Spectrum Brands Holdings Inc (SPB) 2015 Q3 法說會逐字稿

Good afternoon. My name is Patsy and I will be your conference operator today. At this time, I would like to welcome everyone to the HRG Group third-quarter earnings conference call. (Operator Instructions). Thank you and I would now like to turn the call over to Mr. James Hart. Mr. Hart, you may begin the conference.

Thank you, Pat, and good afternoon, everyone. Welcome to our quarterly conference call. With me today are Omar Asali, President and CEO of HRG Group, and Tom Williams, the 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 HRGGroup.com. As a reminder, this call cannot be taped or otherwise duplicated without the Company's prior consent.

Before we begin, I would like to 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, its transactions, and other nonhistorical 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, estimate, 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 forward-looking 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 HRG with the Securities and Exchange Commission.

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 that we just issued this evening.

With that, we will begin the call by turning over to Omar.

Thank you, James. Good afternoon, everyone, and thank you for joining us today. I'm going to start at your slide five.

Our consolidated results overall this quarter were very solid. Spectrum Brands continued to do very well and is performing according to plan. Fidelity & Guaranty core business also continues to perform very well for us. We have been working to stabilize the Salus business and have done so, and we continue to focus on our performance in Compass, our MLP, which obviously is affected by the challenging commodity marketplace.

Peeling back a bit further, this past quarter we saw good organic growth in Spectrum and FGL. And at Spectrum, our results were complemented by the successful integration of our recently announced acquisitions. We've taken actions this quarter to improve our position for long-term success and further value creation. Some of these actions are, one, we increased our investment in Spectrum Brands; two, we advanced the process that's underway in FGL and that is ongoing; and, three, we corrected the strategic course at Salus.

In determining the path that we are on and as we continue to move forward, we remain very focused on where we allocate our capital and where we are being efficient there to maximize value on continuing to deliver growth in our key businesses and building and increasing our net asset value.

Moving on to your slide six, just to highlight some of the key things in our different segments, starting with consumer products, the $1.4 billion Armored AutoGroup acquisition closed this past quarter. This transaction adds a growing new vertical to Spectrum while diversifying its revenue and cash flow. We expect this to be an accretive transaction in its first full year and we believe this has been a very attractive deal for Spectrum Brands.

Obviously in our consumer segment, we faced foreign-exchange headwind and the management team at SPB has responded very well to managing that challenge. Currency-consistent revenue grew on an organic basis by roughly 3.7% and we continue to expect a record fiscal year from SPB this year.

In insurance, as I mentioned, the strategic review process is underway and continues at FGL. The process has proceeded as we expected so far and we're pleased with where we are. In the meantime, FGL continues to deliver on its core strategy by increasing the annuity sales book and managing the investment portfolio very well.

In energy, obviously commodity pricing have been a challenge and that continues to persist in the marketplace, as I'm sure you are all seeing. In response to the commodity challenge, we are managing the operations at Compass very tightly and conservatively. To that end, during this past quarter we sold about 5,000 acres of non-core assets and we realized about $19 million in proceeds. We continue to focus on seeking a pathway forward to protect and preserve the value in Compass while we are managing our liquidity and leverage.

In asset management, we have simplified our strategy. One, in terms of Salus, we continue to manage the portfolio of loans there and have stopped initiating new loans. Salus also is working on reducing its leverage in the CLO, and we continue in asset management to build our platforms in energy and real estate and are primarily doing that through raising third-party capital.

Finally, at the HRG level, our access to capital markets continues to be very robust. We completed several tack-on bond offerings this past quarter. The proceeds from these offerings predominantly went to our increased investment in SPB. And during this past quarter, we continued to focus on maintaining discipline with our G&A expense at the corporate level, which is down roughly 40%.

Focusing a bit on Spectrum Brands, starting on slide seven, we're very pleased, obviously, to enter the highly profitable auto care category through the Armored AutoGroup transaction. The integration of this business is off to a fast and smooth start, which is one of the strengths of our SPB team and platform. This transaction, as I mentioned, is an accretive transaction and we see quite a bit of opportunities to grow the business both through cross-selling, as well as through geographic expansion.

Spectrum continues to do very well managing its existing portfolio of products and pruning in certain areas where it is appropriate. On the expansion side, the integration of IAMS and Eukanuba in the pet area, as well as Salix, the leading provider of rawhide chews, has been completed in record time, and both businesses are performing at or ahead of expectations.

The team at SPB has also been successful in introducing innovative new products. Some of the new launches we've had in appliances, as well as in personal care, like the 5 Minute Pizza Oven, as well as the George Foreman Evolve grill system, continue to get good traction in the marketplace.

