Compass Diversified Holdings (CODI) 2016 Q1 法說會逐字稿

Good morning and welcome to Compass Diversified Holdings' 2016 first-quarter conference call. Today's call is being recorded. All lines have been placed on mute. (Operator Instructions). At this time, I would like to turn the conference over to Scott Eckstein of The IGB Group for introductions and the reading of the Safe Harbor statement. Please go ahead sir.

Thank you and welcome to Compass Diversified Holdings' first-quarter 2016 conference call. Representing the Company today are Alan Offenberg, Chief Executive Officer, Ryan Faulkingham, Chief Financial Officer, and Elias Sabo, 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 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 believe, expects, projects, and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties affecting future results and conditions, certain factors that 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 Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2015, 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 statement 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 2016 earnings conference call. In the 2016 first quarter, our leading middle-market businesses generated stable level of cash flow that were consistent with our expectations. For the three months ended March 31, 2016, CODI generated cash flow available for distribution and reinvestment, which we refer to as cash flow, or CAD, of $13.6 million.

Turning to our results for the quarter, at our niche industrials businesses, we achieved combined sales and EBITDA growth mainly driven by solid performance at our Sterno Products subsidiary. In addition to continued operational efficiency improvements at Sterno, the Northern International results for the quarter drove strong year-over-year performance.

Within our branded consumer businesses, growth was primarily driven by strong performance in our Liberty Safe business which exceeded our expectations, reflecting robust market demand and volume, as well as the significant success our management team has had generating continued operational efficiencies.

For the first quarter, we paid a cash distribution of $0.36 per share, representing a current yield of approximately 9.1%. Since going public in May of 2006, CODI has paid cumulative distributions of approximately $13.56 per share.

Complementing our solid first-quarter performance, we took further steps to strengthen our financial position and liquidity, and specifically, in March, we capitalized on a compelling opportunity to monetize a portion of our interest in FOX, realizing total net proceeds of approximately $48 million. With these proceeds, combined with debt and equity proceeds from FOX's IPO in August 2013, as well as proceeds we received from FOX's secondary offering in July in 2014, we have now generated total proceeds to date of over $190 million while maintaining a 33% ownership in FOX. We continue to be the largest shareholder of FOX and remain enthusiastic about the company's growth prospects.

We also continued to invest in the growth of our current subsidiary during the first quarter, including the accretive add-on acquisition of Northern International for our subsidiary Sterno Products. The addition of Northern International, an industry leader in flameless candles and outdoor lighting products for the retail segment, expands Sterno's product offering into complementary categories and channels serving Sterno's primary food service and retail markets while continuing to build the strength of the iconic Sterno brand.

Following the end of the quarter, we completed an accretive add-on acquisition of Phoenix Soil by our Clean Earth subsidiary. Phoenix Soil marks our second add-on acquisition since we acquired clean Earth in 2014. This transaction bolsters Clean Earth's existing soil treatment capabilities while expanding its presence into New England with a new state-of-the-art facility where it can accept and treat essentially any non-hazardous contaminated soils. The new facility also features a more centralized location to customers which will reduce transportation costs and help Clean Earth in serving both existing and new customers. Adding this highly complementary business strengthens Clean Earth's capabilities while allowing it to reach into new markets and enhance the Company's growth potential.

In summary, our first-quarter performance was in line with our expectations and demonstrated steady cash flow from our existing businesses. As Elias will discuss momentarily, some of our subsidiaries experienced softness quarter-over-quarter. However, in reviewing our full-year expectations following the first quarter, our 2016 outlook for our subsidiaries remains consistent with our comments from last quarter's earnings call.

Looking forward, we continue to be committed to capitalizing on CODI's financial strength to compete attractive strategic add-on and platform acquisitions that will drive cash flow and build long-term value for our shareholders.

