Compass Diversified (CODI) Q3 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to Compass Diversified Holdings 2016 Third Quarter Conference Call. Today's call is being recorded. [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 third quarter 2016 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 reconciliation and the Company’s Form 10-Q which includes reconciliations of non-GAAP financial measures discussed on this call are available on the Company's Website at www.compassdiversifiedholdings.com. Please note that, throughout this call, we will refer to Compass Diversified Holdings as CODI or the Company. Now, allow me to read the following safe harbor statement. During this conference call, we may make certain forward-looking statements, including statements with regard to the future performance of CODI. Words such as believe, expects, projects, and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from these projected in these forward-looking statements. And some of these factors are enumerated in the risk factors discussion in the Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31st, 2015, as well as in other SEC filings. In particular, the domestic and global economic environment has a significant impact on our subsidiary companies. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking 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, we continued to generate stable free cash flow across both our niche industrial and our branded consumer businesses. We also took advantage of market opportunities by consummating an accretive platform acquisition while also continuing to realize gains for our shareholders. Before discussing our subsidiaries third quarter performance, I’d like to talk more about our recent acquisition and our success in monetizing our interest in Fox Factory Holding Corp. or FOX. During the quarter we utilized our strong balance sheet to continue growing our family of leading middle market businesses by completing a platform acquisition of 5.11 Tactical, a leading provider of tactical apparel and gear that serves a wide range of global customers including law enforcement, military, special operations and firefighters as well as outdoor enthusiasts. 5.11 represented a very attractive transaction for us because it already possessed many of the qualities we look for in our companies. Our commanding leadership position, a broad customer base as well as an expansion of product lines equally important, their management team is quite seasoned with a proven track record of success. 5.11 also has compelling opportunities for further growth as we expect the company to expand its consumer penetration globally. In addition to adding a company that we believe has many of the qualities we consider essential for success, the acquisition of 5.11 was also accretive to our shareholders. As part of this transaction CODI acquired a substantial tax assets, the positive effect of which will be meaningful for CODI’s annual cash flow. Overall, we expect this transaction to provide $0.30 to $0.35 per share of cash flow accretion to CODI on an annualized basis. We’re very excited about this addition to the CODI family and have already started working with CEO, Tom Davin and his team to continue serving tactical professionals while working to grow 5.11’s presence in the expanding tactical consumer market. During the quarter we also generated $63 million in proceeds from our Partial Divestiture in Fox. We remain a substantial shareholder in Fox and continue to be excited about the company’s growth potential. Also during the quarter we consummated the sale of our majority owned subsidiary Tridien Medical, to Hill-Rom. We’ve enjoyed our time working with Tridien’s management team and appreciate there are many accomplishments during our ownership and wish them and the company continued success in the future. By completing these transactions we’ve further bolstered our financial liquidity for capitalizing on strategic add-on and platform acquisition opportunities while increasing the total gains realized from investments in our subsidiaries. Including these latest transactions as well as Fox secondary sales and past opportunistic sales of subsidiaries we’ve now realized over $625 million in gains for our shareholders since going public just over 10 years ago. Now let’s turn to our year-to-date results. During the first nine months of the year our middle market niche industrial and branded consumer businesses continued to generate consistent free cash flow. In particular, our ERGObaby, Liberty Safe and Sterno Products subsidiary each showed double digit EBITDA growth for the first nine months of 2016 compared with prior year. Our niche industrial businesses produced solid results during the nine months ended September 30, with the combined revenue increase of 14.9% and EBITDA growth of 3.5% compared with the first nine months of 2015.This included a 59% revenue and 46% EBITDA year-over-year increase from our Sterno Product subsidiary. Sterno continues to benefit from the add-on acquisition of Northern International completed earlier this year. In our branded consumer businesses we reported combined revenue growth of 5.5% for the first nine months of 2016 and EBITDA performance that was in-line with prior year. This includes solid results from our ERGObaby subsidiary which reported 17% growth in both revenue and EBITDA for the nine months ended September 30, 2016 compared with the prior year period. ERGObaby continues to benefit from the integration of the Baby Tula business whose contributions have met our expectations and has supported ERGObaby’s continued growth. Our Manitoba Harvest subsidiary continued to see considerable benefits from its 2015 acquisition of Hemp Oil Canada achieving a 38% increase in revenue on a year-over-year basis for the first nine months of 2016. We’re pleased with the progress Manitoba has achieved this year and believe this business is well positioned for additional growth in 2017. For the three months ended September 30, 2016, CODI generated cash flow available for distribution and reinvestment which we refer to as cash flow or CAD of $22.6 million which exceeded our distribution for the quarter. For the third quarter we paid a cash distribution of $0.36 per share representing a current yield of approximately 7.8%. This brings cumulative distributions paid to $14.28 per share since CODI went public in May of 2006. As a result of the cash accretive add-on acquisitions for Sterno, Clean Earth and ERGObaby completed earlier this year and the platform acquisition of 5.11 Tactical in the third quarter we anticipated that our CAD will approximate our distribution for the full year of 2016. Longer term we continue to expect that on a full year basis the cash flow generation provided by our current group of subsidiaries including the add-on acquisitions mentioned earlier as well as the addition of 5.11 Tactical will provide us with cash flow generation that meaningfully exceeds our distribution. In conclusion, the first nine months of 2016 has been a period of sustained progress for CODI. Our current businesses as a whole continued to generate stable operating results that were consistent with our expectations. We also expanded our family of leading middle market businesses and strengthened our cash flow with the accretive platform acquisition of 5.11 Tactical and the add-on acquisitions that we completed earlier this year. These acquisitions couple with our Partial Divestitures in Fox plus the sale of Tridien Medical have further strengthened our financial position and enhanced our ability to continue providing cash distributions to our shareholders. I’ll now turn the call over to Elias to review the quarterly performance of our current group of subsidiaries.

