Compass Diversified Holdings (CODI) 2015 Q1 法說會逐字稿

Good morning, and welcome to Compass Diversified Holdings 2015 first-quarter conference call. Today's call is being recorded. (Operator Instructions).

At this time, I would like to turn the conference over to Matt Steinberg of The IGB Group for introductions and the reading of the Safe Harbor statement. Please go ahead, sir.

Thank you, and welcome to the Compass Diversified Holdings first-quarter 2015 conference call. Representing the Company today are Alan Offenberg, CEO; Ryan Faulkingham, CFO; and Elias Sabo, a founding partner of Compass Group Management.

Before we begin, I would like to point out that the Q1 press release, including the financial tables and non-GAAP reconciliations, is available on the Company's website at www.compassdiversifiedholdings.com. The Company also filed its Form 10-Q with the SEC last night.

Please note that throughout this call we will refer to Compass Diversified Holdings as CODI or the Company.

Now I'd like to read you 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 factors discussion in the Form 10-K, as filed with the Securities and Exchange Commission for the year ended December 31, 2014, 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 would like to turn the call over to Alan Offenberg.

Good morning. Thank you all for your time, and welcome to our first-quarter 2015 earnings conference call. Our results for the 2015 first quarter were consistent with our expectations, as we generated predictable levels of free cash flow from our leading niche industrial and branded consumer businesses.

For the three months ended March 31, 2015, CODI generated cash flow available for distribution and reinvestment, which we refer to as cash flow, or CAD, of $15.5 million.

At our niche industrial businesses we continue to achieve combined sales and EBITDA growth, primarily driven by solid performances at our American Furniture and Arnold Magnetics subsidiaries. These businesses capitalized on their leadership positions and comparative financial strength to take advantage of attractive market opportunities.

Our recent acquisitions of Clean Earth and SternoCandleLamp performed in line with our expectations for the first quarter, and further demonstrated CODI's ability to acquire niche leading businesses that are accretive to CAD.

Turning to our branded consumer businesses, while combined revenue and EBITDA were lower as compared to the prior year, we believe these businesses are well positioned for growth in 2015.

At Liberty Safe, quarter-over-quarter comparisons are still negatively impacted by the industry downturn that began late in the first quarter of 2014. However, Liberty Safe had a dramatic improvement in revenue, EBITDA, and EBITDA margins sequentially. We are optimistic that our actions to rightsize Liberty, combined with the promising sequential increase in customer orders, have this business poised to achieve growth for 2015.

Additionally, as Elias will detail momentarily, although CamelBak reported softer-than-expected results for the quarter, we still anticipate this business will deliver a solid performance in 2015.

When factoring in the consistently strong growth levels achieved at ERGObaby, we reiterate our expectation that our branded consumer businesses will deliver solid year-over-year earnings growth.

It's worth noting that our results in the first quarter at our subsidiaries with international sales were negatively impacted by the strengthening US dollar relative to other European currencies.

Separately, certain of our subsidiaries experienced higher transportation costs in the first quarter of 2015 due to the well-publicized port congestion on the West Coast. Although port congestion poses a risk to incoming shipments and may temporarily impact future results, we don't believe the impact will be material. And we continue to work through these issues within the supply chains of our subsidiaries to ensure inventory is delivered on time at retail, while we remain mindful of costs.

For the first quarter, we paid a cash distribution of $0.36 per share, representing a current yield of approximately 8.6%. Since going public in May of 2006, CODI has paid cumulative distributions of approximately $12.12 per share.

Although our cash flow per share in the 2015 first quarter was reduced to a level below our current distribution per share, following the IPO by FOX in 2013, we expect that the acquisitions of Clean Earth and SternoCandleLamp, as well as growth from our other business, will result in CODI generating cash flow that exceeds our distribution on an annualized basis going forward.

Additionally, we have realized gains of more than $340 million from opportunistic divestitures of CODI subsidiaries, which have never been included in our calculation of CAD.

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

Thank you, Alan. I will begin by reviewing our niche industrial businesses. Please note that the revenue and EBITDA numbers I provide for Clean Earth and SternoCandleLamp will be on a pro forma basis, as if these businesses were acquired on January 1, 2014.

Our niche industrial businesses continue to generate strong and predictable free cash flow. We reported a combined revenue increase of 6% during the first quarter of 2015 as compared to the year-earlier period. EBITDA on a combined basis increased by 2% as compared to the year-earlier period. However, the combined EBITDA margin declined to 12.7% for the quarter ended March 31, 2015, from 13.2% in the prior-year quarter.

