Harbinger Group's (HRG) CEO Phil Falcone on Q3 2014 Results - Earnings Call Transcript

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Harbinger Group Inc. (NYSE:HRG)

Q3 2014 Earnings Conference Call

August 8 2014 10:00 AM ET


Phil Falcone - Chairman of the Board, Chief Executive Officer

Omar Asali - President, Director

Tom Williams - Chief Financial Officer, Executive Vice President


Charles Pushkar - L S Partners

Nazir Khan - Turbo Land


Good morning. My name is Phinix, and I will be your conference operator today. At this time, I would like to welcome everyone to the Harbinger Group, Inc. Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. (Operator Instructions) I would now like to turn the call over to James Hart, Senior Vice President, Communications. You may now begin your conference.

James Hart

Thank you, Phinix. And good morning everyone. Welcome to our quarterly conference call. With me today are Phil Falcone, Chairman and Chief Executive Officer of Harbinger Group; Omar Asali, President of Harbinger Group and Tom Williams, our CFO.

During today's call, our 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 www.harbingergroupinc.com. As a reminder this call cannot be taken or otherwise duplicated without the company's prior consent.

Before we begin, I would like to remind everyone that this call may contains statements that are forward-looking and that term is defined by the Private Securities Litigations 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 and other non historical statements in the discussion and analysis. These forward-looking statements are subject to certain uncertainties, risk and assumptions including risks related to the general economic and business conditions and are based on management's belief as well as the assumption made by and information currently available to management. When you listen to this call the word belief, anticipate, estimate, expression and similar expressions are intended to identify forward looking statements. All forward looking statements made today reflects the company's current expectations only. And our management believes that its expectations reflected in these forward looking statements are reasonable. The company undertakes no obligation to revive or update any statement to reflect events or circumstances that occurred after this call. Important risks, certainties, assumptions and other factors that could cause actual results to differ materially from those in these forward looking statements are identified and disclosed in report filed by Harbinger Group with the SEC.

During the call management will provide certain information that will constitute certain non-GAAP financial measures and (inaudible) adjusted EBITDA and adjusted operating income. Certain information required to be disclosed about these non-GAAP measures including reconciliation with most comparable GAAP measures is available in the earnings press release that we issued this morning.

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

Phil Falcone

Good morning, everyone. And thank you for joining us today. I'll begin today's call by touching on some of the key accomplishments we made during the quarter. I will then turn the call over to Omar Asali, who will describe some of the highlights in our operating performance this quarter. And then Tom Williams will join to provide an overview of our consolidated financial results. We will then open up the call to take your questions.

So to begin with just a quick snapshot. This is a very, very solid quarter highlighted by our largest ever quarterly performance for both revenue and operating income. As Omar will describe to you that collective strength we are seeing at Harbinger Group reflects contribution from all areas of our business. For example, Spectrum Brands delivered record third quarter revenue in its 15th consecutive quarter of year-over-year growth and adjusted EBITDA which is its primary measure of profitability. We also saw strong gains and profits across our other segment as well. We designed Harbinger Group as a permanent capital vehicle that would invest and diverse in uncorrelated sources of long-term cash flow growth. By design, we don't need these all these parts of the business to be moving in the same direction at all time to achieve our ultimate goals. However, when that does happen as it did for the most part this quarter, we have the capability of setting new performance threshold. And as please as we are about our financial performance this quarter, we also accomplished a great deal with our capital structure as well.

I'll walk you through the highlight momentarily but to put it very simply, with the actions we've taken over the past few months, we've simplified our capital structure and created sufficient flexibility for ourselves as we continue to pursue our strategy of acquiring under valued or fairly valued assets that possess attractive financial or strategic characteristics. In short, we believe that our capital structure is matured and meaningfully involved from where we began just a few years ago. And we are very well positioned as we look into the future.

