Good morning and welcome to the Compass Diversified Holdings 2017 Third Quarter conference call. Today’s call is being recorded. All lines have been placed on mute. If you wish to ask a question at the end of the prepared remarks, please press the star then one key on your touchtone phone.

At this time, I’d 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’ third 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 third quarter press release, including the financial tables and non-GAAP financial measure reconciliations are available on the company’s website at www.compassdiversifiedholdings.cm.

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 to net income 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 a material basis from those projected in these forward-looking statements and some of these factors are enumerated on 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 third quarter 2016 earnings conference call. In the third quarter, our leading middle market businesses continued to generate stable levels of cash flow that were consistent with our expectations.

During this time, we also capitalized on market opportunities to reinvest in our subsidiaries’ continued growth with two accretive add-on acquisitions.

Before I discuss our results, I would like to briefly highlight our recent acquisitions which demonstrate our ongoing success capitalizing on our balance sheet strength to strategically acquire companies that enhance our subsidiaries’ growth prospects, building greater value for our shareholders.

First, in July our newest subsidiary, Crosman Corporation acquired the commercial business of LaserMax, a leading designer and manufacturer of firearm-mounted laser aiming devices. This is the first add-on acquisition we’ve completed for Crosman since acquiring the company in June, and we are very excited about this transaction.

A key part of Crosman’s growth strategy involves its expansion into attractive adjacent markets. Adding LaserMax’s commercial business expands Crosman’s presence in the outdoor recreation space with a premium laser site brand.

Leveraging its enhanced product line, Crosman can now reach a wide range of new customers across retail channels while pursuing new cross-selling opportunities with current big box retail and international customers.

We look forward to continuing our work with Crosman to build on its leading position in air guns while adding further market share in new products.

More recently on the niche industrial side, our Sterno Products subsidiary completed the add-on acquisition of sevenOKs, a leading provider of insulated food carriers for the food service and retail markets. This represents our second accretive add-on acquisition since we acquired Sterno Products in 2014.

Similar to the 2016 acquisition of Northern International, the addition of sevenOKs will further Sterno Products’ expansion into the food service market while bolstering its broad portfolio of industry-leading products.

In our view, the addition of sevenOKs is a natural extension of Sterno’s 100-year mission to provide customers with quality products that help keep food at ideal serving temperatures. Turning now to our 2017 nine-month performance, our subsidiaries produced solid operating results that were consistent with our expectations.

At our niche industrial businesses for the nine months ended September 30, 2017, we posted a combined revenue increase of 5.4% as compared to the nine months ended September 30, 2016. EBITDA increased by approximately 1.5% as compared to the corresponding period in 2016.

Clean Earth continues to benefit from the accretive add-on acquisitions the company has completed over the last 18 months, generating a year-over-year revenue increase of 14.4%. Turning to our brand and consumer businesses, we reported year-to-date combined revenue growth of 2.2% compared to the prior year on a pro forma basis.

EBITDA for the nine months ended September 30, 2017 was in line with the comparable period prior year. Within our brand and consumer businesses, Manitoba Harvest displayed EBITDA growth of 40.9% in the first nine months of 2017 compared with the comparable 2016 period.

This reflects our success procuring organic hemp seed supply while enhancing Manitoba’s infrastructure to support its future growth. We also saw solid growth from 5.11, whose revenue increased by 7.4% during the nine months ended September 30, 2017 compared with the prior year period.

EBITDA at 5.11 increased 10.2% during this time frame as compared to the corresponding period in 2016. During the third quarter, we installed a new ERP system to support 5.11’s long term growth objectives. This implementation impacted their third quarter results, which Elias will discuss in more detail.

For the three months ended September 30, 2017, CODI generated cash flow available for distribution and reinvestment, which we refer to as cash flow or CAD, of $26.2 million. Third quarter CAD, which increased year over year and exceeded our distribution for the quarter, was in line with our expectations.

For the third quarter, we paid a cash distribution of $0.36 per common share, representing a current yield of 8.5%. This bring cumulative distributions paid since CODI’s 2006 IPO to $15.72 per common share. We also paid a cash distribution on October 30 of approximately $0.61 per share on our recently issued 7.25% Series A preferred shares.

The distribution on the Series A preferred shares covered the period from June 28, 2017, the original issue date, up to but excluding October 30, 2017.

In summary, during the third quarter, our leading niche industrial and branded consumer businesses collectively generated free cash flow that was in line with our expectations, enabling CODI to generate CAD that exceeded our distribution per share.

