Spectrum Brands Holdings Inc (SPB) 2015 Q4 法說會逐字稿

Good morning ladies and gentlemen. My name is Sally and I will be your conference operator today. At this time I would like to welcome everyone to the HRG Group's fourth-quarter earnings conference call.

(Operator Instructions)

I will now turn the meeting over to Mr. James Hart, Senior Vice President of Communications. Please go ahead, sir.

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

During today's call a presentation will accompany our remarks. This presentation may be accessed through the website that is available from the investor relations section, I'm sorry, the webcast which is available through 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 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, 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 our 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 we issued this morning.

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

Thank you James. Good morning everyone and thank you for joining us. We'll begin on your slide 5 with the state of the business highlighting significant developments across each of our segments starting with Consumer Products.

We enjoyed record results at Spectrum Brands this past year. The integration of our acquisition in automotive care is very much on track and we remain very enthusiastic about our prospects for growth in this category.

FX and currency continues to be a real headwind for Spectrum but the team has responded very well for this challenge. And on a currency consistent basis revenue grew organically by 2.1% this past year.

In Insurance we are very pleased that SGL reached an agreement with Anbang and we've agreed to sell our 47 million share position in that transaction. The deal with Anbang reflects a 29% premium to FGL's unaffected stock price.

Once the deal closes HRG will have earned a very substantial rate of return on our original $300 million investment in FGL. And operationally FGL continues to execute its core strategy very well, increasing its annuity sales book and managing its investment portfolio for very attractive risk-adjusted returns.

Moving over to Energy we all know obviously what's happening in the commodity pricing environment and the challenges there. Oil and natural gas prices are off approximately 50% from this time last year.

At Compass we have taken to key actions. One, is managing the operations and our costs very tightly and very conservatively and then two, working to derisk this segment through the sale of some assets.

So as you all probably know by now after the quarter closed we reached an agreement to sell 90,000 acres for $160 million in cash. The proceedings from these sales will substantially delever the segment by reducing the outstanding term loan at Compass.

After the deal closes we'll still have assets accounting for the majority of our 2015 production, so there will be further opportunities for monetization and deleveraging. As a team we remain very focused on following the best path forward to protect and preserve value and to manage Compass' liquidity and leverage.

In Asset Management we're continuing to wind down the loan portfolio at Salus. And our priority is to maximize the recovery of the capital in this segment and to minimize our G&A expenses.

Finally, at the HRG level delevering our balance sheet remains a high priority. We will be working to build a plant to use the proceeds from FGL transaction to delever our balance sheet, though it's premature at this point to announce anything specific as we await the closing of that transaction.

Moving on to your slide 6 to discuss the details on Spectrum's performance this was SPB's sixth consecutive year of record financial results. We had our highest ever revenue and cash flow with double-digit growth in adjusted EBITDA to a little over $800 million.

This was also a very strong year for our European business, despite the impact of unfavorable FX which provided a headwind throughout most of the year. We also had a very strong fourth quarter with revenue up 11% on a reported basis and about 17% without the impact of FX. Adjusted EBITDA increased nearly 23% to $229 million and that was largely driven by the Hardware & Home Improvement business and very strong increases in home and garden.

Importantly adjusted EBITDA margin at SPB was up 160 basis points to 17.5%. Obviously there were challenges this past year and this past quarter; in particular, in the US the battery sales where we experienced some pressure from lower distribution space and the timing for some holiday shipments which was obviously fixed in the month of October.

Spectrum's focus on continuous improvement savings and new product introductions is helping both expand the margins and drive more dollars to the bottom line. So we're pleased to report that our overall gross profit margins increased about 80 basis points from last year to a very healthy 35.7%.

On the M&A front at SPB, the integration of the deals done this past year in pet, home and hardware, and in automotive care are all on track and in some cases ahead of schedule. Of course, while M&A will always be a part of SPB's growth plan the focus for this upcoming year is on integrating some of these new acquired assets and on focusing on sales growth, organic sales growth and margin expansion.

