Spectrum Brands Holdings Inc (SPB) 2015 Q1 法說會逐字稿

Good morning. My name is Sean, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Harbinger first-quarter earnings conference call.

(Operator Instructions)

Thanks you. Mr. James Hart, Senior Vice President of Communications, you may begin your conference.

Thank you, Sean, and good morning, everyone. Welcome to our quarterly conference call. With me today are Omar Asali, President of Harbinger Group, and Tom Williams, our CFO.

During today's call, a presentation will accompany our remarks. This presentation may be accessed through the webcast that is available from the Investor Relations section of our website at harbingergroupinc.com. As reminder, this call cannot be taped or otherwise duplicated without the Company's prior consent.

Before we begin, I will remind everyone that this call may contain statements that are forward-looking, as that term is defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include but are not limited to discussions regarding industry outlook, opinions. Expectations regarding the performance of the Company's business, its liquidity and capital resources, and other non-historical statements in the discussion and analysis.

These forward-looking statements are subject to certain risks, uncertainties and assumptions. Including risks related to the general economic and business conditions, and are based on management's beliefs as well as assumptions made by and information currently available to management. When you listen to this call, the words believe, anticipate, estimates, expect, intend, and similar expressions are intended to identify forward-looking statements.

All forward-looking statements made today reflect the Company's current expectations only. And although management believes that its expectations reflected in these statements are reasonable, the Company undertakes no obligation to revise or update any statements to reflect events or circumstances that occur after this call.

Important risks, uncertainties, assumptions, and other factors that could cause actual results to differ materially from those in these forward-looking statements are identified and discussed in the reports filed by Harbinger Group Inc with the Securities and Exchange Commission. Including Harbinger Group's most recent annual report on Form 10-K.

During the call, management will provide certain information that will constitute non-GAAP financial measures under the SEC rules, such as adjusted EBITDA and adjusted operating income. Certain information required to be disclosed about these non-GAAP measures, including reconciliations with the most comparable GAAP measures, is available in the earnings press release we issued this morning. With that, we'll begin by turning the call over to Omar Asali.

Thank you, James. Good morning, everyone, and thank you for joining us. I will cover the business highlights for the quarter, and then turn it over to Tom Williams to cover the financial highlights.

Starting on your slide 5, the summary for the quarter is we had a solid quarter. It was consistent with our expectations. Our key assets, Spectrum Brands, and Fidelity & Guaranty continue to execute and do well and according to plan, so we're very pleased that.

This is a quarter where we did see some macro headwinds. Obviously, commodity prices have been a challenge, and that impacted Compass. And I'll discuss that later on and clearly oil and gas prices are topic du jour these days. We had some negative impacts from foreign exchange, so the euro, the pound, and other currencies impacted our consumer product segment. And obviously the low rate environment continues, and that had some impact on FGL.

The good news is we believe with all these headwinds, our businesses continue to perform. The management at our OpCos continue to execute on the plan, we feel that we're actually very well-positioned despite some of these challenges.

The past quarter and recent news from us, and our Companies also have expressed some transition on leadership. So the CEO of Harbinger Group, Philip Falcone, has separated from the Company this past quarter. Dave Lumley has announced his retirement from SPB for later this year, and same with Lee Launer.

In the case of Lee Launer, we have identified the next CEO. It's Chris Littlefield. Many of you have met him, and know him.

Chris is a veteran in the space, and he will be leading Fidelity & Guaranty. And we're very excited about Chris and his capability. As far as the special plans, both at HRG and SPB, they're underway, and we will be coming back to you and to the market with our plans in the near future.

Overall strategy in terms of our acquisitions and looking for opportunities, nothing has changed. We remain selective in that area. We continue with our disciplined approach.

We've identified some tuck-in acquisitions that we'll discuss that we have executed on. But the strategy continues in terms of how we execute on M&A at HRG and OpCos.

Moving on to the next slide. In terms of the state of the business, and I touched on some of these things, so I'll go through the slide relatively quickly.

We're very proud of how SPB has navigated both the FX issue, as well as the union labor dispute on the West Coast. The company continues to perform very, very well, despite these challenges. And frankly, we continue to be well-positioned for our growth plan, both organically as well as through tuck-in acquisitions.

FGL continues to execute in terms of increasing our market share, as well as building our annuity book. We had a record quarter in terms of our sales. In terms of energy, obviously, the oil and gas price has been a challenge for Compass, and that's not within our control.

What has been within our control, the operations, the efficiencies in the business, the production level, our management team continued to execute on all these fronts. And we feel they've done a pretty good job on that front. And importantly, this past quarter, we executed on the acquisition of our Minority Partner, which simplifies the governance of Compass going forward, and simplifies the strategy and the direction that we want to take.