Complementing this, we continued to reinvest in our subsidiaries’ continued growth with two accretive add-on acquisitions. Given our financial strength, we have significant capital to deploy for future acquisitions to support our future growth and our ability to provide our shareholders with stable cash distributions.

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

Thank you, Alan. I will begin by reviewing our niche industrial businesses, which include Advanced Circuits, Arnold Magnetic, Clean Earth, and Sterno Products. For the third quarter, our niche industrial businesses generated stable operating results.

Revenues rose slightly as compared to the year earlier period while EBITDA increased 7.1% during this time frame. The combined EBITDA margin for the third quarter increased 108 basis points compared to the prior year quarter. Advanced Circuits reported solid third quarter results that were in line with our expectations.

Revenue increased 3.5% year over year driven by higher quick turn PCBs, long lead time PCBs, and subcontract sales, partially offset by decreased sales in quick turn small run PCBs. Third quarter EBITDA increased 5.3% compared to the year ago period, reflecting the current sales mix.

Arnold Magnetics reported third quarter results that were consistent with management’s expectations. Revenue decreased slightly on a year-over-year basis due to lower PMAG and international sales volumes.

EBITDA rose by 8.5% during the third quarter and EBITDA margins increased by approximately 130 basis points to 13.7% , reflecting operational and productivity improvements implemented by Arnold senior management over the past year as well as favorable [indiscernible].

We are pleased with the productivity improvements implemented by Arnold management and continue to believe in Arnold’s strong competitive advantages and ability to reach our long term expectations. Clean Earth produced solid third quarter results and continues to perform in line with our expectations.

Revenue increased 8.1% driven by higher contaminated soil revenue and contributions from add-on acquisitions. Third quarter EBITDA rose by 17.7% while margins increased by 174 basis points to 21.2% compared to 19.4% in the same period last year, primarily due to sales mix.

Clean Earth continues to perform in line with our expectations considering dredge material volumes that are historic lows. Turning to Sterno Products, third quarter revenue was slightly below our expectations. Revenue decreased 5.2% in the quarter due to sales softness in the Sterno Home division.

We believe Sterno Home is well positioned for 2018 with a strong product line up and channel inventory at more favorable levels. EBITDA decreased 5.2%, which was consistent with our expectations, while EBITDA margins were flat compared to the year ago period.

This was primarily attributable to higher raw material costs partially offset by increased manufacturing efficiencies Sterno has continued to achieve during the course of 2017. Next, I will turn to our branded consumer businesses, which include Liberty Safe, ERGObaby, 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 if these businesses were acquired on January 1, 2016. Our branded consumer business performance during the third quarter of 2017 was slightly below our expectations.

Combined revenue for the quarter decreased 5.4% on a year-over-year basis while EBITDA decreased 19.2% compared with the prior year. Liberty Safe reported third quarter results that were consistent with our expectations. Year over year, revenue declined 26.2% while EBITDA decreased 20.6%.

Liberty’s performance reflects lower sales in the non-dealer channel primarily related to a large outdoor retailer that filed for bankruptcy in the first quarter of 2017 as well as a softer market environment.

Our full-year revenue and EBITDA expectations for Liberty remain unchanged from the revised expectations we discussed on our last earnings call. Performance at ERGObaby was slightly below our expectations.

Revenue declined 6.2% year over year due to lower sales of infant travel systems and a challenging domestic retail market, offset by strong international carrier sales. In 2016, we chose to wind down the Orbit Baby business and the loss of those revenues has impacted revenue comparisons throughout 2017.

The bankruptcy of a large national retailer during the quarter had a meaningful impact on our revenue and EBITDA. In addition to decreased sales to this customer, we recorded an accounts receivable reserve of approximately $500,000 which contributed to the EBITDA decline of 7.7% year over year.

During the third quarter, ERGObaby launched the Omni 360 carrier, which is exceeding our expectations; however, given continuing retail softness in the domestic market and the ongoing effects of the large national retailer bankruptcy, we expect fourth quarter performance to be below our original expectations.

Manitoba Harvest’s third quarter results met our expectations as we continue to build out their infrastructure for long term growth. Revenue declined 12.4% due to lower international ingredient sales related to excess supply in one of our international markets, as discussed on earlier calls.

This was partially offset by strong branded product sales growth following our success in increasing the supply of organic hemp. EBITDA declined on a year over year basis, as anticipated, as we continue to invest in the infrastructure of this business.

We continue to believe in Manitoba’s long-term growth potential and remain committed to maximizing the value of our investment. Third quarter results at Crosman were in line with our expectations.

