Leon Berman - IR Elias Sabo - Founding Partner and CEO David Swanson - Partner, CGM Pat Maciariello - Partner Ryan Faulkingham - EVP, CFO and Co-Compliance Officer.

Lawrence Solow - CJS Securities Douglas Mewhirter - SunTrust Robinson Humphrey Robert Dodd - Raymond James.

Good morning and welcome to Compass Diversified Holdings' 2018 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 Leon Berman 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 2018 conference call. Representing the company today are Elias Sabo, CODI'S CEO and a founding partner of Compass Group management and Ryan Faulkingham, CFO.

Also joining us today are Dave Swanson and Pat Maciariello, partners of Compass Group management, who will review our subsidiaries performance.

Before we begin, I would like to point out that the Q1 press release, including the financial tables and non-GAAP financial measure reconciliations, are available on the company's website at www.compassdiversifiedholdings.com.

The company also filed its Form 10-K with the SEC last night, which includes reconciliations of non-GAAP financial measures discussed on this call. Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income in the company's financial filings.

The company does not provide a reconciliation of the ratio of its estimated cash flow available for distribution and reinvestment to its distribution.

This is because certain significant information is not available without unreasonable efforts including but not limited to our company's future earnings, current taxes, capital expenditures and the distribution to be paid as approved quarterly by our Board of Directors.

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 will make certain forward-looking statement, including statements with regard to the future performance of CODI.

Words such as believes, expects, projects and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions.

Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factor discussions in the Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2017, 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 Elias Sabo..

Good morning. Thank you all for your time and welcome to our first quarter earnings conference call. I will begin by reviewing the highlights of the first quarter.

We continue to capitalize on compelling market opportunities in the first quarter, completing the platform acquisition of Foam Fabricators and the add-on acquisition of Rimports for Sterno Products. Foam Fabricators is a leading designer and manufacturer of custom molded protective packaging solutions.

Foam Fabricators possesses the key qualities that we seek in a platform acquisition, including a strong competitive market position and experienced management team, a diversified customer base, strong free cash flow and compelling growth opportunity.

We are pleased with the acquisition and expect Foam Fabricators to be accretive to cash flow starting in the current quarter. We also continued to reinvest in our subsidiaries and completed the third add-on acquisition for Sterno Products since acquiring the business in 2014.

The acquisition of Rimports will add a complementary product line of scented liquid candles, essential oils and diffusers to Sterno’s Product offering and expand Sterno’s retail channel presence. This acquisition is also expected to be accretive to cash flow starting in the second quarter.

Given the size of Rimports we will be providing pro forma combined to information for Sterno as Sterno had acquired Rimports on January 1, 2017. We have also taken steps to enhance and strengthen our liquidity position and capital structure.

During the first quarter, we completed an offering of 4 million shares of 7.875% Series B preferred stock yielding net proceeds of $96.7 million.

Following the end of the quarter in April we refinanced our existing credit facilities and extended the maturity, specifically we signed a credit agreement for revolving credit facility totaling $600 million and a term loan facility in the amount of $500 million.

In addition, we completed a private offering of $400 million of 8% fixed rate senior unsecured notes due 2026 adding a new piece of capital to our capital structure. These recently completed financing have enabled CODI to accomplish important objectives related to further diversifying our capital structure without diluting our shareholders.

With these financings, we have enhanced our financial flexibility and now have $500 million of liquidity to pursue additional acquisition that build long-term shareholder value and support our ability to provide stable cash distribution. We previously communicated a distribution coverage ratio of 65% to 75%.

Due to the higher financing costs associated with these financings, we now expect our distribution coverage ratio to be 70% to 80% for 2018, down from 94% in 2017. Turning to our quarterly performance, our first quarter results met our expectations.

On a pro forma adjusted basis, we produced consolidated revenue growth of 6.7% from the first quarter of 2017 exceeding our expectations. On a pro forma adjusted basis, our EBITDA declined by 6.3% from the first quarter of 2017, meeting our expectation.

The decline in EBITDA is attributable to investments we have chosen to make in two of our faster growing subsidiaries 5.11 and Manitoba Harvest as well as 5.11 having a large direct agency order in the first quarter of 2017 that did not occur in the first quarter of 2018.

