Compass Diversified Holdings (CODI) 2015 Q2 法說會逐字稿

Good morning and welcome to Compass Diversified Holdings 2015 second-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 second-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 Q2 press release including the financial tables and non-GAAP reconciliation 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, allow me to read the following Safe Harbor statement.

During this conference call, we may make certain forward-looking statements including statements with regards 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, 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 second-quarter 2015 earnings conference call. Before I discuss our performance for the second quarter, I'd first like to highlight our recent success in capitalizing on market opportunities with the acquisition of Manitoba Harvest and the divestiture of CamelBak, each deal closing subsequent to the end of the second quarter.

Beginning with Manitoba Harvest, which we acquired on July 10, we've once again added a business that met our strict acquisition criteria. Based in Winnipeg, Manitoba, Manitoba Harvest is a pioneer and global leader in branded hemp-based foods.

The Company operates in a large and expanding marketplace, has strong and growing cash flows, a passionate consumer following, an experienced management team, and compelling expansion opportunities. The Company's industry-leading products, which have significant retail exposure across the US and Canada, are the fastest growing in the hemp-food market and among the fastest-growing in the natural foods industry. We are excited to work with Mike Fata, the CEO and Founder of Manitoba Harvest, as we focus on penetrating new markets in the US and Canada to further drive the Company's already strong growth. Manitoba Harvest will be part of our branded consumer businesses.

Turning to CamelBak, we announced on July 27 that CamelBak was sold to a strategic buyer, and we subsequently completed this divestiture earlier this week for a total enterprise value of $412.5 million plus an additional $14.1 million of estimated cash and working capital adjustments subject to customary post-closing true ups.

This transaction represented a very profitable opportunity for us to monetize our interest in one of our subsidiaries. CODI received approximately $367.8 million in total proceeds from sale with respect to the Company's outstanding loans to CamelBak including accrued interest in its equity interest in CamelBak. We expect to report a gain from the sale between approximately $150 million and $170 million during the quarter ended September 30, 2015.

In reflecting on our partnership, we truly enjoyed working with CamelBak's management team led by its CEO, Sally McCoy, and are proud of our accomplishments together. CODI's strategic investments enabled CamelBak to increase consumer penetration levels, build cash flows, and generate greater organic growth. We wish CamelBak continued success in the future with their new partner Vista Outdoor.

The sale of CamelBak unlocks significant value for our shareholders and strengthens our balance sheet to pursue both organic and acquisition-related growth opportunities going forward. As we have consistently demonstrated in the past, we will remain disciplined in our approach to new acquisition opportunities.

Turning now to our 2015 second quarter results, performance in the quarter exceeded our expectations as we generated strong levels of free cash flow from our leading niche industrial and branded consumer businesses. For the three months ended June 30, 2015, CODI generated cash flow available for distribution and reinvesting, which we refer to as cash flow or CAD of $27 million, an increase of 115% compared to the second quarter of 2014.

At our niche industrial businesses, we achieved solid combined sales in EBITDA growth. For the six months ended June 30, 2015, our niche industrial businesses posted a combined revenue increase of approximately 8.3% as compared to the six months ended June 30, 2014, on a pro forma basis. EBITDA increased by approximately 4.6% as compared to corresponding period in the previous year. These businesses produced a combined EBITDA margin of 14% as compared to 14.5% for the six months ended June 30, 2014.

Sales and EBITDA growth were primarily driven by strong performances at our American Furniture, Advanced Circuits, and Tridien subsidiaries as well as positive contributions from our recent acquisition of Clean Earth and SternoCandleLamp, both of which continue to perform in line with our expectations.

Turning to our branded consumer businesses, these businesses achieved solid levels of combined revenue and EBITDA growth compared to the prior year. Combined revenue at our brand consumer businesses increased by approximately 3.4% for the six months ended June 30, 2015, excluding FOX. EBITDA increased sharply on a combined basis by approximately 17.8% when compared to the first half of 2014, and the EBITDA margin increased to approximately 22.9% as compared to 20.1% for the six months ended June 30, 2014.