On a pro forma basis, third quarter revenue rose 7.3% year over year mainly due to growth in archery products and contributions from the add-on acquisition of LaserMax’s commercial business during the third quarter. EBITDA decreased 7.5% compared to the previous year primarily due to sales mix.

The integration of LaserMax is proceeding on schedule and we are excited to leverage this premium laser site brand as we look to expand market share in the outdoor recreation space.

Lastly 5.11’s third quarter performance was consistent with our expectations, taking into consideration the implementation of the new ERP system that Alan mentioned earlier. The implementation adversely impacted revenue and EBITDA due to lost shipping days at the end of the quarter and elevated SG&A expenses.

We anticipate additional impact in the fourth quarter with the business normalizing afterwards. Although the ERP implementation has caused some disruption in 2017, we expect 5.11 will see the long-term benefits of this new system with enhanced customer management, fulfillment and margin analysis capabilities.

For the third quarter, 5.11’s revenue decreased 3.6% compared to last year. Management estimates the impact on revenue related to the lost shipping days from the ERP implementation to be approximately $4 million to $5 million.

Further, revenue was negatively impacted due to a $4 million decline in direct to agency sales as a result of a large direct to agency order in the prior year quarter. As we’ve discussed previously, DTA orders are hard to predict and can distort financial results on a quarter to quarter basis.

EBITDA declined by about 40% primarily as a result of the ERP implementation and lower DTA sales. Despite the challenges incurred from the implementation of the ERP system, we are very encouraged by the growth in the consumer segment of 5.11’s business.

In the third quarter, direct to consider sales through our retail and ecommerce channels grew by 56%. At September 30, 5.11’s total retail store count was 24. I would now like to turn the call over to Ryan to add his comments on our financial results..

Thank you, Elias. Today I will discuss our consolidated financial results for the quarter ended September 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 September 30, 2017 was approximately $324 million, up 28.4% compared to $252.3 million for the prior year period.

This year-over-year increase reflects notable revenue growth at our Clean Earth subsidiary primarily due to contributions from our add-on acquisitions in 2016 and the acquisition of AERC Recycling Solutions in March of this year, as well as the revenue contributions from Crosman and 5.11.

Net income for the quarter ended September 30, 2017 was $8.4 million as compared to net income at $50.2 million for the quarter ended September 30, 2016. During the third quarter of 2016, CODI realized a net gain of $50.4 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 a secondary public offering. Cash flow available for distribution or reinvestment, which we refer to as CAD, for the quarter ended September 30, 2017 was $26.2 million compared to $22.6 million in the prior year period.

Third quarter CAD was consistent with our expectations, reflecting stable operating results from our leading middle market businesses.

Based on our 2017 earnings expectations for each of our subsidiaries and the recent accretive acquisitions we completed, including Crosman, LaserMax and sevenOKs, we expect CAD will exceed our distribution for the fourth quarter and full year 2017.

Taking a look at our balance sheet, we had approximately $41.5 million in cash and cash equivalents and net working capital of $298.4 million as of September 30, 2017. We had $561.4 million outstanding on our term loans and $25.5 million in outstanding borrowings under our revolving credit facility. We have no significant debt maturities until 2019.

In addition, we had net borrowing availability of $523.2 million under our revolving credit facility at the end of the quarter. During October, we successfully re-priced our $561.4 million Term Loan B from L+275 to L+225, a 50 basis point reduction. We estimate this re-pricing will reduce our annual interest costs by $2.8 million.

Turning now to capital expenditures, during the third quarter of 2017 we incurred $4.3 million of maintenance capital expenditures compared to $4.1 million in the prior year period. The increase was primarily due to the addition of capex spend at 5.11 and Crosman.

For the fourth quarter, we anticipate maintenance capex spend to be between $4.5 million and $6.5 million. During the quarter, we continued to invest growth capital at 5.11 for the new ERP implementation, retail build-out, as well as a new warehouse discussed on prior calls.

The current year-to-date growth capex spend on these initiatives was $17.5 million. We estimate an additional $7 million to $10 million of growth capex spend at 5.11 during the fourth quarter of 2017 and the first quarter of 2018 for these projects. With that, I will now turn the call back over to Alan..

Thanks Ryan. Overall our subsidiaries generated solid third quarter results that met our expectations and allowed us to exceed our distribution, underscoring the leadership of our niche industrial and branded consumer businesses.

We also drew upon our strong balance sheet to consummate two accretive add-on acquisitions as we continued to reinvest in our current subsidiaries and to support their future growth. I would like to close by briefly discussing M&A activity and our forward growth strategy.