Spectrum continues to manage its existing portfolio very well, accelerating the pace of new product introductions and eliminating areas where the competitive dynamics aren't attractive. So we've seen some of that in the unprofitable businesses and geographies in hardware and home improvement as well as in pet.

Also Spectrum has deployed its more, more and more philosophy that you've heard the management team down there discuss. And this entails entering more countries, serving more channels and launching more categories with our existing retail partners.

So overall very pleased with the very strong quarter and frankly a very strong year at Spectrum Brands. We continue to be excited about the prospects of the business in 2016 and expect to deliver a seventh consecutive year of record financial performance.

Moving to slide 7 to discuss the Insurance segment, FGL continues to perform and has had a very nice quarter and frankly is very well-positioned for its new owner. Average assets under management increased by 8% to more than $18 billion. The FGL team continues to manage their portfolio very well with $1.1 billion of new assets purchased this past quarter at an average yield of about 5.13%.

It was also another quarter of strong overall returns as FGL's earned yield across the entire portfolio was 4.92% and this is up 14 basis points from a year ago. Our annuities products continue to resonate very well in the marketplace and with our distribution channel with additional $433 million of sales in this past quarter.

Adding that to our previous successes earlier this year we recorded $2.5 billion in sales in 2015 which is an outstanding growth from the prior year. Core fixed indexed annuities were up more than 50% from 2014.

Taking all these results together FGL's GAAP book value per share excluding AOCI increased 7%. So now our GAAP book value is about $24.02.

And with the outcome of the FGL's strategic review now known our team is focused on Front Street Re which is our reinsurance business. And we will be reviewing the different alternatives for that business to maximize and optimize value going forward for our shareholders.

Moving on to your slide 8 for our Energy segment, obviously there's no surprise here in terms of the pressure with the commodity prices. Average price for oil is down 44% from 2014 and the NGL pricing is down a little more than 50% from a year ago. Accordingly we've taken steps to delever Compass.

The term loan balance has been reduced by $20 million through the previous disposition of some non-core assets. And following the close of the quarter we reached agreement to sell assets comprising roughly 40% of our daily production. These two actions will allow us to reduce the term loan by more than 50% once our transaction closes.

We think these are all steps that are in the right direction given the challenging environment in oil and gas. But in the meantime we will continue to manage our business hyper efficiently. By focusing on creating and maintaining operational efficiencies we're pleased that the business has remained profitable on an adjusted EBITDA basis despite a very, very challenging tape in commodities.

Just to give you a sense of our production levels we maintained our quarterly production levels and we been actually very, very disciplined on the cost side. Our daily production this past quarter was in line with our expectations of 86 million cubic feet equivalent per day. And then our quarterly production was 113,000 barrels of oil, 151,000 barrels of NGL and about 6.1 billion cubic feet of natural gas.

So we've managed to maintain our production levels and have a very shallow decline in these properties despite a very challenging environment. The team again looking ahead will remain focused on protecting and building value at HRG by ensuring that we're managing the leverage and the liquidity profile at Compass.

Wrapping up on slide 9 with our smallest segment which is Asset Management we continue to unwind Salus loan portfolio and reduce the G&A in that business. We've made excellent progress so far and we have collected about 50% of the value of the loans outstanding this past year.

And as a result of collecting these loans and some write-downs our updating results in the segment are down given the smaller book that we manage and the smaller interest income. We will continue to follow this course and we will continue to make the proper ongoing reductions in our infrastructure and G&A costs to make sure that they are in line with the projected business volumes going forward.

In our other lending platforms in energy and infrastructure as well as in real estate the teams continue to perform very well there. And we're pleased with where we are in those businesses.

So hopefully this gets you some insight into the key drivers for this past quarter as well as our year. We're frankly very proud of the progress we made with the announcement of the FGL deal and the Compass transaction. And as a team we remain very focused on our top strategic priority which is closing these transactions.