Thank you, Alan. I’ll begin by reviewing our niche industrial businesses which included Advanced Circuits, Arnold Magnetics, Clean Earth and Sterno Products. As Alan highlighted in his remarks our Tridien Medical business was sold to Hill-Rom during the third quarter. The discussion of results to follow excludes Tridien. Our niche industrial businesses continued to generate stable free cash flow. We reported a combined revenue increase of 19% during the third quarter of 2016 as compared to the year earlier period. EBITDA on a combined basis was consistent with the third quarter of 2015. The combined EBITDA margin declined to 18.2% for the quarter ended September 30th, 2016, from 22.2% in the prior year quarter. Advance circuits reported softer results in the third quarter. Revenue decreased 2.5% and EBITDA decreased 4.9% year-over-year, reflecting lower sales and long lead time PCBs and quick turn PCBs mainly due to the overall economic slowdown, partially offset by growth and assembly and subcontract sales. Third quarter EBITDA margins were lower by 80 basis points compared to the year ago period. Based on ACI's results to date, we believe full-year 2016 earnings will be slightly below 2015's full-year earnings. Arnold Magnetics third quarter 2016 results were down from the third quarter of 2015. Revenue decreased 17% year-over-year, primarily due to higher PMAG sales in the prior year resulting from a one-time sale in September of 2015. EBITDA decreased by 38% year-over-year reflecting the PMAG sales impact in the third quarter of 2015 as well as the executive transition related cost that we incurred during the third quarter of 2016 as a result of executive management changes. Given the third quarter's results, we now expect that Arnold for the full-year 2016 will experience a modest EBITDA decline from the prior year. Clean Earth's third quarter revenue was up by 17% primarily due to increases in contaminated soil, hazardous waste and dredged material volumes. Clean Earth's third quarter EBITDA declined by 8.7% and EBITDA margins decreased to 19.4% compared to 24.9% last year, mainly due to higher backend cost at some of our soil facilities. The performance of recent add-on acquisitions including Phoenix Soil and EWS Alabama continued to meet our expectations and Clean Earth remains on track for a solid year in 2016. Sterno continued to perform well in the third quarter. Revenue increased by over 75% and EBITDA increased 47% compared to the year ago period reflecting the addition of Northern International. In addition to the contribution to EBITDA from NII, Sterno continues to improve operational leverage with further manufacturing efficiencies and has benefitted from lower raw material prices. Next, let's turn to our branded consumer businesses, which include Liberty Safe, ERGObaby, Manitoba Harvest and 5.11 Tactical. Please note the revenue and EBITDA numbers I provide for Manitoba Harvest and 5.11 will be on a pro forma basis as that these businesses were acquired on January 1st, 2015. Our branded consumer businesses achieved results for the third quarter of 2016, consistent with our expectations. Combined revenue increased by 2% on a year-over-year basis while EBITDA declined by 10% compared with the prior year. Liberty Safe reported solid results for the third quarter in line with our expectations. Liberty's third quarter revenue was slightly above 2015 levels, reflecting continuing strong overall consumer demand particularly in the dealer channel. Third quarter EBITDA margin [indiscernible].7% compared with 18.6% in the year ago period. This decrease in third quarter EBITDA margins primarily reflects lower manufacturing overhead absorption as compared to last year due to our planned inventory build in the third quarter of last year. Given the strong demand for Liberty's products, we remain confident in its prospects for the remainder of the year. ERGObaby had another solid quarter as it continued to benefit from the add-on acquisition of Baby Tula completed earlier this year. Revenues increased by 35% and EBITDA increased by 38% year-over-year primarily due to Baby Tula's results. EBITDA also increased due to improved margins based on channel mix. Our Manitoba Harvest subsidiaries experienced strong top line growth both on a sequential and a year-over-year basis. Revenue grew by 70% from the third quarter of 2016 compared with the prior year, while EBITDA increased by 27%. As the company continued to benefit from its Hemp Oil Canada acquisition completed last December. Importantly, we are very pleased with our efforts obtaining organic seed supply and continuing to make progress towards building the company's infrastructure to support its future growth. We believe this business is well positioned to achieve further organic growth in 2017. Lastly, 5.11's performance under our ownership during the month of September met our expectations. For the third quarter on a pro forma basis, revenue was down 13% for the quarter compared with the prior year period and EBITDA decreased by 4.9 million for the third quarter of 2016 as compared to the prior year. Both of these declines were primarily as a result of a large director agency or DTA international sales order that occurred during the third quarter of 2015. The DTA business can include large orders and their timing could have a meaningful impact on year-over-year results positive or negative. Offsetting the DTA decline was meaningful growth in the higher margin retail and e-commerce distribution channels during the third quarter of 2016. This business continues to perform well and we are quite enthusiastic about its growth potential particularly as 5.11 gains increased momentum in the Tactical consumer market. 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 30th, 2016. I'll limit my comments largely to the overall results for our company, since the individual subsidiary results are detailed in our form 10Q that was filed with the SEC yesterday. On a consolidated basis, revenue for the quarter ended September 30th, 2016, was 252.3 million, an increase of 67.4 million as compared to 184.8 million for the prior year period. This year-over-year increase reflects notable revenue growth in our ERGObaby, Manitoba Harvest and Sterno subsidiaries due primarily to contributions from our add-on acquisitions as well as the revenue contribution from 5.11. Net income for the third quarter was 50.2 million compared to a 166 million in the year earlier period. The year-over-year decline was primarily due to the $164 million gain on the sale of CamelBak that CODI during the third quarter of 2015. Cash flow available for distribution or reinvestment which we refer to as CAD for the quarter end of September 30th 2016 was 22.6 million to the third quarter of 2016 compared to 23.8 million in the prior year period. As we mentioned on our last conference call, as a result of the recent cash flow accretive add-on acquisitions for Sterno, Clean Earth and ERGObaby and taking into consideration in the expected accretion from our platform acquisition of 5.11, we anticipate our CAD will approximate our distribution for the full-year 2016. Turning now to the balance sheet. We had 26.4 million in cash and cash equivalence and net working capital of 289 million as of September 30th 2016. We had approximately 567.1 million outstanding on our term debt facility and 167 million in borrowings under our revolving credit facility as of September 30th 2016. The increase in outstanding debts from the prior quarter is a result of our acquisition of 5.11 Tactical completed in the third quarter. Specifically we upsized our term loan by 250 million and borrowed 150 million on our revolver at the same time expanding our revolver capacity from 400 million to 550 million. We have no significant debt maturities until 2019, in addition we had net borrowing availability of approximately 378 million under our revolving credit facility at quarter’s end. Additionally our 8.6 million shares of FOX which are recorded as an equity method investment in our balance sheet had a value of 198 million at September 30th, 2016. Turning now to capital expenditures. During the third quarter of 2016, we encourage 4.1 million of maintenance CapEx compared to 5.5 million in the prior year period, the decrease is primarily attributable to reduce maintenance CapEx spend at Liberty, Arnold and Clean Earth as compared to the prior year period. For the fourth quarter of 2016, we expect to incur maintenance CapEx of between 5 million and 6.5 million. We anticipate growth CapEx spend for the remainder of 2016 to be between 1 million and 2 million as we continue to invest in the long term health of our subsidiaries. I will now turn the call back over to Alan.