Middle market deal flow remained steady yet competitive during the third quarter. High valuation levels continued to be driven by the availability of debt capital with favorable terms and financial and strategic buyers seeking to deploy available equity capital.

As 2017 comes to a close, we continue to focus on pursuing both platform and add-on acquisitions that either open up attractive new business segments for CODI or bring strategic value to a current subsidiary company.

We remain committed to our disciplined approach of acquiring niche middle market businesses with a reason to exist that will continue to drive future cash flow growth for CODI. This concludes our opening remarks, and we’ll be happy to take any questions you may have. Operator, please open the phone lines..

[Operator instructions] The first question is from Larry Solow of CJS Securities. Your line is open..

Great, thanks. Good morning, guys. A bunch of puts and takes. Actually the quarter to me seemed a little bit lighter. I know you sort of said in general, everything was in line, but it seemed like when you went through your commentary, there were a few more things that seemed to be below expectations on the itemization.

Is that a fair characterization, or am I being a little too negative?.

Sure Larry, this is Ryan. No, there was--what we meant with in line was that the cash flow that we generated, or CAD was in line with our expectations, right? There was some absolute puts and takes on the EBITDA company by company - some were up, some were down.

We were obviously meaningfully impacted at 5.11 for the quarter because of the ERP implementation, which we discussed; but you’re right in your assumptions..

And maybe just a couple specifics. On the positive side, Clean Earth I think had a nice rebound, good year-over-year growth, and last quarter was a little bit slower, there were some push-outs of the dredging, which has been pushed out for several years.

Have some of those projects resumed? What drove the growth this quarter, was it anything specific?.

Yes, I mean, really Larry, it was contaminated soil and hazardous. Dredge really remains at historic lows with respect to the activity in that segment, so that’s really what drove it, and we agree with you that Clean Earth continues to do a really nice job.

When dredge does resume activity to call it even mid-cycle levels one day - I wish I could tell you when, certainly it’s our hope that it’s next year, but when that happens, I think you’ll really start to see the earnings power of Clean Earth when it’s hitting across all of its business segments..

I know the expectations on the industry level have obviously been skewed and pushed out, but is the expectation for that, the dredging side to pick up? Does Clean Earth feel that that will pick up next year, or could it be another--?.

I think, Larry, it’s the hardest segment of their business for them to really project with confidence, because they really don’t control the process of a dredge project being started. I think as we’ve discussed in the past, oftentimes the Army Corps of Engineers, municipalities, etc.

that are driving these projects, and they can be impacted by weather, budget cycles, bidding for the contract, etc. So Clean Earth unfortunately can’t make the process go faster.

Where we remain optimistic at the macro level is that there are many--I mean, the list is long of the announced and anticipated dredge projects in their geography, so we know they’re out there and we know they exist. It’s just a function of them coming to market and we have no reason to believe that they’ve been losing market share.

We think they’re still getting the amount of business that they’ve received historically, it’s just that the business, it’s down. It’s just down, and so I wish I could tell you with confidence that Clean Earth expects and can tangibly point to something that would result in next year being a better dredge year, but unfortunately I can’t..

Right, but I guess on the flipside or the positive side, it probably can’t go down much for us, right, for them and that piece of the business at least? You never know, but--.

You know, being intellectually honest, never say never; however, this does appear to be a historic low in the dredge segment..

Right, fair enough. Okay, just onto ERGObaby, obviously the Toys R Us bankruptcy skewed performance, and it sounds like that’s going to continue. Was there also just a little bit of a general sluggishness there? How is Baby Tula doing also on that, and then on the positive side, it does sound like the new products are starting to do well..

Sure Larry. So yes, there is a--I’d say just kind of general sluggishness in U.S. retail, although kind of the bankruptcy had a disproportionate impact.

One of the problems that happens, and we found this with Liberty Safe as well earlier in the year, there’s just an inventory de-leveraging throughout the system that occurs that can distort financial results kind of disproportionately, and we’re experiencing that right now.

So you know, that’s kind of both--we expect this to be both third quarter and some of fourth quarter. That being said, the entire U.S. market I think is a little bit more sluggish. The international markets are extremely strong for us, and so we feel kind of on balance the business is doing well, notwithstanding that the U.S.

retail is in major transition, and we hear that not only specific to ERGObaby but I think broadly. We hear that with almost all consumer products and retail companies given what’s happening with the transition to online and ecommerce. With respect to the question on Baby Tula, Baby Tula is performing kind of in line with expectations.

When we bought the company, we had expected, because they were on backorder on a number of products, that the business would be a little bit lower, and it was reflected in the multiple that we paid, so we had anticipated this level of revenue and it’s staying right about where we had anticipated.