With the NOL positioned at HRG we believe we will realize the proceeds from FGL in a tax efficient manner. And obviously as a team we will continue to make sure that we're allocating capital in a way that maximizes shareholder returns. And to that end we expect to use a meaningful portion of the FGL proceeds to reduce our HRG debt.

We will obviously keep you posted in the upcoming quarters. And we look forward to reporting our progress back to you.

With that let me conclude my remarks. And I will turn it over to Tom to cover the financial highlights.

Thanks, Omar. My remarks today will focus principally on our performance in the fourth quarter and it where it makes sense I will also discuss our results for fiscal year 2015. We will then allow some time at the end for your questions.

So let me begin with a quick review of HRG's top-line performance this quarter on slide 12. We reported $1.45 billion of consolidated revenues this quarter. On a reported basis this is a decline of about $60 million from the fourth-quarter 2014.

However, if we adjust for the nearly $74 million of unfavorable FX this quarter consolidated revenues increased nearly 1%. If we further adjust for the impact of net investment gains from Insurance which typically reflect actions taken in the portfolio to respond to market conditions HRG's consolidated revenues increased 13.5% in the quarter.

Taking a closer look at the key drivers to this result Consumer Products achieved a reported revenue increase of 11%, reflecting strong growth in several of Spectrum Brands largest product categories including Hardware & Home Improvement and pet supplies. If we adjust this result for the impact of the unfavorable FX Consumer Products top-line growth was more than 17%. These results benefited from the highly accretive acquisitions completed in the past year which added a combined $178 million of revenue.

But even if we exclude the impact from M&A organic revenue at Spectrum on a currency consistent basis grew 2.1% this quarter which is a very solid result. Our energy revenues continue to reflect the impact of the decline in oil and natural gas prices. And in this type of environment we look to weather the storm by managing operations as efficiently as possible to preserve the maximum profitability and cash flow of this business.

The transactions that were already announced will also help to derisk and delever the segment. You should expect that we will continue to look at ways to reduce risk and leverage in our Energy segment.

Turning to Insurance, FGL sold $2.5 billion in annuities this fiscal year demonstrating the attractiveness of FGL's products and their qualities as an insurance provider. Reported revenues in the segment declined, however, due to strong net investment gains in the year-ago period.

Excluding these net investment gains and losses from both periods, segment revenue increased more than 10% this quarter. Finally, in Asset Management revenue declined due primarily to the reduction in interest income in Salus as the balances of the loans outstanding continue to runoff.

Our results this quarter didn't include many unusual items but there were a couple of items worth bringing to your attention. First, for more than a year commodity pricing has obviously been very unfavorable in our Energy segment. Accordingly, it has been something of a regular occurrence for us to determine that the carrying value for Compass exceeds what is permissible.

As a reminder to value proven reserves the test uses simple average spot prices for the LTM period. This is usually not indicative of forward strip prices which by definition means it may not adequately reflect what the assets would be worth otherwise in the open market.

However, the results of this test determined that we should record a non-cash impairment of $45.7 million to our oil and gas properties in Energy this quarter. Over the course of the past fiscal year we have incurred more than $485 million in such non-cash impairments which has substantially reduced the carrying value of our assets in the Energy segment.

The second item is the agreement to sell FGL. The agreement with Anbang was reached in November well after September 30 closing date for the fourth quarter. In accordance with GAAP no changes are required yet to the presentation of our results for fiscal 2015 and our 10-K will be in the format that you've been accustomed to in the past.

Once the transaction closes which we expect to close in the second quarter of calendar year 2016 we expect to book a gain on the disposition of our ownership position on the income statement. As a reminder with our expected NOL position we expect to be able to accomplish the sale of the stake of our ownership in FGL on a tax efficient basis.

Turning now to the measures of profitability on slide 14, we reported consolidated operating income of $55 million at HRG this quarter. If we exclude the non-cash impairments in Energy I just described as well as the adjustments in Salus' loan portfolio allowance that Omar described earlier operating income of $117 million this quarter compares to $146 million from the fourth-quarter 2014.

