Compass Diversified Holdings
NYSE:CODI
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Compass Diversified Holdings
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Good morning, and welcome to Compass Diversified Holdings Fourth quarter and Full Year 2018 Conference Call. Today's call is being recorded. All lines have been placed on mute. [Operator Instructions]
At this time, I would like to turn the conference over to Leon Berman 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 fourth quarter and full year 2018 conference call. Representing the company today are Elias Sabo, CODI's CEO and Founding Partner of Compass Group Management; and Ryan Faulkingham, CFO. Also joining us today are David Swanson and Pat Maciariello, partners of Compass Group Management, who will review our subsidiaries' performance.
Before we begin, I would like to point out that the Q4 press release, including the financial tables and non-GAAP financial measure reconciliations, are available on the company's website at www.compassdiversifiedholdings.com. The company also filed its Form 10-K with the SEC last night, which includes reconciliations of non-GAAP financial measures discussed on this call. Please note that references to EBITDA and the following discussions referred to adjusted EBITDA as reconciled to net income in the company's financial filings.
The company does not provide a reconciliation of the ratio of its estimated cash flow available for distribution and reinvestment to its distribution. This is because certain significant information is not available without unreasonable efforts including but not limited to our company’s future earnings, current taxes, capital expenditures and the distribution to be paid as approved quarterly by our Board of Directors. 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 will 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, 2018, 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 does not undertakes no obligation to publicize, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
At this time, I'd like to turn the call over to Elias Sabo.
Good morning. Thank you all for your time and welcome to our fourth quarter earnings conference call. I will begin by recapping our 2018 successes and challenges. 2018 was one of our busiest years ever. In February, we consummated the platform acquisition of Foam Fabricators. Foam Fabricators is performing in line with our expectations and is cash flow accretive.
Also in February we consummated the ad-on acquisition of Rimports into the Sterno Group. Rimports is performing ahead of our expectations and is highly cash flow accretive. Throughout the year we consummated three accretive ad-on acquisitions for Clean Earth, which are performing in line with our expectations.
In September we consummated the ad-on acquisition of Ravin into Velocity Outdoor. Ravin performed below our expectations for our period of ownership in 2018. However, Ravin bring significant intellectual property and is highly strategic to Velocity. We’re pleased with the Ravin acquisition and expect it to be cash flow accretive in 2019.
Also in 2018, we strengthened our balance sheet with the issuance of $100 million of perpetual preferred stock and the refinancing of our debt. The refinancing of our debt was a significant milestone for us as we are able to issue an unsecured bond for the first time in our history. We also lengthened our debt maturities to 2023, 2025 and 2026 respectively. Not only did the refinancing enable us to lower our balance sheet risk, but we are able to lower our weighted average cost of capital, which we believe will provide significant benefits to our shareholders for years to come.
We are pleased with our balance sheet flexibility, however, the refinancing did increase our blended interest rate and our total interest cost, providing a headwind to cash flow in 2018.
Now turning to our financial performance, throughout the presentation when we refer to pro forma adjusted results, revenue and EBITDA for Velocity including Ravin, Foam Fabricators and Rimports will be as these businesses were acquired on January 1, 2017. During the fourth quarter revenue increased by 1% and EBITDA declined by 12% on a pro forma basis from the fourth quarter of 2017.
Our industrial businesses continue to perform above expectations, with revenue and EBITDA growth of 3.5% and 5.3% respectively. Dave will provide further details in his section. Our consumer businesses, however, performed below our expectations in the fourth quarter and throughout 2018. Fourth quarter revenue and EBITDA decreased by 2.3% and 34.5% respectively. Pat will provide further details in his section.
During the fourth quarter, we experienced unusually large amounts of one-time expenses included in these numbers are approximately $4.5 million of one-time charges. Over the course of 2018, we made significant investments in our two fastest growing subsidiaries, which possess the potential to generate significant shareholder value. We invested heavily in the management, sales and marketing functions at Manitoba Harvest causing a 14% decline in EBITDA year-over-year, but accelerating revenue growth to 21% as a result.
We also invested heavily in our 5.11 subsidiary, completing an ERP implementation, moving into our new distribution center and adding several new executive management personnel. These investments came at a heavy cost to EBITDA and given 5.11’s negligible cash taxes these costs weighed heavily on our 2018 cash flow.
Although, our financial performance in 2018 was below our expectations we are confident that we increased shareholder value as a result of our actions. Last week we announced the definitive agreement to sell Manitoba Harvest to Tilray in a transaction that values Manitoba Harvest at up to C$419 million. This sale will generate a return on our invested capital that will far exceed our returns threshold.