Before I discuss our niche industrial and branded consumer businesses performance for the quarter, I should mention that throughout the presentation when we refer to pro forma adjusted results, revenue and EBITDA for Crosman, Foam Fabricators and Rimports will be as of these businesses were acquired on January 1, 2017.

Our niche industrial business has generated solid pro forma combined first quarter results, performing above expectation. Revenues grew 9.4% from the first quarter of 2017, while EBITDA increase 6.2% from prior year period.

We anticipate our niche industrial businesses will continue to meet or exceed our expectation in the second quarter and for the remainder of 2018. Dave will provide further details in his comment. Our branded consumer businesses achieve pro forma combined first quarter results that were slightly below our expectation.

Revenue increased 3.2%, however EBITDA decline by 24.6%. As I mentioned earlier, we are investing heavily in two of our higher growth subsidiaries, resulting in temporary reductions in our operating earnings.

Looking ahead, we anticipate that our branded consumer businesses will produce lower EBITDA in the second quarter of 2018 than in the second quarter of 2017.

However, we continue to expect full year 2018 EBITDA to be roughly in line with 2017, despite a significant increase in the investments we have made in these businesses to faster longer-term growth. Pat will provide further details in his comments.

For the three months ended March 31, 2018, CODI generated cash flow available for distribution and reinvestment which we refer to as cash flow or CAD, of $14 million. Ryan will provide further details in his comments. For the first quarter, we paid a cash distribution of $0.36 per common share, representing a current yield of 9.2%.

This brings cumulative distribution paid since CODI’s 2006 IPO to $16.44 per share. We also paid a cash distribution on April 30th of approximately $0.45 per share on our 7.25% Series A preferred shares. I will now turn over the call to Dave to review our niche industrial subsidiaries quarterly performance..

Thanks, Elias. Starting with Advanced Circuits, revenue increased 2.8% and EBITDA increased by 3.7% from last year's first quarter in line with expectations. Arnold Magnetics revenue increased by 11% and EBITDA increased by 24.5% from last year's first quarter, exceeding our expectations.

As we mentioned on our last call, we believe Arnold results bottomed in 2017 and we view the company’s strong Q1 results as confirmation that the company is on track to achieve solid growth in 2018. Clean Earth's revenue increased 23.2% and EBITDA increased 26.5% from the first quarter of 2017 exceeding our expectations.

Based on Clean Earth's solid first quarter performance, we expect Clean Earth's to exceed expectations in 2018. Sterno Products revenue and EBITDA increased 5.7% and 1% respectively in the first quarter of 2018 compared with the prior year period in line with expectations.

The integration of Rimports is going well, and we believe this business will perform in line with expectations on a pro forma basis for the remainder of 2018. Foam Fabricators revenue increased 1.3% and EBITDA declined 3.7% in the first quarter of 2018, compared to the prior year period in line with our expectations.

In the first quarter, raw material prices increased causing margins to temporarily compress.

As a reminder, Foam Fabricators has contracts with customers representing a significant majority of their business that allows for a pass-through of certain price changes in their primary raw material typically quarterly, however with some lag prior to going into effect.

We expect Foam Fabricators to perform in line with expectations for the remainder of 2018. I will now turn over the call to Pat to review our branded consumer subsidiary's quarterly performance..

Thanks, Dave. Beginning with Liberty Safe, revenue declined 16.2% and EBITDA increased by 4.5% from the first quarter of 2017, in line with expectations.

As a reminder, Liberty Safe had a major national retail customer declared bankruptcy in the first quarter of 2017 and as a result, revenue comparisons have been distorted throughout 2017 and the first quarter of 2018.

Additionally, in the first quarter of 2017, Liberty Safe had a write-down of accounts receivable attributable to this customer, which did not recur in 2018 causing margins to expand. ERGObaby's revenue declined 2% and EBITDA decreased 22.6% compared with the prior year period in line with expectations.

ERGObaby's first quarter operating results were affected by one of its largest domestic customers, a national retailer filing for bankruptcy in the fourth quarter and entering liquidation in the first quarter.

