Good morning and welcome to Compass Diversified Holdings’ 2017 Second 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’ second quarter 2017 conference call. Representing the company today are Alan Offenberg, Chief Executive Officer; Ryan Faulkingham, Chief Financial Officer; and Elias Sabo, a Founding Partner of Compass Group Management.

Before we begin, I would like to point out that the second quarter 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-Q 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 in the company’s financial filings.

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 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 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, 2016, 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 2017 earnings conference call. We’re pleased with the second quarter performance of our niche leading businesses, which continue to generate stable free cash flow. Before I discuss our second quarter performance, I would like to highlight our success with acquisitions.

In June, we completed the platform acquisition of Crosman Corporation, of the world’s leading designer, manufacturer and marketer of airguns, archery products, optics and related accessories, Crosman is a strong addition to CODI’s family of middle market companies. CODI previously owned a majority stake in Crosman and divested the business in 2007.

So we are very familiar with the company and its management team.

Like our previous platform acquisitions, Crosman possesses the key characteristics that we look for in all our subsidiaries, including a commanding industry position, an extensive product portfolio with iconic brands offering multiple revenue streams, growing cash flows, a seasoned management team and compelling growth products – prospects.

The acquisition of Crosman represents our second platform acquisition in the last nine months, bringing CODI’s current number of niche industrial and brand consumer businesses demand. We look forward to working with Crosman’s management team to solidify the company leading position in airguns and to gain additional market share in archery products.

An integral part of Crosman’s growth strategy is expanding into attractive adjacent markets. Following, we ended the second quarter, Crosman acquired the commercial business of LaserMax, a leading designer and manufacture of firearm mounted laser aiming devices.

With the strategic acquisition Crosman has expanded its outdoor recreation market presence with a complimentary, premium brand, extending its reach to a wider range of new customers across retail channels. This transaction also creates new cross-selling opportunities with Crosman’s current big box retail in international customers.

We are excited to work with Crosman in exploring these cross-selling synergies offering outdoor enthusiast or more extensive product array featuring LaserMax’s innovative laser solutions. Aside from acquisitions, during the quarter, CODI also completed an offering of 4 million preferred shares, generating $100 million in gross proceeds.

In addition to increasing our liquidity, this transaction has diversified our capital structure, giving CODI access to a wider range of investors throughout the capital markets. This new structure also lowers our cost of capital to facilitate our continued growth without diluting our common shareholders. Now let’s talk about our year-to-date results.

During the first half of 2017, our middle market niche industrial and branded consumer businesses generated stable levels of earnings that were consistent with our expectations. In particular, our Ergobaby, Manitoba Harvest, 5.11 subsidiaries each show double-digit EBITDA growth for the first six months of 2017 compared with the prior year.

In our niche industrial businesses, we experience combined revenue growth for the first half of 2017 of 7.9% on a year-over-year basis, including notable increases at our Sterno products and Clean Earth subsidiaries.

Clean Earth continues to benefit from the accretive add-on acquisitions, the company has completed over the last 12 months, producing an 18.4% year-over-year revenue increase.

Sterno products generated revenue and EBITDA increases of 9.2% and 4.9% respectively, as it continues to benefit from the acquisition of Northern International completed in January of 2016.

Our branded consumer companies produce solid results during the first half of the year, with a combined revenue increase of 6.5%, an EBITDA growth of 13.4% compared with the first six months of 2016, on a pro forma basis for the acquisitions of 5.11 and Crosman.

As we mentioned on our last conference call, our large national outdoor retailer filed for bankruptcy protection during the first quarter and this has impacted our Liberty and 5.11 subsidiaries.

Even with this impact, for the first six months of 2017, 5.11 reported revenue and EBITDA year-over-year growth on a pro forma basis of 13.4% and 45.9% respectively. We also had solid performance from Ergo Baby, which increased revenue 10% and EBITDA 10.4% compared to the prior year period.

For the three months ended June 30, 2017, CODI generated cash flow available for distribution and reinvestment, which we refer to as cash flow or CAD of $25.5 million, which was in line with our expectations. For the second quarter, we paid a cash distribution of $0.36 per share, representing a current yield of approximately 8.3%.

This marks a significant milestone for CODI as it brings cumulative distributions paid to $15.36 per share since our initial public offering in May of 2006, which is an excess of our full IPO price.

These achievements reflect a solid cash flow generation of our subsidiary and our commitment to providing consistent distributions to our shareholders, which we have never reduced even during the financial crisis.

As a result of the cash flow accretive platform acquisition of Crosman in the second quarter and the add-on acquisitions for Clean Earth and Crosman completed this year. We continue to expect that CAD will exceed our distribution for the full year 2017.

To summarize, during the first six months of 2017, our current businesses continue to generate consistent free cash flow. Additionally, we capitalized on market opportunities to complete the platform acquisition of Crosman.

In the same period, we reinvested in our subsidiaries continued growth with the add-on acquisition of the LaserMax’s commercial business by Crosman, as well as the add-on acquisition of AERC by Clean Earth earlier this year.

We also added a new component to our capital structure that is non-dilutive to common shareholders, while generating net proceeds of approximately $97 million.

With CODI’s enhanced capital structure in over $500 million of liquidity available to us, we are well positioned to pursue attractive platform and add-on acquisitions that generate strong cash flows and support our ability to provide consistent cash distributions to our shareholders.

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

Thank you, Alan. I will begin by reviewing our niche industrial businesses, which include Advanced Circuits, Arnold Magnetics, Clean Earth and Sterno Products. For the second quarter, our niche industrial businesses reported a combined revenue increase of 3.7% as compared to the year earlier period, while EBITDA declined 5.8% during this timeframe.