Within our branded consumer businesses, Liberty Safe generated results that were more indicative of a normal operating quarter reflecting the outstanding job of our management team to right-size the business following the gun safe sector's dramatic down cycle in 2014.

Additionally, ERGObaby sustained strong growth levels on the heels of some exciting new product launches, and CamelBak delivered solid performance in the quarter.

For the second quarter, we paid a cash distribution of $0.36 per share representing a current yield of approximately 8.7%. Since going public in May 2006, CODI has paid cumulative distributions of approximately $12.48 per share.

Our cash flow per share in the 2015 second quarter more than doubled compared to the year-ago period and exceeded our current distribution per share. While we expect that the sale of CamelBak will reduce cash flow below our distribution on an annualized basis going forward, we now have realized gains of more than $500 million from opportunistic divestitures of CODI subsidiaries including the sale of CamelBak, which is never been included in our calculation of CAD.

Importantly our enhanced liquidity position combined with our current family of middle-market leaders, which includes the addition of three new platform companies over the past year bodes well for CODI to continue to provide shareholders with attractive distributions.

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 continued to generate strong and predictable free cash flow. We reported a combined revenue increase of 10% during the second quarter of 2015 as compared to the year-earlier period.

EBITDA on a combined basis increased by 6% as compared to the year-earlier period. The combined EBITDA margin declined 50 basis points to 15.1% for the quarter ended June 30, 2015, from 15.6% in the prior-year quarter.

Advanced Circuits delivered solid results in the second quarter. Revenue increased by 8% year-over-year driven by continued strong performance in assembly sales as well as strong growth in small-run and quick-turn production PCB.

Second-quarter EBITDA margins were higher by approximately 210 basis points compared to the year-ago period and by approximately 220 basis points sequentially, reflecting a shift in the sales mix and lower SG&A expenses.

Arnold Magnetics reported softer results in the second quarter. Revenue decreased 10% year over year, reflecting lower sales of the reprographics of the PMAG division as well as weaker economic conditions in Europe primarily in the oil and gas sector. These results are partially offset by growth in Precision Thin Metal sales.

Second-quarter EBITDA at Arnold declined by 17% year over year due to a decrease in higher-margin sales and restructuring and operational improvements in Europe that had not yet been fully realized. In spite of these challenges, we continue to anticipate modest 2015 year-over-year earnings growth at Arnold.

Moving to Tridien, results in the second quarter exceeded management's expectations. Second-quarter revenue grew by approximately 14%, driven by an increase sales of newly introduced power products as well as sales growth from non-powered products. The sales growth in non-powered products was principally from significantly higher orders from a large customer that, as mentioned on the last earnings call, is terminating its contract with Tridien later this year.

As a result of significant operating leverage and the resulting manufacturing efficiencies, EBITDA increased by about 55% compared to the year-ago period.

At AFM, performance remains strong during the quarter. Revenue increased by approximately 30% compared to the year-earlier period, representing the 10th consecutive quarter that sales increased year over year. In addition, EBITDA grew by more than 50%. We believe AFM will continue to take advantage of healthy demand levels for its current and new products.

At Clean Earth, second-quarter revenue increased 18%; however, EBITDA decreased 6% compared to the pro forma prior-year period. Sales benefited from an increase in contaminated soil volumes as this business continued to receive positive contributions from the December 2014 at on acquisition of AES.

Sales growth was partially offset by a decrease in dredge materials due to the timing of new bidding activity. Clean Earth's second-quarter EBITDA margins decreased by approximately 440 basis points compared to the same period last year primarily due to a less favorable sales mix. We are confident that the recent increase in dredge market activities will lead to strong operating results for Clean Earth over the second half of 2015.

SternoCandleLamp performed well in the second quarter. On a pro forma basis, revenue at Sterno increased by approximately 2%, EBITDA increased 14%, and EBITDA margins were higher by approximately 180 basis points compared to the year-ago period. The margin improvement was primarily attributable to greater labor and manufacturing efficiencies achieved during the 2015 second quarter.

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

Our branded consumer businesses achieved strong results for the second quarter of 2015. Combined revenue and EBITDA increased by approximately 12% and 50%, respectively, compared to the year earlier period. The combined EBITDA margin increased 630 basis points to 25% for the quarter ended June 30, 2015.