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, which continued to generate solid cash flow. We reported a combined revenue increase of approximately 10% during the first quarter of 2016 as compared to the year-earlier period. EBITDA on a combined basis increased by 1.5% as compared to the year-earlier period, while the combined EBITDA margin was 14.2% for the quarter ended March 31, 2016 compared to 15.4% in the prior-year quarter.

For the first quarter, Advanced Circuits results were in line with management's expectations. Revenue was flat on a year-over-year basis while EBITDA increased 3.9%, primarily due to growth in quick turn PCBs and assembly, offset by a decline in long lead time PCB. First-quarter EBITDA margins for this subsidiary were slightly higher at 31.9% compared to 30.8% in the year-ago period, reflecting the current sales mix.

Arnold Magnetics' results for the first quarter were in line with our expectations. Revenues were down 12% year-over-year due to lower reprographic sales, lower PMAG European sales as a result of a weaker oil and gas sector, and decreased sales in precision thin metals. EBITDA declined by 25.9% during the same period primarily attributable to lower margins as a result of lower sales volumes in the quarter, as well as a one-time charge related to its Switzerland pension plan.

Cleaners' results for the first quarter, which is seasonally their slowest quarter, were in line with our expectations. Revenue increased 9% for the first quarter while EBITDA declined approximately 13%. Revenue growth was primarily due to higher sales in soil and hazardous waste. The decrease in EBITDA was primarily attributable to sales mix. Notwithstanding the minor year-over-year decline in earnings in Q1, Clean Earth remains on track for a solid year in 2016 and in line with our expectations.

Sterno Products generated strong first-quarter results ahead of our expectations. During the 2016 first quarter, revenue increased approximately 54% and EBITDA increased approximately 68% compared to the year-prior period, primarily from the Northern International add-on acquisition in January 2016. EBITDA margins increased by approximately 124 basis points, reflecting increased manufacturing efficiencies and lower raw material prices.

Turning to Tridien, first-quarter results were in line with our expectations. First-quarter sales at Tridien decreased 11% compared with the prior-year period due to the previously discussed fourth-quarter contract termination of one of Tridien's major customers and the associated loss of revenues. This was partially offset by improved power product sales resulting from new product introductions during 2015. EBITDA margins for the first quarter of 2016 declined due to certain manufacturing inefficiencies continuing into the early part of the first quarter of 2016 resulting from a facility move in the 2015 fourth quarter.

Next I will turn to our branded consumer businesses, which include Liberty Safe, Ergobaby and Manitoba Harvest. Please note that the revenue and EBITDA numbers I provide for Manitoba Harvest will be on a pro forma basis as if this business was acquired on January 1, 2015.

Our branded consumer businesses achieved solid results for the first quarter of 2016. Combined revenue increased 8.7% compared to the year-earlier period, and EBITDA increased 13.7% compared to the first quarter of last year.

First-quarter results at our Liberty subsidiary once again exceeded our expectations, reflecting strong demand and continued operational efficiency. For the first quarter of 2016, revenue increased over 12% to $29 million compared to the year-ago period. EBITDA grew approximately 85% compared to last year's first quarter. First-quarter 2016 EBITDA margins grew to 20.5% compared to 12.4% in the year-ago period. EBITDA margin continued to improve this quarter due to greater operating efficiencies and lower raw material costs.

As many of you know, the second quarter is typically a seasonally slow quarter for Liberty. Additionally, we are investing in manufacturing improvements which will negatively impact our gross margins in the second quarter. However, these improvements are necessary to continue to grow this business.

For the first quarter of 2016, our Ergobaby subsidiary's revenue decreased by $1.3 million or 6% year-over-year as a result of lower international carrier sales offset slightly by an increase in sales of baby carrier and accessories to national and specialty retail accounts. EBITDA decreased 15.3% from the prior year due to the timing of certain marketing initiatives as well as increases in staffing costs and professional fees. International sales decreased primarily as a result of strategic changes in our distribution model, resulting in Ergobaby reporting a one-time charge of approximately $600,000. In addition, certain international distributors slowed orders in advance of the launch of the Company's newest product, the Adapt baby carrier, which has garnered several industry awards. We continue to remain optimistic about the Company's future prospects.

