Compass Diversified (CODI) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to Compass Diversified Holdings 2013 Second Quarter Conference Call. Today's call is being recorded. [Operator Instructions] . At this time, I'd like to turn the conference over to Michael Cimini of The IGB Group for introductions and reading of the Safe Harbor statement.

Thank you, and welcome to the Compass Diversified Holdings Second Quarter 2013 Conference Call. Representing the company today are Alan Offenberg, CEO; Jim Bottiglieri, CFO; and Elias Sabo, a founding partner of Compass Group management. Before we begin, I would like to point out that the Q2 press release, including the financial tables, is available on the company's website at www.compassdiversifiedholdings.com. The company also filed its Form 10-Q with the SEC this morning. Please note that throughout this call, we will refer to Compass Diversified Holdings as CODI or the company. And now I will 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 in the Risk Factor discussion in the Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2012, as well as in other SEC filings. In particular, the domestic and global economic environment has a significant impact on our subsidiary companies. 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 conference over to Alan Offenberg.

Good morning. Thank you, all, for your time, and welcome to our second quarter 2013 earnings conference call. We're pleased to report strong second quarter results that were consistent with management's expectations. For the 3 months ended June 30, 2013, CODI generated cash flow available for distribution and reinvestment, which we refer to as cash flow of $23.5 million or $0.49 per share. Based on our performance, we paid a cash distribution of $0.36 per share for the second quarter, representing a coverage ratio of cash flow to distributions paid of approximately 1.35x for the quarter and a current yield of approximately 8%. Since going public in May of 2006, CODI has paid cumulative distributions of approximately $9.60 per share. Overall, we continue to benefit from the operational and financial strength of our niche businesses. For the 6 months ended June 30, 2013, our leading branded products businesses consisting of CamelBak, ERGObaby, Fox and Liberty, achieved combined revenue and EBITDA growth of approximately 13% and 15%, respectively, as compared to the 6 months ended June 30, 2012. These 4 businesses, which represent approximately 2/3 of our total subsidiary EBITDA, also slightly increased EBITDA margins on a combined basis during the 6 months ended June 30, 2013, to approximately 20.1% from approximately 19.9% for the 6 months ended June 30, 2012. In terms of our niche industrial businesses consisting of Advanced Circuits, AFM, Arnold and Tridien, we continue to generate predictable and strong free cash flow. For the 6 months ended June 30, 2013, these 4 businesses, which represent approximately 1/3 of our subsidiary EBITDA, posted combined revenue growth of approximately 2%, although EBITDA declined slightly by approximately 1% as compared to the corresponding period in the previous year. In addition, they produced a lower combined EBITDA margin of 14.3% as…

Thank you, Alan. I will begin by reviewing our branded businesses. During the second quarter, our branded products businesses produced combined revenue growth of approximately 9% for the second quarter of 2013 over the year-earlier period. The combined EBITDA, however, is essentially flat quarter-over-quarter and EBITDA margins declined to 19.2% for the quarter ended June 30, 2013, from 20.7% for the quarter ended June 30, 2012, for these 4 subsidiaries on a combined basis. 3 of the 4 branded products businesses grew both revenues and EBITDA by double digits in the second quarter, led by Liberty, which increased revenue approximately 42% over the year-earlier period. This business posted another record quarter in Q2 as we continue to capitalize on the robust demand for the company's premium home and gun safe. In addition, the success we have achieved in further scaling this business contributed to a significant increase in EBITDA of more than 41%. At ERGObaby, we delivered revenue and EBITDA growth of approximately 23% and 40%, respectively, as we maintain our focus on strengthening ERGObaby's brand awareness and expanding the company's domestic and international distribution channels. Including the second quarter, ERGObaby has now posted double-digit revenue and earnings growth in each of the past 4 quarters. At Fox, this business posted another strong quarter with revenue and EBITDA growth of approximately 16% and 29%, respectively. As Alan mentioned earlier, Fox successfully priced its IPO and will begin trading today under the symbol FOXF. Finally, at CamelBak, as anticipated, this business was adversely affected by the fulfillment of a contract with U.S. Marine Corps that was completed in the first quarter of 2013. In addition, unfavorable weather conditions stemming from unusually heavy rainfall in many of the company's markets, led to lower product demand during the second quarter. Although Q2 revenue…