Thanks, Ryan. Overall, in the third quarter, we continue to generate consistent free cash flows across our niche industrial and branded consumer businesses. Complementing this performance, we capitalize on favorable market opportunity to complete the accretive platform acquisition of 5.11 Tactical. Also, during the third quarter, we consummated the sale of Tridien Medical and realized 53 million in proceeds from partially monetizing our interest in FOX, increasing the gains we have realized per shareholders to over 625 million. I'll conclude my remark by briefly commenting on M&A activity. We continue to see lower middle market deal flow in the third quarter of 2016 as compared to the prior year. Trends contributing to high valuation levels have persisted, including the availability of debt capital with accretive with attractive terms and financial and strategic buyer seeking to deploy available equity capital. Consistent with our strategy, moving ahead we will continue to explore attractive opportunities for platform acquisitions seeking leading middle market companies with a strong reason to exist that meet our specific criteria. In conjunction with this, we will also continue to reinvest in the growth of our current subsidiaries including strategic add-on acquisitions that can drive further cash flow growth. Given our strong balance sheet and substantial liquidity position, we remain in an excellent position to keep executing on our strategy which should continue to create long term shareholder value and support our ability to provide stable cash distributions. This concludes our opening remarks and will be happy to take any questions you may have. Operator, please open the phone lines.

[Operator Instructions] Your first question comes from the line of Kyle Joseph with Jefferies. Your line is now open.

Good morning, guys. Thanks for taking my questions.

Good morning, Kyle.

Good morning.

I just had a few company specific ones. So, for 5.11, I know you have kind of some limited data. I was just hoping to get a little more color on that. Can you describe, is there any I know you mentioned businesses a little bit lumpy. Is there any big seasonality in that business that you can give us some color on?

Yes. So, Kyle, there is a little bit of seasonality. Fourth quarter is typically the strongest quarter, predominantly due to two to four factors. One, a lot of the law enforcement, you have budgets that they typically either use or lose. And so, they will traditionally spend a little higher in the fourth quarter in order to use up the remaining budget dollars. That's on the professional segment of the business. And then in the consumer segment of the business, clearly there is a tendency towards the holiday season to drive higher sales. And we would expect as we move further into that as a percentage of overall sales as our consumer grows we would expect that to carry even greater seasonality. On the flipside, Q1 is typically our lowest seasonal period and then Q2 and Q3 is usually kind of a pretty average for us.

Okay. And then, could you give us some color on whether it's revenue or EBITDA for that business or I mean I guess what you could do is give us what the Q3 growth rate would have been as to big sale in 2015?

I'm sorry, Kyle. Can you repeat, I just want to make sure we understood that?

Yes, no. I'm just trying to get a sense for the growth for the company. I know in this past quarter the res and EBITDA were down. It sounded like that was primarily because of very difficult comp and strong sales in the third quarter of 2015. So, I was wondering if you can give us the growth rate X'ing out that large sale if that's possible.

Yes. So, the growth would be --.

Yes. Hold on one second, we're getting that data for you Kyle.

All right.

And in the meantime, Kyle, I would also point you to the 8-K that we filed last night with 5.11's financials pro forma with -- that was two nights ago, sorry. And you can see six months June, over prior year six months June, and you can get some growth rates there. That could be something that you could use for data.

That's helpful, yes. I'll follow-up on that. Okay.

Kyle, in the third quarter, business was outside of the large DTA contract, roughly flat revenue and EBITDA. What we look at is a year-to-date because you can get some orders that will flow from one quarter to the other. And that would be up mid-single digit. So, year-to-date excluding DTA, kind of its consistent with our expectations for this business, kind of mid to high single digits revenue growth.

Thanks. That's very helpful. And then Ryan, just for you, you did a good job talking about the pro forma capitalization and you need debt. Can you give us a sense of and I can go back to the queue and what not. But in terms of your cost of funds, any changes there or just a bigger debt balance?