Lastly, first-quarter revenues for Manitoba Harvest, which we acquired on July 10, 2015, increased 29% to $13.7 million compared to the prior-year period. This was due to the acquisition of Hemp Oil Canada, which we acquired in December 2015. EBITDA for Manitoba Harvest was flat compared to the prior year, reflecting our continued investment in marketing and advertising for this business.

For 2016, we expect solid topline growth on a constant currency basis. However, as we have mentioned previously, we will continue to invest in this business to facilitate long-term growth at the expense of near-term EBITDA.

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, 2016. I will limit my comments largely to the overall results for our Company since the individual subsidiary results are detailed in our Form 10-Q that was filed with the SEC yesterday.

On a consolidated basis, revenue for the quarter ended March 31, 2016 was $208 million, up 16% as compared to $179.4 million for the prior-year period. This year-over-year increase was primarily attributable to contributions from our 2015 acquisitions of Manitoba Harvest and its Hemp Oil Canada add-on, as well as notable revenue growth in our Liberty, Clean Earth and Sterno subsidiaries.

Sterno's results include the acquisition of Northern International in January this year.

Net loss for the first quarter was $15 million compared to a net loss of $25.3 million in the year-earlier period. The lower net loss was primarily due to an impairment recorded in the prior year associated with our Tridien subsidiary.

Cash flow available for distribution or reinvestment, which we refer to as CAD, for the quarter ended March 31, 2016 was $13.6 million compared to $15.5 million for the prior-year period. The decline in cash flow for the first quarter of 2016 reflects the loss of cash flow from the CamelBak and AFM businesses sold during 2015, partially offset by our acquisitions at Manitoba Harvest in July 2015, and its add-on, Hemp Oil Canada, in December of 2015.

Turning now to the balance sheet, we have $72.6 million in cash and cash equivalents and net working capital of $190.2 million as of March 31, 2016. We had approximately $319 million outstanding on our term debt facility and no outstanding borrowings under our revolving credit facility as of March 31, 2016.

We have no significant debt maturities until 2019. In addition, we had net borrowing availability of approximately $396 million under our revolving credit facility a quarter's end. Additionally, our 12.1 million shares of FOX, which are recorded as an equity method investment on our balance sheet, had a value of $191.4 million at March 31, 2016.

Turning now to capital expenditures, during the first quarter of 2016, we incurred $3.7 million of maintenance CapEx compared to $4.3 million in the prior-year period. The decrease is primarily attributable to lower levels of maintenance CapEx associated with Clean Earth as compared to the prior-year quarter. For the full year 2016, we estimate our maintenance CapEx will be between $14 million and $18 million and growth CapEx will be between $2 million and $3 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 first-quarter performance reflects stable cash flow generation from our family of niche leading businesses that was consistent with our expectations. Complementing this solid performance, we continued to strengthen our financial position, realizing $48 million in proceeds from partially monetizing our interest in FOX. Including our FOX secondary sale in March and past opportunistic sales of subsidiaries, we have now realized gains for shareholders of over $520 million. We also continue to reinvest in the growth of our subsidiaries by completing two recent accretive add-on acquisitions.

As we move ahead in 2016, we remain focused on identifying attractive middle-market platform acquisition opportunities that meet our strict acquisition criteria. In addition, we continue to pursue opportunities for strategic add-on acquisitions to enhance the growth trajectories of our current subsidiaries and improve cash flow growth. With over $500 million in available capital, we are well-positioned to continue executing on this core investment strategy.

I'd like to close by commenting briefly on M&A activity. During the first quarter, middle-market deal flow was down compared to both the first and fourth quarters of 2015 as persisting high valuation levels continue to be driven by the availability of debt and equity capital with favorable terms and financial and strategic buyers seeking to deploy available capital.

