Compass Diversified Holdings' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Compass Diversified Holdings (CODI)

Q2 2012 Earnings Call

August 8, 2012 09:00 am ET

Executives

David Burke – Investor Relations, The IBG Group

James Bottiglieri – Chief Financial Officer

Elias Sabo – Partner, Compass Group Management

Alan Offenberg – Chief Executive Officer

Analysts

Larry Solow – CJS Securities

Vernon Plack – BB&T Capital Markets

Troy Ward – Stifel Nicolaus

J.T. Rogers – Janney Capital Markets.

Presentation

Operator

Good morning and welcome to Compass Diversified Holdings 2012 Second Quarter Conference Call. Today's call is being recorded. All lines have been placed on mute. (Operator instructions)

At this time, I'd like to turn the conference over to David Burke of the IBG Group, for introductions and the reading of the Safe Harbor statement. Please go ahead, sir.

David Burke

Thank you, and welcome to Compass Diversified Holdings second quarter 2012 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 the call, 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 last night. 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 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, 2011 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 call over to Alan Offenberg.

Alan Offenberg

Good morning. Thank you all for your time and welcome to our second quarter 2012 earnings conference call. We are pleased by our strong consolidated results for the second quarter of 2012, which exceeded our expectations. While Jim will discuss our second-quarter financials in more detail, I would like to note that CODI generated cash flow of $23.3 million for the three months ended June 30, 2012, an increase of 26.6% from the year earlier period. Our notable performance reflects the leadership position and comparative financial strength of our niche businesses.

We continue to capitalize on opportunities to increase the relative market share and expand into adjacent markets. Our results for the quarter were also positively impacted by our newest subsidiaries, Arnold Magnetic and CamelBak, both of which we acquired less than a year ago.

Based on the strong performance across our diverse family of niche market leaders, we paid a distribution of $0.36 per share, representing a coverage ratio of cash flow to distributions paid of 1.34 times for the second quarter, and a current yield of approximately 10%. Since going public, CODI has paid cumulative distributions of approximately $8.16 per share. We remain focused on taking advantage of organic and acquisition related growth opportunities, while maintaining our commitment to provide consistent cash distributions to our shareholders.

During the quarter, we took three meaningful steps to enhance our balance sheet. First, we sold our HALO subsidiary for net proceeds of $66 million. Second, we issued an additional 30 million of term loans, which carry only minimal amortization payments through the end of 2017. Third, we reduced the pricing on our expanded term loans by 1.25%.

These moves have strengthened our balance sheet and provided us with approximately $285 million in total liquidity at the end of the second quarter, positioning us well to capitalize on additional platform and add-on acquisitions. As we have in the past, we will maintain our disciplined approach by acquiring companies that have a real reason to exist at favorable valuations and terms. We will also continue to reinvest in our current subsidiaries to drive future performance.

Before I turn the call over to Elias for an overview of our subsidiaries, I would like to provide some commentary regarding our thoughts about our current group of subsidiaries. We have four leading branded product businesses, consisting of CamelBak, ERGObaby, FOX, and Liberty that represent approximately two-thirds of our subsidiary EBITDA.

These four companies are rapidly growing as evidenced by combined revenue and EBITDA growth of approximately 15% and 20% respectively for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011. EBITDA margins also expanded from approximately 19.1% for the six months ended June 30, 2011, to approximately 19.9% for the six months ended June 30, 2012, for these four subsidiaries on a combined basis. All references to combined revenue and EBITDA growth and EBITDA margin are prepared on a pro forma basis, as if we acquired CamelBak on January 1, 2011.

The remaining approximate one third of our subsidiary EBITDA is generated within our niche industrial businesses. These four businesses, which consist of advanced circuits, Advanced Circuits, American Furniture, Arnold, and Tridien when combined produce steady predictable financial performance characterized by high free cash flows. For the six months ended June 30, 2012, these businesses produced a combined 14.7% EBITDA margin, which was equal to the performance for the six months ended June 30, 2011. Combined revenues and EBITDA declined by approximately 4% for the same six month comparison.

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