Advanced Circuits posted consistent results that were in line with our expectations for the first quarter. Revenue increased by 3% year-over-year, driven primarily by continued strong performance in assembly sales. First-quarter EBITDA margins were lower by approximately 180 basis points compared to the year-ago period, and by approximately 120 basis points sequentially, reflecting a shift in sales mix.

Arnold Magnetics reported improved results in the first quarter. Revenue increased 2% year-over-year, reflecting higher precision thin metal sales, partially offset by the anticipated decline in sales of the reprographics component of the PMAG division. First-quarter EBITDA at Arnold rose by 11% year-over-year due to an increase in higher margin sales and a reduction in employee costs as a result of management's efforts to reduce its cost structure.

At Tridien, first-quarter revenue grew by approximately 2%, driven by higher sales of lower-margin, non-powered products. As a result, EBITDA was lower by about 37% compared to the year-ago period. EBITDA was also impacted by higher production costs. During the first quarter, Tridien recorded an impairment charge of $8.9 million due to one of its largest customers not renewing its purchase agreement, which represented 20% of Tridien's 2014 sales.

At AFM, performance remained strong during the first quarter. Revenue increased by more than 17% compared to the year-earlier period, representing the ninth consecutive quarter that sales have increased year-over-year. In addition, EBITDA grew by nearly 50%. Supported by its strong backlog and solid demand levels for its products, we believe AFM will continue to capitalize on strong market conditions.

At Clean Earth, first-quarter revenue increased 14% and EBITDA increased 6% compared to the pro forma prior-year period, primarily due to the contributions from the December add-on acquisition of AES. Sales also benefited from an increase in contaminated soil volumes, partially offset by a decrease in dredge materials due to the timing of new bidding activity. Clean Earth's first-quarter EBITDA margins decreased by approximately 100 basis points compared to the same period last year, primarily due to sales mix of services provided.

SternoCandleLamp met our expectations in the first quarter. On a pro forma basis, revenue at Sterno declined by approximately 4% as a result of the timing of a large customer order. However, EBITDA was flat, due to higher margins compared to the year-ago period. The margin improvement was primarily attributable to greater labor and manufacturing efficiencies achieved during the 2015 first quarter.

Next I will turn to our branded consumer business, which includes ERGObaby, CamelBak, and Liberty. The discussion of results to follow excludes the FOX results from 2014, as we no longer hold a controlling interest.

Combined revenue and EBITDA decreased by approximately 4% and 8%, respectively, compared to the year-earlier period. The combined EBITDA margin declined 70 basis points to 20.7% for the quarter ended March 31, 2015.

ERGObaby continued to deliver strong performance for the first quarter, posting revenue and EBITDA growth of approximately 6% and 17%, respectively, as compared to the prior-year period. Including Q1, this business has now posted double-digit earnings growth on a year-over-year basis for 10 out of the past 11 quarters. ERGObaby continued to experience strong demand for its latest product launches, led by its award-winning ERGObaby 360 four-position carrier, introduced in early 2014. We are pleased with the performance of this business, and remain optimistic regarding its future growth prospects.

Liberty's first quarter was in line with our expectations. While first-quarter revenue declined 11% compared to the year-ago period, revenues were up 16% sequentially. The increase in sequential revenues reflects demand for premium gun and home safes returning to more normalized levels following the downturn that began late in the first quarter of 2014. First-quarter EBITDA margins rose 40 basis points year-over-year and 660 basis points sequentially. Margin expansion in the quarter is a testament to Liberty's improved operational efficiencies, reflecting the actions taken by its management team during the downturn last year, as well as production volume returning to a more normalized level.

Lastly, CamelBak's first-quarter performance came in below expectations as revenues decreased 5%, and EBITDA declined 22% compared to the year-ago period. While CamelBak continues to experience solid demand from its latest product introductions, sales were impacted by strong levels of shipments that occurred late in the fourth quarter of last year, and reduced inventory available for sale as a result of the West Coast port congestion. Earnings at CamelBak were also impacted by the strengthening US dollar versus the euro and the British pound, as well as increased freight costs as a result of the port congestion.

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

Thank you, Elias. Today I will discuss our consolidated financial results for the quarter ended March 31, 2015. 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. My consolidated revenue discussion will exclude FOX, which we believe is a more meaningful discussion due to the restriction on providing discontinued operations reporting for FOX.

On a consolidated basis, revenue for the quarter ended March 31, 2015, was $257.3 million, up 35% as compared to $189.9 million for the prior-year period. This year-over-year increase was mainly attributable to meaningful revenue growth at ERGObaby and AFM, together with incremental net sales at Clean Earth and SternoCandleLamp from their acquisition dates, partially offset by the decrease in revenue at Liberty and CamelBak.

