Spectrum Brands Holdings Inc (SPB) 2016 Q1 法說會逐字稿

Good morning, my name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the HRG Group, Inc. second-quarter earnings conference call.

(Operator Instructions)

I will now turn the call over to James Hart, Senior Vice President, Communications. You may begin your conference.

Thank you, Mike, and good morning everyone. Welcome to our quarterly conference call.

With me today are Omar Asali, President and CEO of HRG Group, and George Nicholson, 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, opinion, 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 condition 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 including HRG'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 that we issued this morning.

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

Thank you, James. Good morning everyone and thank you for joining us for the second-quarter earnings call.

I'm going to start on your slide 5. In Consumer Products Spectrum reported another excellent quarter with solid organic top-line growth on a currency consistent basis and record results in our key product categories.

The Armored AutoGroup business continues to perform very well and we've started to shift our focus from quote, unquote, year one integration efforts to executing a global growth strategy for that business which includes leveraging Spectrum's existing retail relationships and infrastructure. At Spectrum we expect to generate a very healthy $505 million to $515 million in free cash flow this year and we also expect a high single-digit range increase in sales despite the FX headwinds.

In Insurance we continue to see progress in closing the FGL transaction with Anbang and expect that this transaction will close in the third calendar quarter of 2016. This past quarter we received CFIUS clearance for the transaction which was the only federal level approval needed in the US.

We also received Vermont approval and we are now working to complete the rest of the regulatory approvals. FGL reported very good results this past quarter with solid growth in annuity sales and very good returns in our investment portfolio.

Moving to Energy, the results for this past quarter reflect continued headwinds from the commodity prices and obviously the impact of our recent asset sales. We're continuing to look at opportunities to further monetize and delever in this segment.

We're also working with Compass' bank lending group on the next scheduled redetermination. While it's too early to say what will happen in that process I can say that our decision-making will continue to be driven by preserving value at the HRG level.

Over at Asset Management, the outstanding ABL receivable is down by about 75% from this time last year and we have substantially reduced G&A across this segment. Finally, at the HRG level, we remain very focused on closing the FGL transaction and simplifying our overall business. As I've said in the past we will discuss our plan for the FGL proceeds following the close but we expect to delever and to pursue strategies that will maximize shareholder value.

Turning to your slide 6 for a more detailed look at Spectrum, revenue increased by more than 13% on a reported basis or more than 16% without the impact of FX. Currency consistent organic revenue, i.e., excluding the impact of any M&A increased 4.9% over the second quarter of 2015 with record results in home and garden and in hardware and home improvement.

Spectrum's focus on the product mix, shared infrastructure and continuous cost improvements yielded substantial gains in our profitability this quarter as adjusted EBITDA increased 44% to $230 million and adjusted EBITDA margin increased 410 basis points to a very strong 19%. Our adjusted EBITDA excluding the impact of M&A was up approximately 25%.

In addition, gross profit margins increased 320 basis points from last year to 38.3%, reflecting the benefits of Spectrum's exit of unprofitable areas of the business and discipline in the face of promotional pricing by our competitors. Taken together, this was another record quarter for Spectrum and we continue to expect a seventh consecutive year of record financial performance. We believe that Spectrum remains undervalued and should be trading more in line with the rest of the Consumer Products group.

Despite Spectrum's consistently impressive high-quality results our stock price currently trades at an EBITDA multiple that is a full turn or two below the consumer product peer group. On a free cash flow basis, Spectrum is trading at approximately 9% to 10% free cash flow yield while our peers are trading at closer to 5% to 7% free cash flow yield. Our management team will continue to focus on driving outcomes and building value and we believe that over time this will result in the market fairly valuing Spectrum given the robust EBITDA and free cash flow generation of the Company.

Moving to Insurance on slide 7, the net book value of Front Street, our reinsurance vehicle, increased 10% sequentially from the first quarter to approximately $94 million. As we have publicly discussed our reported Insurance segment now reflects only the results of Front Street as we continue to reflect FGL as an asset that's held for sale on the balance sheet and is reported as a discontinued operation on our income statement.

Moving to FGL, we had a very good quarter as our annuity sales including FIAs and MYGAs were $610 million in the quarter, AOI nearly doubled to approximately $43 million and our ROEs grew to about 12%. In addition, FGL grew its assets under management by about 5% to $18.5 billion. FGL continues to do an excellent job in managing its portfolio, purchasing $700 million of new assets this past quarter at an average yield of 6.1%.

Across our entire portfolio, FGL's average earned yield increased to 4.91%. Taking all these strong results together, our GAAP book value excluding AOCI increased to about $1.5 billion.

As for the merger with Anbang, FGL has moved closer to completing that transaction as I mentioned by receiving the CFIUS approval. We continue to make progress in securing the other remaining regulatory approvals and we expect this transaction to close in the third calendar quarter.