The combined EBITDA margin declined to 17.7% for the quarter ended June 30, 2017, compared to 19.5% in the prior year quarter. Advanced Circuits posted solid second quarter results that were consistent with management’s expectations.

Revenue rose 3.5% on a year-over-year basis, while EBITDA increased 10.2% due to the higher printed circuit board sales offset slightly by a decrease in assembly gel. Second quarter EBITDA margins for this subsidiary rose to 31.7%, an increase of 200 basis points compared to 29.7% in the year ago period, reflecting the current sales mix.

Arnold Magnetics results were in line with our expectations for the second quarter. Revenues were down 7.2% year-over-year, reflecting lower domestic sales in aerospace and defense and PMAG, as well as decreased international sales volume. EBITDA declined by 27.3% during the quarter compared to the prior year.

Arnold’s management team continues to invest in operational and productivity improvements to the business and we are quite pleased with the progress they have made. However, this is adversely impacted current period earnings. We continue to believe in Arnold’s strong competitive advantages and ability to reach our long-term expectations.

Clean Earth generated solid sales growth in the second quarter, as revenue rose 14% compared to the prior year, mainly due to increases and contaminated soil volumes and contributions from the add-on acquisitions.

Clean Earth’s second quarter EBITDA declined by 13.1%, while EBITDA margins decreased by 5.1%, primarily due to lower dredged material volume, as well as higher back end cost at some of our soil facility. Clean Earth continues to perform in line with our expectation. However, dredged material volumes are at historic lows.

The starting financial performance and masking the benefit realized in our other lines of business and our acquisition strategy. Sterno’s result for the second quarter, we’re essentially flat versus the prior year and in line with management’s expectation. Year-over-year, revenue increased by 1.3%, while EBITDA increased by approximately 1.8%.

EBITDA margins were consistent with the prior year period, even taking into consideration increase raw material prices. Sterno continues to invest in productivity enhancements to increase manufacturing efficiency and we are pleased with their continuing progress in these areas.

Next, I will turn to our branded consumer businesses, which include Liberty Safe, Ergo Baby, Manitoba Harvest, Crosman and 5.11 Tactical. Please note that the revenue and EBITDA numbers I provide for 5.11 and Crosman will be on a pro forma basis as of these businesses were acquired on January 1, 2016.

Our branded consumer businesses generated solid results for the second quarter of 2017, consistent with our expectations. Combined revenue increased 5.7% on a year-over-year basis, while EBITDA increased 21.1% compared with the prior year.

During the second quarter, revenue and EBITDA at our Liberty Safe subsidiary decreased approximately 10.5% and 15.7% respectively, compared to the same period in 2016. This was due to lower sales in the non-dealer channel, primarily relate to the large outdoor retailer that filed for bankruptcy mentioned earlier by Alan.

We also saw slightly softer market conditions in the dealer channel during the quarter, which we believe could be attributable for the change in presidential administration and a softening of concerns related to firearm legislation. As a result, we believe our revenue and EBITDA for the second half of 2017 maybe lower than previously communicated.

Results for Ergo Baby better expectation during the second quarter of 2017. Revenue for the quarter rose 5.1% on a year-over-year basis reflecting strong international carrier sales and contributions from Baby Tula, offset by lower sales of infant travel systems.

As discussed previously, in 2016, we decided to wind down the Ergo Baby business and as a result the loss of those revenues will impact revenue comparisons throughout 2017. EBITDA increased 11.1% compared to the prior year, as the company continues to benefit from improved margins based on channel mix.

As we’ve mentioned in the past, Ergo Baby is rolling out several new product this year and we expect to see the benefits of these products in back half of 2017. Manitoba Harvest produced solid second quarter results. During the quarter, revenues rose 5.9% on a year-over-year basis, exceeding our expectations.

Manitoba experienced strong growth in branded home products, due to the successful efforts to increase the supply of organic counts. Offsetting the branded growth was lower international ingredient sales, due to excess supply in one of our international market, as we discussed on our first quarter conference call.

This mixed shift resulted in substantial EBITDA growth during the second quarter. Most importantly, we are pleased with our efforts to bolster the company’s operational capability. Since the started the year, we have opened a new U.S. headquarters in Minneapolis, recruited a new CFO, and new Head of Marketing, and a new Head of Sales.

With our executive management team now in place, we are looking forward to growing our investment to raise awareness and educate the U.S. consumer on the nutritional benefits of hemp-based a goods, as we had mentioned from the onset of this investment.

It is possible that EBITDA could decrease in the near-term, as we invest for the long-term success of this company. Crosman, our newest subsidiary performed as expected in the month of June, during the time it was under our ownership.

Where the second quarter on a pro forma basis, revenue was up 4.7% compared with the prior year, primarily due to growth in archery products. Crosman’s performance since joining the CODI family has been in line with our expectation.

And we are excited about its growth potential as Crosman continues to be a leader in the airgun industry, while increasing its market share in archery. Lastly, 5.11 continue to demonstrate strong performance during the second quarter, consistent with our expectations.

On a pro forma basis, revenue increased to 11.3% for the second quarter, compared to the previous year. While EBITDA increased by 35.9%. EBITDA was positively impacted by the timing of a direct to agency order and further growth in higher margin distribution channels, including retail and e-commerce.

I’d like to remind everybody that the timing of direct to agency orders is difficult to predict, and they can have a strong quarter-to-quarter impact on 5.11’s financial results. Retail revenues also grew on a year-over-year basis, due to eight new retail store opening since June 2016. This brings 5.11 store count to 12 as of June 30, 2017.