Lastly, in asset management, we brought both CorAmerica and EIC, our energy and infrastructure lending business, online. So both of these are executing on transaction, and we're pleased that both of them are active in the marketplace.

Slide 7, to dig a bit deeper in Spectrum Brands. This year, Spectrum recently reaffirmed its outlook that this is going to be a record year, and it will be our sixth straight year of record financial performance. So we're pleased to do that.

I mentioned a little bit the FX challenges and the [fort]. But frankly, the strength of our business, our platform continues to deliver results. And we're very happy with how we're positioned in the marketplace.

You've seen us be active in this area in M&A and are tuck-in acquisitions. So with the Tell Manufacturing acquisition, we are now engaged in the commercial lockset business. Which we think is going to be a very interesting opportunity.

We also announced the P&G European Pet Food business acquisition, and now own brands like Iams and Eukanuba which are very attractive in Europe. As well as the [Salex] acquisition, which is the largest vertically integrated dog treat company. And I think that's an acquisition that's going to have tremendous synergies and opportunities across our pet business, so we're really excited to announce that.

Looking ahead in terms of FY15 and beyond, Spectrum is focused on new products. We're investing behind some of our existing brands to strengthen our position. An example of that is the fusion brand that's coming to market, which is 35% longer than the comparable product from Energizer, and I think that's going to be a very attractive brand for us. We continue to gain in the distribution channels, as well as we continue to focus on expanding our footprint in e-commerce.

Just to give you a little bit of financial highlights. If you look at the performance of the Company on a revenue and an EBITDA basis for this past quarter, on a currency consistent basis, we have done extremely well. Where revenues were up 0.5%, excluding the impact of currency, obviously we don't live in a world where currency is consistent.

But that gives you the power of the engine that we have in Spectrum Brand. In terms of both our market share, our pricing, as well as our margins as our EBITDA grew on a currency consistent basis.

Some things to highlight for the quarter that we're very proud of is a record first quarter for the Home and Garden product line, where revenues increased by almost 17%. Also in our appliances area, we witnessed terrific growth on an EBITDA basis. And in appliances, we believe our lineup is as good as it's been given the recent investments that the Company has done. And I think you're going to see the results of that in future quarters.

And finally, HHI had a terrific quarter, with revenue growing 3.5% and adjusted EBITDA growing in double digits. So overall, what we're expecting for the fiscal year is record performance on revenue, adjusted EBITDA, and free cash flow.

Moving on to Fidelity & Guaranty, I think the story this past quarter has been very robust in this area. Our sales have been at record levels. Our market share has increased significantly. The relationships with the IMOs and the distribution Partners continues to be very robust.

We also have done some nice moves in the portfolio. If you look at the average yield on the assets that were purchased this quarter of 5.2%, we're pretty pleased with that. And overall, that has lifted the average yield on the portfolio to 4.83%, which is almost 20 bips higher than a year ago.

We continue to maintain our discipline in our books. So the average rating is 1.5 times from an NAIC standpoint, continued to build book value.

And frankly, if you look again back on the sales numbers, year-over-year, we're up about 115%. And sequentially from last quarter, up about 42%. And these are all very consistent with the plan that we outlined during the IPO time, and management here continues to deliver frankly at different levels in this Company.

Moving onto slide 10, which is obviously a bit more challenging business these days, that's Compass. Oil prices, gas prices, NGL prices have all come under quite a bit of pressure in the last few months. That has had an impact on our performance here, and the good news is we did simplify the governance.

We do own the business 100%, which will enable us to drive the strategic direction as well as key decisions in this Company. Tom will touch later on.

We obviously have an impairment this quarter. It's a non-cash GAAP impairment that's reflective of where pricing is. So he will cover that in detail with you.

But one of the things I mentioned earlier that's important to remind you all and not to lose sight of. Is on the things that our management team does control, they have delivered pretty good results. And that's things like production levels, our operating efficiencies, the cost improvements, making sure our recompletion programs are yielding very attractive returns, as well as optimizing our CapEx.

So I think we've done very well in terms of managing all these key areas. To give you a sense, production levels for this past quarter about 124,000 barrels of oil. About 153,000 barrels of NGLs, and about 6.1 billion cubic feet of natural gas.

The environment obviously is challenging in energy. We are spending a lot of time looking at opportunities that we think would make sense for us. We are looking at frankly the dislocation in the marketplace as a way for us to increase our footprint at attractive value and attractive prices.

Personally I think it's still a little bit too early, and the uncertainty is a bit too high in terms of where the commodity prices are going. But we're doing a lot of work. And we believe if these levels are sustained for a period of time, we are going to be very well-positioned to be an attractive acquirer and to be increasing again our footprint at very, very good levels here.

Lastly, in terms of our smallest segment, this is your slide 11, asset management. Just a couple of very quick highlights here.