Performance at our ERGObaby subsidiary was strong in the second quarter posting revenue and EBITDA growth of approximately 10% and 24%, respectively, from the prior-year period. Including Q2, this business has now posted double-digit earnings growth on a year-over-year basis for 11 out of the past 12 quarters.

In the second quarter, ERGObaby's revenues benefited from the timing of international distributor sales with certain orders shipping in the second quarter of this year as compared to the third quarter in 2014. Strong EBITDA growth at ERGObaby was primarily attributable to an improved product sales mix with a larger percentage of higher-margin baby carrier sales as compared to the prior period.

ERGObaby continues to experience positive feedback from trade shows for its newest products highlighted by the recent launch of its natural curve nursing pillow. In addition, Orbit Baby is preparing to launch its new O2 jogging stroller which has also received rave reviews. To support these product launches, we anticipate a significant increase in our marketing spend in the second half of the year. Given the recent performance of this business, combined with its latest product launches, we remain excited about the future prospects of this business.

Liberty achieved second-quarter results that were consistent with our expectations for this business. Liberty posted second-quarter revenue growth of 31% compared to the year-ago period. The increase in year-over-year revenue reflects demand and volume returning to a more normalized level. Second-quarter EBITDA margins were 14.4% compared with negative 2% in the year-ago period and 12.5% in the first quarter of 2015.

Second-quarter EBITDA margins were also at more normalized levels with the improvement reflecting the successful turnaround and reemergence of this business following last year's industry downturn.

CamelBak delivered second-quarter revenue growth of 4% and EBITDA growth of 22% compared to the year-ago period. During the last week of the quarter, CamelBak recognized a duty tax rebate of $1.5 million that contributed to EBITDA growth. Excluding that one-time rebate, CamelBak achieved year-over-year EBITDA growth of 6.5%. As Alan highlighted in his remarks, this business was sold to Vista Outdoor subsequent to the end of the second quarter.

Lastly, our newest portfolio company Manitoba Harvest, which we acquired on July 13, achieved second-quarter growth rates that were consistent with our expectations. Revenue for the quarter increased approximately 44% from the prior-year period. We believe this business will possesses strong long-term growth potential, and we are excited to work with their experienced management team.

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 June 30, 2015. I will limit my comments largely to the overall results of the 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 the more meaningful discussion due to the restriction on providing discontinued operations reporting for FOX.

On a consolidated basis, revenue for the quarter ended June 30, 2015, was $284.7 million, up 56% as compared to $182.7 million for the prior-year period. This year-over-year increase was attributable to meaningful revenue growth across all subsidiaries with the exception of Arnold Magnetic as well as incremental net sales at Clean Earth and SternoCandleLamp since their acquisition dates.

Net income for the second quarter was $26.6 million compared to $12.3 million in the year-earlier period. We reported a gain on the equity method investment in FOX of $11.2 million as a result of an increase in FOX's share price during the quarter.

Cash flow for the quarter ended June 30, 2015, was $27 million compared to $12.5 million for the prior-year period. Cash flow for the second quarter of 2015 reflects year-over-year growth at our ERGObaby, AFM, Advanced Circuits, Liberty Safe, Tridien, and CamelBak subsidiary businesses as well as the positive contributions from SternoCandleLamp and Clean Earth partially offset by the lower results at Arnold.

For the six-month period ended June 30, 2015, cash flow was $42.5 million as compared to $27.1 million for the six months ended June 30, 2014.

Turning now to the balance sheet, we had $25.4 million in cash and cash equivalents and networking capital of $198.8 million as of June 30, 2015. We had approximately $322 million outstanding on our term debt facility and $189 million in borrowings outstanding under our revolving credit facility as of June 30, 2015.

We have no significant debt maturities until June 2019. In addition, we had net borrowing availability of approximately $206 million under our revolving credit facility at quarter's end.

Subsequent to the acquisition of Manitoba Harvest and the sale of CamelBak, we will have no outstanding borrowings under our $400 million revolving credit facility. We expect to realize the gain on the sale CamelBak between approximately $150 million and $170 million during the third quarter, further demonstrating the strength of our financial position.