As we discussed on previous calls, we continue to invest capital to support 5.11’s long-term growth as the company continues to increase this consumer market presence. I’d 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, 2017. 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 June 30, 2017, was $307.4 million, up approximately 44% compared to $214.2 million for the prior year period.

This year-over-year increase reflects notable revenue growth in our Clean Earth, Sterno and Ergo Baby subsidiaries, due primarily to the contributions from our add-on acquisitions as well as the revenue contribution to Crosman and 5.11.

Net loss for the quarter ended June 30, 2017, was $2.7 million as compared to net income of $19.4 million for the quarter ended June 30, 2016. During the second quarter of 2016, CODI realized a net gain of $18.9 million related to the equity investment in our former subsidiary Fox Factory Holding.

During the first quarter of 2017, we sold our remaining FOX shares in the secondary public offering. Cash flow available for distribution or reinvestment, which we refer to as CAD, for the quarter ended June 30, 2017, was $25.5 million compared to $15.6 million in the prior year period.

Second quarter CAD was in line with our expectations reflecting solid performance from our leading middle market businesses.

As a result of our 2017 earnings expectations for each of our subsidiaries and the accretive acquisitions we completed in 2016 and year-to-date including Crosman and LaserMax, we continue to expect CAD will exceed our distribution for the full year 2017. Turning now to the balance sheet.

We had approximately $39.3 million in cash and cash equivalents and net working capital of $286.2 million as of June 30, 2017. We had $562.8 million outstanding on our term debt facility and $3.7 million in outstanding borrowings under our revolving credit facility as of June 30, 2017. We have no significant debt maturities until 2019.

In addition, we had net borrowing availability of $544.6 million under our revolving credit facility at quarter’s end.

As Alan mentioned during the second quarter, CODI completed a public offering of 4 million of its 7.250% Series A Preferred Shares, our total net proceeds of approximately $97 million, which we used to repay a portion of the outstanding balance on a revolving credit facility. Our first preferred distribution will be in the fourth quarter of 2017.

Turning now to capital expenditures. During the second quarter of 2017, we incurred $4.3 million of maintenance capital expenditures compared to $6 million in the prior year period.

The decrease was primarily due to lower maintenance CapEx spend at Advanced Circuits and Clean Earth compared to the previous year, offset by the addition of CapEx spend at 5.11 and Crosman.

Second quarter maintenance CapEx was slightly lower than anticipated and we expect to realize a portion in this spend throughout the balance of 2017, as we reinvest in our subsidiaries long-term growth.

For the full year 2017, including the addition of Crosman, we anticipate incurring maintenance CapEx in the range of $20 million to $25 million and growth CapEx in the range of $25 million to $30 million.

As previously discussed, the 2017 growth CapEx spend will be concentrated at 5.11, including the installation of a new ERP system, moving into a larger, more efficient warehouse and continued growth in our direct-to-consumer channel.

In addition, we anticipate further growth CapEx spend at Manitoba Harvest to continue improving operational efficiency and our access to organic chem supply. With that, I will now turn the call back over to Alan..

Thanks, Ryan. In conclusion, during the second quarter, our niche leading businesses generated consistent free cash flow that was in line with our expectations.

We also continued to use our strong balance sheet to capitalize on attractive accretive acquisitions including the platform acquisition of Crosman, as well as add-on acquisitions to reinvest in the growth of our subsidiaries.

Also during the quarter, we completed a preferred share offering, which increased our liquidity and improved our capital structure without diluting common shareholders. I’d like to finish by commenting briefly on M&A activity. During the second quarter, middle market deal flow remained competitive as it has been for the past several quarters.

Valuation levels remain elevated due to the availability of debt capital with favorable terms and financial and strategic buyer seeking to deploy available equity capital. As we move through the balance of 2017, our focus remains on pursuing attractive platform and add-on acquisition opportunities to drive increased cash flow.

As always our team will remain disciplined and deploying capital. With over $500 million of available liquidity, we remain confident in our ability to continue executing on our investment strategy, while providing consistent distributions to our shareholders. This concludes our opening remarks, we will be happy to take any questions you may have.

Operator, please open the phone lines..

[Operator Instructions] And your first question comes from the line of Larry Solow of CJS Securities. Your line is open..

Great, thanks, good morning..

Good morning..

I was wondering, if you guys could maybe Elias, just on Clean Earth, I know you said it’s sort of in line with your expectations and I realize the dredging piece has been down and out for two, three years now. But the business has a whole been somewhat flat, because of the dredging even with some of the acquisitions you’ve made last couple years.

Do you still expect – we were actually expecting it, have a little pop this year out of that mid-dredge range, maybe closer to $40 million, I know you don’t guide specifically on the EBITDA for holding. Can you just sort of give us maybe a little qualitative outlook and with or without dredging, where we stand..

Sure. I think Larry, your observations are right on track and consistent with how we’re looking at this. The dredge market is particularly challenging for the company, because they can’t control when these projects begin and when they’re executed upon.

And so I think we all entered the year believing that the opportunities for dredge would be increased this year.

But for many of the same reasons that we’ve talked about historically, whether it’s bureaucracy, whether it’s whether, whether it’s other factors that could just impact the disbursement of funds to consummate or to begin and then ultimate consummate those projects.

Just hasn’t come together as the company and we expected and it’s certainly not for any reason attributable to the company’s activities, we don’t believe there is any change in a market share dynamics of the business in the industry as it relates to Clean Earth’s position.

And so I think that to get a little bit more sticking to the qualitative side of it, but addressing some more of the quantitative assets of your question..

Right..