We believe the strategic investments we made in Manitoba Harvest, which cause margins to decline under our ownership were a catalyst that enabled this transaction to occur. In the same regard, we believe the decisions we executed at 5.11 although painful, and a drag on our 2018 financial performance will serve to dramatically increase shareholder value in the future. As Pat will highlight, we anticipate strong revenue and earnings growth at 5.11 in 2019.
For the three months ended December 31, 2018, CODI generated cash flow available for distribution and reinvestment, which we refer to as cash flow or CAD of $22.9 million, representing a decline of approximately 10% over the prior year. For the year-to-date period, our cash flow grew approximately 2%. Our cash flow growth in 2018 was below expectations. However, we are pleased to have grown cash flow given the significant investments we made in 5.11 and Manitoba Harvest mentioned previously.
For 2019, we expect slightly above trend subsidiary consolidated EBITDA growth, and as a result, expect a CAD payout ratio of 75% to 95%. Ryan will provide further details in his comments. For the fourth quarter, we paid a cash distribution of $0.36 per common share, representing a current yield of 9%. This brings cumulative distributions paid since CODI’s 2006 IPO to $17.52 per share. We are pleased to have produce cash flow that exceeded our fourth quarter and our full year 2018 distributions.
We also paid cash distributions on January 30th of approximately $0.45 per share on our 7.25% Series A preferred shares and approximately $0.49 per share on our 7.875% Series B preferred shares. Both distributions cover the period from and including October 30, 2018 up to but excluding January 30, 2019.
I will now turn the call to Dave, to review our niche industrial subsidiaries 2018 full year performance.
Thanks, Elias. On a pro forma adjusted basis 2018 revenues for our niche industrial businesses increased by 10.6%, while EBITDA increased by 9.4% compared to 2017. Starting with Advanced Circuits, 2018 revenue increased by 5.4% and EBITDA increased 10% compared to the prior year, exceeding our expectations. We expect Advanced Circuits 2019 financial performance to be roughly flat with 2018.
Arnold Magnetics 2018 revenue increased 11.6% and EBITDA increased 35.8% from 2017, exceeding our expectations. We continue to experience increased demand across our aerospace and defense end markets, as well as benefit from operational improvements. We expect Arnold to achieve solid growth in 2019.
Clean Earth’s 2018 revenue increased 26.4% and EBITDA increased 17% from 2017, meeting our expectations. Clean Earth continue to experience solid organic growth across its contaminated materials and hazardous waste service lines and benefited from recent add-on acquisitions. We anticipate solid growth in 2019 and we continue to seek add-on opportunities.
The Sterno Group’s 2018 revenue increased 5.9% and EBITDA increased 4.5% from 2017, meeting our expectations. Sterno’s 2018 margins were impacted by integration costs associated with the Rimports acquisition and increased chemical input costs. We expect Sterno to achieve solid growth in 2019.
Lastly Foam Fabricators 2018 revenue increased 1.6% and EBITDA increased 1.4% compared to the prior year, meeting our expectations. We expect Foam Fabricators 2019 financial results to be roughly flat as compared to 2018.
I will now turn over the call to Pat, to review our branded consumer subsidiaries 2018 performance.
Thanks, Dave. On a pro forma adjusted basis 2018 revenues for our branded consumer businesses increased 6.1%, while EBITDA decreased 14.8% compared to 2017. Beginning with Liberty Safe, 2018 revenue decrease 10.1% and EBITDA decreased 31.3% from 2017 performing below our expectations. Liberty Safe experienced both the challenging outdoor sporting goods market and rising input costs due to steel tariffs. We expect Liberty’s financial performance to stabilize in 2019 and be in line with 2018 results.
Ergobaby’s 2018 revenues decreased 12% and EBITDA decreased 36% from 2017 below our expectations. As we have discussed on prior calls, we believe that headwinds faced in 2018 were transitory and we expect a recovery in performance in 2019. We anticipate modest growth in revenue and earnings in 2019.
Velocity outdoor’s 2018 revenue increased 10.3%, while EBITDA increased 21.9% from 2017 due primarily to the addition of Ravin. As a reminder for much of 2017 and early 2018 Ravin’s products were on allocation to its customers and Ravin’s customers were stocking inventory. Importantly, when we acquired Ravin, we assumed a normalized level of revenues and EBITDA in valuing the company.
For 2019, we expect Velocity’s financial performance to decline from 2018, in part due to tough comparisons for Ravin and in part due to continuing challenges in the outdoor sporting goods market.