Obviously, we have seen some areas at SPB where we were pruning, so SPB exited several unprofitable geographies, some in the hardware and home improvement area, as well as in pet.

All of this is being done under the strategy of, obviously, managing our portfolio of products and following our more, more, and more philosophy, which means more countries, more channels, and more categories for the SPB products.

On your page 8, just to give you some financial highlights for the quarter, the quarter, I thought, was very, very strong and we were very pleased with the results that SPB put up. Revenue on a currency-neutral basis was up about 16%. Excluding the benefit from M&A in pet, HHI, and auto care, revenue increased about 3.7%, with topline growth in all product categories, with the exception of batteries.

EBITDA margins were 18.9% this quarter, which is an excellent result for us. It's roughly 100 basis points up from last year, and I believe this is one of the best achievements this quarter for SPB and the management team as we continue to build our EBITDA margins and continue to perform.

Some of the areas that are noteworthy, in home and garden we had a record quarter. Adjusted EBITDA grew by 21% and revenues grew by about 16% to more than $200 million. We did well in HHI and also in appliances.

Some of the challenges at SPB were in the US battery channel, where we continued to see pressure from aggressive competitor promotions. But overall and despite some of these pressures, Spectrum focused on continuous cost-improvement yielded results as gross profit margins were a healthy 36.7%.

In summary, from a financial standpoint SPB is on track and continues to expect a record fiscal year in 2015.

On your slide nine, in insurance, the key fundamentals in this segment continue to be very solid. Our assets under management are up to $17.9 billion. FGL has been managing the portfolio very well, with roughly $1.7 million of new assets purchased this quarter at a yield of 4.76%. Overall for our book, the earned yield was 4.73%, which is about 11 basis points up from the third quarter of last year.

We have achieved these results while maintaining our NAIC rating of 1.5 times, which is within our risk thresholds and is consistent with the peer group in this space.

Our sales in core fixed indexed annuity products continues to resonate very well in the market. They were up roughly 34% from the third quarter of last year. And importantly, the sales of new products that we launched in this past year, which talks to our new product innovation, were roughly more than 50% of that growth.

FGL also had a good quarter in its indexed universal life business, which is a very small piece of our business mix. Nonetheless, it grew at 67% and is one of the highest levels of quarterly sales that FGL has had in several years.

Given the rate environment, management de-emphasized the MYGA program and that was something that impacted the topline. But, again, it was very prudent from a returns standpoint and a risk management standpoint. The GAAP book value per share, excluding AOCI and FGL, increased about 8% over this past year to $23.55 a share.

In the insurance segment, just moving for a sec to Front Street Re, which is our reinsurance business, we booked a $16 million loss this past quarter, and that was primarily driven by the Frederick's of Hollywood filing for bankruptcy and 363 sales transaction.

Real quickly in the energy, which is your slide 10, our performance here obviously continues to be challenged by the commodity markets. The average price for oil is down about 45% from the third quarter of last year. The NGL's pricing is down about 57% from third quarter a year ago.

So in response to this, our team has been very focused on operating efficiency at Compass and implementing cost improvements across the organization. This past quarter, our average daily production was roughly 87 million cubic feet equivalent, which was in line with our trend and what we were expecting for this quarter. We produced about 116,000 barrels of oil this past quarter, about 151,000 barrels of NGL, and about 6.3 billion cubic feet of natural gas.

So on the production side and through our recompletion program, the team has delivered good results, same in terms of the operating efficiencies. Obviously, the commodity price has been the challenge. But despite that challenge, the business remains profitable on an adjusted EBITDA basis.

Wrapping up our segments on your slide 11, in terms of asset management our numbers for this quarter were down and that was largely driven by the reduction in loans outstanding at Salus, which is a strategic decision that we're making to stop originating loans in that business, and that lowered the amount of interest revenues.

As we've discussed in the prior quarter, we tightened the strategic focus at Salus. We are very focused with the team there on maximizing the recovery of the loan portfolio. And in our review of that portfolio this past quarter, we determined that we were not comfortable with the collateral on a couple of small loans and that triggered roughly a $9.6 million impairment this past quarter.

To be clear, these loans that we impaired are not in default and we will continue to, obviously, pursue recovery. But we did that impairment just based on our review of collateral value.

Finally, in asset management our energy and infrastructure business, our real estate business, both are performing well and according to plan. And both are spending more money with third-party capital providers to try and build their platforms and expand their footprint.

Lastly for me, on slide 12, let me just spend literally a few seconds here discussing the path forward for HRG. Over the near term, you should expect for the process that is underway at FGL to be an important priority and focus for us, and that will continue.