As we noted on the prior call, while these results were expected, and we anticipate headwinds to persist in the second quarter, we are maintaining our guidance that ERGObaby's full year performance will be relatively flat year-over-year. Manitoba Harvest revenue increased by 24.5% and EBITDA declined 44.9% from the first quarter of 2017.

As we previously stated, we are investing heavily in sales and marketing to raise brand awareness. First quarter results exceeded our expectations and we are starting to see revenue grow faster than anticipated. For the remainder of the year, we believe the business will continue to exceed our expectations on a top-line basis.

Crosman's revenue increased 7.1% and EBITDA would essentially flat in the first quarter of 2018 compared with the prior year period in line with expectations. Lastly, 5.11's revenue grew 6.9% and EBITDA decreased 39.5% compared with the prior year period.

During the first quarter of 2018, 5.11 had virtually no direct agency shipments, which as we mentioned previously are unpredictable quarter-to-quarter. Excluding the direct agency business, Revenues increased over 23%.

In addition, first quarter EBITDA was also affected by significant investments we have been making in 5.11 to capture compelling growth opportunities. Specifically, in the later part of 2017, we sold an ERP system and in April, we moved into our newly expanded warehouse, more than doubling our shipping capacity.

The ERP implementation in a new warehouse significantly increased 5.11's operating expenses. We believe these costs will start to decline following the completion of the move in April. However, we expect the second quarter' operating results to include some additional frictional cost associated with the move.

We expect 5.11's results to normalize in the second half of 2018 and we are reassured that the investments we have made are producing tangible results as evidenced by a direct-to-consumer growth of 68% in the first quarter. With that, I will now turn the call over to Ryan to add his comments on our financial results..

Thank you, Pat. Today, I will discuss our consolidated financial results for the quarter-ended March 31, 2018. 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, 2018, was $360.7 million, up 24.4% compared to $290 million for the prior year period.

This year-over-year increase reflects notable revenue growth at 5.11 and Manitoba Harvest subsidiary, as well as a Clean Earth primarily due to contributions from the add-on acquisition of AERC Recycling Solutions in 2017.

It also reflects increased revenue contribution from Crosman and its acquisition of the commercial business of LaserMax, Sterno's acquisition of Rimports and our acquisition of Foam Fabricators in February. Net loss for the quarter ended March 31, 2018 was $1.6 million, as compared to net loss of $21.1 million for the prior year quarter.

Cash flow available for distribution and reinvestment which we refer to as CAD for the quarter ended March 31, 2018 was $14 million compared to $14.9 million in the prior year period.

Based on our 2018 earnings expectations for each of our subsidiaries, and the recent accretive acquisitions we completed including Foam Fabricators and Rimports, we expect CAD will meaningfully exceed our distribution for the full year of 2018.

As Elias mentioned earlier, we anticipate our common distribution payout ratio to be between 70% and 80% in 2018 assuming the same level of distributions in 2018 as in 2017. Moving to our balance sheet, we had approximately $46.3 million in cash and cash equivalents and net working capital of $416.5 million as of March 31, 2018.

We had $559 million outstanding on our prior term loans and $391 million in outstanding borrowings under our prior revolving credit facility. In March 2018, the company completed an offering of 4 million shares of its 7.78% Series B Preferred Shares.

As Elias mentioned, we have recently taken steps to further diversify our capital structure without diluting shareholders, while significantly enhancing our financial flexibility for growth. Importantly, we have unlocked approximately $500 million of liquidity to pursue additional acquisitions of leading middle market businesses.

I would like to highlight that we have accomplished these important objectives related to strengthening our financial flexibility without increasing our total debt outstanding and without increasing our leverage levels. I'll now provide more detail on our recent financings.

In April 2018, the company signed a credit agreement for a revolving credit facility totaling $600 million and a term loan facility in the amount of $500 million.

The spread on our revolver decline by approximately 50 basis points across the applicable rate grade, and the spread on our term loan to be increased 25 basis points from the previous agreement. In April 2018, the company also completed a private offering of $400 million of 8% senior unsecured notes due 2026.