Yes, no. just a bigger debt balance, I mean, obviously our term debt has a little higher rate than our revolver. So blended it's probably a little higher but no changes to rates or terms.

Okay. And then one last one from the. In terms of ERGObaby, apologies if I missed this in your commentary. But it looks like the gross margin was down a little bit sequentially in year-over-year. Did you guys, can you give us an explanation, is there anything related to the two acquisition there or was there something one time?

Yes. So, on a sequential basis, there is a little bit of mix ship that can happen. I think that can be end up being a little bit based on kind of contributions from our different product lines whether it's ERGO or Baby Tula, some other channels. Baby Tula especially, which goes much more direct to consumer and much less through international distribution, will carry some higher margins. So, depending on the different growth rates and kind of the mix, margins contain sequentially. In terms of year-over-year, most of the change in kind of any noise remaining in the numbers continues to be due to Orbit. I think as you know from our last call, we made a decision to wind down the Orbit business. And part of the wind down of that business is giving kind of credits and trying to just liquidate through the inventory and get through that process. Outside of Orbit, this business we look at as kind of stable to off in terms of margin year-over-year.

Great. Thanks for all that, all the color there. Congratulations on a good quarter, it looks like all your hard work over the past few years is really paying off. Thanks, guys.

Thanks.

Thank you, Kyle.

Your next question comes from Larry Solow with CJS Securities. Your line is now open.

Hi, good morning, guys.

Hey, Larry.

I'm wondering just if you can give just -- to me, I thought the obviously year-to-date things are fine. But it looks like at least based on some of our expectations, some of your industrial businesses, there are some specific reasons that sort of each holding. But it looks like in general a little softness on the industrial side. Is that fair to tell that that's sort of a common theme you guys are seeing. I know a lot of our industrial companies are seeing that. Any thoughts will be great.

Yes. Larry, I think that it is company specific, as we talk about some of the industrials. If you like to go through them, we can do that. So, for the quarter, look the quarter was okay for some of the industrial businesses. Year-to-date performance is pretty strong which I think is an important metric. And it's not as though we've seen anything in the third quarter that leads us to conclude that the group is positioned for a rocky road. What we did specifically call out Arnold, because we are not letting you and everyone else know that we expect them to have a modest decline year-over-year. We're early in the year. We didn’t necessarily -- we did not expect that. So, I think that that Arnold specifically is experiencing some softness. Clean Earth I would say is there year-to-date results are more reflective of how we view that company for the year and as you know we've discussed in the past, it can be a little bit lumpy that I think with Clean Earth, that's what we get. Although the dredge business it's sought at Clean Earth. And that's often times not a segment of their business where they have really any control in terms of driving the starting in of project. In the bidding associated with projects. So, it's both lumpy and not something that they can necessarily drive on their own. So, again another reference to a company specific point. But excluding dredge, we're very pleased with the company's performance year-to-date. And we certainly expected to finish the year, up versus prior year. So, I share your caution with respect to industrials as we talked about really all year. And I don’t think this is changed through the lens of the companies we own. We don’t see anything more than a flat to modest growth economy. And so, we're really very happy with the way our company's perform are performing in that context. But time will tell.

Okay. I know, or -- I know the demand changes is a couple of months old. But I'm not sure if you have ever publicly sort of commented on that it sort of what you can say, what sort of the outlook going forward I know Arnold has probably been 20 year modest, but I would say it’s probably been one of the few that has not probably lived quite up to expectation?

Yes that’s a very fair characterization Larry, Arnold has certainly not performed during our ownership up to the level that we would have expected and we’ve talked about many of the reasons for that over the years and I think that we’re in a good position now to really take a look in after sales, do we still believe in this investment pieces, do we think there is a long term upside for the company, can we create value here and it goes about the saying, the good news is that even in all this context the company continues to generate meaningful positive free cash flow and contributes to our CAD. But, we’ve announced publicly that the former CEO Tim Wilson has retired. He has been replaced by Dan Miller, who is the current CEO of the business. So that's something we are very pleased and grateful for all of Tim's contributions to the company. We are equally excited about what Dan brings to the companies operational expertise. We believe the second to none surrounding himself with some great existing talent at the company but also augmented the team. I prefer not to comment really below that level as that would be very atypical for us to do at any of our subsidiaries. But Dan has made some changes in and brought in some people as well we think has really helped position Arnold to execute on the plan that we really envisioned from day one. And the team there has done a great job. We’ve talked in the past about all of the segments that there is, the great news is the diversification of their business has allowed us to maintain that cash flow that I referenced earlier however, we have not been able to see each segment of – sorry each division of their business perform strongly at the same time. So it seems though once the couple of them click one experiences some softness, but we are as I said really confident going forward that Dan and his team will be able to realize on Arnold’s potential. But understand every time there is a change like this, and you have got a global operation like Arnold with multiple industries it's simple to describe but running a global businesses is always complex and execution is critical and so I don't want to, well I have the enthusiasm I reference, I don't want to imply to you or anyone that Dan can press the easy button and we are just right back where we want to be. This will take a little bit of time. You have already heard our thoughts on the balance of this year and I think that as you would expect the team along with us are taking a very strategic and thoughtful approach to what we need to do position the company for a long term success and we will talk about next year probably at our next quarterly call but my expectations is that Arnold will perform as we described earlier on the calls, slightly down versus prior year and it's not as though we are going to – it's unlikely that we forecast a dramatic upturn from next year. I think we are really charged Dan in the team with doing all the things required to position and create a long term value as opposed to just taking short term measures that don't result in any long term benefit.