Turning now to 5.11, 5.11’s 2018 revenue increased 12.2%, exceeding our expectations, while EBITDA decreased 16.2% compared to 2017. As discussed on previous earnings calls, 5.11’s margins were negatively impacted by the installation of a new ERP system, the transition to a new distribution warehouse and the recruitment of a number of executive management team members. With these activities largely behind us, we expect 5.11 to produce a strong rebound in margins in 2019, as well as continued solid revenue growth.
Lastly, on the Manitoba Harvest sale process, the process is moving along smoothly and we are hopeful the transaction closes in the next few weeks.
With that, I will now turn the call over to Ryan, to add his comments on our financial results.
Thank you, Pat. Today I will discuss our consolidated financial results for the quarter and year ended December 31, 2018. I will limit my comments largely to the overall results for our company, since the individual subsidiary results are detailed in our Form 10-K that was filed with the SEC yesterday. At the end of my remarks, I will comment on CAD for 2019.
On a consolidated basis, revenue for the quarter ended December 31, 2018 was $452.5 million up 29.9% compared to $348.4 million for the prior year period. This year-over-year increase reflects notable revenue growth at our Clean Earth subsidiary, which benefited from the three add-on acquisitions in 2018, increased revenue contributions from 5.11 Tactical, as well as contributions from our acquisitions of Foam Fabricators and Rimports in early 2018, and Ravin in the third quarter.
Revenue for the year ended December 31, 2018 increased to $1.7 billion, an increase of $421.9 million or 33.2% compared to $1.3 billion for the prior year. The increase in revenue year-over-year is primarily the result of notable sales increases at Clean Earth, 5.11, Manitoba Harvest, Arnold and our legacy Sterno business and also reflects our acquisition of Foam Fabricators, and the add-on acquisitions of Rimports and Ravin.
Net loss for the quarter ended December 31, 2018 was $6.5 million as compared to net income of $49.1 million for the quarter ended December 31, 2017. During the fourth quarter of 2017, CODI recorded an income tax benefit of $38.7 million, primarily related to the enactment of the Tax Cuts and Jobs Act in December 2017, which lower the U.S. Federal Corporate Income Tax Rate from 35% to 21%.
For the year ended December 31, 2018 net loss was $1.8 million.Net income for the year ended December 31, 2017 was $33.6 million, primarily due to the previously mentioned Income Tax benefit. Cash flow available for distribution or reinvestment, which we refer to as CAD, for the quarter ended December 31, 2018 was $22.9 million compared to $25.6 million in the prior year period.
During the fourth quarter, our cash flow results were primarily impacted by lower earnings in our branded consumer businesses and higher interest costs than in the prior year. For the year ended December 31, 2018 cash flow was $93.7 million as compared to $92.2 million in the prior year.
Moving to our balance sheet, we had approximately $53.3 million in cash and cash equivalents and networking capital of $429.1 million as of December 31, 2018. We also had $496 million outstanding on our term loan facility, $400 million in senior notes and $228 million in outstanding borrowings under our revolving credit facility. We have no significant debt maturities until 2023, and had net borrowing availability of approximately $372 million under our revolving credit facility at the end of the year.
At December 31, 2018, our leverage ratio was approximately 3.9 times. As a result of the expected sale of Manitoba Harvest, and assuming we receive the net proceeds we anticipate at close and six months thereafter, we estimate our pro forma leverage ratio will be approximately 3.3 times. In addition, we will have pro forma revolver availability of greater than $550 million providing us great flexibility in managing our business.
Turning now to capital expenditures. During the fourth quarter of 2018, we incurred $5.4 million of maintenance capital expenditures compared to $6.9 million in the prior year period. For the full year 2018, we incurred maintenance CapEx of $27.2 million as compared to maintenance CapEx of $20.3 million for the year ended December 31, 2017. The increase in maintenance CapEx was primarily related to the acquisitions completed during 2018.
During the fourth quarter, we continued to invest growth capital spending $3.1 million, primarily at a 5.11 subsidiary. For the full year of 2019, we expect to incur maintenance CapEx of between $27 million and $32 million and anticipate growth CapEx spend of between $18 million and $23 million as we continue to invest in the long-term growth of our subsidiaries. The larger share of our growth CapEx spend will be to support 5.11's long-term growth objectives.
I'd like to now make a few comments on our expectations for 2019, as well as explain how we will provide guidance to our investors going forward. As most of you know, the quarterly cadence of certain aspects of our CAD calculation are very difficult to predict. For example, capital expenditures and current tax expense or cash taxes.