Our 15.1 million shares of FOX, which are recorded as an equity method investment on our balance sheet, had a value of $242.9 million as of June 30, 2015.

Turning now to capital expenditures, during the second quarter of 2015, we incurred $3.9 million of maintenance CapEx, an increase as compared to maintenance CapEx of $3.5 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 pro forma for the acquisition of Manitoba Harvest and the sale CamelBak of between $18 million and $22 million and growth CapEx between $1 million and $2 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. Overall, we achieved strong results ahead of our expectations for the quarter across most of our family of niche-leading businesses as we 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.

Following the slower-than-anticipated pace of deals at the start of 2015, middle market activity has gradually picked up. However, challenging competitive pricing dynamics remain the same. With the sale of CamelBak, we will have over $600 million of available capital to continue to pursue acquisitions. In addition to cash, we will have $400 million of availability under our revolver and over $200 million of potential liquidity through our FOX ownership. Nevertheless, we will remain steadfast in our disciplined approach to acquiring niche middle-market businesses with a reason to exist.

The success of our three acquisitions over the past year are prime examples in this regard. Clean Earth and SternoCandleLamp have each performed in line with our initial expectations. We are also excited about the long-term potential of our latest acquisition Manitoba Harvest, which continued to generate strong growth rates.

Overall, we view our recent acquisition very favorably, and given our financial strength, we will continue to pursue attractive accretive acquisitions while reinvesting in our current subsidiaries to increase market share and drive future performance.

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.

Thanks very much. And Alan as it relates to Manitoba, I'm just trying to get some idea of the type of growth that you expect there. I know you -- obviously, it is growing very rapidly. But is that a business you hope will double in the next two or three years?

Well, Vernon, I'll let Elias comment on that more specifically, but I would say that the historical growth rates that we have seen recently are growth rates that we think are sustainable. But I'll turn it over to Elias to elaborate further.

Yes, Vernon without giving specific targets and timelines, as you just asked, I think we expect this to be a rapidly growing business on the top line. I think the second quarter was great quarter for them producing kind of north of 40%. We would expect that this business will continue to produce very strong revenue growth. I don't know that it will be quite as high as the second quarter but I think will continue to produce very strong results.

I would note though, and I think we talked about this at our investor conference, this is a business that in order to continue to drive rapid revenue growth rates, we expect to accelerate a lot of the sales and marketing initiatives. And so, I don't know there will necessarily be any type of operating leverage as you expect on sales growth. In fact, at the onset of some increased sales and marketing objectives, there could be deleveraging that goes on until you catch up. We plan, because of the opportunity here, to aggressively invest in this business and drive kind of growth rates, at least top-line growth rates, that are really strong and then over time allow operating margins to catch up. Is that helpful?

Yes, very helpful, thank you, Elias. And in terms of maintenance CapEx or growth CapEx, what type of CapEx are you expecting to put into this business?

It's a relatively low-maintenance CapEx business, Vernon. I would say it's kind of under $1 million of maintenance CapEx. That being said, you have kind of a step function that will happen here where we'll have a facility expansion that will occur over the next couple of years. It depends a little bit on the growth rate. Depending on how quickly the business grows, we may have to accelerate with that expansion is. That's a true growth CapEx. I would say likely in the next two, on the outside three years, we will have a probably $10 million-ish CapEx spend to be able to accommodate the additional capacity that we will need for this business. But on a true maintenance level, this is relatively light, well under $1 million.

Okay, great. And switching quickly to Liberty, I know that that business has rebounded. You also talk about the you mentioned that the second quarter is typically their slowest quarter. Does that mean that we can expect from what you can tell right now revenue for liberty in third and fourth quarter to be higher than the second quarter?

I think, Vernon, that the third quarter -- second and third quarter can both be traditionally slow periods for Liberty, broadly referred to as a summer slowdown. We've seen really good demand. I think that -- I caution to guide you towards extrapolating second-quarter results and rather would refer you to kind of more normalized quarterly performances of a couple of years ago to give you a sense based on those first two quarters what we think the last four quarters would look like.