Okay. Okay. And I realized the macro on the judging part of business has been against you guys for a while and notably that will change. Just the dimension of the higher back end cost of the soil facilities is that something that is just a temporary issue or?

Yes. Look it's certainly something that we are working to try to mitigate but for right now I cannot classify this as temporary, but it's fair to say that management is certainly not pleased to see its backend cost increase and are working diligently to try to create alternatives that can bring that cost back down to a level that is much more pleasing to them and to us.

Okay. Just housekeeping question just on 5.11 Tactical, you obviously you have got months of ops in the quarter, but I believe you end up your fee end up going up for those four quarter so that essentially was that probably was a little bit dilutive on a CAD basis of the quarter just because – ?

That's right Larry. That's right because we have only one month of earnings.

Got it, great. Okay I appreciate it guys. Thanks a lot.

Thanks Larry.

And your next question comes from Leslie Vandegrift with Raymond James. Your line is now open.

Hi, good morning guys. How are you doing?

Good. How are you Leslie?

Doing well. And well, quick question just a follow-up on some of the slide 11, you talked about the 30% to 35% of expected CAD contribution there annually going forward. So with the DTA that you talked about benefiting from on an acquisition, about what portion of that is because of that and not U.S. sales expectations?

So, I think you are asking what part of the – how much of the business is the DTA business and how much does that drive the results. I would say on an annual basis the DTA piece of it is less than 10% and in terms of driving the amount of cash flow for CODI, it will have some impact but it's more about the lumpiness quarter-to-quarter and I would say it's less about, we think that the that business line is closer to a low than it is to a high in terms of what its annual contribution should be. So, we think there is upside to this as we go forward. But in terms of, I think we are trying to just forecast for the market is that this can be very lumpy and from a quarter-to-quarter basis we can look like we're up significantly or we can look like its down significantly and I would suggest that we all look at this kind of on a year-to-date basis. But it is less than 10% of the business and because the consumer side of the business is growing as rapidly as it is, we would expect overtime for just the differential in growth rates to cause that component of the business to become even a smaller contributor.

Okay, all right and then on that with the consumer side growing, you talked about both penetration in your opening remarks on that, do you have a specific target for the next country or partner I guess you could do more than one on one?

So on the consumer side its predominantly a domestic business, and when we talk about growing consumer penetration, it's relative right now, I would say focused two fold, the primary focus is getting more points of distribution and we're doing that through developing our own retail stores which is a big part of our growth plans as well as continuing to open up and merchandise new wholesale accounts. And so as we get more points of distribution that obviously will carry a lot of growth we expect with that. In addition and as we've done with all of our consumer businesses and I think as you've been aware a big emphasis is on raising the awareness levels, creating stronger marketing programs, reinvesting back in the marketing and so I would say that's the kind of second pillar here in growing the consumer business, but just to reemphasize this is a predominantly domestic consumer business that international components of the business is more on the professional side.

Okay and then, but on that side if you are looking more for the international on the professional side then is there a target there, specific or government or you said in police and military, is there somewhere right now that you are looking?

So internationally I would say there is a lot of targets, I mean we have a very large sales funnel for different governmental agencies internationally that we're working with, whether that be in the Middle East, in Latin America, I mean that's a focus area for us. We're obviously trying to grow each of the different areas of the business, it can be a little bit lumpy or wins some of the international government by as we mentioned, but we have a really good robust sales pipeline, I think now it’s about converting that sales pipeline into contracts that we can execute against clearly a headwind that we face right now is the strengthening dollar that over the last year as we know has strengthened against all currencies and specifically some of the Latin American currencies even more so, so that does provide somewhat of the headwind and we're not able to forecast where the dollar goes, but I would say strengthening dollar will be a headwind to being able to kind of execute against some of the international growth. We're looking for a wide range of government that we're going after in terms of broadening out this business and getting more penetration globally, so it’s not one specific, it's a pretty good sales funnel we have right now.

Okay perfect. Actually on that lastly reported on -- with the strengthening dollar, I saw on Manitoba it was a slight for us, that's another large one, but I didn't because of the movement against the Canadian dollar as well, but what is, do you hedge against that? How big of an impact do you see going forward even if we're just stable right here?

Yes, so we do not hedge the dollar limit and the reason for that is the largest, we have a relatively large business in the United States where we are selling supply to U.S. based customers and we have cost in the U.S. So clearly that doesn't need to be hedged maybe just from the production side, ultimately from the supply side, ultimately when we looked at the impact on the earnings of the company given U.S. distribution, given the cost that we have in both Canada and the U.S. we didn’t think there was a material enough benefit from putting a hedge in place, offset some of the volatility of kind of the hedge and hedge accounting. And so it will move around a little bit, but we think what could happen is it could clearly just stores the revenue picture if the U.S. dollar strengthened, but at the same time it may depress what the costs are of the product that we're receiving out of Canada and it may depress some of the costs that we're paying for individuals, rent all of the things that are domiciled in Canada and paid for foreign money. So when we look at it, it could slowdown some of the revenue growth, but it may add a margin and net, net on a operating cash flow basis, it doesn't have a material impact. So, as a result of that we've chosen not to hedge the money.

All right, perfect. Well, thank you. And just a level comment on the management that you're talking about, the US sales are also even down here in a small market I mean there's a recently noticed a couple of the hence the product show up. So, I guess it is working. So, good job, congratulations on the quarter guys.

Great, well. Hopefully you're a customer.

I was just going to say Leslie on behalf of the company. I hope you could more than notice it.

Yes, I did. Actually, I'm an allergic to fish and the Omega 3s and that stuff is fantastic for me.

Excellent. That's be on.