With the existing NOL positions that we enjoy at HRG, we believe there is an opportunity to realize substantial value with the asset and to do so in a tax-efficient manner. We obviously will continue to support the growth initiatives at SPB and will continue to focus on managing the liquidity and leverage at Compass. Over the medium to longer term, our focus is to delever HRG. And obviously if the right opportunities do arise, we will consider new investments that would fit our strategy.

In all of these actions, our investors and shareholders should expect that our guiding principle is going to be maximizing shareholder value.

With that, before I turn it over to Tom Williams, our CFO, who is going to discuss the financial highlights for this past quarter, let me update you real quickly on an upcoming personnel change. Tom recently informed me that he has decided to retire from HRG at the end of this calendar year. Tom has been a key member for our team for the past few years. He has been a very good partner and has helped us build this Company and has provided strong leadership as we have grown the business. We're very supportive of Tom in making his choice and we wish him, obviously, well for the future.

To ensure a smooth transition in his role, Tom will be with us until January 1, 2016, when we expect to have appropriate replacement before then and where we can have a seamless and smooth transition in his role. Obviously as we work on that transition and as we have a new replacement, we will keep you informed.

So with that, I would like to thank Tom for his contributions, and let me turn it over to him to cover the quarter.

Thanks, Omar. And let first start by saying that my decision to retire from HRG comes after I've spent the past 35 years working mostly in senior roles and I believe it's the right time for me to take a break. And I came to this decision after much thought and consideration.

I will be here until January 1, 2016, and will be fully engaged with the business throughout this time period, and I will fully support Omar and the rest of the team as needed.

With that said, let me begin my remarks with a quick review of HRG's topline performance this quarter. As you'll see on page 14, we reported $1.55 billion of consolidated revenues in the third quarter. And on a reported basis, this is a slight decline from the third quarter of 2014.

However, if we adjust for the $63.6 million of unfavorable FX this quarter, revenues increased 1.1%. If we further adjust out the impacts of net investment gains from insurance, which typically reflect opportunistic moves in the portfolio in response to market conditions, revenues increased 13.9% as compared to 2014.

Taking a closer look at the key drivers to this result, in consumer products, reported revenue growth of 10.5% reflects growth in all product categories, except batteries, which were again affected by promotional activity from a competitor.

Spectrum's results this quarter benefited from the Armored AutoGroup acquisition, which, taken together with the previous M&A in pet and hardware that closed during the first half of this year, added $141 million of revenue to the topline. If we exclude M&A, organic revenue at Spectrum grew 3.7% on a currency-consistent basis this quarter, a very solid result.

In energy, revenues continue to be pressured by the severe declines in oil and natural gas prices. As Omar described, we took action during the quarter to lessen our exposure to this segment by selling off certain non-core properties and we will continue to do whatever it is in our shareholders' best interests moving forward. In the meantime, we are hyperfocused on managing operational cost at Compass and being as efficient as possible.

Turning to insurance, FGL continues to see excellent demand for its products and core fixed annuity sales grew 34% to $507 million. Reported revenues declined due to strong net investment gains in the year-ago period, resulting from moves made in the portfolio. Excluding net investment gains and losses for both periods, segment revenue increased more than 14% this quarter.

Finally, in asset management, revenue declined $4 million, due primarily to a loss of interest income at Salus. As discussed last quarter, Salus had shifted its strategic focus away from new loan origination to managing the existing loans in the portfolio and maximizing capital recovery.

Turning to page 15, now to some of the special items affecting our results this quarter. With the continued unfavorable trend in commodity pricing this quarter, we performed a ceiling test in compliance with the SEC reporting requirements under the full cost method of accounting. The test revealed that the carrying value for Compass's oil and gas properties exceeded what was permissible. We've seen this previously over the past year and it has affected other oil and gas operators as well.

As a reminder, this test uses simple average spot prices for the LPM period to value proven reserves. This is usually not indicative of forward strip prices and may not adequately reflect what the asset is worth on the open market. However, as a result of the test, we recorded a non-cash impairment of $102.8 million to our oil and gas properties in energy this quarter.

Next, as disclosed last quarter, Frederick's of Hollywood declared bankruptcy and its results have now been deconsolidated from our corporate and other segment. There were two items of note relating to Frederick's this quarter. One, we recorded a $38.5 million gain to reflect the elimination of Frederick's cumulative historical losses from the balance sheet, and two, based on the results on the sale of Frederick's assets, we determined that $16.3 million of loans that were previously made by HRG and its subsidiaries to Frederick's were unrecoverable and written off as a result.