The recognition of capital expenditures in our financial statements is driven by a point in time at which an asset is placed into service, which may at times slip into subsequent quarters, reducing our ability to predict quarterly CapEx. Our subsidiary executive teams are limited to a budgeted capital expenditure spend in any given year. Thus, on an annual basis, we can estimate it reasonably well.
The recognition of cash taxes calculated under income tax accounting rules are estimated by applying an annual expected tax rate to quarterly results. Certain of our companies begin the year in a taxable loss position then move into an income position, which causes significant swings in quarterly cash taxes, diminishing our ability to predict our quarterly cash taxes. However, on an annual basis, we estimate cash taxes reasonably well.
Therefore, going forward, we will provide our investors with an estimate of what our expected ratio will be of our annual common distribution to our annual CAD or our payout ratio. If there is a change in our annual payout ratio guidance, we will update our investors via our commentary in future quarterly earnings calls. As mentioned in Elias's comments, we anticipate our distribution payout ratio for the full year of 2019 will be between 75% and 95%, assuming the same level of distributions in 2019 as in 2018.
Finally, I'd like to remind investors of the seasonal nature of certain of our businesses and as a result, we typically generate our lowest quarterly EBITDA during the first quarter.
With that, I will now turn the call back over to over to Elias.
Thank you Ryan. As we reflect on 2018 we generated year-over-year revenue growth and increased cash flows as we continue to provide shareholders stable and sizable distributions. Our team continued to draw upon our strong balance sheet to capitalize on accretive market opportunities and we are pleased to have completed a total of six accretive acquisitions during the 2018, including five ad-on acquisitions and one platform. As we look towards 2019 we are well positioned to have solid growth in consolidated revenues and earnings.
We expect a stronger balance sheet position as a result of our expected sale of Manitoba Harvest and we anticipate generating our highest level of CAD since going public almost 13 years ago. I would like to close by briefly discussing M&A activity and our forward growth strategy. Middle market M&A activity remains at historically high levels, debt capital remains robust with favorable terms and strategic and private equity acquirers continue to seek opportunities to deploy available capital.
As a result valuation multiples remain robust. Our acquisition efforts will continue to focus on accretive ad-on opportunities and selective platform opportunities where we can acquire niche market leaders at valuations where we can expect to exceed our weighted average cost of capital.
Further, we will continue to consider opportunistic divestitures in this robust market in line with our strategy of creating long-term shareholder value. Going forward, we will maintain an intense focus on executing our proven and disciplined acquisition strategy, opportunistically divesting when appropriate, distributing sizable distributions and creating long-term shareholder value.
With that, operator please open up the lines for question and answers.
[Operator Instructions] Your first question comes from the line of Larry Solow from CJS Securities. Your line is now open.
Great. Good morning, guys. Thanks.
Good morning, Larry.
Just a couple, on the guidance outlook, Elias just on the -- seems like a pretty wide range 150 to 190 is there -- is it just sort of variability at some of your larger holdings that’s driving that or anything in particular?
I think it’s just still early in the year, Larry. And so, we like a little wider range obviously and there’s a lot of factors that can affect this. I think, as Ryan did a really good job of highlighting some of the things are a little more unpredictable in cases -- some of the cases we increased our CapEx if we think there’s good opportunities to pursue, in some cases maintenance CapEx as well that can have a negative effect on CAD.
As you know our cash flow is actually defined as our CapEx not our depreciation right. And so, that can affect it and it could be for a good reason right we’re investing in the business because we may think there are good opportunities to pursue. So we just felt it was prudent at this point in the year to have a wider range, I think, as we go through the year our goal would be to narrow that as we get more kind of clarity on how the year is developing.
And clearly kind of the economic backdrop is going to play a reasonably large kind of role in what we’re able to produce. We’re assuming sort of consensus GDP growth out there. But if that is higher or lower clearly that could make us move around within the range.
Okay, fair enough. So it sounds like you are assuming sort of similar sort of economic backdrop that we’re in now obviously that could go one way or the other but…
Yes, probably a little bit slower economic growth in 2019 than what we experienced in 2018. That’s what we’ve factored in, but kind of I think consensus is 2% to 2.5% that’s sort of what we’re factoring in with our guidance.
And to your corporate or maybe not just on the sale of Manitoba, I think that would be accretive to CAD. So does that included in that number or not?
So as of right now Manitoba Harvest is included in the number as if we continue to own it. We’ll update guidance after the sale likely in our first quarter. That being said, given the timing of payments, I think, as we communicated in our release we’re getting a portion of our proceeds upon the close. We’re also getting a portion of the proceeds six months later. So, as the result of that it also has as much of a positive CAD impact given the staging of those payments.