Believe that to the extent a dredging project can get started, call it here within the next few months or something that can lead to a bump in that segment of the business in the back half of the year. Then I think that the numbers that you’re talking about are certainly achievable this year.

And I think that, even without that, I’m not going to suggest that we’re going to hit the number you throughout there. But I do think that we can begin to approach that level with just a good solid half. And I think that’s consistent with where we’ve led you historically.

I think we certainly hoped that had dredging been a more active piece of the business that we could have been in a position this – at this time of year to guide you through a higher number. But given where dredge is throughout this year-to-date, we certainly don’t feel comfortable doing that.

And so we are remain extremely confident in Clean Earth stability to grow. The management team is doing an incredible job. I can assure you that they are not pleased that the dredging market has not come together.

And also that they’ve had despite some of the revenue growth in other aspects of their business, the higher end back – the higher back end cost on some of the soil projects has also hurt their EBITDA this year. But the good news is, those are things that are fixable and the company is either fixing them, or fix them past 10.

So we don’t believe that they have long-term impact to the company’s profitability. But this will from time to time present itself in a normal course of Clean Earth business.

So agree with everything you said, I hope that gives you a little bit more color towards our outlook for Clean Earth, but it is I would say if not our lumpiest business, it’s amongst our lumpiest businesses, and mix as you can see with dredge being a smaller part of the business right here, mix can also have a pretty meaningful impact on their margins even with the growing revenue profile.

So we are incredibly optimistic and confident in their ability to continue to grow the add-on acquisitions have been great. We take there maybe more opportunities for them to continue to grow of the acquisition.

And there will be a time when this company of hitting on all cylinders and all segment to their business and when they do I think we’re all going to be very, very happy..

Great. That’s fair enough. Good answer understood. Just quickly on Ergo Baby, had a good quarter, nice balance from Q1 and I realize quarters are lumpy. But just statistically, I know you had a couple of new products are pending, I have those now – those on the market or any update there..

Yes, sure, Larry. So Ergo we saw – had a solid quarter, international was very strong. And part of that strength has been driven by the introduction of our newest product under our Ergo Baby line, which is called our omni, and that due to hit the U.S. market here in the third quarter.

So that is very strongly kind of on target and if anything maybe even low ahead of the – our schedule. And then Baby Tula also had a couple of product launches that have already occurred in the second quarter. So we feel pretty good about the product launch cadence here.

And then we have some products that will be launching right at the end of the year that should hopefully give us the momentum in a new category coming into 2018..

Great. And then, if I could just – lastly, just on Crosman, could you maybe just give us a 45 second minute just comparing to the company today, sort of what it was, when you sold it ten years ago..

Sure. I think that Crosman has changed over the years and what similar is the continued leadership position that they’ve had in the airgun industry and related accessories. They are and have been the leader in that space for quite some time. And that leadership position remains intact today as it was years ago.

I would say that the largest difference that we see in the business is a change in their product mix to now include the archery side of the business, where they have grown meaningfully in the last couple of years. We think there continues to be opportunity.

So when we sold the business there, their primary lines of the business were their airgun business and their Soft Air business. Now while the Soft Air remains a component of their business, it’s a much smaller part of their business than it was ten years ago, whereas archery has now grown to be a much larger presence.

And my recollection is if they had a small piece of archery back then ten years ago that would have been it was immaterial relative to their overall business.

So now we believe that they are on a firm ground in terms of having two real long-term – long viable businesses in the long-term, whereas Soft Air is not quite as popular as it was all those years ago.

So the airgun business and the archery business represent two major outdoor product categories, where Crosman has and the airgun business again the leadership position in the archery business are rapidly growing in emerging presence in that industry.

There’s a – also in the last ten years, they’ve added some management talent to their team, some areas of expertise that – just that as they’ve grown and matured as a business that they’ve added.

So we’re really pleased with the expansion of the team as well as the increase with that expansion added talent to the management team that is really very impressive. And I don’t say that to the detriment of the company’s management team that we had ten years ago, they were also fantastic.

But with time, they’ve just been able to add some additional numbers to the team that didn’t exist previously. And I would say those are – and with that I should say the diversification within their customer base is also a meaningful change and they had a very large number one customer that is probably identifiable.

And I would say that while that’s still remains large customer and a great customer, the concentration with that one costumer has come down meaningfully since the last time we own the business.

So we’re just feeling really great about their opportunities and above – for all the reasons I just described, but I would say, I probably went over your 45 second to a minute – my apologies, but I do think all of those items are relevant, when considering how the business has change today versus when we sold it ten years ago..

Great, excellent. Appreciate your enthusiasm too. Thanks, Alan..

Thank you, Larry..

Your next question comes from the line of Kyle Joseph from Jefferies. Your line is open..

Hey, good morning guys and thanks for taking my question..

Hey, Kyle..

Ryan, just a quick question, make sure a modeling question for you. I think you said the first preferred distribution in detail the fourth quarter.

Are those going to be semi-annually or in a quarterly basis going forward?.

So they’re going to be on a quarterly basis, on the 30 of January, April, July and October. I think I got those, right. The first payment will be October 30. So we will not have a payment in Q3. This will be a deduction to our cash flow available for distribution that’s how we going to treated.

So the CAD number will talk about in the future will be essentially CAD available to common shareholders. So the October 30 payment is an extended accrual period. So it’s going to be about $2.4 million as oppose to the normal quarterly payment going forward, which will be about $1.8 million, again 7.250% on that $100 million..

Got it. That’s helpful, thanks. And then maybe for Elias. So we have a couple of quarters a data from 5.11 and Crosman, we just have the one.

Can you give us an idea sort of the seasonality in those two businesses?.