Before I open up the lines for Q&A, I would like to announce that we will be hosting our 2016 analyst/investor luncheon at the Saint Regis Hotel on Thursday, June 16. In addition to presentations from members of CODI's senior management team, Chris Dods, the CEO of Clean Earth, and Mike Fata, the CEO of Manitoba Harvest, 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). Larry Solow, CJS Securities.

Good morning guys. I'm wondering if you could just -- you had a call not too long ago -- so perhaps just discuss a couple of the larger segments, holdings I mean. So just on Ergobaby, which has had a great run for the last five years or so, it sounds like this quarter was pretty much a timing related slowdown and a one-time charge there. How do you see this going forward? Do you still think it could be a high single-digit grower on the top line, and maybe better on the bottom line?

This is Elias. I would say your categorization of the quarter is correct. And we did make a change with a distributor where we are going direct to the Canadian market, so that was the change in the international distribution model that we referenced. And we took back the inventory that was there, so that clearly held back sales and profit growth and the charge that we have referenced was in respect to that.

I think, in general, we feel really good about this business and its prospects. As you know, we don't guide to specific numbers, but I would say our outlook for this business in terms of continued growth, both in top and bottom line, hasn't changed. We still think there's a lot of opportunity. We are still launching great, new, innovative products, the latest which is the Adapt carrier, which have, again, won a lot of awards from the industry. So we feel really good about the business and its prospects notwithstanding there was a little bit of I would say just kind of one-time things that occurred in this quarter and more timing related.

And then Liberty has obviously put up some great numbers for the last several quarters. It looks like it's sort of ahead of that run rate that you sort of refer back to in I think 2011 and 2012 or 2012 and 2013 before the pull back as things kind of heated up a little too much, and there was a little too much inventory in the channel. Do you think these numbers are sustainable? Are we getting -- how do things look at the retail level, or are things heating up again too fast? Do we run that risk again as we go forward?

I'll try to answer each component of your question. I think, first and foremost, I certainly wouldn't guide you towards suggesting that the first-quarter performance is sustainable. It was an outstanding quarter on a lot of levels, as evidenced by not only the cash flow but the margin level. And so while we still anticipate a very strong year for the Company, please do not take that quarter's performance and extrapolate it into what we anticipate full-year performance to be.

As referenced in some of the prepared remarks, we will expect to see a softer second quarter for the reasons described, but notably due to some investments in maintaining the machinery, which will result in a little bit of downtime in the plant, which will reduce some of those efficiencies that we've seen. But that's by design to make sure that, for the rest of the year, the Company remains as well-positioned as it is today.

I think there's always a risk that things could be heating up too quickly, but from what we see at the Company and from what the Company arguably, more importantly, sees from its customers, it doesn't feel like this is the same type of run-up that we saw last time. I think the inventory at retail does not appear to be nearly as high as it was during the last call it uptick in demand. And so I think all participants in the industry, both the manufacturers and the retailers, seem to have that in still their near term memory so as to not hopefully repeat the issues that the industry went through just now, not even a couple of years ago. So I think it feels better than that, but time will tell. And oftentimes, election cycles can have impact on this business because it does have correlations to the firearms industry as we discussed in the past. Again, the Company doesn't feel as though that's what's driving it right now but it's probably a little too early for us to have a real great clear view on what's driving it other than it's just a good time right now. Demand for firearms is high, and with it is demand for safes.

On top of that, the Company has done a great job over the years throughout its time as one of our subsidiaries of investing in its brand building, investing in marketing, and we believe that continues to take market share in this industry. So we are all very positive about Liberty, what's happened in the recent past. It certainly has us cautious about things overheating too quickly, but it feels very different based on what we can see in the industry. But all that said, it should be a really nice year for the Company.

Just lastly, on Arnold, I don't know internally what you guys were expecting for the quarter. It was somewhat less than my expectations. What's the outlook there? I know it's more of a longer-term thing, but do you still see perhaps 2017/2018 as a potential inflection point of the business?