Demand levels remain strong. Their factory is operating incredibly efficiently. We're very pleased with their performance, and we think it will again resume performing not just through this first half of the year but on a full-year basis consistent with the type of performance we saw with the business prior to the boom-bust cycle of the previous two years.

Okay, that's great. Just one more quick one in terms of CamelBak, should we expect a little over a month to be included in Q3 results?

Yes, that's right, Vernon.

Okay, all right. Okay, great, thank you.

Larry Solow, CJS securities.

Just on CamelBak, in terms of selling the business, did the buyer come to you? Were you guys looking to sell it, or was it just sort of an opportunistic price that you couldn't turn down?

Let me -- there were a couple of questions there. Number one, we were approached by the buyer. We were not in the market to sell this business. As you may know, Vista Outdoor is a newly public entity, spinoff from another parent company and they are, by their own words, interested in expanding their presence in the outdoor market. And with that, looked around and became very interesting CamelBak and approached us. So we were not looking to do anything with the business but rather we were approached.

The price, obviously, is one that we were very excited about, which is why we consummated the transaction and felt as though it was great opportunistic divestiture for us and one that allowed us to really unlock a lot of value. I think relative to probably the expectations that people had in the marketplace for CamelBak and allows us to delever and reload our balance sheet to pursue future growth opportunities. So we were very excited about the opportunity. Although it was unexpected, we think it's a great outcome, and we think that the future of CamelBak as they partner with Vista going forward is as bright as it would've been under our ownership. So it's a great company, it's one of those situations that has you know of bittersweet taste to at the time because we loved working with his team, and thought that we had a tremendous working relationship, but we were compelled to consummate the transaction based on the economics associated with it.

Yes, seems a great deal. What about just about Advanced Circuits? It's been a pretty sort of rough three years or pretty flat. I think you have some pretty good bookings the last couple of quarters, and then this is a very nice quarter. Is this -- any more color on that, and do you think it's somewhat sustainable, or too-early-to-call a trend.

You know, Larry, I think it's a little too early to call a trend. We did see -- what I would say is the business, we get some days where our bookings are really great. We get some days where they're not so great. When the business was really performing consistently with kind of strong growth rates, we had more consistency on a day-to-day basis in terms of our order patterns. Because we haven't yet returned to that kind of level of consistency, I would say it's just too early for us to call this business as having kind of turned the corner.

But we were very happy with the second quarter and the companies were being extremely hard on a lot of different initiatives to kind of accelerate their growth, but it's still a bit choppy. So as happy as we were for the second quarter, we still remain a little bit guarded here going into the back half of the year.

And then Tridien is obviously a much smaller holding. I know they're facing the loss of a customer coming up. Had a pretty good quarter. Is there anything that was -- is it timing related or any thoughts on that?

Yes, there were a couple of things that happened in the quarter. I mean they had really an excellent quarter. We had been talking for an extended period of time on these conference calls about some new products that were coming through the R&D pipeline being launched and were fully -- there was kind of a nice pickup of those products. They were in our powered group which traditionally carries a higher margin. So the launch of those products into the marketplace, that really helped overall both on revenue growth and on profit growth. As we said in our transcript, there was a big boost in the orders on our non-powered business as well.

Right.

And that was from the customer that is terminating its relationship with us later in the year.

Okay.

And so, some of that was a little bit higher than we would've anticipated, and it's not going to be recurring going forward.

Right, got you.

It was a very strong quarter for them. And you know on the powered side we still think of some of these new products as doing pretty well in the marketplace.

Okay, and just on Arnold. I know this year wasn't supposed to be a big growth year either, or anyhow, so I think more really a 2017 and 2018 story maybe. But it sounds like sort of discipline in the quarter or relative to some expectations may be more timing related as you still think you've got a little bit of growth for the full year. Is that fair to say?

Yes, Larry, we do believe that we will get a little bit of growth year over year in Arnold. The quarter certainly was below our expectations, yet at the same time it's pretty identifiable what led to that underperformance. And one of the items -- both of the items actually referenced in our prepared remarks, but the continual erosion of the reprographics business, which was something we understood upon acquisition of the company, so that's just a natural headwind that they faced. I think the good news is over time that just becomes a smaller and smaller amount as that business gradually goes away. But this quarter in particular, the company was burdened by some underperformance in Europe, as we mentioned, as well as a restructuring that's taken place in the European operations that hasn't fully reflected itself in the company's operating performance, which we expect to see the benefits of those restructuring efforts begin to impact the company throughout the balance of the year.