So I’ll start with 5.11, Kyle, and I think the business does historically have some more back end seasonality. Really because of few factors, one in the professional segment, it feels like everybody want to spend whatever their budgets are department by department. And I think in a lot of contracting with state and local and federal government.

You end up finding that is a use it or lose it. And so typically, it gets you, and that give some kind of upward seasonality due to the fourth quarter. And the consumer side of the business, we clearly see a more back end loaded revenue opportunity, clearly as the holiday shopping generally tends to more revenues in our fourth quarter.

So we would point you to there, on the base business, there should be some back end seasonality. Now all of that being said, as Ryan highlighted this as that I, the thing that can distort the financials of 5.11. Clearly is the direct agency business.

Just to remind everyone these are where we contract typically with international government and they can be very large orders. So that can have some pretty large revenue distortion. But to be – to your point there is back end cyclicality or seasonality, I’m sorry that we should expect out of 5.11. And Alan, I’ll let you answer on the Crosman..

Sure. Thanks a lot. Kyle, what we see with Crosman is. Due to hunting season and holiday season, I would say the second half of the calendar year is where you would expect to see a greater proportion of Crosman’s revenues.

We will let our experience play out, but to give you some general – very general guidance it might be more of a 60%-ish to 65%-ish second half of the year versus the first half of the year. But again, I don’t want you to get to tied to those comments, because with an emerging archery business, with the new optics business.

We really want to see under our ownership going forward, how that plays out. But to give you that’s a general sense though of historically in the last few years at a very macro level, what their seasonality looks like..

That’s very helpful, thanks. And I think just in the context of your CAD covering the dividend well in the second quarter. Can you just sort of update – can you update us on your philosophy about capital retention versus dividend increases at this point..

Yes, sure. Just as a reminder, our board is responsible for setting our distribution policy. But we have been working and continue to work towards a strategy of building our cash available for distribution to exceed our distribution in a way.

That is – I lean towards word material, but the way I defined that is in a way that removes what we as a management team perceive to be a concern in the marketplace about the sustainability of our distribution, despite the fact that we have such a rich history of paying it of earning it and never reduce it yet.

And we think a lot of that misconception in our opinion is attributable too, in some ways our definition of CAD, because it excludes the gains on the realized investments that we’ve had over the years. And so because when you look at that number, if you include the gains, there’s quite a sizable gap.

But because of the – weather it’s a quarterly get here or there below one of our analysts, who I won’t proud of by name, but it was a great observation on one of our non-deal road shows, explained Ryan and I that we don’t “screen well”.

And so what we want to do in our strategy is to grow that distribution to a level, where hopefully concerns about the ability for us to sustain it or eliminated or at least meaningfully quieted, because we think that will lead to capital appreciation for our shareholders.

And we’re trying to deliver on what we believe to be both an income and growth story. And we think the income story is pretty well understood we think the growth story is something that we need to do a better job of not only communicating, but also demonstrating via our financials.

And so that’s what we’re going to try to do and to the extent that we can work to achieve that type of returns for our shareholders that include both capital appreciation and our distribution we believe that that will be something that our shareholders respond to very well.

I think that we remain absolutely committed to our distribution as we have been for some time and we continue to be operating with that same level of commitment. However, I do think our first goal is to raise that level of distribution as I described before we would consider a rising of our distribution.

But again the Board sets that policy our working model right now is commitment to that distribution and growth of our CAD is relative to that distribution..

That’s helpful. And I think that’s a good way to think about it. Thanks for answering my questions and congregations on a good quarter..

Thank you, Kyle..

Your next question comes from the line of Doug Mewhirter from SunTrust. Your line is open..

Hi good morning..

Good morning, Doug..

Most of my questions have been answered. First, I guess practically speaking, what’s the level of dry powder. I mean, I know that you have – it’s easy to do the math on your how much of your credit facility in cash and that sort of thing. I know you’d like to operate within certain leverage limits, consolidate EBITDA leverage limits.

But in terms of looking for your next platform – acquisition what – how big are you comfortable going on that next platform acquisition..

Yes, sure Doug. This is Ryan. So as you’re aware within our existing credit facility we have what we call our acquisition spike, which allows us to move our leverage above our typical 3.5 times level up to 4 times in a quarter.

Now, today we’re down just below 2.6 times, So pretty low levered, we do have a lot of available capital on our revolver, the use of all of that is of course dependent on the multiples we pay for businesses. And how EBITDA credit we get. We are always going to be or not always – today we will be leveraged constrained.

However, assuming reasonable multiples a $500 million business is doable today. If we were to pay a double-digit multiple that might be north of 10 times or even 11 times or 12 times, we’re probably won’t be able to get that $500 million business.

So that all really is multiple driven but today I can comfortably say we have $500 million available to us to deploy into the company..

Okay. Thanks. That’s a very helpful answer. And second, might be harder to answer or – I would like to try to sort of tease out what the – in this quarter what the true sort of organic growth is? And actually you can even apply it on a pro forma basis for 5.11 because I know there’s been a few bolt-on acquisitions year-over-year.

I’m just trying to get understand that sort of a mid single digit revenue maybe little higher on EBITDA in terms of the true organic trajectory..

Just to confirm, did you mean specifically 5.11 or consolidated all the companies?.

Consolidated..

Okay..

Or 5.11 too – if you have that sort of although 5.11 again it’s all organic if you do in a pro forma basis. I’m trying to excel maybe effects of the bolt-on acquisitions, which I know I’ve had a benefit but in sometimes it secure the underlying growth of the business..