The new credit agreement replaces our previous revolving credit facility and term loan in addition to closing on attractive eight-year fix grade notes. We are pleased to have refinanced our existing debt and extent in the maturities of revolver and term loans to 2023 and 2025 respectively under favorable terms.

Turning now to capital expenditures, during the first quarter of 2018 we incurred $6 million of maintenance capital expenditures compared to $4.7 million in the prior year period. Our first quarter maintenance CapEx spend was slightly lower than anticipated and we expect to spend the shortfall during the remainder of 2018.

During the first quarter, we continue to invest growth capital primarily 5.11 spending $6.2 million during the quarter.

For the remainder of 2018, we expect to incurred maintenance CapEx of between $20 million and $25 million and anticipated growth CapEx spend of between $15 million and $20 million as we continue to invest in the long-term growth for our subsidiaries.

We expect the majority of our growth CapEx spend will be to support 5.11's long-term growth objectives and to invest new manufacturing capabilities at advance circuits to support its growth. I would like to now make a few comments on 2018 CAD.

As we've discussed on previous calls and in our Form 10-Q, certain of our businesses are seasonal in nature and therefore Q3 and Q4 are typically our highest producing cash flow quarters.

Further, given the commentary provided by Elias in past on 5.11 as well as some incremental CapEx spend occurring in Q2, we anticipate our second quarter CAD will approximate last year’s second quarter CAD. With that, I will now turn the call back over to Elias..

Thank you, Ryan. During the first quarter we grew revenue, generated solid cash flow, provided sizable distributions to our shareholders and took important steps to accelerate the growth and future prospects of a number of our subsidiaries.

Our team also capitalized on compelling market opportunities in the first quarter and we are pleased to have completed two accretive acquisitions since the beginning of the year. I would like to close by briefly discussing M&A activity and our forward growth strategy. During the first quarter middle market deal flow continued to remain steady.

The availability of that capital with favorable terms combined with financial and strategic buyers seeking to deploy available equity capital continues to drive activity. Going forward, we will continue to execute our proven investment strategy.

We remain well-positioned to draw upon our strengths related to CODI’s beneficial ownership and management attributes to pursue attractive platform acquisitions as well as add-on acquisitions to accelerate the growth of our subsidiaries.

By following this course and maintaining our disciplined approach to deploying capital we will continue to create long term value for our shareholders. Before I open up the lines for Q&A I would like to announce that we will be hosting our 2018 Analyst Investor Luncheon in New York on June 14.

In addition to presentations from members of CODI’s senior management team Don Hinshaw, the CEO of Sterno Products will be presenting as well. We hope to see many of you in attendance at this event. This concludes our opening remarks and we’ll be happy to take any questions you may have.

Operator, please open the phone lines?.

Thank you. [Operator Instructions] And our first question comes from Larry Solow. You may proceed..

Great, thanks. Good morning, guys..

Good morning, Larry..

Just on moving parts, just I guess to summarize it, it looks like I know you guys normally guide on the CAD I guess it’s just sort of in the last quarter you started your structure you give us a little updated payout ratio which is a slightly lower but is that just basically due to the financing or it looks like all in maybe themselves are doing it slightly less maybe then you had thought to start the year or maybe not I'm just trying to get a little color on that.

Thanks..

Yeah, sure Larry. So, in terms of CAD, I’ll start with the latter part of your question, but the business is I think from a CAD generation standpoint are really performing in line with our expectations and we expect 2018 on a full year basis to be what we guided last quarter. The only real change in our mind is the increase in the financing costs..

Okay..

Just by moving some of that outstanding revolver to the senior notes that cost of capital into..

Right.

That’s what cheers like it’s a pretty modest tweak there so that’s just point to the financing okay and then if you could just maybe just if you could just discuss your largest and newest platform holding outside of Foam Fabricators being 5.11 seems like the ERPM implementation obviously some issues sort of disguise -- you had great growth in the core business, very impressive.

So, if you could just sort of give us a little more color and maybe quantify what the impact was in the quarter.

Why there are still issues then you have to source them more money on I guess to both European and maybe boosting Warehouse and you’re sort of confidence that it won’t continue to linger?.

Sure. So, Larry, it’s Elias. I think everyone is well aware in September last year we implemented a new ERP system and along with implementing a new system because these things really cut everything in your entire operation cause them disruption.