And it's an interesting dynamic with Arnold because we've discussed they work on so many different end uses and different applications that in Europe we specifically highlighted that boiling gas was challenged in Europe, which it absolutely was. They've got other oil and gas customers in other parts of the world where that business is doing just fine, and it's entirely dependent on the application being used by -- the applications associated with the European business were impacted by current prices throughout the energy markets. In the other segment, it wasn't. So it's both kind of the blessing and the curse, I should say, of diversification. More of a blessing, of course. But we expect that Europe's performance will improve over the balance of the year.

PMAG North America, Precision Thin Metals continued to perform extremely well. The [Flex Mag] division is performing consistent with our expectations and performing very solidly.

So it's really I think exciting for us to think about the future for Arnold in the context of having all of their cylinders firing at once, which it hasn't really benefited from yet. And when that happens, I think you'll see performance more in line with our initial expectations. We'll see, I believe, growth year over year this year and as we talked about in prior calls, as Tim Wilson presented at our investor conference a couple of years ago, some very exciting macro level long-term opportunities particularly in the automotive sector that we continue to be very enthusiastic about.

So while the quarter was certainly below our expectations, I would summarize by saying we do still expect modest year-over-year growth, and we remain very bullish about this Company over the medium and long-term.

Got it, great. Thanks, Alan, appreciate it.

Kyle Joseph, Jeffries.

I was just hoping to get your outlook for margins on ERGObaby. I know you guys talked about increased marketing spend there, but just whether it's just gross profit margins or EBITDA margins if you could just give us an idea for trends there and when you expect those to normalize as well.

Yes, so Kyle, I would say on gross margins, we expect them to be relatively flat, a little bit of margin to move around kind of a couple hundred basis points here or there. I don't mean to say that like flippantly, but it's just based on kind of whether we ship internationally, which is lower margins because the distributors handle a lot of the sales and marketing costs for you, or if it's more domestic where they are higher because you are incurring those costs below the gross margin line.

So they can shift around a little bit based on kind of the timing of some shipments. But I would say just generally look at margins as being stable where we've been running for the first half of the year over the last half of the year. In terms of -- and that's on a gross margin basis.

In terms of EBITDA margins, we do expect EBITDA margins to come down in the back half of the year. I don't have specific guidance for what that will look like, but I would say but I would say we are planning on a pretty large incremental incremental marketing spend here around product launches. And because we have a major launch out of our Orbit Baby stroller line, we think that it makes sense to put a really big marketing push behind that. This a really good innovative product, and we want to get this broadcast out to the market broadly. So I think with respect to when will it normalize, we would think going into 2016 we will revert to kind of normal spend levels. But this back half of the year, we do plan on deleveraging our EBITDA in order to a big marketing push.

Okay, great, thank you. And then Ryan, I may have missed this. I hopped on a little late and playing little catch-up here. So interest expense was elevated in the fourth quarter and the first quarter, and looked like it was a more sort of normalized rate in the second quarter. Can you remind me why it was elevated in the fourth quarter and the first quarter?

Sure, sure. So we have a swap on our interest, and we don't elect [this accounting]. So those unrealized gains and losses just go right to interest expense. There is an interest expense table in the back of our MD&A and our 10-Q which reconciles that out nicely and you'll be able to see that impact quarterly.

Okay, great. And then so after CamelBak and congratulations on that sale by the way, that was a great transaction.

Thank you.

Should I assume -- so you going to fully pay down the revolver but is the term loan going to be fully outstanding. Did I hear that correctly?

That's correct.

Okay, thank you.

And we will have some cash --

Yes and then for your outlook I know you mentioned that CAD would be below the dividend for some time. For the longer-term, do you think you think you can eventually cover CAD with the existing portfolio or is your outlook that you would need to acquire a company, and I know you have plenty of liquidity to do so, to eventually get CAD back to the dividend rate?