So we’re pleased with the business and where it’s at, and we continue to believe long term that ERGObaby’s business is positioned really well..

Okay. Just lastly on 5.11, I realize it’s a choppy business, especially with the direct to agencies.

Excluding the choppiness and the ERP implementation, which sounds like it may impact Q4 a little bit more, is there anything else of concern, positive or negative on that side, or is that business still chugging along as pretty much--you know, you guys have owned now, I guess about a year, so..

Yes, look - a year in, I would tell you that we’re more excited to own the business than we were when we underwrote it, so that’s always a good sign..

Absolutely..

I think on the positive side, the consumer acceptance of this brand is far greater than what we had anticipated in our underwriting, and so we feel that the business has a probably better shot to transition over to primarily a consumer brand, or at least have a bigger component of consumer, and as we all know, I think consumer generally carries kind of better valuation multiples and higher growth rates and better margins.

So from that standpoint, I would say it is kind of far exceeding our expectations. I would say if there is anything that has been a little bit difficult, it’s been a couple of the major projects that we’re working on. This ERP implementation was very difficult. I think most companies would tell you the same.

I don’t know anybody that’s been able to go through this and not come out a little bit scathed, and we have this major warehouse consolidation and expansion to enable continued growth. Those two projects are chugging along, but taking up quite a bit of time. I would say if you look at the business in general, as I said, we really are excited about it.

I think domestic, professional, it’s kind of at what we had expected it to be, which is kind of a mature slow growth business. Consumer is way ahead of what we expected, and actually the international acceptance of this business, mostly right now on the professional side, is well exceeding our expectations.

So I think we are really pleased with the business, and we think the future here is brighter than we did a year ago..

Excellent, great. I appreciate the update. Thanks guys..

Thanks Larry..

Thank you. The next question is from Robert Dodd of Raymond James. Your line is open..

Hi guys. Just to the point you raised in response to those questions, on the branded retail side when we look at, for example ERGObaby with Toys R Us, and obviously we did see an issue with the Gander bankruptcy at Liberty, can you give us--I mean, and obviously U.S. brick and mortar retail is having its issues.

Can you give us any color, like for example with ERGO, how much of their business is through maybe large national chains, brick and mortar boutiques, brick and mortar versus online kind of direct to consumer, because obviously two of those three potentially face major challenges from the other one, and there could be a transition issue that could drag potentially for a while if U.S.

brick and mortar retail continues to struggle..

Yes Robert, so look - I think it’s the point that all consumer product businesses are dealing with today. You know, we talk a lot about the transition in the domestic retail market and how moving to ecommerce is having kind of a major impact on how we do business.

If we could talk specifically about ERGObaby, broadly I think that is something that all of our companies are dealing with and all of our companies are having to create strategies, each one which may be particular to itself because you may have shipping issues or other things, depending on the type of product.

But really, everybody is trying to figure out how you best cope with that. In terms of ERGObaby, the domestic business today is probably 25% to 30% - I don’t have an exact number, but 25% to 30% driven by online and the rest is driven by more traditional kind of retail.

Now within the more traditional retail, call that 70%, 75%, some of that might be online too, and so they all realize that they’re moving, whether it’s even a specialty shop or whether it’s big box national retail, they all understand the need to move to online distribution.

So I would say that the business is absolutely changing, our customers understand that the business is changing, and we’re working with them, but it’s going to present headwinds.

I think that one of the things that happens is you do have some inventory deleveraging as you move from brick and mortar to ecomm as most ecomm players are able to deliver with less inventory and be a little bit more efficient, so that does have somewhat of a headwind and drag as that transition continues.

But that’s kind of what we see both holistically and with ERGO. I would mention that at Baby Tula, virtually all of their sales, not 100% but call it probably 70%, 75%, they’re almost opposite of ERGO in being online.

A lot comes through their own direct online and then a big chunk comes through Amazon and other partners that are predominantly just online..

Thank you. Just to that point, you could run--on ecommerce, you can run thinner inventory, direct drop ship to consumer in principle, etc.

Pretty hard to do that with Liberty obviously because the things are really heavy and expensive to ship, so where do you think you stand in the channel flush-out, if that’s the right word, related to the bankruptcy and cleaning that channel out in brick and mortar locations between the non-dealer channel and things like that?.

Yes, on the Liberty side, I think they’re working through that and I would expect that they’re largely through it. It’s hard to know precisely, but based on our discussions with management, we believe that that’s largely complete.