Thanks, guys.

Your next question comes from Doug Mewhirter with SunTrust. Your line is now open.

Hi, good morning. My question about your sales growth and trying to I guess figure out what the overall maybe organic sales growth was year-over-year this quarter and year-to-date because I know you had some bolt on acquisitions and some lumpiness. Any kind of estimate into a round numbers what that might have been for the 3Q16?

Doug, I'll jump in on behalf of Ryan in the group. That's just not a number that we have readily available. And I prefer that we not get at it but I can also tell you that we'd be pleased to try to calculate that at least in a while it may not be as precise as we'd like, I'm just not sure, maybe it can be precise, but if it can be, at least we can get close. I would think but that's just Ryan, you're free to elaborate.

Yes, no that's very Alan, I think that's fair. I mean but the -- I think the best way to think about it obviously just go through company by company and talk about what we think to be long term growth rates reach business which I think we've done a number of times. But in terms of I think the challenge really is the addition of some of our Arnold's businesses which while we recognize, we don’t pro forma those, we do platforms given their somewhat smaller nature to the add ons and we do a lot of them. We've done five of them. So, to pro forma all those would be a little cumbersome in terms of reporting. So, we recognize it's difficult to get to but I would say that it's part of our next earnings call Q4 will provide some guidance to what we expect for '17 on full-year basis both revenue and EBITDA. So, that should help.

Okay. Thanks for that. And I appreciate that the challenge of getting that information. Moving to a more political side, could you notice there's an election coming up and two of you big subsidiaries are I would say have lot of political influence, Liberty and 5.11 now. I know Liberty got a bit whip side but the last time there is sort of a run on the bank in this regard. And I don’t know if they, if the subsidiaries have contingency plans or they're trying if they've taken measures to avoid disruption from either spike or a sudden drop in sales because I know they like to have steady production that kind of keeps helps them on the margin side?

Yes. Interestingly we have noticed there is an election upcoming. With respect to Liberty Safe, they really made operational changes since their last what I'll just call cycle where the inventory at retail really got loaded and all those stakes were selling at retail. There were just too much inventory in the channel Liberty basically sped a whole, plus they had high levels of their own inventory where they spent a lot of the year not producing which meaningfully hurt their margins in free cash flow as you would expect. But what they've done since and at that time they were also importing a large number of stakes which had a long lead time and once you make that commitment to order them, even if you start to see the pace of sales slowing down, you can't really unwind those orders. So, what Liberty has done since then and they've done a nice job in our opinion and continue to refine it, but they have moved as we referenced earlier or even in the past year or so to a more level loading of their inventory build to try to as you referenced maintaining more stable level yet also have a level of inventory of core products that allows them to satisfy a potential surge in demand but not so much that they have excess inventory. And they are I think there, so they and they have meaningfully reduced their imported program. With and they got great new equipment in their factory that allows them to ramp up demand to the extent they need to. So, I think Liberty is relative to the last cycle as both change their practices as well as having lived through it recently. They're just much more cognoscente of seeing the signs and knowing how to deal with them. And it's very important here also, that some of their retail partners. They also don’t want to be in the same situation that they were in the last cycle. So, I think Liberty is very well positioned for whatever the future holds and in the election year or in a year where there is just some other factor that may drive surge in demand. So with respect to 5.11, I will ask Elias to share his thoughts on that.

Yes. So we don't actually think there will be much impact on 5.11. Its businesses you are I think well aware from how we have communicated about the company, the market that we supply are mostly related to law enforcement both on the federal and at the local levels and so I don't think there will be a meaningful impact one way or another based on the election results in terms of the programs that we are doing with kind of those agencies.

Okay. Thanks for that. My last question maybe on a financial side or the balance sheet side, you leveraged up to buy 5.11 with it should be a good use of the capital so which is fine and I know that you did that secondary or you participated in the secondary offering with Fox factory which will help you get some funds to maybe deleverage. Is there some sort of target or range which you are shooting for as you move into next year? And as the leverage affect your willingness to make acquisitions maybe the size of the acquisition or the nature of the acquisition?

Yes. Sure. So Doug, I think as you saw on the filed Q last night where our leverage as of September 30 is 37 and you mentioned one of our primary drivers to be able to de-lever will be Fox shares amongst other opportunities, but with respect to where we are positioned we do in the short term want to de-lever and if you look back at our history we are generally comfortable in the sort of two to three times with respect to leverage. However, even at 37, we remain able to acquire businesses both add-on as well as platforms. Can we buy 5.11 size business today? No, but could we buy $100 million to $200 million platforms, yes. So we are still in business. We are still looking. There are still a lot of great opportunities and as you know in the past too one of the best way or great way for us to deploy capital is to through add-ons given their accretive nature. So well positioned today but do as you mentioned we expect to de-lever in the short term to provide us more capital to grow.

And here is the yin and the yang relationship that exist between Elias and me versus Ryan. While we never take for granted the support of the debt and equity capital markets, I would go so far to say that while Ryan is factually correct that maybe today we do not have the liquidity to acquire a 5.11 sized transaction at this moment I can also tell you that we definitively are looking for opportunities just like that in addition to the size that Ryan referenced because we believe that if we are able to find opportunities of the quality of a 5.11, for example and we are able to bring additional cash flow to CODI that we would hope and it would be consistent with history that we would be able to find the support to enable us to consummate an acquisition of that size. So it's been kind of the way we have lived since being a public company if you go back and look at our history. It's particularly with respect to our leverage levels. It's never just purely consistent. It's either kind of getting to a level like it is now. We are little uncomfortable and absolutely want to bring it down or typically after a opportunistic divestiture we can find ourselves virtually deleverage with the exception of what we would consider to be part of our permanent capital structure. So we continue to live that way. We have grown accustomed to it. It doesn't mean we don't have periods of higher leverage than we prefer to live with but we have also lived periods of lower leverage. And so I would say we are very much operating business as usual with a desire in a very disciplined way continue to deploy capital if appropriate and if not we will keep fighting till we find the right opportunities.