The $29 million 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 the ongoing headwinds from FX adjusted EBITDA in Consumer Products grew a very robust 23% rate on a reported basis with increasing contributions from nearly all lines of business. Adjusted EBITDA in Energy declined $9 million this quarter due primarily to the impact of the lower commodity prices, though we have mitigated this impact somewhat through cost controls and the subsidiary continues to be profitable.

Our Insurance segment's adjusted operating income increased due to the significant increases in asset under management and the net investment spreads. Finally, this quarter we recorded a small operating loss in Asset Management which was due primarily to the impact of lower top line and cost to support our energy lending and commercial and residential real estate businesses.

Taking a look now at a snapshot of our full-year performance in fiscal 2015 on slide 15, overall revenue of $5.8 billion declined 2.5% from 2014 due primarily to the same factors that affected the recent quarter: unfavorable foreign exchange and the lower amount of net investment gains in Insurance. Excluding both of these items our revenues this year increased nearly 10.5%, representing more than $580 million of growth. And despite the impacts of FX over the past three years we have increased our revenues at a greater than 9% average annual growth rate.

Looking at the profitability by segment in 2015 most of our businesses performed as they did in the fourth quarter. Specifically this includes double-digit growth in Consumer Products and declines in Energy and Asset Management, all of which occurred for the same reasons I just discussed regarding the fourth-quarter trends. We ended the year with more than $330 million of corporate cash and investments at the HRG level which we believe provides us with sufficient flexibility to execute against our business plans.

Wrapping things up on slide 16 before we open up this call for your questions I'd like to walk you through our latest sum of the parts valuations. I will remind you that this is a blended presentation of both market value of our assets where such values are readily available and the book value for everything else.

Only our publicly traded holdings in Spectrum, FGL and HGI funding are shown at market prices. All other assets and liabilities are measured at book value which may not be indicative of their actual market value.

Taken together our estimated value as of September 30 was $14.07 per share. Relative to this same time last year the value of our combined holdings in Spectrum, FGL and HGI Funding had increased more than 13% or approximately $2.64 per share of increased value. However, our overall value did decrease by about 10.6% per share due primarily to the impact of the write-downs in Energy and Asset Management.

Combined these two segments accounted for about $1 of negative book value per share. However, we believe the fair market value for these assets continue to be positive.

With that this concludes today's prepared remarks and we'd like to open up the call for your questions. Operator, please provide the callers with your instructions.

(Operator Instructions) Lauren Gallagher, Credit Suisse.

Good morning. Apologies if I missed it but I was curious if you could provide a little bit of information on dividends for fiscal 2016?

Yes, you'll see in our 10-K that will be filed later today and we continue to see dividends coming in from Spectrum Brands and also for half a year convention from FGL. And those are approximately $51.3 million for 2016.

Okay. And then you said obviously the proceeds from FGL will be used to delever. I was wondering if you could elaborate on that a little bit?

Yes, it's premature to give you anything specific. The deal has not closed and as Tom mentioned hopefully we'll be closing the deal in the second quarter of the calendar year 2016.

And we will be making determinations in terms of the best use of proceeds. But fair to assume very substantial part of those proceeds will be used to delever the Company at HRG level.

Okay great. Thank you very much.

(Operator Instructions) Brett Levine, Anchorage Capital.

Hey guys, thanks a lot for your time. One follow-up on the FGL.

I'm not sure if you'll answer it or not. But have you guys disclosed or can you give any guidance on the after-tax proceeds or your tax basis or how big the NOL is at the holdco level?

We have not disclosed an exact number. But I think we've indicated in a number of conversations including this one that we expect the closing of the transaction to be very tax efficient at the HRG level but have not quantified the number if you will.

Do you report the size of your NOL?

We reported on annual basis on 12/31 of each year. That's our fiscal tax basis so you'll be seeing that in the quarter end. But you'll see there are substantial NOLs for this to be a tax efficient transaction.

