statement that has a lot of factors around it, that might be the king of all forward-looking statements.

Understood. Jim, you mentioned -- did I hear you correctly essentially you have is it roughly $325 million in untapped?

That was as of December 31st.

Okay. Thank you very much.

Henry Coffey, Ferris Baker Watts.

Jim, I particularly appreciate all that detail you shared with us. A couple of questions. I sort of heard the tail end of Vern's question. How much debt and acquisition capacity do you have right now, and could you kind of break it down for me?

Let's talk the debt that is outstanding right now. We've got $155 million under our term loan facility outstanding. And we've got $50 million under our revolver outstanding. That is as we speak right now.

Right, that is as of December or as of right.

That is as of right now. So basically that will leave us the $275 million of availability under the revolver.

$275,000 million of additional availability?

Additional availability.

And the revolver is for $325 million, right?

That is correct.

And what is the current borrowing cost on both of these facilities?

Well, we swapped out the term debt, and that is roughly at 7.25 fixed now, due to the swap.

And is that plus fees and costs?

Well, we had some debt issuance costs that would be amortized.

Right, so what would be the all in cost on that facility now?

That is probably added.

Those are -- the cash has already been spent. I'm not sure I understand the question, Henry. I mean incrementally.

I am just trying to model, that's all.

(multiple speakers) 7.25, so I am not.

I understand what you're saying.

It is basically $5 million amortized over six years, so a little less than $1 million a year.

And then the cost on the revolver is?

2.5 over LIBOR right now.

And you can borrow incrementally against that at that rate?

That is correct.

Okay and you talked a little bit about AFM and the staffing business but before we get into those two, there is some component of cyclicality to your other businesses. Obviously not as much as with those two. What is your outlook for your other businesses? You can just -- let me make that an open-ended question and you can give us whatever you want.

Again, you can take this whatever caveat you got and the part of the issue is we don't really know how the year is going to turn. So Advanced Circuits is a business that has historically moved with the R&D cycle more than the economic cycle and do I mean by that? For example, in the last recession you saw that they didn't move together because of times when electronics, for example, purchasing was down or medical device purchasing was down. The companies that were the OEMs were increasing their R&D to try to basically get customers, whether individual or corporate to spend out of their malaise. So I am cautious that remember, Advanced Circuits for those of you on the call who know the company does not look like your average circuit board company which is why it produces 35 to 40% EBITDA margins. It is a quick-turn prototype specialist, largest in the country in that space. It has grown rapidly. We currently are not seeing a slowdown in demand for its product.

This is not a backlog business. It might be the opposite of a backlog business. People want their product in two or three days, so I have no idea what its going to do later in the year. But we have no reason to believe from our management talks to customers, tries to get projections to give you a sense what we grew our capacity last year and our thinking already about capacity issues over the next 12 to 18 months. So this business currently is not seeing anything in the way of a slowdown. And Jim, or Elias or Alan, you guys are all on the call I know. Interrupt me if you want to add more color to these (multiple speakers).

And putting that second line on, Joe, what does that do for margins? I know those are real economies of scale benefit that goes with (multiple speakers)?

I would say that margin, there is a lot of things that go into margin including some increase in some of the materials and things. I'm not sure we think a lot is going to change in margins in one direction or another. Elias, do you have any other further comment to that?

No, I think that is correct.

You are right that there are economies of scale in the business; there is also other factors going on that this may to some extent offset.

Okay, thank you.

I know -- Aeroglide, different business. It is a backlog business. It has got a six to nine-month backlog typically. Our backlog looks fine right now. I cannot tell you that six months from now the six or nine-month backlog is going to be as strong as it is now. I just don't know. We, again, talk to our customers. And this is an instance where they have a lot of international customers. It is a global business. A lot of business is in Asia and Europe. Food companies. I think it is the largest segment of the customers. And at this point backlog is our best way to feel the pulse of the individual. In this case it is a very healthy individual as measured by backlog, which is really the best I can do to tell you.

We feel good about this. We talk to our customers. We are in this case expanding our sales efforts particularly in Asia. Those are beginning to yield fruit. There's no reason why this company shouldn't be growing this year, but in terms of speaking specifically about what I can tell you which is the current backlog its healthy and strong and is as healthy as we've seen it. Alan, anything else to add there?