Thank you, Elias. Today, I will discuss our consolidated financial results for the quarter ended June 30, 2013. I will limit my comments largely to the overall results for the company, since the individual subsidiary results are detailed in our Form 10-Q for the quarter that was filed earlier this morning. On a consolidated basis, revenue for the quarter ended June 30, 2013, was $245.8 million as compared to $230 million for the prior year period. This increase was attributable to the double-digit revenue increases at ERGObaby, Fox and Liberty. Net income for the quarter was $2 million as compared to net income of $2.2 million in the year-earlier period. During the second quarter of 2013, we recorded approximately $6 million in higher non-cash supplemental accruals spends. This expense is based on the periodic review of current cash flow generation levels of CODI subsidiaries and anticipated market multiples for those businesses, in the event they were to be sold in the current environment, reflecting the increase in value of our subsidiaries. For the second quarter of 2013, CODI recorded lower interest expense of approximately $2.6 million as compared to the prior year period, due to a reduction in borrowing cost and for change in fair value of interest rate swaps. During the quarter ended June 30, 2012, CODI recorded a loss from discontinued operations of $1.7 million, which consisted primarily of transaction-related cost from the sale of HALO. Cash flow for the quarter ended June 30, 2013, of $23.5 million was essentially flat, as compared to $23.3 million for the prior year period. Cash flow from the second quarter of 2013 reflects strong year-over-year growth in our ERGObaby, Fox, Liberty Safe and Arnold Magnetic businesses, largely offset CamelBak as was previously mentioned. For the 6-month period ended June 30, 2013,…

Thank you, Jim. To close, I'd like to add some commentary on acquisition activity. We've seen a modest increase in M&A activity among middle-market businesses since the start of the year, and are cautiously optimistic that deal flow will increase over the balance of the year. Valuation levels remain relatively high for higher quality companies, driven by the continued availability of attractive debt capital and by the prevalence of strategic and financial buyers seeking to deploy capital. As we have in the past, we will maintain our disciplined approach by acquiring companies with a real reason to exist under favorable terms and valuations that are accretive to cash flow. I would like to thank everyone again for joining us on today's call. We'll be happy to take any questions you may have. Operator, please open the phone lines.

[Operator Instructions] And we'll take Larry Solow from CJS Securities for our first question.

I'm wondering if you could just give us sort of your read on -- your outlook across companies. I realized CamelBak, obviously, had a temporary and expected drop. What's your read as you look today versus last time from your quarterly call?

Larry, in terms of just an overall...

Yes. Just can you tell me how your businesses are doing in general. Just like a broad...

Yes. I think, as described in our opening remarks, the businesses on balance continue to perform relatively well and consistent with our expectations. I think with respect to comments, or as compared to comments that we made in our first quarter conference call, I don't think we had any material changes to our outlook over the balance of the year.

We'll take our next question from Troy Ward with KBW. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Can you just give us a little more color on potential margin pressures you're seeing, you said in the industrial segment. Can you give us some color on what those are related to and whether you think those can abate or you think you can see that continue?

Yes. Troy, I think that it's probably different for each of the companies. But I think that, certainly, competitive markets can impact the margins. I would say, right now, Advanced Circuits finds itself in a pretty competitive situation as does American Furniture. So that certainly been a challenge. I think to probably a lesser extent, material costs have been challenging, but not nearly as meaningful as I think the competitive situation. Elias or Jim, would you add anything to that broadly?

No. I think, Alan, the only thing I would add is, I think, the margins in the second quarter really just reflect a mix shift across companies. And each of the individual companies are holding in with their margins. It's really just more a component and mix shift issue than it was actual margin degradation in company-by-company. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. Great. And then on Tridien, this quarter sounded like when you talked about the new products coming on, the R&D that we've been working on for quite some time, you hedged a little bit and talk about early 2014. Whereas before, I believe, that was kind of viewed as a 2013 event. Is there -- is that the correct assumption? Did I get that correct? And is there something at Tridien that we should be concerned about in our modeling?

Yes. So you did hear correct that we've said it's either late 2013 or early 2014, where we'll be launching a number of new products. I would say, it's pushed out slightly from what our initial timeline and expectations were. These products are quite complex, as you can imagine, and they go through quite a bit of testing. So we do -- we expect there is still potential that we get some revenue from new product launches in the back part of 2013, although we feel 2014 is more probable at this point.

[Operator Instructions] And we have no further questions at this time.

We'd like to thank everybody again for joining us today. We look forward to speaking to you next quarter. Thank you.

This concludes today's conference. Thank you for your participation.