I would say the other expectations we have is Manitoba Harvest expected to be more seasonally -- they’re expected to be weakest in the first quarter. The period that we’re still owning them. And so, as the result of that both of those sort of distort what the kind of CAD impact will be upon divestiture. So that’s something that we’ll update after the close.
Okay, fair enough. And then obviously, Manitoba it sound that announced sale sounds opportunistic. Just in general the environment out there anything could happen for you guys, but obviously you mentioned you have a good amount of liquidity now and you’ve continued do tuck-in acquisition which seem like a little easier at least for you guys strategically in an elevated price environment that have prices and quality of the stuff that you’ve been seen in terms of stuff on the market changed at all the last couple of quarters?
No not really, I mean I think there was a modest probably dip in what you had in December early January, probably is much to do with credit markets, which started to get really tight. The term loan market in particular really sold off as did the bond market. And so, that drives a lot of M&A activity and valuation multiple, but appreciate that was only over a four week period. And so, it was so temporary that it didn’t derail or caused multiples to decline.
I think there is more talk now about where we are in the cycle. You start to hear of that a little bit more, so that can overall have an impact on kind of activity. But as of yet, Larry, we’re still seeing activity at historically high levels. I would say or at least pricing at historically high level.
So, we continue to be really patient. This is what I think where our capital structure and the permanent capital that we have really stands out. Our strategy is -- we’re always open for business for a new platform acquisition. But we’re also going to be very disciplined on pricing and in today’s market that makes it more unlikely to find an asset that kind of meets our pricing and return required threshold.
But that being said, as you’ve identified, we feel really good about our strategy to continue to do tuck-in acquisitions at much more favorable prices, generally can also have some ability to create savings and even higher levels of accretion. And then, we remained positioned with a strong balance sheet, but we still would consider opportunistic divestitures given where we are.
Great. And then just a couple of questions, you guys did a good job with given us the outlook for each holding, but just on Sterno, seasonally I know the core Sterno was strongest in Q4. I don’t know, if there -- I would think their imports actually would be pretty strong in Q4. So just curious while the sequentially it was sort of flat Q3 to Q4 on the EBITDA basis, anything there that noteworthy?
I mean, the only thing I would say it would just be a slight shifting in sort of the type of holiday promotions at a couple of our customers one in particular where kind of a bigger focus on Q3 than last year and a slightly lesser focus on Q4 than last year. Nothing really in total though out of the ordinary.
Okay. And then lastly, just maybe for David, just on Advanced Circuits so not quite one of your bigger holdings these days, but still more than around a year just had a pretty -- very good quarter and a good year in 2018. Might we get a little bit more growth in 2019 than sort of the flat exception you mentioned?
Leon, this is Pat. So I’d say the company is doing a -- it had a good quarter, the company is doing a good job of attracting defense customers, which hasn’t historically been sort of the core customer base. We’re optimistic that what you said is a possibility, but nothing we’d commit to right now.
Yes, I would say Larry, we still look at the backdrop of the industry that we are participating in, which is not really a robust industry in circuit boards. I mean, this company is an awesome company to produce free cash flow, I think as you look at it has very little CapEx doesn't pay a lot of taxes, the working capital is negligible.
So, from a just producing free cash flow, it is a great company, it's also very predictable and doesn't have a lot of -- kind of variability either quarter-to-quarter or year-to-year I would say kind of the other side of that is it's not a great growth business because it doesn't fit in a great growth industry.
And so, although, 2018 was very positive and we're really pleased with Advanced Circuits. I think coming off that strong of a year, it's probably reasonable to expect kind of this year to moderate.
Great, fair enough. Appreciate that. Thanks for the color.
Your next question comes from the line of Leslie Vandegrift from Raymond James. Your line is now open.
Hi, good morning. Thank you for taking my question.
Good morning, Leslie.
Just a quick follow up on Clean Earth. You mentioned; A, the impact of acquisitions last year, but at the end of the year it underperformed at least our estimates. Was there any impact from the government shutdown do they have contracts with them that had issues?
No, no noticeable impact from the government shut down, nothing specific, I think there was you know, a little bit of wet weather particularly in the Northeast in the fourth quarter, which create some timing for certain work, but no impact that we noticed from the government shutdown.
And I would just add Leslie that Clean Earth is a business as we all know that is -- can have some lumpiness and it's quarter-to-quarter cadence, we don't really look at quarter-to-quarter with that business we look much more on an annual basis. From an annual basis 2018 was a really good year, I mean, not only were the tuck-ins very accretive, but the organic growth in both lines of business that constitute 90 plus percent of our EBITDA contaminated materials and hazardous both of those grew above what kind of the long-term normalized growth rate.