Net loss for the first quarter was $25.3 million compared to net income of $7.4 million in the year-earlier period. In the 2015 first quarter, we recorded a non-cash impairment charge of approximately $8.9 million at our Tridien subsidiary. In addition, we recorded a loss on the equity method investment in FOX of $13.4 million as a result of a decline in FOX's share price during the quarter.

Cash flow for the quarter ended March 31, 2015, our seasonally lowest earnings quarter, was $15.5 million compared to $14.6 million for the prior-year period. Cash flow for the first quarter of 2015 reflects year-over-year growth at our ERGObaby, AFM, and Arnold Magnetics subsidiary businesses, as well as positive contributions from SternoCandleLamp and Clean Earth, partially offset by the lower results that Tridien, CamelBak, and Liberty.

Turning now to the balance sheet, we had $20.5 million in cash and cash equivalents, and net working capital of $192.3 million as of March 31, 2015. We had approximately $323 million outstanding on our term debt facility, and $189 million in borrowings outstanding under our revolving credit facility as of March 31, 2015. We have no significant debt maturities until June 2019.

In addition, we had borrowing availability of approximately $207 million under our revolving credit facility at quarter's end. Our 15.1 million shares of FOX, which are recorded as an equity method investment on our balance sheet, had a value of $231.8 million as of March 31, 2015.

Turning now to capital expenditures. During the first quarter of 2015, we incurred $4.3 million of maintenance CapEx, an increase as compared to maintenance CapEx of $3.1 million for the prior-year period, primarily as a result of the inclusion of the Clean Earth and SternoCandleLamp acquisitions. For the full-year 2015, we expect to incur maintenance CapEx between $18 million and $22 million, and growth CapEx between $3 million and $4 million as we continue to invest in the long-term health of our subsidiaries.

I will now turn the call back over to Alan.

Thanks, Ryan. Our performance for the first quarter was consistent with our expectations. We delivered steady performance across our family of niche leading businesses, and continued to operate from a position of financial strength. I would like to close by briefly discussing M&A activity and our growth strategy going forward.

Middle-market M&A deal flow was slower at the start of the year as the number of opportunities brought to market was less than anticipated. However, there has been an increase in deal flow in the past few weeks. That said, the market and pricing for acquisitions remains competitive. As we have previously stated, we will remain disciplined with respect to valuation and pricing in deploying our capital into the right opportunities.

Based on our past success in strengthening CODI's financial flexibility and liquidity, we are well positioned to actively seek additional platform acquisitions, as well as add-on acquisitions that are accretive to CAD.

Clean Earth and SternoCandleLamp are two recent examples of attractive businesses that met our strict platform acquisition criteria of companies with strong market positions, healthy and stable cash flows, experienced management teams, and solid growth potential.

We will also continue to reinvest in our current subsidiaries to generate organic growth and increase market share, while maintaining our commitment to provide cash distributions to our shareholders.

Before I open up the lines for Q&A, I would like to announce that we will be hosting our 2015 analyst investor luncheon at the New York Palace Hotel on Wednesday, June 17. In addition to presentations from members of CODI's senior management team, Margaret Hardin, the CEO of ERGObaby, will be presenting as well. We hope to see many of you in attendance at this event.

This concludes our opening remarks, and we will be happy to take any questions you may have.

Operator, please open the phone lines.

(Operator Instructions). Vernon Plack, BB&T Capital Markets.

I was looking for a little more color on Tridien, and what your current thoughts are, how you are feeling about the company. Do you invest more in it? Do you look for add-ons? Do you limit your investment? Just some more color would be helpful.

Yes, Vernon, it's Elias. So, the first quarter was not a great quarter for Tridien. There was some margin pressure, as you saw. There's been a continual transition from some of the higher-acuity, more IP-related products to more of the basic, non-articulating products that have lower IP. And as a result of that, you've seen some steady margin compression.

I think where we stand with the business today is really focused on getting the business back to a level of profitability, enhanced profitability from today. I think with respect to investment in the business, it's really more limited today to CapEx-type investments that can improve productivity, enhance margin, and strengthen the competitiveness of the business. Likely not looking to add onto this business, and any type of add on acquisitions until we really get a little bit more stabilized, and back to a level of earnings power that we feel better about.

But it's been a -- it's been a little bit of a tougher industry over the last couple of years, given the changing pricing pressures and the competitive dynamics that have really shifted the focus of our customers to cost as one of the more important priorities. And as a result of that, there's been some significant margin degradation.

Okay, great. That's very helpful. Thank you.