You’re right about the size of the product making it difficult to go through ecommerce; however, Liberty has worked over the last several years to develop a web-based sales portal for folks, and the way that--when people order and purchase online, those orders would then get routed to a local dealer.

But in the long term, though, if anyone is aware of Amazon slowing down on what they're capable of doing, I’d love to hear about it, because it feels as though big, heavy things are just going to be figured out in terms of being able to order them there and have them installed and delivered.

While that’s not figured out yet, I can assure you that the Liberty management team believes that that’s coming sometime in the future and are working very hard to work out what they believe will be a good strategy to facilitate that channel going forward..

Okay, thank you. The other thing I didn’t really want to bring up on Liberty, but obviously there have been some fairly significant [indiscernible] firearms incidents recently. Sometimes in the past, that has had an effect on demand for Liberty products.

Have you seen anything there?.

We have not. It’s been--it might be early, but at the same time, during the prior events that were obviously horrific, there was a different tone being discussed surrounding gun control, and that doesn’t appear to be the case right now.

So again, pure speculation - I don’t think that our country has become desensitized to these types of incidents, but perhaps they have, which would be pretty stunning; but I think it’s more likely attributable to the lack of discussion surrounding change in gun laws, which I think really spurred a lot of demand post the incidents that you reference..

Right, got it. Thank you. If I may have one more, on 5.11, your current retail store count, 24. Obviously the direct to consumer and the retail side, that’s performing really well, ERP issues aside.

Are you currently expecting to--I know you have a plan to increase that 24 anyway, but are you in the process of revising--you know, of increasing that plan, still on plan, or where do you expect the retail store count to go?.

Yes Robert, I think we’re still on plan with that.

I would say, again, there is quite a bit that we’re biting off right now in terms of kind of getting the ERP to be run very efficiently and gain all of the productivity enhancements and capabilities that we expect to get out of that, and then we have the major warehouse move that we’re going into in the first quarter, so we’re cognizant not to put too much on the plate so that nothing gets done properly.

We want to make sure that we kind of tick these off. I think longer term, our expectations are at or stronger for retail and the direct business.

I will say one of the great things about this ERP system that we’re implementing is it gives us much more capability to be a truly integrated, and what you’ll hear, omni-channel kind of consumer business today.

As Alan mentioned, ecommerce is moving at the speed of light and the things that you have to be able to do in terms of customer fulfillment are moving very quickly, and we think this ERP system when we get it fully running will enable us to do that, and really should give us, I think, longer term some tailwinds to be able to integrate our retail and our commerce together in ways that we can’t right now.

So I think longer term, we probably are more bullish and would be revising, if anything, up what our expectations for retail rollout are. In the near term, given all that we have on our plate, we’re probably kind of at what our expectations were and at what we’re running for 2016 in terms of growth..

Okay, got it. Thank you..

Thanks Robert..

Thank you. The next question is from Brian Hogan of William Blair. Your line is now open..

Good morning. A couple quick follow-ups on 5.11 there.

Obviously it’s off a very small store base, and I understand that; but do you have same store sales for 5.11?.

Yes, we have same store sales. I think we are kind of--because the store base is so small right now, Brian, I think it’s just going to be distorting to give that out. I think we would--you know, we’re choosing at this point not to give out same store sales.

I think when the store base becomes a little bit more mature, it may be something that we revisit; but for right now, it’s just too early to be sensible, and it’s going to be volatile because you might be comping in one quarter five stores, and then in the next quarter you might have 10 stores that are in there.

But it’s just too immature right now to be a good number. What I would tell you, though, is that our same store sales are comping strongly against prior year, and we’re really pleased with the direction that we see in terms of same store sales growth within the base, given that it’s a very, very small base right now..

All right, I appreciate that. I guess the 56% growth on the retail/ecommerce business, is that like a growth rate that’s sustainable for the near term, given your ramp for that business and those stores, or is that just kind of--obviously it’s not a [indiscernible], I get that, but--.

I think 56% is a lot, right? I don’t know that we can sign up for that type of growth. Do I think that there is strong double-digit growth in our direct to consumer business for the foreseeable future? Yes.

I think that the commitment to continue our retail build-out, right now with only 24 stores we are massively underpenetrated, and so we see a lot of growth potential there.

Our ecomm business, we see a lot of growth potential just given the tailwinds and the general transition, and being able to integrate both our ecomm and retail should also be a strong tailwind for us.

Can it grow at kind of 56% like it did in this last quarter? I think that’s probably aggressive, and remember it’s coming off a relatively small base, so just kind of as numbers get larger, as the base gets larger, it’s likely that the growth rate will come down, although we probably believe that the absolute dollar growth, not the percentage, should stay kind of at the level or maybe even accelerate.