No, Joe.

AFM, our goal for AFM this year and I can tell you right now we are delivering product on a daily basis. That is not quite the level as pre fire. I think we've talked to you guys about our manufacturing capability versus pre fire. We are hoping to get that up to 100% here in the reasonably short term with bringing on line of one additional facility. But I don't actually -- we feel very confident that the insurance is going to cover obvious is associated with lost inventory and with rebuilding the building. We know, we believe we're going to get some business interruption insurance. If you were to say to me instead of making X of EBITDA this year as a result of the fire, the lost weeks, the resulting inefficiency of operating out of multiple facilities instead of one until you get that facility rebuilt in the fall, that you made Y. I know the theory behind it is -- I know our insurance consultant tell us that X minus Y ought to be the business interruption insurance and that we ought to collect that. I am hopeful that the cash flow generation of AFM this year is actually on par with as if we didn't have the fire. I unfortunately wouldn't be too shocked if it was a couple million dollar shortfall on that or something because I am, again, I am cynical about most things.

Particularly insurance, I hope.

Not a cyclical business historically at all. These are specialty medical mattresses largely; we sell other support services but largely mattresses. We -- the business has grown. You saw the fourth quarter results. It is by far our best quarter and that is because we have increased product placement with some critical customers. Those are going to continue; this business is going to grow this year I think I mean barring something that is totally unexpected, this business is going to perform pretty well notwithstanding the economy because it is A] in that niche and B] it is a product the market definitely needs and it doesn't have.

Business we've talked about. Halo, you know what I think what happened with Halo was, it was our first year with the Company last year and our management said to us, it's a strong year. Here is what its going to look like. The fourth quarter is where all the EBITDA is generated. And I've maintained that one of the beauties of our model, Henry, is that we can own businesses for longer than forever theoretically. But once you know a business you know it and you have some level of comfort and ability to work with it so you shouldn't be in a structure where you kind of then have to sell a business. And so Halo last year was our first full year and I will tell you that we were interested and anxious to see how the fourth quarter came out and it hit on all cylinders exactly what we projected and maybe even a little better.

So this year going into the first quarter you start building backlog again, and the backlog looks fine. There is a couple dynamics here. Number one is the type of products we supply have actually tended to be less cyclical than other segments of the marketing budgets for corporations. Number two is we are a rapid batter of sales reps, and we are a grower and a consolidator in the industry so there is an offsetting effect. I think this year is going to be fine for this company. It's going to be flat or better. Some of that is going to be that even if there is sort of same customer decline we have added a lot of new people and we continue to consolidate the business. And those are going to help us.

We are also working on a couple of really interesting add-on acquisitions here over the course of the year that we hope we can get that are going to be brought in at extraordinarily attractive multiples. I think we've talked in the past about this company's ability to buy at three to four times cash flow at the end of the day once you consolidate some of the back office. So we think that opportunity is going to exist this year. So we think this is going to be a good year for Halo.

And then Silvue is not really having historically been a cyclical business. It serves the ophthalmic market. It has got so much international exposure right now that a big driver of the growth train is non US. The alternate product growth, whether it is in the metals area, or in the electronics area, we think its going to be very strong this year and should offset any kind of decline. So we look for that business actually to grow over the course of the year. Again lots of factors impact these and these are all, as I said caveated by all the forward-looking statement comments. But it really is a matter of CBS having the most -- and CBS represents 30% of our cash flow or something, I have to look at the numbers. So it is an important element. But the other sides of the business we are more insulated, and we have good feelings about. And a number of them have, whether it is new products or new end markets, have some very strong trends that will assist them even if there is some cyclical softness.

Now on Fox our traders want to know if there is going to be a product dividend.

[laughing]

No, listen. I really appreciate that. Thank you.

(multiple speakers) I doubt their bikes are that good, so.

Yes, they are. We have that national master's champion here. But no, thank you very much (multiple speakers)

Sponsorship.

We will. Thank you. I appreciate that much detail.

(OPERATOR INSTRUCTIONS) Jeff Smith, Eagle Investment Management.