And finally, a follow-up from last quarter regarding the loan to RadioShack. With the bankruptcy and liquidation process well underway, we determined that no additional impairments were needed to the RadioShack loan. However, we still remain committed to maximizing the recovery of this capital that is owed to us. Accordingly, Salus has taken steps this quarter to preserve all of our legal rights and we are pursuing the appropriate legal remedies. We will keep you informed of our progress as it is warranted.

Separate from RadioShack, as part of our review of Salus' loan portfolio, we determined that the collateral for three specific loans were underperforming. And as a result, we booked a $9.6 million impairment this quarter to Salus' results.

Turning now to profitability, we reported consolidated operating income of $74.5 million at HRG. If we excluded the non-cash impairments I just described, our operating income of $187 million this quarter compares to $229 million from the third quarter of 2014. The $42 million year-over-year decline relates primarily to the favorability and net investment gains in the year-ago period in insurance, as well as reduced profitability in energy.

Looking at the preferred measures of profitability for each of our segments, despite ongoing headwinds from FX, adjusted EBITDA in consumer products grew a robust 17% rate on a reported basis, with increased contributions from nearly all lines of business. And adjusted EBITDA in energy declined $9 million this quarter, due primarily to the impact of the lower commodity prices, though our efficiency efforts have helped to mitigate the impact and the subsidiary has remained profitable.

Our insurance segment's adjusted operating income decreased, primarily due to the less favorable contributions from investment gains as compared to 2014. And finally, the small operating loss at asset management was due primarily to the impact of the lower topline, as well as certain legal and consulting costs incurred by Salus as it reorients its business.

Turning now to our capitalization, we have received more than $51 million of dividends from our subsidiaries so far this fiscal year, nearly $30 million from Spectrum, $9 million from FGL, $10 million from Compass, and $2.3 million from our asset management businesses. And we expect we will receive approximately $67 million in consolidated dividends this year.

This quarter, we continued to benefit from the excellent relationships that we have with capital markets to help execute our strategic vision. In a series of transactions in April and May, we successfully raised $400 million through tack-ons to our existing 7-7/8% senior secureds and our 7-3/4% senior notes. The offerings were all well oversubscribed and priced attractively.

A majority of these proceeds raised were used for our participation in the equity offering Spectrum held this quarter to refinance -- to finance its acquisition of Armored AutoGroup. The remainder was held on the balance sheet for general corporate purposes.

We also had a positive outcome to our pursuit of a purchase-price adjustment from Old Mutual with respect to our acquisition of FGL. During the quarter, we received more than $61 million, reflecting the $50 million we originally pursued, plus interest and our attorney fees, net of the settlements of a counterclaim. We recorded a $3 million gain this quarter, reflecting the difference between the original $50 million pursued and the $47 million of accrued receivables that we carried on our balance sheet as of March 31.

With these positive cash flows, we ended the quarter with corporate cash and investments of approximately $394 million at HRG and HGI Funding. As a result, we believe our liquidity is strong and adequate to meet our business needs and, as we discussed last quarter, we have an intermediate- to long-term goal to delever our Company, where we are targeting to have a more balanced cash interest expense to dividends received ratio.

Before we open up the call to your questions, I want to take you through our latest sum-of-the-parts valuation. Though we believe this provides a measurement of shareholder value that we've created, it differs from a NAV type calculation in that only our publicly traded holdings in Spectrum and FGL and HGI Funding are shown at market price. All other assets and liabilities are measured at book value, which may not be indicative of market value.

Taken together, our estimated value as of June 30 was $15.33 per share. This is a 6.7% increase from where we were last quarter, with a 7.6% increase in the blended value of our consumer products and insurance segments, offset by the impact of our recent impairments in energy and asset management.

With respect to energy, the negative $0.51 of book value for this segment includes $100 million of intercompany debt that is held at the HGI energy level and not at the Compass operating company level. And without this intercompany amount of debt, Compass is essentially book value neutral.

Our debt and liability values increased from last quarter, due primarily to $400 million of tack-on offerings that were completed this quarter. And our stock price also increased more than 4% during the quarter, outperforming the NASDAQ, Dow Jones, and Russell indexes for the three-month period ended June 30.

Relative to this time last year, our sum-of-the-parts value is up modestly and the recent stock performance of SPB and FGL has also been accretive. Spectrum has had a strong start to the fourth quarter, and with the record results expected this fiscal year, we believe this strength should continue. As Omar described, the FGL strategic review process is continuing and we expect the underlying health in FGL's business should continue to provide positive contributions to shareholder value.

And with that, we would like to open up the call for your questions. Operator, can you please provide the instructions?

(Operator Instructions). Lauren Gallagher.