But I think to answer your question, we view this as a long term, kind of strong double digit growth as we build out our network..

Very helpful. Then also [indiscernible] ERP transition, in the 10-Q you mention it went off on September 28, and that’s essentially two days in the quarter, but yet $4 million to $5 million of revenues spilled over into the 4Q, and I guess the 10-Q also said it didn’t come back on until October 9.

I mean, that’s obviously much longer, so can we proportion the revenue delay? I guess, I’m trying to understand the shift..

Yes, so let me just say that shipping at the end of the quarter tends to always be heavy, and so we--as much as we try to get out a lot, it’s just some of it is based on when our customer orders come in.

It tends to be end of month is always heavier, and so those three days, the 28th, 29th and 30th would have been very large shipping days for us and disproportionately higher than what you would have had earlier in the month.

So you know, that is one factor that is affecting why the number was slightly higher, I would say, at the end of the quarter, because of the end of the month shipping that we typically experience. In terms of the bleed over into the fourth quarter, it really is a little bit hard for us to tell right now. I wish I had better visibility.

I can tell you that there will be some disruption in the fourth quarter and we believe that it will be contained to disruption in the fourth quarter, and that in the first quarter going forward in 2018, that this will be behind us and you won’t hear this again. But that being said, we were down for nine days.

I think what was even more problematic is when you come up with an ERP system, you don’t immediately come back at full speed.

I mean, you’re just working through so many issues when you go live with these things, and you can do all the conference room pilots that you want, but the reality is until you go live, you’re not going to figure out where some of the bottlenecks are.

So yes, we missed and didn’t come back up until early October, but then even beyond that it bled out into--kind of further into the month, until we could resume back to normal shipping.

We feel really good about where we are today in terms of being able to get shipping back to historical levels, but that being said, we have a pretty big backlog that we’re trying to clear. Our hope is that because it was done early in the quarter, we can make up a lot of it in November and December, and the disruption is reasonably well contained.

But we just don’t have perfect visibility on that yet, but our hope is that it’s--you know, we certainly think it’s not proportionate, like what you just said, kind of nine days in October compared to three days in September.

We certainly would hope that it’s not proportionate, that it’s significantly less, notwithstanding everything I just said, because we have a reasonably good period of time to make up some of our shipping..

Shifting to Arnold, I guess, you said in your prepared remarks the operational and productivity improvements have been impressive.

What accelerates revenue growth, then? Is it just a matter of time before that stars to turn around, is it market driven? How do you get revenue growth at Arnold?.

Yes, I think, Brian, that the markets that we’re most excited about going forward are aerospace, defense, and medical. In addition, part of the infrastructure and operational improvements that we’re talking about also surround enhancing the sales efforts and the human resources there.

I think the company has done a really good job there, so it’s really been a combination of, call it fixing what goes on behind the scenes while also trying to ramp up their outward facing functions. We’re optimistic about both.

You certainly in the quarter see the operational side being much more reflected in there, but the sales guys do deserve credit for the products that they did sell because the mix was good and it also aided the margins. So this isn’t an indictment of the sales team - they’re very good.

It’s more of a function of what markets we’re looking for them to focus on and where the management team wants them to spend their efforts.

Everyone at the company is very well regarded and highly thought of by current management, so we believe that as those efforts, outward-facing efforts are increasingly more focused on the markets that we think are more attractive long term, that you’ll begin to see that top line move in the right direction.

We certainly don’t expect any major changes in this calendar year, but hopefully we’ll begin to see some of the efforts bear some fruit in 2018..

All right, then shifting back to ERGO and Baby Tula, have you seen any competitive threats, different ones? I mean, obviously we’re shifting to online, and I guess kind of lay of the landscape and how competitive that market is?.

Yes, I would say the competitive landscape has kind of been pretty similar to what it has been over the past year. We clearly have competitors that are trying to come into the market periodically.

We have some that rise up a little bit, some that fall a little bit, but we look at what our share data is on a quarter to quarter basis, and it’s very stable in the domestic markets, so we think there’s pluses and minuses on the competitive landscape but by and large, we’re kind of holding steady with our share.

As I said, internationally, we either in markets that are already established are taking share and driving pretty rapid growth, and in some markets, in particular a market like China, for example, we’re growing very rapidly as this business and the distributor partner that we go through is starting to expand.

It’s just becoming more of a common juvenile product where it may not have been before, so some markets are doing that. But I tell you, Brian, it’s pretty steady here in the U.S., no major changes in the competitive landscape..