Yes, I think our intention is obviously to continue to grow the businesses as we have. So I think there is expectation that the portfolio or the companies or the subsidiaries that we have would in time do that.

However, recognizing with proceeds from the CamelBak sale, the opportunity to redeploy those into cash flow generating subsidiaries will obviously help that pretty significantly. But obviously there's never really -- we don't necessarily know the timing of that when we deploy those proceeds but once we do, I think we're probably as a management team pretty confident we will exceed cash flow available for distribution on an annualized basis.

All right, great, well, thank you very much for answering my questions and congratulations on a great quarter.

Thanks.

(Operator Instructions) Brian Hogan, William Blair.

A question on the Manitoba. You gave the sales growth rate of 44% and maybe it's in the 10-Q, but did you actually give the dollar figure?

We did not (multiple speakers).

Do you plan to? Can I have it? (laughter)

Unfortunately, Brian, this business from and SEC reporting standpoint was not what they deem to be significant. So we were not required to file historical financial statements.

I think what you'll see is as we publish our Q3 and Q4 results we will put in pro forma prior-year amounts and that will then help you as part of your modeling and such. But as of right now there's nothing that's public. But at the September 30 Q as well as year end, you'll get more color there.

Great, okay. That sounds good. Sales, I think US is a big opportunity. Can you remind me of the sales mix US and Canada. Is that driving some of the growth is the shift over more to the US?

Yes, it's roughly 50-50, although that mix is moving towards the US and I would say is the year develops, we would expect there to be a higher concentration going forward from the US than from Canada just because we think that such a more under saturated market.

Okay. And then the margins and the year-over-year growth of EBITDA, does that -- I would expect it to be lower because you are investing. But can you kind of give us a sense of where those are at?

Yes, so gross margins are roughly flat year over year, and we would expect that gross margins to hold kind of flat. I will say among some products there can be some differences in gross margin. Some of the ready-to-eat products may have a slightly lower margin but overall I don't think that's going to have a big impact. So we'd look at flattish type gross margins.

EBITDA margin, we absolutely expect to come down. And again, that's a function of investing significantly in market awareness, predominantly in the US because market awareness is so low, but because we think it's such a great opportunity and we think the sales and marketing dollars that we can invest here have tremendous return on investment. So, we plan on initiating higher sales and marketing, driving higher revenue, and then over time we would expect our EBITDA margin not only to revert back to what they been historically but even grow as you get leverage on that.

But it's -- I would think of that as more of almost like a, you know, they call it like a J-curve right? It's going to -- I would think margins will dip in the near-term and then out a little ways they'll start to kind of stabilize and then pick up on the operating margin level.

But quarter by quarter, I think we'll be able to give guidance here in terms of how we're thinking about margins and investment in this business. But for the nearer term I would say for modeling expect EBITDA margins to come down.

Okay, thanks for that. Question kind of broadly and a little more specifically on manufacturing, American Furniture Manufacturing capacity constraints. Do you have any constraints broadly? And then last quarter you had said American Furniture was operating at capacity. Were you able to raise prices or what's the capacity levels there?

Yes, American Furniture, given its growth rate, is approaching some capacity issues that they have navigated to date by adding additional production lines to satisfy current levels of demand. And for the right now that has been sufficient. If they continue on this current level of growth, it is likely that they would need to consider additional capacity probably outside of their current footprint as after a couple more lines are so, they're maxed out the existing facility. So that's something that we have our eyes on, obviously, and will pay attention to.

The good news is this is ramping up that type of production and acquiring access to a facility is not that hard. It's something that done in the past many years ago and something that if we need to do, we are very confident that the Company will be able to do that.

You know with respect to prices, this is a very difficult industry. I don't know what exposure you've had historically to the furniture industry but it is very much driven by price points at retail. So it's very difficult not only for American Furniture but for others in the promotionally priced furniture industry to go to their customers and just simply raise prices. Whether it's because raw material costs have gone up, whether it's because demand has increased because they are still driven by a price point at retail.

And so, we have had not as much success raising prices, not just now but over the course of our ownership than we probably would've hoped for when we initially acquired the company due to the industry dynamics that I just described.