Okay. Thanks. It's all my questions.

Thank you.

Your next question comes from Brian Hogan with William Blair. Your line is now open.

Thanks and good morning.

Good morning Brian. I am surprised you are awake given the game last night.

I did stay up so. The inventory level on the balance sheet particularly the finished goods inventory was big and had a step up due to the 5.11 and I guess can you give an – is that the run rate going forward roughly that level I mean it seems like an awfully high inventory little bit to continuing for that level business but can you just explain inventory there?

Yes. Sure. Sure. So you are exactly right the reason for the significant increase is 5.11 and above and beyond the normalized 5.11 inventory is that step up which is in finished goods. It was little over around $40 million roughly. So and that will amortize pretty quickly through cost of sales so you will see that come down over time here.

Is it like three months, six months what kind of time?

Yes, it's nine months. Their inventory turn is a little bit longer and I think it's also the reason why their inventory balance for that business is a little bit higher than you would expect given the nature of their business and their product offerings. They need to maintain sizes and colors across a pretty broad spectrum to provide for both professional and consumer end users. And look, the long term nature of the terms really is actually also a good thing. Because their products aren’t really fashion related. They don’t go at a style, they continue to be desired. So, there is really from our perspective much lower inventory risk even though the balance is what it is. Elias, do you have any other comments to add there?

I would just say Brian, that it's this will be a heavier working capital business than some of our other companies. And part of the nature is you just need to be in stock for satisfying the end customer. And there is a variety of sizes. So the inventory turns will be lower in this business than they've been in some of the other businesses that we've owned. And it's just something that we will need to understand and kind of at least something we do address in terms of managing going forward. As Ryan said, that it is relatively low obsolescence riskier. So, we feel good in terms of the financial impact from carrying a larger balance sheet. But nonetheless this company will buy the nature of the industry that it serve and the structure of the industry carry a larger amount of inventory with low returns than what we're used to out of some of our other companies.

Sure. Yes. This other can be some more efficiency, yes, there. Staying with one, the store openings, we kind of briefly talked about the growth there at the retail channel. You had eight retail stores, I mean, do you plan to double that and how fast you plan to actually grow that business, and then think that base revenues were down 4% but offset by the retail e-commerce channel, so.

Yes. So, we don’t give specific targets in terms of the amount of the new store openings that we'll have. But so pleased to say that this is with only eight stores incredibly underpenetrated. And we think there is a lot of runway in order to grow the number of stores that we have which really benefits us because it does allow us to display the full range of product that we have. And as you know, with a lot of our wholesale customers it’s a much more limited amount that you get in terms to display. So, we think this is good, it allows us to open up our distribution points which today remain very much under saturated. And so, it is a key pillar of what our growth is and not to get this specific targets I would say there should be a good expectation that we will grow these businesses. It's a very high return on investment. The payback is really short with these business, with these retail openings. And the comp store sales are growing very nicely right now. So, there is a lot of tailwinds with that side of the business and as long as those tailwinds are continuing, it's an area that we think it's prudent to deploy capital into. Now, in addition to that, and I think what you'll hear a lot of companies talk about is having a strong army channel strategy. Our e-commerce business is growing very rapidly and we think that that is part of just a brand becoming more well known in being elevated and is a critical pillar as well to the growth of the consumer business. And lastly, wholesale remains also a meaningful component. So, we're focused on kind of the all three channels of consumer growth. But right now the retailers massively underpenetrated and we think there is lots and lots of runway here for us to grow that side.

All right. And then do you have an appropriate expense space there, I mean, does -- do you need to add more infrastructure there. I mean, all sort of not stores but is it fully staffed fully ramped?

Yes. So, I would say we have as you indicated. Our SG&A will by definition grow as we every -- with every new box that we open. Although this is also kind of really high margin because we're capturing the retail spread as well. So, more than offsets any of the SG&A build. In terms of I think what you're asking, do we have in the infrastructure at a corporate level to be able to handle the roll out. I would say we are mostly built out, although depending on the speed at which we roll out retail, may dictate that we need some additional overhead to support it. But today, we do have a pretty good group with infrastructure in systems that is in place and would be capable of handling additional leverage. But again, you always will need to add to that if you are really accelerating in terms of roll out.

Sure. Shifting over to advanced circuits. That was just softened so across the sales and then the demand. Can I take a step back in your strategy? I mean, you're mostly United States and you have some foreign competition that's very stiff. Do you have the right strategy there in place? You need to be have some international manufacturing, what's thoughts there?