All right, and then the last one from me is actually on the inventories. Total inventories were definitely higher than what I had modeled in the quarter and the balance sheet.

I guess the question is it driven by the 5.11 and the ERGObaby Toys R Us bankruptcy thing? I guess, what are the attributes to the higher [indiscernible] and also the DTA, I guess, sales at 5.11, is that--?.

Yes sure, Brian, this is Ryan. Some of that inventory level is seasonal in nature.

A lot of our consumer companies have, call it seasonal sales in the fourth quarter associated with the holidays and such, but it’s also been a little bit of 5.11 associated with the build-up in inventory with our retail expansion and also a little bit ahead of the ERP implementation to make sure that they had product during the downtime here.

So those are probably the two biggest drivers of inventory levels..

Okay, thanks..

Thank you..

Thank you. As a reminder, if you do have a question, please press the star then one key on your touchtone telephone. The next question is from Doug Mewhirter from SunTrust. Your line is open..

Good morning, guys, this is Michael in for Doug. Thanks for taking our questions. Thanks for all the detail. It seems like a really exhaustive Q&A session, so we just have maybe a few more broad questions for you guys.

I guess frankly to expand on that last question about inventory, it seems to us that you guys are constantly growing your retail mix organically and through tuck-in M&A, like LaserMax.

Obviously the fourth quarter is huge for retail, but if we think about your businesses, most sell through the indirect channel, say like 5.11, but could you please give us some sense of how much your retail related business has already seen some sort of holiday business flow through your P&L in the third quarter as opposed to this quarter, as most shipments for holiday season are usually shipped prior to the actual selling season, particularly in mid to late September?.

Yes Michael, so it’s probably hard to go high level on that, but I think you’re right - there are definitively some shipments that occur in September in preparation for the fourth quarter.

But by and large, more come in October-November, given what Elias was mentioning earlier, which is kind of retailers moving to less inventory, therefore shorter lead times. So I think it will be a greater impact in Q4 than it was in Q3, but again business by business that could be a little different. But by and large, I think that’s fair..

Okay, thanks for that. Then recently we saw an interesting study from NRF, so the National Retail Federation, and they’re predicting consumers are going to be spending about 3.5% to 4% this year on holiday gifts versus prior year.

While this doesn’t sound like much, it’s actually pretty much double the rate we’ve seen over the last few years, and what’s really interesting from the survey is that online was cited for about 60% of consumers, they’re citing that online is going to be their most popular destination.

So I guess broadly speaking, and I understand we just sort of dived into this with ERGObaby and a little bit with Liberty, but with most of your growth expected--most of this industry growth expected to come online versus brick and mortar this season, can you please help us understand how your retail-related businesses are positioned for this growth?.

I think as Elias mentioned earlier, as you would imagine over the last year and even dating back to that, the retail landscape has clearly been changing for quite some time, and I think that the good news there is that our companies have been working towards being ready and staying on top of those trends for quite some time.

I think that all of our companies have really done a good job and I think are very well prepared for ecommerce to the extent that’s how customers are going to shop this holiday season, so I don’t view it as a particular weak spot relative to prior years.

In fact if anything, I think our ability to handle those types of sales across our group of companies has only improved in the last year.

Elias, would you like to add anything to that?.

You know, Alan, the only thing that I would mention, and Michael, just when you look across the company, ERGObaby is not a heavily gifted around the holiday product, right? I mean, as you can imagine, as a juvenile product, when you have a kid, you need one of these, and so it’s driven more by birth rates and when that kid is born.

It really is almost irrelevant to seasonality. In fact, if anything fourth quarter tends to be a little bit weaker domestically because retail partners are trying to shift some dollars into more gifted items and they let the inventory work down a little bit, so that doesn’t have any effect.

Manitoba Harvest, as a food business, has virtually no seasonality, and so a couple of our businesses really aren’t going to be touched.

The ones that probably have the biggest impact, I would say, are 5.11 and Crosman, both of which are--can be heavily gifted items, and I think both of those were--to Alan’s point, we’ve done a lot to invest in, broadening distribution, and also being able to broaden our ecommerce capabilities, and I think we would see both of those having hopefully positive pick-ups in Q4, and we hope that the National Retail Federation is right with their projections.

I think that will inure to everybody, including those companies’ benefit..

Sure, that’s great. Thank you for all the detail. That’s all our questions..

Great, thank you..

Thank you. There are no further questions at this time. I’ll turn the call back over to management for closing remarks..

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

Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day, everyone..