I would say the implementation went fine, but as anticipated it did cause the operation to flow - anticipated it did cause the operation to flow markedly kind of in the beginning part of the fourth quarter.

Some of the issues that we ran into, is going to we were - demand has been building incredibly strong, so that’s a great thing and that’s why we’re investing a lot of money long-term into the business, because of the demand growth.

As demand continue to strengthen, what we found is our backlog continue to increase and we were in the process and has been in now are move into much expanded warehouse, but at the time we do not have outright shipping capacity to fully distribute all of the backlog had built from kind of being down the beginning part of the quarter with the ERP implementation.

That also got into the first quarter, now the good news is demand continues to kind of grow at a pace that is significantly greater than what we had expected when we first start this business. The bad news is, it’s hard for us to catch up especially in the warehouse that we were in which had capacity limitation.

So, in April we moved into our new warehouse that is significantly larger, obviously the move also cause some shipping delays because you are moving a $100 million plus of inventory from kind of a couple buildings consolidating into one and getting that up and running and there is efficiency gains that need to be had.

We believe over the second quarter, we are going to start gaining efficiency and our throughput is going to start increasing, we are already seeing an increase kind of at the end of April here into May.

And that we’re on a good trajectory to get not only our backlog cleared but to kind to catch up and be able to ship whatever demand is in the quarter. That likely we believe will happen in the third quarter.

So, there has been a lot of frictional costs associated with this, I would just say from kind of its painful when you go through these periods it’s been a top transition we had two major projects that run on at the same time, but we believe this 5.11 opportunity is really extraordinary and I mean we point to the direct to consumer growth, it was north of 65% in the first quarter.

The reception to the brand as a consumer brand is far stronger than what we thought. But the unfortunate reality was if we didn’t make the investments in both ERP and in expanded distribution, we would never get in position to capture kind of the growth opportunities that are there.

So, we have suffered some lump, there is no doubt about that over the last three quarters. We expect the second quarter for also be sub-optimize as we’re getting our warehouse up and fully running and to optimize level.

But in the back half of the year we expect these things to be behind us and we expect our ability now to be focused on kind of continued demand creation run the brand and generating kind of the operating profits with these businesses, capable of as these things get behind us..

And I suppose it was just rapid growth. In the long run I got to imaging your margins will – up.

Is it fair to say, once you get these problems behind, once you get the sort of growing pains behind you – I mean I am not going to continuing on this growth trajectory, but even cutting that in half or whatever I suppose you searching some enhanced profitability..

Yeah, we think our profitability is going to reverse back to historical levels and overtime we believe our profitability our margins can actually grow beyond what our historic levels are as we continue to transition more to direct to consumer.

And so, we absolutely think the margin compression we have had in the last nine months and what we will see in the second quarter is due to kind of the disruption from the move in the ERP and as we take those outliers we think the earnings power from the right backed in with this business and even with the growth and I mean we think there is accelerated growth potential.

Now that expansion capital has been invested, we think even with some very strong growth, we’re going to be able to experience significant margin expansion. So, it’s been a – these investments have caused some temporary reductions in our operating earnings, but we remain as or more enthused about this business as we've ever had..

Right. And it sounds like the potential is even greater than a lot of that good things are seem like much longer-term type stuff in there. The issues you have seem short term and where growth came in transitory nature. So absolutely. Okay, just switching gears real quick and I'll let someone and get back in the queue.

Just on the ERGObaby, obviously, it's come out of some pressure last few quarters primarily due to Toys R Us. But if we exclude Toys R Us which may not be that easy to do, but going forward, I guess there won't be an equation. This company still be in maybe not fast, maybe not the high-single low double-digit growth it had seen on the top-line.

But could this sort of return as some type of sustainable growth in the long term as we look out year from now or whatever?.

We believe, so Larry this is Pat. I think in addition to-Babies R Us and in addition to the large retailer in the U.S.

So, I think there is a we have a large distributor customer in Asia that has consolidated facilities and there is even though it's our indication that sell-throughs are still fine working to sort of reduce their inventory as well, and that's having a headwind as well.

