Spectrum Brands Holdings Inc (SPB) 2016 Q4 法說會逐字稿

Good afternoon. My name is Candy and I will be your conference operator today. At this time, I would like to welcome everyone to the HRG Group, Inc. fourth-quarter earnings conference call.

(Operator Instructions)

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

Thank you, Candy, and good afternoon, 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 website that is available from 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 businesses, 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 statement 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 these in these formative 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 afternoon.

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

Thank you, James. Good afternoon, everyone, and thank you for joining us today. I'm going to start on your slide 5 with a high-level review of the business.

In consumer products, Spectrum Brands reported record full-year results, with solid organic top-line growth and further expansion of the profit margins. To continue its momentum, Spectrum is aggressively moving to implement its Spectrum first model, which identifies new growth accelerators and expands on the principles of the more, more, and more strategy.

During the year, Spectrum increased its investments in R&D and marketing, which we believe lays the groundwork for future growth. Spectrum also exited unprofitable businesses in order to improve its margins and cash flows, even though this cost some top-line headwind this past quarter. With these initiatives underway and gaining traction, we expect Spectrum will achieve record results for the eighth straight year in FY17.

In insurance and reinsurance, the closing of FGL's transaction with Anbang continues to be a top priority at HRG. Anbang and FGL recently agreed to extend the outside date for the completion of the merger by three months up to February 8, 2017. We aren't going to comment on the specific details of the regulatory process, but I can say that we remain committed to closing the transaction subject to the conclusion of the regulatory approval process.

Elsewhere across HRG, we've made substantial progress in simplifying our Company. We disposed of all of our interest in Compass, as well as CorAmerica, and we successfully completed the wind down of EIC. In addition, the wind down of Salus is almost complete, and since the beginning of FY16, Salus loan portfolio has been reduced by approximately 85%.

Finally at the HRG level, last week we announced that I expect to be leaving the Company in the second half of FY17. We also announced that HRG has begun a process to explore strategic alternatives with a view to maximizing shareholder value.

I am very proud of all that we have accomplished since starting HRG and know that the Company is very well positioned for the next stage of its evolution. Of course, we will keep you updated as appropriate regarding the Company's review of strategic alternatives.

Turning to your slide 6 for a more detailed look at Spectrum's record performance in FY16, revenue increased by more than 7% on a reported basis, or more than 10% without the unfavorable impact of FX. Spectrum had a strong results across its entire portfolio, but with record fiscal results in home and garden, HHI, and global auto care.

Revenue growth in 2016, excluding the impact of M&A completed this past year, as well as FX, was 2.6%, well ahead of GDP. This growth came across all lines of the business, except in small appliances, which is experiencing some category softness and competitive pricing actions. The top-line growth at Spectrum was achieved while improving overall profitability at SPB, as the Company has optimized its product mix and continues to pursue cost improvements.

In FY16, overall adjusted EBITDA increased 19% to $953 million, and adjusted EBITDA margin increased 180 basis points from FY15 and reached a very healthy level of 18.9%. All lines of the business contributed to this result, which we believe demonstrate a very balanced achievement across the portfolio of Spectrum Brands. All lines of business also achieved higher adjusted EBITDA margins as compared to a year ago.

Overall gross profit margins at SPB increased 250 basis points to 38.1%, driven in part by the decision to exit out of unprofitable areas of the business. The strong performance on both the top line and in the margins helped to drive record free cash flow of $535 million in FY16.

This exceeded the high end of the original guidance by about $20 million and reflects an $81 million increase over FY15 and nearly a 50% increase in free cash flow from two years ago. We expect that these results will continue at Spectrum with an eighth consecutive year of record financial performance in 2017, with increases in revenue and margins and growth in free cash flow.

Moving to your slide 7 to discuss insurance, Front Street net book value as of September 30th was about $112 million, which was a $15 million increase from the third quarter. I will remind you that FGL is an asset held for sale on the balance sheet, and its results are not reflected in the insurance segment anymore.

Nonetheless, just to give you an idea of the performance of FGL, FGL results were very strong in both the fourth quarter as well as the full year, with 40% growth in overall annuity sales in the fourth quarter contributing to more than $2.5 billion in sales across the full fiscal year of 2016.

AOI was $162 million, which was an increase of 37% compared to a year ago. The strong annuity sales helped increase FGL total assets under management by more than $1.2 billion to $19.4 billion. In addition, FGL purchased $800 million of new assets this past quarter, and the average earned yield on the total portfolio was 4.9%.

Net investment income grew nearly 7% from the fourth quarter and spreads across all of our product lines increased by about 7 basis points. With these strong results, FGL continues to increase its GAAP book value. Excluding AOCI, GAAP book value per share increased $1.34 to $25.36.

Lastly, on your slide 8 and before we turn over the call to questions, we show the updated view of our traditional sum of the parts. This reflects market values as of September 30, 2016, showing an increase of 17% from the start of the fourth quarter and an increase of 42% from the start of the fiscal year.

With that, let me conclude my remarks and open up the call for questions. Operator, could you please provide instructions?

(Operator Instructions)

At this time, we show no questions. I will turn the call back over to James Hart.

Thank you, Candy, and thank you, everyone, for joining us this afternoon. This concludes our call today.

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