Yes. So, just to step back and maybe as you said when we think about strategy for advanced circuit, the business really kind of is in two primary areas. One is it is a quick turn provider of circuit boards mostly supporting research and development needs and then kind of preproduction needs. That is the largest part of the business and I would say that is the really I relatively insulated part of the business from overseas competition due to the fact that if you need a circuit board for a prototype or preproduction run, you need it, you're less price sensitive and you really don’t want those products being held up in customs from foreign suppliers. And by and large, the foreign suppliers are meant to and equipped to run massive volumes of kind of longer lead programs, not really doing as much of quick turn stock. So, that is one side of the business and the larger side. The other side of the business focuses on defend, and defense business needs to stay in the United States as a result of the high par requirements and secrecy around a lot of our defense programs. So, we intentionally have looked for businesses when we are either doing acquisitions or as we position this company that really met the criteria of its quick turn and it's going to be more insulated or it's going to be defense related and it's going to stay here. As we all know, when sequestration went into effect, it pushed down a lot of defense work and that's had a real dampening effect on advanced circuit to revenue opportunity. And so, it's made the business a kind of stable to a slightly down business here over the last few years. At some point, we build out them out on defense level. And we feel that the company will be positioned well and is positioned well in order to experience revenue growth again as kind of defense bottoms out and starts to pick up a little bit. In terms of is the strategy right and do we need international manufacturing assets or partnerships, what I would say is we already have international partnerships? So, when a customer migrates from being in preproduction to production, if they need help getting to a lower cost base for high volume runs, we have the ability to do it. The problem with that business quite frankly is its really low margin. And will do it as an add-on service for our customers. But it's never been something that's been a primary driver of where we want to go with the business. Because we think it changes the margin profile really negative. And we think that wouldn’t be value additive to our shareholders. And I think if you just look at the competition and at their publicly traded competitors, you'll see margin profiles there significantly lower than what we're able to achieve in this business. And so, we look we understand the fact that the business has been a kind of flattish to down a little bit business. And that makes you question whether this strategy is kind of the right strategy. Well, all that being said, we do think that eventually defense will come back. And there is a market for this business that is domestic and it is the higher margin, higher value stuff that we like and we think the strategy is right now best for our shareholders and value creation.

All right. Thanks for that long explanation, it's really helpful. On our financial the harvest. How was the crop basically when they get into the supply, they were able to meet demand?

Sure. So, we have to separate into two. One, the organic and the nonorganic. In terms of nonorganic we have overly sufficient, I mean it's a well-supplied market. So, on the nonorganic side, there is no issues. In terms of the organic, the initial because we're now just starting to get the crop in and we're just starting to get seed and we're doing all the things that we have to do like micro testing and all of the food safety that goes on. Initial thoughts are it looks good and it looks like the crop is going to be significantly larger than what it was last year. A lot of that is due to the work that we've been doing with farmers in order to either convert over to organic crop or to develop new organic crop. So, we've been working very hard on that. But a lot of it will depend on as more and more of the organic seed is coming in, it has to pass on some very high testing that we do in terms of food safety. But initial kind of expectations are it looks pretty good and we feel we'd be -- that's going to be a good tailwind coming into this year.

Sure. Thanks. And then one last one and it's kind of a housekeeping going through the 10Q and subsequent events. There is a $7 million profit allocation. Does that show up on the income statement in the 4Q or where does that show up?

No, Brian, that is considered a distribution. So, that was declared by the audit committee last week and we'll get paid out in November. And that does not go through the income statement, you'd see that on the cash flow statement and through equity.

All right, thanks.

Again, in Q4.

Correct. Thank you.

Yes. Thanks, Brian.

And your next question comes from Berny Picchi with Palisade Capital Management. Your line is now open.

Good morning, guys. Congratulations on all the interest you had here in the call. But I can't believe it there were no questions particularly we're very in the capital structure on this proxy that you've sent out regarding the trust preferred. Could you talk about that right a little bit more color behind it and how that fits into your skin, these to be the capital structure and also desire to keep your leverage at a certain level?

Yes. Berny, I'll take a first crack at this and then perhaps Ryan and Elias may add on to that, and obviously we're in an area here where what I can say is all is a little bit challenged just because it's a public filing and all the things that go along with that. But I would say first conceptually, from the beginning, one of the things we've always it'll be interested in was trying to identify an appropriate piece of capital that could slot between our common stock and our current debt facilities. And so, we've looked for that for quite a while and think there may be some opportunities for us to further explore that. I think that we are, we've also told the public for many years that in order to ultimately achieve our growth plans, we will undoubtedly at some point in the future need to issue common equity. As well as likely expand our adjusting credit facility. So, I mean, holistically we've always been looking to evolve our capital structure overtime to support the growth of our business but to also deliver as low a cost of capital as we can. And so, that's really what our intentions are. And we continue to explore all that and hope that over time we will be able to deliver as we discussed. Ryan touched on the levers that we can hold to do that, so I won't repeat what he said already. But hopefully that gives you the context of the filing that you've referenced. And if not happy to elaborate if possible to maybe a more specific enquiry.

Alan, are you -- or realize that there are your constrain or the things you can't really talk because it is a filing issue, you said public filing. But are you close to the limit of your borrowing capacity and to your leverage capacity, so to say under your bank covanence and is this the device that would shift more of the capital structure from debt to equity, something that you need to do in order to give you some more breathing room, these of either banks?

Yes. So, I'll touch on that, Berny. We do have over 370 million available under our revolver but we are constrained from a leverage standpoint. As you are aware, we have the ability to enter an acquisitions like period which we are I now which allows us to go to four to quarter. So, we do have still a lot of room with respect to leverage. But you are exactly right, this is longer term if this presents itself and it's a good opportunity for us. It is a way that we think that we can shift to the equity side some of our capital and thereby of course reducing leverage. I'd also say interestingly to there are some interesting preferred products out there that may in fact improve our equity cost of capital when you think about it broadly. So, it's really an interesting opportunity for us to do exactly what you said.

Okay. Well, thanks and thanks for the full answers to so many of the questions. And congratulations on the interest that your company's engendered straight.

Thank you, Berny. We appreciate your questions and I know we'll look forward to seeing you very soon here. So, thanks for being on the call today.

And I'm showing no further questions at this time. I would now like to turn the conference back to management for closing remarks.

I'd like to thank everyone again for joining us on today's call and following our story. We look forward to sharing our progress with you in the future. Thanks.