So short answer is, couple of things we believe are short term, and we do believe that we will be able to get back on the path of growth there is a throughout the world there is a lot of positive signs as well..

Okay, great. Thanks. Appreciate it..

And our next question comes from Doug Mewhirter with SunTrust. You may proceed..

Hi, good morning. Just a couple of questions on the subsidiaries. Any there is looks like some year-over-year revenue growth that Clean Earth was pretty healthy.

Did you see any return to any hedging contracts being executed? And also, if not, is there increases ability to when you might see a rebound in that part of the business?.

Sure. So, this is Dave. So, I'd say the growth we've seen recently is a little bit of year-over-year dredge growth but not a lot. The biggest driver has been the contaminated dirt line of business. There is also a benefit from the AERC acquisition that we did in the first quarter of last year.

And as it relates to dredge, we're really not going to have much visibility on some of the big projects that we expect until kind of summer time. So, not in the near-term, but later this year, we should have some visibility on that. So, a little bit of dredge growth but that wasn't really the drag our Clean Earth's good quarter..

Okay, thanks for that. And moving to Crosman. It seems like your gross margins were little thin in the quarter. And I know maybe that jumps around because the seasonality. But I didn't know - was there anything else in there other than maybe I don't know if LaserMax had lower gross margins in the rest of the business.

Or was there any other sort of extra cost turning now this quarter?.

Yeah, I'd say you'd hit on one topic, which is it is a seasonally light quarter for Crosman. So hard to take a lot out of it. But I'd say in terms of the slightly lower gross margin year-over-year, is mostly mixed issues. Some of our, I think higher margin were slightly lower sales and vice versa.

And I'd also we'd also had some raw material price increases that we have plans to mitigate overtime. But there are some price raw material pressure in there as well..

Thanks. And my last question on Arnold Magnetics. Really nice performance in the quarter. Are you getting a tailwind from a higher oil price? Because I know that part of your customer base is wealth of service I didn't know if that help..

Yeah, and it's a good question. I would say as you point out historically, have more oil and gas business with that industry downturn have seen less. I'd see gas business with that industry downturn have seen less.

I’d say we’re starting to see some green chutes and a little bit in the quarter is due to that end market but not a lot I think it was driven more by the aerospace and defense end markets, but we agree with you that if oil prices stay here take higher that could be a tailwind for Arnold going forward but not a lot of that reflected in the first quarter..

Okay, thanks. That’s all my questions..

Thanks, Doug..

And our next question comes from Robert Dodd with Raymond James. You may proceed sir..

Hi, guys. A couple more on 5.11 if I can and then one on Advanced Circuits.

Suffice a little, with $0.68 direct-to-consumer grow is there any potential for growth to accelerate, because it’s great but obviously comes the problems are there any risk we’re going to look at a warehouse capacity issue again 18 months from now if the business keeps growing like this? And what’s been done kind of today to prevent that for coming kind of big step of problem 18 months down the road?.

Yeah, so Robert I think right now given how we designed the new warehouse, it’s size and what our expected throughput is, when we get to running completely efficiently and just if our full disclosure when you bring up a new warehouse then you have new equipment in there, it takes a few months to get to a fully kind of an efficient running operation.

And so, we believe when we get there we will have more than doubled the capacity that we add in our old facility and so notwithstanding the growth that we’re seeing I think in our view this provides us with a multi-year runway to be able to support that growth domestically.

Internationally we have kind of other arrangements for kind of distribution and so that knock our International growth is not constrained by kind of our current domestic capacity.

So, we feel pretty good for the next few years that we’re going to be able to handle any type of growth I think kind of in the intermediate the longer term, and grab probably opportunities to further optimize, potentially have something a second distribution facility and so part of this disruption was moving right.

We went from two smaller facilities very inefficient into one large facility, just to move it down also was disruptive I think we were adding a second one four or five years from now somewhere else in the country because we had grown fast enough to warrant that.

I think number one it would be less disruptive and number two it’s kind of a far way out so long way to think we feel we have ample capacity really and kind of domestically that sort of double the size of the business potentially doubled one..

Thank you. On the direct-to-agency obviously you didn’t have a roll in this quarter did last one, has anything changed in say the RFP pipeline if that’s sort of acronym for this.