Bob Napoli, William Blair.

By any chance, do you have constant currency revenue growth numbers by company?

Just to make sure, Bob, we heard it correctly -- was do we have constant currency growth numbers by company? I'll let Ryan answer that definitively, but I'm fairly confident that the answer is no.

Yes, right (laughter). There's no doubt that our subsidiaries as part of their planning do look at their revenue from a currency perspective. I don't have that handy here. But it will probably make sense for you to think about what our international sales are in our 10-Q, relative to total sales. We don't particularly provide information to give you what region that is. But that might be a good way to think about the level of sales that might be impacted by that.

Okay. And maybe just a question on ERGObaby, if you would. What would you expect the long-term organic growth rate of ERGObaby to be?

Well, we don't give specific guidance on growth rates. I think I would say, broadly, we continue to expect ERGObaby's growth rate to be above our portfolio average. We think it's one of our faster-growing segments, and historically this has been a very rapid growing business. So I think we feel comfortable that this will be above the portfolio average. But, Bob, I'm a little bit hesitant to give specific guidance as to where we expect revenue or earnings growth specifically.

And then last question is just on the Clean Earth and Sterno, those two in particular, it's the first year that you've owned them in the first quarter. Just trying to understand the revenue trends from the fourth quarter to the first quarter, how much of seasonality is in those businesses.

I'll speak with respect to Clean Earth. And the first quarter for Clean Earth would be a seasonally lower period for them. And that's primarily going to be weather-related. It's difficult, as you might imagine, for them to be processing dirt from holes that are dug. If there's snow on the ground, those holes can't be dug out, so they can't have the materials to process. So traditionally that's going to be a seasonally lower quarter for Clean Earth.

I'll let Elias comment with respect to Sterno.

Yes. And Sterno also has similar seasonality, as Alan mentioned, with Clean Earth, where Q1 is the lowest revenue and earnings-producing quarter. And the reason behind that is, if you think the products that are used for Sterno, portable heat -- predominantly services, food service, and hospitality industries, corporate parties -- those type of things are all expanded, especially in the fourth quarter. So Q1 is historically the soft quarter from a seasonality standpoint for that business.

And so those businesses are performing in line, I think as you said up front, with your expectations at this point?

Absolutely, yes. Very pleased with the performance of both of those subsidiaries.

Thank you very much.

Larry Solow, CJS Securities.

Just on CamelBak, so it sounded like, although the quarter was a little bit below your expectations, it sounds like -- well, clearly, there was some pull forward, so that was timing; and then the port issues. Sounds like both of them are somewhat under control, and you feel like you'll make up the difference in the remaining three quarters. Is that fair to say?

That is absolutely fair to say.

Okay. And then just on Arnold, I know a lot of the growth is still a couple of years away. A nice performance this quarter. Is some of that sustainable? Because some of it was driven on the profit side by some cost-cutting. How do you view that?

Well, I think that on our last call, Larry, we did make reference to the fact that we expected Arnold to have a year in 2015 that exceeded 2014 in terms of its financial performance. You certainly saw that in the first quarter. And I would reiterate our expectation for Arnold in 2015 to be above the performance of 2014.

With respect to the specific segments, I think that we are very pleased obviously with the performance of the precision thin metal segment, as highlighted in our comments, and we expect that division to continue to be strong. Obviously, with PMAG, we anticipate continued solid performance of that business. And even a steadier and improving performance at Flexmag, which is a lower margin business for the Company, but is one that has also seen some improvement in this quarter.

So I wouldn't want you to take numbers and just annualize them. But I would say, we would expect strong performance for Arnold throughout the balance of this year.

Okay. Just in terms of the dollar, are you seeing any -- maybe not -- but just in terms of -- are you seeing any competitive issues? Foreign competitors, maybe in either ERGObaby or CamelBak, with an ability to cut you on price just because of the currency benefit for them. Have you seen any of that, or less spending or anything because of currency? Or is it just more translational issues?

We just completed our subsidiary company board meeting, Larry, and I would really classify the issues discussed as more currency translation issues as opposed to specific competitive issues due to currency.

Right, okay. And then lastly, just on Advanced Circuits. Any outlook? It seems like from some of the other companies that I have that have government exposure seeing some improvement. What's your guys' thoughts on trends there sort of been in a stable, but lack of growth for the last couple of years. Any thoughts on that? Thanks.

Yes, Larry, I think -- it's Elias -- I think it's probably consistent with what you just said. We see that business as stable. The government side, the defense side of the business, still remains pressured. And so I would say until we see that pick up materially, we probably -- the outlook should be kind of stable, consistent with what we did in the first quarter. The mix will change a little bit, so margins can bounce around a little, but I think kind of stable growth out of that business at this point.