I would say, however, given the capacity levels and the demand for the company's products, what they have done a really nice job of is introducing new products, rotating out some SKUs that were less profitable, replacing them with newer SKUs that are more profitable. And so, that's one way that the company has been working to grow its margin at a time when we would like to see them be doing that given the level of demand for their products.

So it's not, unfortunately, unlike other industries where just given the demand levels, you can go and get price increases. It's a lot harder to do in the furniture industry, unfortunately.

And then across your other portfolio companies any constraints in capacity?

None to come to mind. Ryan, Elias -- I don't believe -- Elias has talked about the future plans for expansion at Manitoba Harvest in the out years.

You know, interestingly, Liberty could be in the coming years depending on current levels of demand and normalization and their continued growth and driving of category awareness as well as brand awareness through their national advertising programs. They could potentially down the line need to consider some additional capacity.

But on a near-term basis, I don't think of anyone of our subsidiary companies that is facing capacity constraints that would impact their ability to achieve the growth plans that we have for them.

Okay. And then just one last one on -- you kind of touched on it a little bit earlier. The pipeline. Can you give a little bit of color there, like how competitive it is? Are you seeing a lot of deals picking up and in what areas?

Sure, I think that we've seen a pickup in activity but it's hardly a robust market right now for middle-market M&A. I think that we are seeing everything we should see. We measure that against third-party market data. So, I'm very confident in our efforts to successfully source opportunities. It has picked up, which is nice, and I think we're seeing opportunities across geographies, across our two verticals, and so it's not as though there's a tilting one way or the other.

But the market does remain competitive as it has been for years. The availability of capital from the debt standpoint, from cash on strategic acquirer's balance sheet, cash at private equity firms available to deploy, there's a lot of available capital to support buyouts in middle-market M&A activity. And so, the market remains competitive and we don't really see that changing anytime soon.

So, we don't really give specific details about our pipeline. But what I can tell you is we continue to review a lot of exciting opportunities, but that funnel gets narrow really quick, as you know, and we'll look at a lot of opportunities in excess of 500 a year, and we will hopefully acquire one or two new subsidiaries per year. So I'm pleased with her activity level. I wish the market was a little bit more active but it has picked up, and hopefully we will be successful in deploying our capital.

But as you've heard us say over the years since we been a public company, we are only going to do that in it disciplined manner and we're not going to get ahead of ourselves in deploying capital just for the sake of deploying it. We hope to have great opportunities throughout the balance of this year but if we don't, we've made some great acquisitions this year. We have a lot to work on with our existing group of subsidiaries, and we think we can generate great growth from what we already own.

But we do look forward to deploying our available capital provided we can get the right risk-adjusted return for our shareholders.

Thank you.

Leslie Vandegrift, Raymond James.

I just had a quick question about the CamelBak sale. So with that capital, you know how -- I know you talked about paying down the revolver. Is there any interest in a particular industry to go into? Are you going to stick with the consumer products business? Looking for kind of a replacement investment, or is it just whatever comes down the pipeline that you are interested in?

Yes, I think we remain very interested in both of our verticals, and one of the things that we really resist doing is looking at our group of subsidiaries, having a situation like we just had the great opportunistic divestiture CamelBak, and then put pressure on ourselves to try to find a specific replacement, because I think ultimately that can lead to some suboptimal decision-making if you're trying to deploy specifically in a certain area. Make no mistake, if an opportunity came to acquire what would be affectionately referred to as CamelBak's replacement at the right value with the right team in the right industry, we would love that. It would be tremendous.

However, we are equally as excited about adding to our industrial group, and I think that for us again it just comes down to where we think we can find good opportunities to deploy our capital in a way that we think we can generate strong risk-adjusted returns for shareholders.

So very excited about consumer, very excited about industrial, and hopefully we can be successful in both verticals. It's always been a very difficult thing for us to predict where that activity going to come from, but it's -- so we're pursuing both and hopefully will be successful there but we're not really focused on specifically acquiring a certain type of company as a specific replacement for CamelBak.

Okay, perfect. Thank you.

Thank you, and I'm showing no further questions at this time. I'd 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. Thanks.

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