As you know, project year-to-year can go one might be in the third quarter this year, in the second quarter the year before. So that can distort quarterly comparisons. But I would say with Clean Earth because of that we really need to look on an annual basis. And we're extremely pleased with the performance. It was one of kind of is a really good year of performance for Clean Earth and we expect 2019 to carry on with that.
Okay. And then on that note, you mentioned the possibility of some near-term acquisition again for Clean Earth. What's the overall appetite there just over the next 12 to 18 months?
Yes, we think this is a core competency of this company and this management team, their track record with the add-ons has been really strong both in terms of growing revenue and improving efficiencies and it's a very fragmented market. So we think there's a lot of opportunity to continue what Clean Earth has been doing and the track record would suggest very accretive add-on acquisitions, and we're seeing a lot of opportunities to continue that. I'd say particularly on the hazardous side of the business.
Okay, thank you. And then, on the sale of Manitoba, part of the deal obviously is the receiving of some stock from Tilray and was curious how you guys held the Fox Factory shares for quite a while and made a large gain on those when you sold them. What's the plan for the Tilray stock, kind of same idea hold for a longer period or is that more of a short-term plan, given your [indiscernible].
Yes, I would say just broadly in general, our business is not to hold publicly traded companies because as we are in predominantly we look to generate income on our assets and holding publicly traded stock is a non-income producing balance sheet asset. So that would just be sort of our broad statement. We don’t give timing on expectations with respect to divestitures of any assets including publicly traded companies that we have in our balance sheet.
That being said, I would say as we looked at this transaction and Manitoba Harvest is kind of was our fastest growing business from a revenue standpoint and was really positioned incredibly well and I think as some of the legislation is changing and we’re finding what kind of we term internally this hemp curiosity that was starting to take place. We had real positive use as to this company and its opportunity and the company has announced recently that it entering into the CBD market in states where it’s legal to distribute, which is another huge positive.
So all that being said, I would just say, Leslie, we are very positive about the company and when we divested it, it was at a price that we thought was great for our shareholders. But equally important as we thought the buyer here was just the ideal partner for this company and that together they’d be able to do more than what we would have been able to do with this company on our own.
So we have a very favorable outlook on kind of the entire space, on the buyer and on Manitoba. And so that we feel good about the shares that we’re taking, which is why we took a relatively healthy slug as part of the consideration here. But we’re not going to give kind of any public announcement yet as to what our intentions on timing are with those shares.
Okay, thank you. And my last question just kind hits 5.11 at Ergobaby directly it had a lot of expansion certainly on the 5.11 side with the retail store space and obviously Brick and Motor right now just had its struggle overall. What’s the reason here, I guess, the valuation there on expanding retail stores versus putting that CapEx into marketing and online sales given the overall market for Brick and Motor?
Yes, I don’t think it’s an either or and I think that to some extent retail stores help drive online as well. So first of all I would say, within though the ROI we’re able to kind of see as we model these out and as they come to provision these stores, significantly surpasses sort of our threshold.
And we also think it’s great for consumer awareness. We try to place these stores in areas that there’s a lot of people driving by seeing our signs, a lot of curiosity and we think so far it’s doing great things for the brand and at the same time having a really positive financial impact.
Yes, Leslie, I think the other thing just to keep in mind here is that the channel that 5.11 goes through, which is sort of the outdoor/sporting goods channel is one that is seeing dramatically consolidation. We see even negative effects on that on Velocity Outdoor and Liberty’s results in kind of over the last couple of years.
But there’s just a limited number of distribution points that exist out there and because this is an apparel product and it is more from a gender basis more of a male product than female, overwhelmingly more male. We think it’s important to have physical points of distribution where people can go in that are being exposed to the brand and get the feel, how it fits, there’s just some important aspects as we are bringing in new customers. So we feel that it’s really important because there’s not as well established distribution network to go through more a traditional consumer wholesale approach that we have some of our own.
Now I’ll also say that this -- our approach is more of an omnichannel approach. So we do have online consumer wholesale, traditional Brick and Motor consumer wholesale and then both our own Brick and Motor and online and they all work together. What we’re able to do in our own stores is really merchandise the entire line and we’re able to create experiences that are different than what some of our consumer wholesale partners that are likely going to go deeper on a fewer skews and have kind of other brands. So they can't create you know the experience that we are able to around our brand.
So we think that these all work synergistically there's other businesses that have done this extremely well and we're really excited about it. We brought in a new executive chairperson in Matt Hyde earlier this year and he is helping to really drive the strategy on our direct to consumer. And we couldn't be more excited about what we're seeing out of that business and think that that can be a great growth engine here for the next few years.