Yes. That’s right, I mean, if we think about cleaners in particular the dredge business being down has pretty much entirely been offset by our add-on’s, so in that context they’ve obviously provided a nice benefit to Clean Earth from a financial performance period-over-period. But they still grew double-digit top line, right.

So I think if you look across our subsidiaries, some of our businesses like Sterno kind of flattish, ACI it has been flat in the last past couple of quarters but we saw a nice increase this quarter.

So I think blended with some – I don’t it was down, so I think Liberty was down I would say mid single digit across the portfolio of company seems to me to be about right. We have some solid double-digit growth at 5.11 of course at that bigger business, Ergo had a nice quarter.

So I feel like that kind of mid single digit deals right today I tell you though as Alan mentioned if we saw a rebound in dredge over the next couple of quarters I mean some continue growth in some of these larger businesses we own I think that could probably creep up, but that deal is right today..

Okay. Thanks that’s very helpful. And that’s all my questions..

Thanks, Doug..

[Operator Instructions] Your next question comes from the line of Brian Hogan of William Blair. Your line is open..

Good morning..

Good morning..

First question regards to the pipeline you commented earlier about the environment, but can you just characterize your pipeline versus historically as it is at fuller, lessor evaluation wise….

I would say that in terms of the opportunities reviewed year-to-date and particularly in the quarter I would say that those levels are reasonably consistent on a year-over-year basis. The last couple of years middle market, transaction, volume based on number of deals has been again reasonably steady year-over-year maybe slightly up a little bit.

But on balance it’s been pretty consistent. And I wouldn’t classify it in the context of history as the most robust middle market M&A market that we’ve seen. However, consistent I wouldn’t say its any worse or any better and we are pleased with the quality of some of the opportunities that we’re looking at.

So there are some exciting things but I really – I hesitate to tell you it’s anything other than consistent with both year-over-year and kind of the last at least six to eight quarters..

Okay.

And then the mix of that – your add-on’s platform is a healthy mix same mix?.

I would say a healthy mix, some of our companies as we know have been active in the add-on space and we for the companies where that makes sense we continue to pursue those opportunities. They’ve worked out generally quite well for us, and with the platforms same thing.

So I would say that the mix remains – I would say consistent again with prior periods..

All right. And then shifting to individual company performances and particularly on the Crosman. Revenue was up 5% in the second quarter, 1% year-to-date and Ryan I think you said or Alan 60-40 back in the loaded thereabouts.

I guess what – the question is longer-term, what is the appropriate revenue growth rates, I know you’re looking to do add-on acquisitions there too.

So I mean X add-on’s what do you think the long-term growth is?.

Yes. Look I think that it could certainly depend on new product introductions. As you said, if I simplify by taking out add-on I think that in the airgun market their leadership position as I mentioned has been longstanding, it’s a relatively mature market. So I would take a low to mid single digit growth in that category is appropriate.

I think that over the longer-term, I think archery probably migrates to that level because that also a somewhat mature industry.

Although there are some changes in the use of certain posts or certain types of hunting, that could lead to some broader category growth as some seasons are either expanded or incorporated into the use of those for the first time. So it’s a little bit hard to predict.

But right now, Crosman is outperforming the category growth given their new product introductions and their emerging presence within that marketplace. So in the near-term and I’m not so sure how long I could predict that. But to get high single digits even maybe low double-digits in archery for a short – a year or maybe two period of time is possible.

I don’t know – I don’t want you anchor on that too hard because I don’t know if it’s going to be definitively deliverable. But it’s certainly possible given the ramp up in the business that they’ve seen. But again it’s also a mature category.

So I think a mid single-digit growth in the archery space over a extended call a five-year or so period of time would be our expectation. And hopefully, we can do better in both, but one of the things we love about Crosman and Company like Crosman over there, strength in our brand, strength to our products.

The market position that they have and if anything in our nice, steady, consistent, growing revenue, growing cash flow business, is really what we think we have here with some upside to do better than that with new product introductions out on acquisitions et cetera.

So I would not, if you were to look at our group as a whole and there, some that are kind of flat there some that are double-digit growers and there are some that are more in the middle. I think Crosman fall more into that middle slot, if you want to group it simply like that..

Okay. And then – you’re right, I did one that on the Crosman.

Is that category that this is right for add-ons or is that just kind of – where go one-off?.

We believe that, it’s right. Crosman already has an optics category within their business, and it’s not a giant part of their business but there have been in it for quite a few years.

And I think that the ability to add a premium brand in the LaserMax brand is going to not only enhance their existing business, but give them true opportunity to pursue certain lines in business, as an accessory product to firearms that they had not been able to – try to pursue historically, given that the nature of their current optics business was a little bit more on the value side of the business, where as we think we can certainly bring LaserMax products into that part of the business.

LaserMax also has the opportunity to be part of a higher and more premium brand segment for Crosman. So we think it adds a nicely to their existing optics business and ideally, we’ll propel that business to be a much more meaningful business along for the company going forward..

All right, thank you. Shifting the 5.11, it kind of similar question on revenue growth perspectives up 13% there about year-to-date. What is the longer-term growth of 5.11? I know, you said, it was going to backend loaded from a seasonality perspective. But it’s kind of looking more of a longer-term.

Obviously, you’ve got adding stores and mix in DTA sales are very lumpy. I mean, I can understand that, it’s kind of looking for up longer-term steady state..

Yes, sure. So I think 5.11 would be in one of the tier category, it balance that if you kind of group into our categories and there are – some are flattish up a little from kind of up mid-single digits and some we expect to be growing high-single digits and into the double-digit, I think 5.11 would squarely be in the higher category.