The quick turn, the pre-production type stuff that we deliver, that business has a little better outlook right now. But, overall, it's a relatively stable business.

Got it. Great, thanks.

(Operator Instructions). [Leslie Vandergriff], Raymond James.

I just had a question on your unrealized loss on derivatives this quarter. It seemed last quarter, at the end of December, you held it on between non-current and current liabilities about $9.9 million, and this quarter about $13.6 million.

With that the hedging strategy, how long do you plan on letting it sit there with the losses, especially with the natural hedge of your portfolio companies and with the expectation of rising rates at the end of the year, or next year depending on who you talk to these days. But how long are you going to let that strategy go on, or do you have plans to change it up in the future?

Thanks, Leslie. So, you're right in the context of your comment about our natural hedge, which we do have with our subsidiaries. And when we entered into this swap, we did take that into consideration, and only hedged the value that we perceive to not be naturally hedged by our subsidiaries.

With respect to the hedging strategy, we think of it simply as protection against the catastrophic world event that we felt we should have been protected for. So our hedging swap strategy was entered into September, protects us for the life of our debt credit facility. It's something that is, as you say, unrealized. It will naturally reverse as the swap matures.

And you're right in the context of it -- it's obviously a bigger P&L impact with where rates have gone. But that will naturally reverse through the -- as the term of the swap continues. But our strategy is the same in terms of that; and simply it's to protect us from catastrophic events that we can't control.

So if I was just to keep the current strategy, no increases or anything like that in the future, at least for now?

No, there's not. To the extent that we -- if we buy another business and have more debt, we will relook at that strategy. But as of right now, there's no intent to change it.

Okay. Thank you.

Brian Hogan, William Blair.

My question is on additional acquisitions opportunities. One, would they be focused more on add-ons? Do you need anything to be bolted on to any of your portfolio of companies? And then, two, you talked about it in your opening remarks a little bit, but just to the deal flow you are seeing out there picking up a little bit. And it's competitive, but I assume you're going to stay or look for things within your consumer and industrial niche areas, but just thoughts around what the areas you are looking at.

Sure, absolutely. With respect to the add-ons for our group of subsidiary companies, it's really an ongoing effort that we never back off from. I think you've seen some activity from various subsidiaries in the past. And we'll can certainly continue to pursue those opportunities up to the extent we believe we can make smart, add-on acquisitions to our subsidiaries. So, that's just a consistent strategy that we've always employed that we will continue to employ. And it might make more sense for certain of our subsidiaries than others, but I think it's a fair conclusion for you to have, that we will always be looking for them and will pursue them and look to complete them as appropriate.

With respect to the new subsidiary company acquisition market, yes, the year did -- was a little bit slower than we would have anticipated, but it has picked up. And I think that you are right. We will continue to look within our verticals, niche industrial and branded consumer. And regarding opportunities in both of those, we're really not focused on finding companies to slot into a specific vertical. Rather, we're really looking across both verticals, and looking for opportunities that provide great risk-adjusted returns to our shareholders. And again, that's really a consistent approach that we've practiced really since inception, and that's what we'll continue to do.

But as of right now, yes, those are the two verticals that we remain focused on, will stay focused on. And our disciplined and patient approach to those acquisitions will remain intact.

Which of the portfolio companies is most ripe for add-ons? You alluded to (multiple speakers).

Well, I think if you look across our group, Advanced Circuits has been an acquirer of add-on acquisitions in the past, and is probably -- in my opinion, anyway -- still a good candidate to continue to do that. Clean Earth made a recent add-on acquisition that I think is excellent for the business, and one that I think can continue to be an acquirer. Certainly, SternoCandleLamp has the opportunity, in my opinion, to be an acquirer of add-ons. I also believe that ERGObaby and CamelBak could be great candidates to make add-ons.

I think that Elias already commented on Tridien. Arnold certainly could be an acquirer of add-on acquisitions. Although based on our experience to date, they maybe just don't have as many opportunities to pursue as others. And Liberty has really been much more of an organic growth story as we take market share and build the business. And really that's also been the story with American Furniture, as we've emerged from a couple of tough years to now be in a great position of growth and profitability. But that's really been much more focused on investing in building the organic growth capabilities of the business.

So, hopefully that gives you a little bit more color.

It does. Appreciate it, thanks.

Thank you. And at this time, I would like to turn the call back over to management for closing remarks.

I'd like to thank everyone again for joining us on today's call, and following the CODI story. We look forward to sharing our progress with you in the future.

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