This is Lauren Gallagher from Credit Suisse. Three questions, the first being the revision downwards in the dividend for fiscal 2015. Can you talk about what, maybe, the $10 million difference is?

Yes. Certainly as we re-evaluated our trajectory in asset management, we lowered our dividend expectations in the next quarter. So that was the primary difference since our last liquidity update.

Okay, great. And then, have you thought to or -- any kind of guidance around fiscal 2016 dividends yet? Or not yet?

No. As we formulate our plans for 2016 and on, we will update investors accordingly.

Okay, great. Second, on the energy business, I'm sorry; could you repeat what the acreage was that you sold?

We sold about 5,000 acres in northern Louisiana that were really non-core for us and we got proceeds of roughly $19 million.

And have you disclosed what you used the proceeds for or was it just cash to the balance sheet?

It's just cash on the balance sheet at our MLP.

And then I guess finally, and this is more a theoretical question in terms of new verticals that you could potentially explore with either sales from a strategic review of FGL or going forward. I was just wondering if you could highlight a little bit about potential interests.

Yes, I will just tell you philosophically -- and obviously, this is a bit premature because, as you see, we have a lot of strategic things going on. And as we advance this, that will put us in a position to, A, delever in 2016, which is an important priority, and then possibly explore new areas.

What I will tell you is we are focused on the same things that you've seen from us at least in the key core areas. So we don't want to chase small opportunities. We want to chase stable businesses, predictable EBITDA businesses, businesses with good free cash flow conversion, trying to stay away from cyclicals. So you are not going to see us exploring things in the energy space, although there continues to be a lot of dislocation in that vertical. But I think there's a disconnect between the dislocation in the space and the M&A valuations; at least at this point there is that disconnect. We'll see how it evolves over the next couple of quarters.

But I think we are more looking at characteristics that are going to help our dividend stream, help the free cash flow, and address the point that you raised, which is making sure the holding company is defeased if we deploy capital in a new vertical.

Okay, great. Thank you very much.

Majid Khan, Toiurbillon Capital.

A couple of basic ones. Let me know if I am incorrect, but you raised about $400 million in debt during the quarter and the debt per share seems to have increased $450 million. What's the difference between the two?

Yes. No, I am not following the math in that regard. Clearly, our additions to debt in the quarter, in April and May, were $400 million, $240 million in secured, $160 million in unsecured.

And then, so on the NAV calculation, I think debt per share -- debt and other liabilities went to$9.13 from $6.89.

Right.

So that's $2.24.

And 24 cents.

That's $450 million implied.

Yes. Clearly, that stack is not only debt, but it's also liabilities. So we have accrued interest obligations. We have accrued compensation benefits that are not entered into the results or delivered. So you may have seen some modest increase in our liabilities, but we are managing this very efficiently.

So our debt stands at $1.754 billion, split between $864 million senior secured and $[8] million (inaudible) unsecured. And the balance would be liabilities.

Got it. And then, I think you touched on it on the call. I apologize for making you repeat it. But could you remind us what the recourse to Compass is for the Company, for the whole total?

Yes. If you are asking about the guarantee, it's approximately $80 million --

Right.

-- that was provided to the banks back in the spring redetermination. And obviously, we're going to be having a new redetermination in the fall.

Right. Redetermination happened in October, in the October timeframe.

Yes, October, November.

And given that you have marked it at negative $100 million, if you gave it away tomorrow, that NAV would go up?

Right. I guess if we hand over the keys, that NAV would go up, yes.

Certainly, the NAV in that regard is book value and it's not reflective of fair market value or the underlying value of the assets.

Got it. (multiple speakers). Or your economic exposure to the liabilities at Compass?

Right.

Fair enough. And what is that for Salas and inside HGI Asset Management?

We are not disclosing the particular parts of asset management. We are reporting it in its entirety and you see it reflected in the sum of parts here.

Okay. But --

But if your question is, what are the potential liabilities there --

Yes, to the HoldCo.

There are none. There are none to asset management.

I thought you were asking for the breakdown of the sum of the parts of the components inside of asset management.

No, I think Omar got it. Thank you.

That's correct.

Lastly, how is the FGL process going?

As you can imagine, we can't comment on the process at this point, other than what we said in our prepared remarks, which the process continues and we are pleased with where we are. And when we have something to report, we will certainly come back to you and our shareholders.

All right. Thank you, guys. I appreciate you taking my call.

Thank you and I would now like to turn the call back over to James Hart for closing remarks.

Thanks, everybody, for joining us today. That concludes the call today. Thanks much for your participation and we will talk to you soon, in a few months' time.

Thank you. This concludes today's conference call. You may now disconnect.