Got it. And then the other question was can you give any insight into the cash cost at the holdco level? Like excluding any deal fees and stuff like that I know that in prior calls it's come up, just curious if you can give any clues there?

Yes, I mean certainly as we've reported each and every quarter we've made substantial improvement in reducing our overall G&A cost. And we said that pre-variable compensation that we would exit the year at a run rate of about $25 million. We're happy to report that we're at that level.

Got it. And then the very last question -- sorry, go ahead.

That's the number for 2015. We continue to make sure that we're trimming G&A. It's been a big area of focus and I expect the run rate going forward to even be below those levels.

Got it. And then the last question is can you just refresh on what obligations you guys have going forward to fund the Energy segment or guarantee anything -- any liabilities there?

So there's a modest guarantee that was in place before the announced transaction with Indigo to put forth about $80 million of cash and marketable securities that are at the HGI funding level. And with the successful completion of the Indigo transaction that number will go down substantially to about $30 million. And you'll see that detailed in our 10-K that will be released in the next few hours.

Great, thank you very much. That's it.

Majid Khan, Tourbillon Capital.

Hi guys. Good morning. Well, first of all I want to congratulate you guys.

It's been a very busy year. You guys have done a lot of things, nearly all of them very good. So congratulations on all the hard work.

Thank you Majid. We feel pretty good about where we are. And thanks for those comments.

Excellent. So just one very quick thing, so you guys bought Spectrum stock last I think in the secondary issuance at 92.5. And it seems like you're going to have some cash available.

I know Spectrum has a buyback authorization but they want to delever. I was wondering if you guys had an opportunity to deploy some more cash given that the stock price is not much higher than where you last invested?

I think that's a good question. I cannot give you an exact answer but I will tell you philosophically that part of the comment when I say we'll be smart in how we allocate the capital coming from FGL plus frankly the cash we already have on the balance sheet, the big focus is to delever our balance sheet.

However, we will be opportunistic and if there are opportunities like you outlined to deploy some capital buying SPB shares at attractive levels then I think assume that we as a management team and as a Board would be pretty interested in that. And we'll do so opportunistically.

Got it. I guess the 2019 notes that are callable in Jan. 2016, they are not -- when the FGL transaction closes even if you retire those between the cash on the balance sheet and the cash left over there's plenty of cash. And I'm sure you have other uses for it, too.

Yes, that's correct. If you look at our senior secured you know that our callable in January of 2016 and I believe they are callable at 105.9, the face amount for those is $864 million.

Right.

So with the proceeds of FGL and the cash that we have on hand there's plenty of excess cash even if all the senior secured notes are called.

Fair enough. Okay, so to the extent that you think your largest investment is undervalued that might not be such a bad use of capital.

I think what you're hearing from me is that yes, we will be opportunistic. And we recognize the opportunities and we know the assets better than anybody.

Perfect. Thank you very much and good job again.

Thanks.

Sam Martini, Omega.

Hey guys, good morning. I apologize. I've been jumping on and off this call and I don't know if it's been addressed but I just wanted to post the divestitures subsequent to quarter in the Energy business just to talk about what's left with Compass, what the liability could be under varying circumstances.

Obviously you still carry it at book value sort of $150 million the wrong direction. And I'm trying to just get a sense of now that we are continuing to make headway what the guarantee, what the outstanding guarantee amount I believe it was $80 million, is it lower?

What is it now? What else is out there that could drive the value back towards zero, back God forbid, positive, etc.?

You guys have done a lot of good work here. And again I'm sorry if you've addressed this already but I've been a little bit jumping around but if you could just touch on forgetting about the book value what the real world value negative or positive is of the remaining Energy business. Thanks.

Sure, thanks, Sam and we did touch on some of these things but let me give you sort of real world where we are. You know we have not closed on the Indigo transaction which is $160 million. Post-closing the $80 million guarantee that you've mentioned will go down to roughly the area of $30 million.