As part of the growth plan in opportunity for 5.11 is that consumer shift that are currently going on and that’s kind of really broad I mean it’s in omni-channel retailer which I know that we’re probably get a lot of play but 5.11 truly as we’ve got really strong e-commerce. We’re growing our own direct-to-consumer retail network.

And we have really good consumer wholesale programs and partners. And so I think the consumer business and coming of what is relatively a small base today have a lot of growth that can really lever up the overall growth of the business.

Professional segment is much more mature, I’m kind of think of that has a low to mid single-digit kind of grow business.

And so I our view in this business should be a kind of higher single-digit, lower double-digit type revenue growth business as we continue to add to our consumer and to the extent that what we’re doing in the consumer market is successful. I think those revenue growth opportunities are more than achievable.

Obviously, the caveat there is, if the consumer business doesn’t grow into quickly as we think clearly the professional business is kind of slower growing and sell if could migrate on. But as we stand today, I think we would look at this is being kind of in that higher category of growth company that we own..

All right. Liberty, I would say little bit of a disappointment there, all of your bankruptcy impacts of on your customers there.

Can you quantify the bankruptcy impact, and then I guess bigger question is, would those sales go somewhere else and I know the environment is little soft selling, but can you expand on the bankruptcy impact?.

Yes. Sure. So Brian, this is Ryan. You recall on Q1, we recorded in accounts receivable reserve essentially for what we had and they are with that large national retailer that was a $1.4 million charge to directly to their earnings in Q1. Q2 has been impacted primarily on a year-over-year basis because that customer really have not begun to repurchase.

Now there’s been lot of talk in the market about how many stores will remain open. So we were remain confident that we’ll get some sales in 2017 with this customer. But it’s going to be much less than prior year, the company continues to work very hard at broadening their distribution directly in the markets where these stores are closing.

And we think with the strong dealer network we have – we think we can offset some of that sales decline without effort. But hard to quantify because it’s really hard to determine when they’ll come out of the situation….

Right. Brian, one of the other things that is difficult to quantify, but certainly I think a dynamic that the company faces with respect to this customer, this customers bankruptcy is that many of the stores are liquidating. And again, the several will be reopened but based on public commentary that the smaller number of stores that will be reopened.

So to the extent, you’ve got liquidating stores with inventory in it in markets that are served by other distribution outlets. There could be some pressure there because people might be looking for deals, we don’t really know exactly how that’s going to impact each region.

So I would imagine that dynamic will probably play out through this year and through the end of the year difficult to quantify.

But until those stores are truly closed with door shut and no liquidation sales occurring in the new stores are open, until that time it will be difficult for us to get a sense of what they call new run rate will be, with that customer.

As it relates – and I think that also impacts, the other sales or I would say that if you could shut those doors immediately, and it just be done then. I would see radically hope to that demand in fact, it would be satisfied by whether it’s another national player or a dealer within those same geographies.

But time will tell, what we’re hopeful that’s the case. Again, as mentioned some of our commentary what appears to be a meaningful lessoning of concern over changes in firearm legislation, probably also has or it certainly has historically led to somewhat softer market for firearm sales and the resulting safe sales that typically correlate to that.

So we will have to see how it plays out.

I think that one of the things that we take a lot of comfort in though – is knowing or believing I should say that Liberty has the same leadership position, market share et cetera that I’ve always as had, that it continues to bring new products to market that it states of the highest quality that its consumers continue to believe it, to be the most trusted brand within the industry.

And so despite of this performance so far to date we don’t think that anything has occurred to alter our view on Liberty’s ability to be a great long-term pro forma for us.

And hopefully, sooner than later once this works its way through the system to get back on track from a profitability and growth standpoint, but you know unfortunately, they can’t control what happened with their customer. But they continue to do a spectacular job of controlling and overseeing the things that they can control.

So it’s a – to blip that they’re not enjoying very much neither or we, but we take it just that a shorter term pressure point that hopefully will get through here sooner than later..

I appreciate that commentary. And then on food side, Manitoba been stronger than anticipated. I guess one of – you’ve mentioned the strong trends here I mean domestically in Canada.

What in your Asian market which is where the supply issue was? Is that essentially work through or there is still some pressure to be there in?.

Yes. That market – is still under pressure. I mean there was a massive amount of inventory build by the end of last year and ended up sitting in the channel and year-to-date, we have virtually no sales in that market. What is also had the effect of doing is really depressing the price in that market.

And so as you can imagine there’s significantly less demand coming out of the market.

And so kind of spot market pricing for the product and today is extremely low and so we would really need the market kind of clear the access inventory resume back to a certain level of demand where pricing starts to normalizing comes back to a level where we feel it’s a good profitable market.

Would you think that will happen by the way? It’s just taking a little longer and I would say kind of as we guided, we think 2017 for that market is probably going to be one that is not going to be overly strong and we’ll have to minimize type of sales.

On the other side, as you mentioned, we’re really encouraged by the branded sales and outside of that market on ingredient sales were strong as well. So kind of the whole business performed pretty well in the second quarter absence one kind of market that does started the financial results down somewhat.

But our – one of the big thing that we’ve been working on it I think you’ve heard us now for the couple of years that we growing this business talk about gaining greater access to organic supply and really working with the farm base in Canada to convert over into half really good long-term supply, convert over there conventional [indiscernible] it remain substantial progress and we’re starting to see the benefits of the supply – continues to grow and I guess depending on kind of the weather which you never predict.

But this looks like what we have contracted coming in for the next year in organic looks very positive as well. So we feel really good that we’re doing the right thing then as I mentioned we now have an executive team that we built in the U.S. that.