Perfect. Thank you for all the color
Thank you, Leslie.
Your next question comes from the line is Brian Hogan from William Blair. Your line is now open.
Good morning.
Good morning, Brian.
I just had a quick question on your leverage. You said you're targeting performance 3.3 for the Manitoba Harvest assuming you get all the proceeds. What are -- what leverage are you targeting? Is that what level you're looking for, is it more like 3 or -- and I know you can go to 3.5 on a normal course and with expansion up to 4.25 with acquisitions. But just what are you comfortable with?
Yes. So Brian, those covenant metrics are actually from our old credit agreement. So one of the things that Elias mentioned in his comments was this refinance we did provide a really good flexibility to us, as we manage our business. Because the covenant metrics that we live in today are 3.5 on our senior. So senior being our revolve on our Term Loan B and 5 times total. So we're comfortably even at 12/31 at a little over 3.9 times leveraged. We're still comfortably within our covenants.
So this brings us down into even more comfortable zone. So we don't typically talk about a target. I think what we think about is in balance sheet risk is maintaining availability on a revolver,, which we have that gives us the flexibility we need to manage our business. So I think 3.3 is a nice place to be. I think we always seek though to have a good balance sheet and a strong balance sheet. So if that were to go down even further that's good news. But I think where we sit today pro forma for Manitoba Harvest is a real good position to be.
All right. And then on Sterno, I'm just kind of begging into the -- what the organic growth rate was for the business in the quarter? I didn't see the contribution from Rimports in the 10-K for the year. So I was just kind of wonder if you’d provide that.
Ryan isn't that…
Yeah. So the Rimports full year number is in the MD&A. So you'll be able to back into -- it's in our section, in the consolidated section of the MD&A, not in the --.
It's in there, sorry if you got to dig for it, but it's there.
Okay. I missed that part in the consolidated over there, I just didn’t see it in the external section. And then likewise is the same thing for Velocity. Can you see Ravin contribution?
Yes, no Ravin is not there. It's not there. But if you look at the information on the website inside of that Excel file, you'll be able to -- I think you'll get some helpful data there, which is on our website.
All right. And then can you comment on 5.11’s growth expansion plans? I mean, is it still more adding more stores, what it the -- or is that kind of you're reading a lot of stores and have you backed off of that a little bit and basically getting down to what are the same stores of sales. I know it's on a small base and I get that. And it's hard to read established stores are growing that, but how has that view changed?
Yes. So Brian, the stores are doing exceptionally well. But it's off of a small base. And so, I would caution everybody that when we look at things ourselves and one of the reasons that we don't give out same store sales data right now is because you look at a kind of a little over 40 stores and it's just too small to make sense, especially given that a lot of these stores are relatively new. And as you know there's a ramp up period that is going to make your kind of same store sales look stronger based on that.
So we look at by whole by cohort going back four years, three years and our same store sales comps are meeting or exceeding what our expectations are by cohort. But again, as you get back a few years it might be on three stores. So it doesn't really give you a lot of great data.
We believe that these stores are absolutely a critical part of our strategy going forward. As we evolve this brand from what was traditionally just a professional brand to what will be is now more of a consumer lifestyle brand. And so, we are fully committed to continuing to invest in our retail store development with the proviso that the numbers continue to look attractive to support that. And right now that remains the case. So that is our sort of defector position going forward.
I would say because of everything that we did over the course of 2018, and we had a really busy year. We may have a few less store openings in 2019 than we had in 2018. And as much of that is we have a lot of new executive management personnel, who also believes fully in this kind of strategy and what we're building out. But as they're getting integrated in and as we're really defining and honing in one of the good things is when you get to 40, 50 stores, you can really start to mine through the data, figure out what is working really well, figure out what's not working so well. And you can adjust your strategy, so that your probability of success on your next store opening is higher.
So we're in the process right now of doing that that probably will make our store opening count in 2019 be temporarily lower than what it otherwise would. But we think this is really a -- not only is this financially accretive in terms of high return on invested capital kind of has a very quick payback, but it's also really strategic, because it continues to drive this business more towards a consumer lifestyle brand. So for those reason we remained -- remaining committed and will so as long as kind of the store performance remain strong as it is.
And then the ERP system is that headwind completely behind you at this point do you think? And then, with that also I would say is the bankruptcies in the industry if you will? Distributors headwinds are they behind you as well in your opinion?