With regards to energy on slide 8, we continue to obviously face a very challenging environment with the average prices for oil and natural gas down more than 30% from a year ago. However, we continue to exercise vigilance on our cost structure and in managing our liquidity in the business.

In terms of operational performance our quarterly production levels declined this past quarter primarily as a result of the sales of the Holly, Waskom and Danville properties that we concluded in prior quarter. At Compass, our daily production was about 49 million cubic feet equivalent and our quarterly production was about 73,000 barrels of oil, 94,000 barrels of NGLs and approximately 3.4 billion cubic feet of nat gas.

Our priorities at Compass remain to manage the business efficiently and to focus on leverage and liquidity. The next redetermination for our term loan is taking place in this quarter. These discussions with the lending group are progressing and it's too early to comment on the outcome of those discussions but we remain very focused on preserving the value at the HRG level.

On your slide 9 in terms of Asset Management, we continue to unwind Salus' loan portfolio. We feel pretty good about the progress we've made this past year and the amount of the outstanding receivables is now less than $200 million. That is more than a $500 million reduction in the size of the portfolio as compared to a year ago and we continue to execute on significant reductions in this segment's G&A.

So wrapping things up with slide 10 which is our sum of the parts on a blended basis reflecting the market value of Spectrum brand and FGL and the securities held at HGI Funding and then the book values for everything else our estimated value as of March 31 was about $16 per share. I'm pleased to report that this reflects an increase of approximately 6% from our December 31 value and an increase of about 13.5% from the start of our fiscal year.

So on that good note, let me conclude my remarks and we'll open up the call for questions. George and I are happy obviously to take your questions. Operator, could you please provide instructions?

(Operator Instructions) Robert Krayn, MidOcean Partners.

Hi, thanks for taking my call. I just had a quick question for you guys.

What does the pipeline look for you in terms of future acquisitions or investments? Is it robust? Do you guys not like the multiples that are out there right now, what are you seeing, what's your sentiment surrounding it?

Yes, the sentiment is really sort of for the second point that you mentioned where we continue to see a lot of assets trade at very frothy multiples. We do like a number of ideas out there that we've been doing some work, frankly we like a bunch of things in the consumer products area. The disconnect for us in the marketplace has been more on the multiples and where some of these businesses are trading and where sellers are willing to transact.

Okay. And then I guess just to follow-up on that, how long do you see yourself holding a substantial amount of cash for a potential deal instead of just further delevering the current balance sheet?

Something that we will determine once FGL is closed and the management team and the Board decides in terms of the direction. I will tell you a bunch of us who are the senior management team here are also meaningful shareholders.

So we're going to be pretty careful that we're not sitting there sort of with what I call just negative carry. Whether we find a transaction to deploy the capital or whether it's delevering and using the bulk of the proceeds to delever, we're going to be smart in our capital allocation.

Okay, and then just lastly, do you guys like your equity multiples trading right now in terms of using that as a currency to make acquisitions in the future? Or do you see anything -- would you rather use debt going forward or do you guys like where you are at right now?

I mean if you're talking about HRG, HRG is a sum of the parts story. And as I said SPB, which is our biggest asset, we believe is undervalued and we think the multiple there is at least a turn or two inside of where the peer group is.

So that gives you a sense because that carries to the valuation of HRG. We think our complex remains undervalued.

Okay. That's everything for me. Thank you.

Majid Khan, Tourbillion Capital.

Hi guys, good morning. Omar, would you mind just walking us through what are the steps remaining for the FGL close?

It's obviously been pushed out sounds like a month or so. I was just wondering what are the regulatory steps, when was the last time you talked to the guys, how does everything look?

Sure. So as I've said in the prepared remarks, we've obtained CFIUS and Vermont approval. The remaining approvals, Majid, are from the state of Iowa, the state of New York and from CIRC in China which is the Insurance Regulatory Commission.

We continue to make progress on all three fronts and we continue to be pretty engaged ourselves here at HRG, the FGL team and the management team at Anbang in terms of providing the information and the answers. And I believe that we're working all very hard to get hopefully to a closing in the third calendar quarter of the year.

Got it. And would you mind just updating us on the status of just the overhead corporate expense you guys were working on reducing that?

Yes, we continue to do that. You know, it's pretty similar to sort of where we were I think last quarter from a year ago. It's been reduced by more than 50%. And we continue to make progress at that level.

Got it. Thank you. Congratulations on the Spectrum and FGL results.

Thanks very much. I appreciate it.

At this time we show no further questions. I will turn the call back over to James Hart for closing comments.

Thank you, Mike, and thank you everyone for joining us today. We look forward to updating you on our next quarter in the summertime. Thank you.

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