We think and really start to push the needle on raising awareness and the education level around hemp-based foods. If you remember that was kind of always the plan took a little longer than we anticipated as we wanted to [indiscernible] for a long time and still chasing and you just done a great job of building out our team.

And now we’re really excited about kind of pumping some investment into that business to start getting the U.S. business up to higher household penetration levels..

Sure.

And then one last one shifting to Arnold, you said in mind, with expectations for the quarter, I mean seeing you encouraging early signs of maybe the turnaround, how long they are going to take to get that business kind of back into growing and profitably in the right direction?.

I think that, yes, with respect to Arnold again that the numbers that describe today I take our certainly not necessarily inspiring at this macro level, but I can tell you that we as a team then the context of the last couple years of probably not sales as good about this business as we do right now.

And that’s why we’re investing in the business to make the necessary changes to get the company on to the path that you just described. And again that’s why you see EBITDA level margins. I should say down a relative to the decline in their top line.

It’s looking for – it’s a lot of work and the reason it’s a lot of work are amongst the reasons to lot of work is.

Arnold is a global company with facilities in several parts of the world, multiple product lines and multiple industries that they serve, the selling of Arnold products is a very technical sale, it’s a long lead time and when you – it’s one thing to bring lean processes and productivity improvements to one facility, but when you’ve got to do it to seven, eight, or nine of them, it just takes longer.

And so we’re incredibly pleased with the progress of the management team as couple of data points that I’ll share with you kind of qualitatively because I’m not sure our level of disclosure here. But we’re seeing contribution margins increase at Arnold, now it’s been I want to say two to three quarters in a row.

So I think that we consider that, now at point we consider a trend. We’ve seen on time delivery rising across the business, again not to the levels where management wanted to be, but still making meaningful progress.

And I think all of these operational improvements as well as organizational strengthening with responsibilities delegated to some pretty capable folks within the management team as well as some possible additions here and there really position the company as well as we’ve seen it.

All of that being said, I don’t think you should expect any type of material changes in this calendar year. I’m hopeful that what you’ll hear from us on our year end/beginning of the New Year call where we start to talk to you about each of our companies and expectations for next year.

I’m hopeful that we’ll be talking about a year in 2018 where we start to see that trend line of growth and profitability trend upwards of to Arnold in that year. But I think 2017 is still a year of building that foundation that will provide Arnold with the opportunity for the type of performance. We believe it’s capable of beginning in 2018.

But we feel really good about it and the management team is doing a tremendous job..

All right. Thanks for your time..

Thank you..

Your next question comes from the line of Robert Dodd of Raymond James. Your line is open..

Hi guys, I’m – a lot of questions have been answered. So on when you talked about Crosman obviously the opportunity to cross-sell LaserMax into the Crosman channel and that’s a fairly obvious thing to trying do, that’s easier for me to say.

More broadly always seeing when you look at 5.11 and Liberty which both sold into Canada you have a lot of – when you look at 5.11, Liberty, Crosman many of these companies have kind of overlapping, kind of customer basis overlapping sales expertise within those businesses maybe different relationships.

Can you give us a bit color on what’s being done right now and I said it’s early to maximize the fact that those businesses together probably have incremental expertise and relationships that they could share, not just cross-sell their own products, but others as well and that is a synergistic value to all of those three together..

Yes. Look I think that what we do to try – because we agree with you that there are opportunities there.

What we do really Robert, in terms of how we oversee at our level, it’s mostly about putting those leadership teams together and have them discuss it and figure out how they can create, what would hopefully be mutually beneficial relationships between the companies. And so we don’t necessarily get involved at that operational level.

However, we see what you see and I think that the management teams of those companies see it and we get together obviously quarterly as a group to the board meetings where these individuals can see each other, but they aren’t touch with each other, pretty regularly if it makes sense. So we’ve make the introductions.

We really try to let them sort it out. I think the good news in the context of from a pure investment standpoint, we didn’t acquire any of these companies with the notion of our valuation being reliant upon achieving synergies across businesses.

And so for us it represents get incremental upside to the extent that they’re successful in those efforts, but we agree there are a lot of the same trade shows. They’ve got consumers that perhaps on all or some of the products. So again, we definitely agree with your assessment that there should be opportunities there.

We’re going to again try to lead the management teams to explore those opportunities and to the extent, they are there. I’m very confident that the management teams will take advantage of those and reap the benefits of them, but time will tell. Nothing imminent as you said particularly as it relates to Crosman since it’s so new to the fold.

But if we can make that happen and our team could make that happen, again everybody would be excited about that. But the flip side is you don’t want to force it, you don’t want to get these teams so distracted on figuring out, how to do something together particularly if it’s – if it doesn’t move a needle, because it always gets complicated.

So that fine line there between doing something because it seems like its novel or would be well received. But if it’s going to generate $50,000 in sales, it probably isn’t worth the effort to try that to bring all that stuff together.

But I can assure you with something that we and the teams of those respective companies are exploring and will continue to explore. Hopefully we will be able to do something. We think it would be very interesting and nice if these companies could work together in that manner, but time will tell..

Okay. I appreciate that color. Thank you, Alan.

And just one follow-up sort of to cost when line, when you said earlier expect CAD will exceed the distribution for the full year just to be clear that it’s the CAD after the preferred deduction in the fourth quarter?.

That’s correct..

Thank you. Okay..

Yes, sure. Thanks, Robert..

Thanks, Robert..

And there are no further questions at this time. I’ll turn the call back over to management..

Thanks, everybody for joining us on today on our call and for your continued interest in CODI. We look forward to sharing our progress with you in the future. Thanks..

And this concludes today’s conference call. You may now disconnect..