It's very hard to predict what the timing is for an inflection point in terms of when some of these longer-term initiatives are going to present themselves. We certainly think that they remain plausible and possible and that the Company is doing what it needs to do to capitalize on the various initiatives.

I think right now, in terms of 2016, we think it's going to be a steady year. Could it be up a little bit, down a little bit? Perhaps, but largely I think consistent or close to consistent with prior-year performance. So we don't see anything that's going to be a catalyst for material outperformance in 2016, and we are hopeful that, in the future, we will see those develop into the opportunities that we believe exist out there. But it's very difficult to give you any sense of certainty with respect to what is the specific catalyst that leads to that inflection point, that leads to material outperformance relative to current levels of performance.

Okay. Fair enough. Thanks a lot Alan. Appreciate it.

Leslie Vandegrift, Raymond James.

How are you doing this morning? Just a quick general question. Overall I know obviously you had the big sales last year, big realizations and you've talked about in the past gave really good guidance. We knew we were going to come in below CAD or below the dividend for CAD. How long are looking at to be able to maintain that while we are out looking for good acquisitions, not just anything, and before we really start looking at dividend policy?

I think that I'll, with all respect, reference one of your analyst peers from another firm who contemplated this question in one of his writeups. And I think the question, if I understand it correctly, is to the extent we have a gap in our current level of CAD, how long would we be able to sustain the current level of distribution? And this is just going to be directionally correct, because it was written a little while ago, so if I get it a little bit wrong, forgive me. But we can certainly follow up with you after the call for the specifics.

But I think the analysis went something along the lines of quantifying the gap between the anticipated level of CAD and our current level of distribution, and it really kind of held everything else in a vacuum, meaning the performance of the other company. And I think the estimate was based on the availability of cash flow that we have or our sources of cash that we have by gain as well as availability under our credit facility that we could sustain our level of distribution for 15 or 20 years before it became an issue. And this is really something that we have been trying to do in our investor presentation as well as in our one-on-one, really communicate to the market that the nature of our business will drive CAD to be at times below, at times to be above, just depending on where we are at. But historically, when it's gone below, it's typically been because we've opportunistically divested a subsidiary which generated a large gain. So while we lose the cash flow until those gains are redeployed, we do in fact have a gain that theoretically those proceeds could be used to sustain the distribution. They're mighty fungible, so I don't want to zero in on any particular source of what could help fill that gap.

But the point is it's a long time, a very, very long time for us to have the type of concerns that I think you are alluding to, meaning would the Board reconsider our distribution policy. We are always conscious about closing that gap as soon as we can by using our available capital to make accretive acquisitions of add-ons as well as new platforms. But because of the analytics that I just walked you through, we really don't feel a need to compromise our disciplined, patient approach to our investment strategy to fill that gap because we've really got plenty of runway before we even come close to considering needing to make those changes. And all of those comments are of course made in the context of nothing that catastrophically affects our economy such that all of our subsidiaries go to zero at the same time. Do I think that's possible? Not really. But it certainly -- things can happen that are unforeseen. I just wanted to put that blanket comment out there just to make myself feel better.

Of course. And in respect, would that have such large of a cushion, even as you (inaudible) to know you have that cushion going out for 10, 15 years as it might be. What's the outlook for possibly selling maybe some of the underperformers then even though you are currently under-earning, so you wouldn't be forced to hold such as Tridien, even though maybe it's back to what you expect for the year after that customer leaving. Would you still be willing to look to offload the less performing businesses this year?

Yes, I think that with respect to any of our subsidiary companies, we will always consider opportunistically divesting them. So, I think that we really do look at that independently of our level of CAD and relative to our level of distribution for the reasons we just discussed. So, I don't think that our current level of CAD impacts really at all how we look at opportunistically divesting any of our subsidiary companies.

All right, perfect. Thank you.

(Operator Instructions). Brian Hogan, William Blair.

Good morning. A question on -- actually a follow-up to that last question. At Tridien, its contributions are quite small to the overall picture. I guess the question is is it worth your time in the whole scheme of things?