One is, CorAmerica, our real estate lending business, is up and running and executing on transactions. And we're very pleased with some of the initial transactions that they've done.

Same with Energy and Infrastructure Capital, which is our energy and infrastructure lending business. And obviously given the comments I made about Compass and the state of the energy market, we actually think this is a business that could be very attractive in this upcoming year given the dislocation in the energy markets.

Lastly, our largest piece in asset management, Salus, continues to perform. More than $800 million in loans out there that they've executed on in the last couple of years. The biggest exposure is RadioShack.

And as many of you have seen, RadioShack filed for bankruptcy yesterday. Our team continues to be on top of the situation, and working closely and constructively with RadioShack. And our team at Salus continues to feel that we are well covered. So with that, let me turn it over to Tom Williams to cover through the financial highlights of the quarter. Tom?

Thanks, Omar. And I want to begin by walking you through the highlights of Harbinger Group's consolidated results for the first quarter. Then I'll share our latest sum of the parts calculation, which we believe provides a useful measure of our performance in creating shareholder value. And then finally, we'll open up the call for questions.

So with that, let's begin by taking a look at revenue. So on page 13, you'll see that we reported $1.44 billion in consolidated revenues this quarter. The reported results declined 4.7% from 2014, due primarily to two factors.

First, $37 million in unfavorable impacts from foreign currency exchange rates in consumer products. And then second, approximately $90 million in lower investment gains in insurance. When you exclude these two items, revenue on a currency neutral basis increased 4.1% over the first quarter of 2014.

Taking a closer look at the key drivers to revenue. Consumer products remains fundamentally strong, with growth in key categories this quarter such as home and garden products and appliances. And in insurance, the lower net investment gains were driven by the performance of the underlying market indices, of which coal options and future contracts are based.

So excluding the net investment gains in both periods, insurance revenues increased more than 12% as FGL continues to see very strong demand for its core products. And as an illustration of this point, FGL reported more than $900 million in annuity sales this quarter, which should also provide us with an indication of the strong pipeline for future growth.

Over in energy, we reported modestly lower revenues reflective of the natural production declines, as well as recent declines in oil and natural gas prices. Both of these headwinds were somewhat offset by the impact of fully consolidating Compass as of November 1. The acquisition increased our 75% economic stake to 100%, and allows us to capture 100% of the revenues for two-thirds of this quarter and obviously 100% as we move forward.

Moving to page 14, the acquisition at Compass had some additional impacts to our results this quarter. Which I'll now briefly describe, along with some other significant items that affected their results this quarter.

With the consolidation of the full interest in Compass, US GAAP requires us to remeasure our basis in the energy segment to reflect this transaction. And using customary valuation methods such as precedent transactions, market comps, an estimated future cash flows, we recorded a $141 million gain to our other income this quarter.

Subsequently at the close of the quarter, and pursuant to our SEC reporting requirements, we performed a ceiling test under the full cost method of accounting. In part, because of recent declines in energy pricing. This test determined that the carrying value for Compass exceeded what was permissible under the ceiling test, and we recorded a $190 million non-cash impairment to our oil and gas properties in our energy segment.

As a reminder, this test uses simple average spot prices for the trailing 12 month period to value the proven reserves. And even though this process is usually not indicative of actual market values or forward strip prices. This impairment does not change our perspective about the long-term value inherent at Compass, or diminish our long-term enthusiasm for our energy segment.

Separately, certain factors triggered an interim impairment test for our Frederick's of Hollywood assets at the close of the quarter. As that business is in the process of executing a turnaround plan for its operations. The result of this test was a non-cash impairment of about $60 million in the Corporate and Other segments this quarter to reduce the carrying value of the goodwill and intangible assets for Frederick's.

Turning now to our profitability, HGR reported a consolidated operating loss of $183 million. If we were to take away the impact of the two non-cash impairments I just described, operating income would be $67 million this quarter compared to operating income of $179 million for the first quarter of 2014.

The decline relates primarily to an increase in FGL's reserves in light of the recent interest rate environment. And looking at the preferred measures of profitability for each of our segments, adjusted EBITDA and consumer products declined very slightly. But this was due to the impact of unfavorable foreign exchange that also affected this segment's revenues.

Excluding this impact, currency neutral adjusted EBITDA in consumer products increased 4.5% or the 17th consecutive quarter of year-over-year growth. Reflecting strong cost controls.

And with respect to FX, Spectrum is a global business operating in 160 countries. So there will always be a certain amount of risk or opportunity against the currency in consumer products as currency moves.

However, we've seen a number of actions by Spectrum as they try to take actions to mitigate the negative effects of currency. Such as its recent issuance of euro-denominated debt, which better matches local expenses to local revenues providing a natural hedge.