Just one follow-up question on CBS Personnel. Could you tell us what the EBITDA margin was during the last recession? How bad did it get?

It's a good -- EBITDA margin last recession very different business because it was a much smaller scale, so you would expect EBITDA margins to be smaller but I'm trying to think. For our company.

Joe, the margin came down to in the low 3% range.

Was what is a 3,3 to 4%. But again, you understand the nature of the fixed costs in this business is pretty dramatic. So the scale, we wouldn't expect that to occur again in this downturn necessarily. But that is what it did -- to answer your question, that's what happened last time.

What would you expect it to go to, I guess in if we do go into another recession similar to (multiple speakers).

I think we are kind of maybe in a recession already so let's just say if the -- however you define it where we are -- incremental numbers make a big difference so when I tell you closer to four than three, you might say that is not much of a difference. But if you are trying to play it out and you say it is in the low three's, that is probably close enough for whatever they say.

Thanks a lot, guys.

Elias, how would you comment on that?

I would say that this year this recession we think will be a lot different than the last one in that there wasn't gross margin expansion like there was in the late '90s in 2000. And the primary driver of EBITDA margin decreased last time was gross margin contraction. This business is highly variable. If you just look at the SG&A costs, about 70 to 75% of our SG&A is variable costs, and depending on the depth of revenue change if you are very gloomy and you believe there's a lot of revenue change I think there is a lot of SG&A that can be taken out and margin can be relatively well preserved.

So we think that our operating model being as dense as it is gives us the ability to ratchet down our SG&A load proportional to revenue declines. And we think that margins because they didn't expand during this last up cycle don't have a lot of on the gross margin side -- we don't think that there is a lot of downside to be had. So further to Joe's point, we would think that we should be able to preserve our EBITDA margin, which is in the low 4% today. We think that we should be able to preserve those margins coming into a recession if we are not in one already, and if it contracts we think it would only be slight contraction.

[Jim Coran, New Salem Investment Management]

I wonder if you could comment on the effect of the sort of tidal wave of specs is having on your efforts in the acquisition front.

A couple thoughts, number one is they are great buyers when you're selling a business. There has never been a more rational buyer in the history of mankind than a SPAC I think. We are actually from in terms of how many middle market companies there are to acquire I can't think of -- and Alan and Elias -- I actually can't think of one single instance, literally one in the last decade we've been doing this where a primary competitor for a transaction was a SPAC. Elias, Alan can you guys think of one?

I can't, Joe.

Neither can I.

So the primary reason is a couple fold. Number one is half the Companies that we've acquired either in Compass Diversified Holdings or before have not been in option processes. They have been transactions that we've gone out and found and networked to. So typically SPACs aren't able to do that. And then in the other half were we've been acquirers typically we've tried to make a trade-off of not being at the highest value by being able to guarantee some sort of certainty of close because we can bring our financing. The SPACs in theory have the money, but of course there is a vote, so they are a very uncertain financer. I mean the reason you go with a SPAC as a seller is because you want a high value and your are willing to live with the uncertainty that either they will rise the side by side debt they need or they will get through the vote but the valuation is so high that you're willing to kind of overlook it. That is almost the opposite business model proposition that we offer.

So actually the SPACs have had no effect on us; and in addition if you look at the SPACs a lot of them are larger. The transactions we are looking at are 80 to $200 million acquisition at the extreme high-end, more like 80 to 150 or 170. And a lot of the SPACs right now that are being raised are targeted at the higher end of that. So it hasn't really affected us on the buy side. I said we haven't sold the business to a SPAC ever either, although we have talked to them because they can be reasonably high value participants.

Thanks a lot.

And it appears we have no further question at this time. I would like to turn the call back over to our speakers for any additional or closing remarks.

Thank you all for your time. It is an interesting market out there, and I know one where you are trying to understand the fundamentals of businesses and think about how the operations look. We would encourage you to dig on Compass Diversified Holdings; we think the more you learn the better a story it is. And so we are available if people have follow-up questions to the extent that these are questions that we can answer. And we will continue to be as disclosive as we have been in the past, and we appreciate your time. And we look forward talking to you again next quarter. Thanks.

Once again, that does conclude today's call. We do appreciate your participation. You may disconnect at this time.