I'll make some comments and then probably have Elias share some comments as well. Look. I think the team at Tridien is working really hard to build its business, and we are certainly by their side trying to help them, as we are with every other subsidiary. Sometimes, initiatives are more successful. Sometimes they are less successful.

I think Tridien has really, in the face of some difficult challenges over the last couple of years, done some really good things to maintain its level of cash flow, and it's absolutely a smaller company relative to our others. But at the same time, it's not a company that I believe takes a disproportionate share of our team's efforts. So I think that it is a company that we are pleased to own, as we are with all of our other subsidiaries, and if opportunistic divestitures present itself for Tridien or any other subsidiary, we will certainly consider it.

But Elias, do you have anything to add to that? No? I think Elias feels as though that was sufficient. So I'm happy to expand if you have any follow-up questions to that one.

No, that's good on that question. I appreciate the commentary.

The next question is on Ergobaby, obviously a disappointment from our perspective and yours, below expectations. But the question is why change the distribution models? I guess it was in Canada internationally. Do you intend to do that in other markets, and why the change in strategy?

First, I don't think, just to clarify, the first quarter wasn't a disappointment in our mind, and met what our expectations were. I would say, in any of our businesses, the quarter-to-quarter performance can shift a little bit, especially when you have some large distributors that you may work with, Ergobaby being one that does have some large international distributors. But we feel on a lot of the metrics that business is actually performing really well and in line with what our expectations are. So I'm just trying to make that point.

In terms of the international distribution model, we really have to relook constantly and are working very closely with all of our international distributors, some of which are stronger than others, which all businesses I would say incur that.

In this instance and specifically in Canada, I think there were a few reasons that made us determine it was beneficial to go direct into that market. One, just given its geographic proximity to the US and our ability to handle that market made a lot of sense. The second thing is the distributor up there was financially not able to support at the same level we would be able to support some of the new product launches, some of the marketing initiatives that we'd like to do there, and we felt that it was better to convert into a different arrangement with that distributor rather than having them be a distributor for us. And there are other distributors globally that we would look at doing this with, although I would say our largest distributors internationally are great partners to us. But some of our smaller distributors that may be struggling to gain the foothold that we believe in the market or not investing in the proper inventory that is going to be required or the sales force or the marketing initiative, we look at all of those continually, and we make assessments as to whether it would be better for us to control the market and to be going into it. But by and large, this is not a wholesale upending of a distribution model that has worked internationally extremely well for us. It will be targeted and selective when we do this. And there's another distributor that will be going direct in the second quarter, and we are in the process of converting that now. But beyond that, I would say maybe we will see one or two, but it's not a wholesale change to our model.

How long is the disruption from the change?

So the end market disruption to the customer is virtually nonexistent because we handle that I think reasonably well. We make sure that our retail partners in the specific markets have sufficient inventory on hand to be able to continue to sell through to the end customer.

The disruption is really Ergobaby's results, because the distributor will have some inventory on hand. That inventory -- and doing this in a process that makes sense because we don't want the product just to be distributed at all costs, so we will typically buy that product back. When you take that product back, it becomes a negative revenue, and that's what you saw with the $600,000 charge that we had. That was product that came back from our predominantly Canadian distributor and that we had a charge to our financial statement.

So, I would say, from a market disruption standpoint, we don't view it as material at all. From an Ergobaby financial statement disruption, it typically is a month or two and then we get back to something where we actually feel pretty quickly we build and build more strength. And then you have obviously the costs you're going to incur but you are reaping the benefit of the direct margins versus distributor margins, which are significant we higher, and more than offset any of the costs that we are investing in. So we think a month or two of financial statement disruption to Ergo, but then benefit following that.

You say significant. That was actually going to be my next question, what are the savings from doing that model. But how much significant is it? How much, on the margin, how much basis points?