Adjusted EBITDA in Energy declined approximately $5 million, due primarily to the impact of lower commodity prices. As well as the incurrence of certain costs, as Compass transitions to a standalone company outside of its legacy JV.

Insurance adjusted operating income decreased $3.6 million, due to the increased insurance reserves. But the underlying trends remaine very healthy, and the FGL teams continue to expand their annuity books very efficiently. And finally, the operating loss at asset management lessened this quarter considerably, as the increased revenues more than offset our cost to expand the segment.

Moving on to page 16, turning now to our capital structure. We received $22 million in dividends from our subsidiaries this quarter, $3 million from FGL, $9 million from Spectrum, $10 million from Compass. And looking ahead, due to the recent instability in oil and gas pricing, we anticipate Compass will use its available free cash flow from operations to reduce debt rather than provide HDI with additional dividends over the remainder of FY15.

And accordingly, we now expect we'll receive approximately $81 million in consolidated dividends this year. Which reflects our original assumption, less the $10 million of contribution per quarter from Compass, over each of the next three quarters.

So we ended the quarter with Corporate cash and investments of approximately $293 million at the Harbinger Group and HDI funding level. This was a decrease of approximately $224 million from our September 30 balance due to several factors.

First, the acquisition of EXCO's interest in Compass. Next, the ongoing investments in acquisition activities which included the repurchase of additional 1.5 million shares of HDI during the quarter, as well as the purchase of an additional 200,000 shares of Spectrum Brands' common stock. And then third, a one-time compensation payment that we made as part of the governance changes that we announced last November.

And we expect dividends, along with our cash on hand will exceed our expected cash requirements and satisfy our interest obligations and operating costs in FY15. We also remain very comfortable with our ability to access capital markets as needed to execute our strategic vision.

Next on page 17, I'll wrap up my discussion with a review of our latest sum of the parts analysis. We believe this calculation provides a measurement on how much shareholder value we are creating. And the largest contributors to our value are our holdings and our publicly traded Companies, Spectrum and Fidelity Guaranty Life, and are based on the 20-day VWAP for the period ended December 30.

Any other securities we hold, such as toe hold positions in assets, we find attractive and which may materialize into larger positions are reflected in HDI funding at market prices. And then, all other assets and liabilities including cash, cash equivalents, and corporate debt are measured at book value.

Taken together, our estimated value at the end of the quarter was $17.06 per share which is an all-time high. And relative to where we were a year ago, this reflects an increase of more than 25%, or $3.44 per share of additional value.

In addition, our common stock price increased nearly 8% in just the first quarter alone, and closing at $14.16, which was our highest ever quarterly close. And we believe both of these points validate the investments that we've made and the way that we're managing our business.

Turning to page 18, and to conclude with a longer-term view of our track record of creating value. As shown on this chart, whether you look at the sum of the parts value of our stock price or our stock price, we have achieved steady increases in measurements of stockholder value creation. And in fact, over the last several quarters, neither measure had a single period where we comped down sequentially.

Our sum of the parts value per share has increased more than 35% since mid-2013, and over the same period our stock price has increased more than 77%. We believe these data points simply demonstrate that our philosophy of buying and holding and building assets that can create book value and generate substantial free cash flow over the long term is working. And with that, we'd like to open the call to your questions. Operator can you please provide the instructions?

Lauren O'Neill from Credit Suisse.

Hello, good morning. I just had to questions.

First is on the commentary about Compass production, the potential attractive buyer opportunities you guys might be seeing. As you mentioned, it might be a little early. Just wondering if you were considering outside of the conventional oil and gas space, and maybe into an unconventional shale play, or whether or not you'd be up for expanding into different regions?

That's my first question. And then second, just curious what is the current restricted payments capacity as governed by the secured debt at Harbinger? And if it's different for the unsecured debt, just wondering if you had those amounts.

Thanks.

This is Omar. Let me take the first question. In terms of expanding our footprint from a regional standpoint, we are absolutely open to that.

We are looking at transactions based on the fundamentals of these transactions, and based on the quality of the asset, the free cash flow yield, et cetera, and the percentage of PDP. So we're open to expanding our footprint.

And obviously we are not interested in high CapEx needing businesses, and we're very, very focused on the free cash flow yield, which is a big part of our MLP strategy. So regionally, we're open to that

In terms of conventional versus horizontal. Our preference is conventional. However, again, the biggest focus is the high PDP component.

We are looking for producing plays, not acreage or growth plays. So if that comes from a smart acquisition that has a component that's horizontal, we would be open to that.

On your question on the RP capacity, I believe we have not disclosed that publicly. So that's something that we cannot comment on.

Okay.

There are no further questions at this time, and concludes today's conference call. You may now disconnect.