Hey Brian, this is Pat. On the ERP the -- there is little issues always here or there as you move through, but in the U.S. which is most of our distribution, we are strongly believe the largest issues are behind us. There will be some implementation in Europe, but that's -- we have some learning that was taken from the U.S. we believe that will go much smoother. So that's number one.
Your second question, I believe was on the bankruptcies in the industry. We look at it every day, I'd say I don't see another gander out there right now and we're optimistic that that won't happen this year. It -- so that's all I think. We looked over the landscape and we're comfortable now that there's nothing like a gander on the horizon.
Yes. And just, Brian look 2018 -- the end of 2017 and 2018 were very disruptive because we have these ERP and warehouse transitions both going and then they went at the same time. We also had a bunch of executive management personnel changes that occurred. So when you have all of that, that's a lot for the company to go through. Frankly, I think the financial performance of the business and the margin that the company generated despite those activities was strong. And now I know that it wasn't strong relative to history or what we all expect. But considering those factors, I think it was really good.
As we said in our commentary, we believe the vast majority of that is behind us we will have a little bit of tweaking here and there on the ERP to get out more efficiency, yes. But, the disruption part of this is behind us. And so, we believe that other than maybe talking about a comp to a prior year, we believe we won't be talking about the ERP as an issue in 2019 and beyond.
Sure. And then, switching over to Ergobaby, excluding baby two it looks like the Ergo sales legacy, if you will were down 30% year-over-year. Is that still impacted by Babies "R" Us bankruptcy or what’s -- and obviously, Amazon as well impacted, but what's driving the…
I don't think those numbers are exactly accurate, Ryan. We'll get you the exact number after, but I would say the -- and I think some of the toy companies other companies with exposure to Babies "R" Us have said the same thing. The business that was last at Toys "R" Us and Babies "R" Us hasn't sort of bounced back into other places in the market as quickly as we would have hoped. I think we're on solid footing now as we enter into 2019, but that was a big part of the driver in Q4 2018.
Yes and Brian just to give you an overall. So Ergobaby's consolidated revenues dropped 12% year-over-year. Of which Ergobaby performed better than the Baby Tula brand. And so, by definition of that statement, Ergobaby was less than the 12% for the year. And that was with some pretty significant inventory changes in our global distribution system, that served as a massive headwind.
So, we think, the Ergo sort of the core legacy Ergo brand, which constitutes most of the revenue in the business. Sort of a mid-single digit down year-over-year. But considering some of the headwinds that it faced, which we think are more transitory. We think that it’s poised for 2019 to be stronger.
Sure. And then, one last one and I guess what business or businesses I'm not asking you to pick a favorite child are you most excited about from a growth opportunity and market potential?
Yes. So, I think when you look at our portfolio of subsidiaries, we have some really great businesses that produce stable and predictable cash flow. I think of a company like a Sterno or an Advanced Circuits. I mean, these are just really great free cash flow providers. And that's consistent with what our business model is. I mean, we provide very sizeable distributions to our shareholders. We need to focus on generating really strong free cash flow as a result.
But, sometimes that comes at the expense of having rapidly growing businesses. I would say, if you looked at kind of how we construct the portfolio we had always thought of really kind of the two primary businesses that were going to generate organic growth for 5.11 and Manitoba. That had -- when I say generate really strong organic growth. And then, we look at our other eight companies and we say, okay, those are going to generate really good solid free cash flow. And the way that we're going to be able to help lever that up is through some tuck-in acquisitions.
So there are two companies that I would say have pretty favorable outlooks right now, that can drive kind of accelerated free cash flow grow -- or celebrated shareholder value growth. Look first and foremost is 5.11, it's the company that has the biggest market potential and the one that has a very large potential multiple on exit given its shift to consumer lifestyle. And so, that's the business that we continue to believe internally can be transformational to the entire company.
I would say the second company, which has just done such a phenomenal job and continues to do a great job is Clean Earth, because it's able to continue to consolidate amongst of what are a lot of one and maybe two plants operated small mom and pops that are out there. These are bought at really attractive valuations. And that company and the management team is so skilled at integrating these that in many cases we're finding these are low-single digit multiples, post-synergies that we're able to bring them. That is massively value-accretive.
So I would say those two companies in particular now that Manitoba, is being sold have really large potential, but 5.11 in terms of, kind of, if you think about transformational potential, i.e. what we had with the Fox years ago I would say the one company that potentially if we execute well can get there will be a 5.11.
Sure, thank you.
I am showing no further questions at this time. I would now like to turn the conference back to Mr. Elias Sabo.
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 you in the future. Thank you and have a nice day.
This concludes Compass Diversified Holdings conference call. Thank you and have a great day.