We don't typically give out specific detail at that level. I would say, if you think about a distributor, we have to sell to a distributor at the margin that is obviously below what we would sell to a retail partner direct, because then they handle all of the sales, marketing, and distribution that's required. So typically you've got to build in something for a distributor.

Now, across industries, distributors work on different margins, but you could take a guess at kind of what the margin for a distributor in this industry is. We clearly now, by going direct in that market, will be able to sell at a wholesale cost to the retailer rather than selling to our distributor at a distributor pricing. So our cost of sale on the good is generally the same regardless of whether we go direct to the retailer or whether we sell through a distributor, and therefore you see the margin gap.

Now, offsetting that, though, just to be clear, is now we will pick up the sales and marketing expenses, and we will pick up the distribution expenses, the logistics expenses. In a market like Canada, again, because it's geographically close to us, and it's something that we can cover, and the way that we made our arrangement with the distributor, we think that will net-net be accretive going forward to EBITDA for our business after we get through the change in distribution model.

All right. And then the Ergobaby, you mentioned a new product launch, and maybe some pullback in sales. When is the timing of the launch, and go into a little more details on that please?

Sure. The launch is occurring now as we speak. It was launched in the US I believe in April was when we started filling with our distribution partners, our retail partners. Internationally will be throughout the quarter. And so far so good. I think what we are hearing back from all of our partners, both retail partners as well as distribution partners, is it's a great product that continues to expand and then fill in the line for any gaps that we may have, and it's got great market potential. It's, again, another product that has got a lot of positive industry support behind it. So we feel really good about it. But it's in full launch right now.

The organic growth at Sterno and Manitoba, could you elaborate on that please? You've obviously had some nice growth to do the acquisitions, but just kind of the underlying trends.

Yes. So, I think probably some of this data will be available in the 10-Q or you would be able to probably get back to it. In terms of Sterno, its very consistent organic growth is topline kind of low single digits. It runs right with US GDP. And so there's no major change there. I think that kind of follows where food-service is. That's on the Sterno brand itself.

I think the Northern International brand we believe, given the emergence of the category, has the ability to grow much faster, but given that we've only owned it now for a month and a half or for a couple of months I guess in the quarter, that's a little too early to start comment on. But the main Sterno brand kind of is growing with GDP organically.

Clearly, as we said in the written remarks, the business continues to have a strong emphasis on manufacturing efficiencies and we are continuing to find ways to manufacture more and more efficiently quarter by quarter. So the EBITDA margin and the EBITDA leverage that we are getting is significantly greater than that, but our revenues kind of are growing in line with GDP just like food-service.

Manitoba Harvest, as we've talked about before, has really been a strong growth business, was growing extremely rapidly throughout 2015. The first-quarter Manitoba Harvest growth was not as strong as we had anticipated. Organically, I think when you go through the numbers, you will see that Manitoba was down marginally year-over-year. Again, this has a lot to do with timing of promotions and distributor orders. We work with all the major US and Canadian retail workers, especially in the organic and natural channels. And if we are running a promotion in one quarter versus not doing it in the next, it can have a pretty major effect on the business, especially given the relatively small size of it. We don't look at this as any indication of weakness in the overall trend.

We look more closely at data on bookings that are coming in because -- and we look very closely at what the sales at the register are, and we get a lot of the data through spins, and so we feel pretty good about the data. The Company is still continuing to have strong sales at the counter. Some of our retail partners may be adjusting their inventory levels a little bit. We're doing promotions here or there that will change timing, and that will affect our sales. And we look at kind of our bookings, which also will smooth that out a little bit, and we feel that's running reasonably well right now and showing growth.

All right. And then the last question, more of a bigger picture question. In what areas, which businesses, are you looking to make add-ons? You obviously made some with Clean Earth and Sterno. -- where -- which businesses are still --

I think we certainly will contemplate add-on opportunities for virtually all of our subsidiary companies. But I think that the ones that I would say have opportunities to consider, just based on the markets that they operate in and what the competitive landscape looks like, I would say that, in no particular order, Sterno has opportunities; Clean Earth has opportunities; Ergo has opportunities; Advanced Circuits has opportunities. I would say less so for Tridien, for Liberty. And Arnold probably falls somewhere in the middle. I think they have some opportunities but not as many as the others that I referenced as having opportunities.