So that guarantee will be cut significantly. The transaction that we announced in terms of selling the Holly, Waskom, Danville field is roughly 40% of our daily production. So we still have 60% of our daily production in two fields in Vernon and in Permian.

And the remaining debt after we close on the deal will be cut by more than 50% at the Compass level and these other assets that we have obviously still constitute more than 50% the value of the business. So we actually feel very good about where we are in Compass and we've cut the guarantee again post-closing to a number that's significantly smaller than the $80 million i.e., the $30 million.

So Omar is it fair to say that post-closing a reasonable threshold for max liability, ignoring act of God and other unforeseen events, a reasonable threshold ought to be negative $30 million? That would be --

I think that's reasonable, taking that guarantee as sort of a reasonable level is probably a sensible approach.

Right and if you had to handicap whether it could come in better than that you'd say it depends on the production or depends on the commodity price?

It still depends on the M&A environment and the commodity price.

And the commodity, yes.

Correct. Obviously you know us Sam, we are working hard to maximize value and we feel very good about where we are and we think we're in a much better spot than where we were a few quarters ago despite the challenging commodity tape.

And Omar, just a housekeeping question on HGI funding, can you just remind us what's in that number if anything for RadioShack?

No exposure to RadioShack in HGI Funding anymore. RadioShack exposure is a little bit in Front Street and obviously in the Insurance balance sheet.

And the status of the allegation of the discovery suit against the former senior creditors is what?

It's still outstanding. The judge has not ruled on their motion to dismiss. We expect the judge to rule frankly any time and he has not given any guidance in terms of when he rule.

In the last hearing he did acknowledge that we're all waiting for a hearing. And we're hopeful that their motion to dismiss will not be granted.

And remind me, Omar, the timing of the judge's opinion on our claims vis-a-vis the unsecured creditors claims, are those on a parallel track or are they totally unlinked? Does one have to come before the other?

No, they are unlinked. I believe the biggest thing left in front of him now is the motion to dismiss that the ABL lenders have asked for and he is just considering that matter and I think will come back to the constituents at the right time but didn't give a sense of timing.

Okay. And I don't suppose you'd hazard a guess based on the text messages and the discovery put forth by the unsecured as to how the judge is feeling?

You know very difficult to handicap. I think it's in the judge's capable hands and let's see what the ruling is going to be.

Suffice to say we feel very good about what we had claimed and our position. We feel very good about our position but it's up to the judge and the legal system.

I'd echo the former comments of someone made that you guys have really worked hard this year and have accomplished a lot. So thank you for that Omar and thank you guys

Thanks very much, Sam. We appreciate it.

Shez Samji, Aspen Hill.

Hi there. Can you just confirm the cash balance between HRG Holdings and HRG Funding. That would be great.

Yes, we report it on a consolidated basis and it's $331 million of both cash and marketable securities.

Perfect. Just the split between the two if you could just specify or confirm.

It's just something we don't disclose, it's a nominal amount of cash at HGI Funding.

Okay, got it. Thank you.

Brett Levine, Anchorage Capital.

Hey guys sorry, just a quick follow-up to the cash G&A question. Just checking the old notes and I think a couple of quarters ago you mentioned having an $8 million run rate for the corporate G&A.

What's the difference between that and the $25 million? I know I'm probably just missing something.

The $8 million I think is the corporate G&A excluding any fees related to deals, etc. And that's the $25 million number this past year that Tom described to you.

Right.

And the $8 million is still the right way to think about that run rate excluding all those costs, the deal costs going forward?

That's correct.

That is correct, yes.

Great. Thank you so much.

There are no further questions at this time. Mr. Hart, I will turn the call back over to you.

Thank you, Sally and thanks again everyone for joining us today and for all of the questions.

To the extent that there are any follow-ups of course always available to address anything that we can. Thank you much.

Thank you, ladies and gentlemen, for your participation. This concludes today's conference call. You may now disconnect.