About what you see I mean obviously - is coming in very volatile quarter-on-quarter just trying to get a sense of the active overall kind of percolating activity levels of the same more or less have you deemphasized that because of direct-to-consumer is going so well, I mean anything on that side you can tell us?.

No, this is Pat, I think overall for 2018 we think our direct-to-agency business will be not quite as strong as 2017. It is a lumpy business I mean we’re dealing with $5 million, $10 million orders that often take four, five, six years to come to provision.

The long-term pipeline is just as strong as it’s been, in the short term there’s going to be some lumpiness and I believe that will manifest itself in slightly lower DTA sales this year as a whole than we had last year..

Okay, all right. Thank you.

And then just on Advanced Circuits, obviously been an incredibly stable good cash flow generating business for you, a number of years I mean I like at my modeling and the revenues are about where they were five years ago it has been stable, kind of flat, a little up a little down, you highlighted that as one of the things that’s going to benefit from some of the growth CapEx you are putting in this year between in 5.11.

Is that just kind of a -- to support its continued stability or do you think that is the plan here to accelerate that flocks and advanced circuits beyond what has been a very, very stable business?.

We didn't think that will allow us I think to accelerate growth. So, one of our facilities are we're upgrading and moving our Arizona facility to do, basically to handle more advanced technologies, I hope this to attract more defense business and to have quite frankly a better more vision layout.

This was a legacy facility of a company that we brought, and we're now sort of upgrading and moving that. So, I hope it will be able to attract more of the different types of customers with this new facility and with our new capabilities. That's why we're making a difference..

Got it. Thank you..

Thank you..

[Operator Instructions] And our next question comes from Ryan Chunk [ph] with Newfleet Asset Management. You may proceed..

Hi.

Just a clarifying question on the 5.11, how much of the direct agency sales are we going to drop in Q2, was that zero?.

I can get that number. It's not going to be a lot, I think we expect most of the DTA sales to be in the back half of the year….

But we did have DTA sales last year. I can get that number one, if you have a follow-up question number before we ended up..

Yes, we can come back on that. The only one I have was just on your new business Foam Fabricators, it seems like the gross margin for a little lower year-over-year even if you back out the step-up.

Can you just remind me what are the raw materials to watch there and what's your kind to play and pass those through?.

Yes. So, the primary raw material is EPS expanded poly siring and that is quoted on IHS, so you can see that kind of daily being quoted. The prices, if you think what is derived from, is going to correlate heavily few oil and natural gas prices. And so, as we've seen an increase in the price of kind of oil, we had expected to see an increase in that.

The vast majority of the contract that we have with our customers, allow for a pass-through or any change in raw material price. Now, this could be up or down. And so, with raw material prices moving higher, we have the ability to pass those through. Typically, that happens quarterly, and typically there is a lag.

So, in the first quarter, we had price increase in our raw material and they don't get pass through until the second quarter and so kind of you have that lag.

So, we expect for the margins, I think the margin variability in this business, it's one other things we really love about the company is because so much of the contract or have through with the customers.

But margin variability over the course of the year is very low, but you can have some slight margin variability quarter-to-quarter based on prices moving up or down in the raw material before we pass it through to our customers..

Okay, great. Thank you. That's all for me..

I'm having an IT issue here and I can tell you it would significantly less than Q2 then it was in Q1 to the tune of right around $3 million to $4 million..

Yes, so we don't expect Ryan a lot of DTA in the second quarter, there will be some in the second quarter of 2018. There was some but not as much in the second quarter of 2017 as in the first quarter of -- the first quarter of 2017.

But we do expect as Pat said, there have some material direct business that comes in like in the third and fourth quarters of this year..

Got it. Thank you..

Thank you. Ladies and gentlemen this does conclude our Q&A portion of the conference. I would now like to turn the call back to Elias Sabo. You may begin sir..

I would like to thank everyone again for joining us on today's call and for your continued interest in CODI. We look forward to sharing our progress with you in the future.

Operator?.

Ladies and gentlemen, thank you for attending today's conference. This does conclude the program, and you may all disconnect. Everyone, have as a great day..