So, again, things can also sometimes present themselves where you didn't expect them to. So, we will consider them for all but, as we've said in the past, we are very happy to support both acquisition related growth and investments to fuel organic growth. And we don't force either business model on any of our subsidiaries. Rather we look to see what the best opportunities are for the subsidiaries and pursue them accordingly.

Thanks for your time.

Kyle Joseph, Jefferies.

Thanks for taking my questions. Sorry I hopped on late, so I apologize if this was already addressed. But --

It's a little early out there, Kyle.

We spoke about two months ago and since then, we've seen broader equity markets recover substantially. Can you give us a sense for what you're seeing in terms of middle-market valuations since the last time we spoke?

You know, I think middle market valuations -- I believe we mentioned this last time. I don't think that was down in terms of middle market private M&A. So there did not seem to be -- or I should rephrase that. There seemed to be dislocation between what was happening in the public markets as it relates to middle market M&A values. So we didn't really see them come down and I would say we certainly haven't seen them come down at all. So they remain pretty robust, as they have been for now quite some time.

Okay. And is there still sort of that spread between the consumer businesses and the industrials? Are industrials still relatively more attractively valued?

Interestingly, I think the industrials have seen some price pressure, I mean upward price pressure, unfortunately, whereas I think, several months ago (technical difficulty) risk pickup and return basis, we felt definitively that there were perhaps some opportunities on the industrial side that were more compelling than on the consumer side. I think that while the multiples might not necessarily be equal to each other, I think we see the industrial multiples for good, solid companies probably tick up a little bit. And I think one of the reasons that might be the case is, as we mentioned in the prepared remarks, the activity levels, meaning number of deals in the middle market M&A space, were down both sequentially and year-over-year with some industry publications estimating that that level of activity as compared to both periods was down upwards of 30%.

So there's really, in this first quarter, been a real reduction in the amount of opportunities, such that, when the good companies come through, almost regardless of which industry they are participating in, prices are being driven up for these premium assets given the amount of capital that is out there to be deployed into this type of investing.

So it's just a series, Kyle, so I don't want to put that out there as being a definitive answer. But it seems as reasonable an explanation at least as I can think of.

And so we still think there are great opportunities in both segments, but it remains competitive and it remains a market in which a full and fair value will likely be required to make an acquisition. I do believe that, as evidenced by some of our recent add-on acquisitions, that we've had some really good success in that space making acquisitions at -- again, I don't want to call them steals, because I don't think in this market you can do that, but at the same time at valuation levels that we are far more comfortable with than we've seen on the platform side.

But we continue to pursue aggressively opportunities across all spectrums, and have seen some good opportunities, but at the same time, we've also been outbid in some cases where it's been competitive and in other cases where maybe it's been a more direct conversation, just been unsuccessful based on the valuation expectations of the seller.

That's great color. Thanks a lot for answering my questions.

Vernon Plack, BB&T Capital Markets.

Thanks. Alan, I was looking for a little more color on the rationale and the logic behind the two recaps that you did, one during the quarter, which was Liberty, and then after the quarter, Advanced Circuits.

I think, as with every recap that we do with our subsidiary company, it's really a function of them paying down their intercompany debt owed to us to a level that is meaningfully below market levels of leverage for companies of this type. So it's really simply a reflection of bringing the Company's strong performance which led to the pay down of debt to a level way below market level, and simply bringing that leverage up to not a high level, but to a more market level for the business.

Okay, all right. Thank you.

I'm showing no further questions at this time. I would now like to turn the conference back over to Mr. Alan Offenberg.

Thank you, everybody, for joining us on today's call and following the CODI story. We look forward to sharing our progress with you next quarter. Thank you.

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