The first action that we took this quarter was to exercise our option to convert what had been our Series A and Series A2 preferred interest into common stock. This is a key aspect for us or a key step for us. The preferred provided the initial funding for us a number of years ago and we feel like we've really taken the steps -- the right steps and to be able to convert this preferred was a big accomplishment for us. Number one, it provides the clarity that capital markets were looking for by removing any overhang associated with the dilutive impact from the issuance of nearly 60 million new shares of common stock. As many of you know, there were number of questions regarding what was going to happen with this common stock? Were the preferred holders going to convert? What were they going to do? And it was very important for us and there was overhanging our stock for a while. So it was very critical for us to clean that up. Number two, it meaningfully reduced our cash obligations giving us additional resources to use and building long-term shareholder value which could help up offset the dilution caused by the new shares. And clearly we are paying a coupon on that, cash coupon so we look that as a meaningful and substantial cash savings. And it created greater liquidity in the trading of SGI which should help lessen the volatility in the day-to-day pricing and increase or attract to invest in certain types of institutional investors. There have been a number of people that were interested in buying the stock but stuff like they couldn't get access to new to the stock so again converting this preferred helped us solve-- partially solve that problem.

We are very pleased to see that the market absorbed the issuance and new shares very well without any real volatility or increase in meaningful volatility. HGI's shares from the data to conversion to the close of the quarter increased by nearly $1 or about 8.5% which is well above the performance of the S&P 500 over that same period. We believe that this indication that majority of the holders of the preferred retain their equity interest after the conversion to common, which help lessen any disruption to the trading or pricing of our securities.

The second action we took to support our capital structure this quarter was an amendment we secured to our debt agreement permitting us to expand the buyback program for our common stock. We are strong proponent of what we are building here at Harbinger Group and we like to use our cash to pursue the highest and best available return. By nature we are an exquisite company and we would prefer using our resources to accumulate additional assets capable of producing long-term value and free cash flow which I'll come back to in just a moment. However, as we look across the landscape of the current M&A opportunities, by and large multiples in the lot of the areas are higher now than what we believe would provide us with the sufficient return. As Tom will describe you later when look at the some of the parts valuation, there is clearly a gap between our intrinsic value and our trading value. This presents us with an attractive opportunity to use our cash to earn a strong return through the acquisitions of our common share. During the quarter, we use about $12 million of our cash to acquire 1 million shares of SGI. By doing so we injected additional liquidity into market for SGI's shares while also sending a strongly positive signal to the market that we believe we are undervalued. But we also kept enough dry powder in the balance sheet to preserve option -- preserve optionality for the future as well. We've sufficient flexibility under the existing program to opportunistically support the stock subject to the ongoing discretion of management.

So the come back to the state of the M&A environment, as discussed in our last call, we look for investments that provide attractive synergies to our existing businesses that is down fundamental but maybe need of financial restructuring or operational turnaround, that have management team's capable of creating long-term value or long-term cash flow positive businesses where we can continue to look to build book value. We follow rigorous discipline process and we don't feel pressure to use our capital when valuation doesn't support our long-term value pieces. Probably speaking we believe valuation is continued to be high in this market so we expect to maintain our discipline and not transact that in uneconomic price.

We were at somewhat active in the quarter acquiring assets that helped to diversify our business mix while also complimenting our existing vertical. Let's briefly touch on those right now. This chart should be familiar to many of you as it shows our five primary vertical. Consumer products, Insurance, Energy, Asset Management and Minority Investments. And assets we hold within each of these silos. We highlighted in green the new addition to our portfolio this quarter, CorAmerica and Frederick's of Hollywood. CorAmerica is a real estate lending company focused on originating and acquiring commercial mortgage loans, and making select equity investments in many different types of real estate including office parts, industrials complexes, retail shopping centers, apartment buildings and hotel. We acquired controlling interest in CorAmerica during the quarter, adding it to our asset management segment where it is expected to further diversify the segment by providing attractive new areas for investment that have not previously been addressed by the segment.

Frederick's of Hollywood is a well known retailer of women's apparel and related products. We previously had a minority investment in the firm but acquired controlling interest during the quarter. We believe that this is an asset that can benefit from additional resources and fresh management and we look forward to reporting on its progress to you in the coming quarters. Before I turn things over to Omar, I wanted to touch on just a few other noteworthy highlights during the quarter. In May, Harbinger Group is named to the Fortune 500 list for the first time. Considering how we built this business from the bottom up just a few years ago, we think this is a testament to both the business model we've built as well as the people who have worked extremely hard over the years to build what is now one of the largest businesses in the United States.

Second in line with maturation of our capital structure, we've expanded the capabilities and expertise of our Board through the addition of two new outside director, Joe Steinberg and Andrew Whittaker. Both Joe and Andrew bring considerable expertise to the Board, have substantial track record of success and investment management. We welcome Joe and Andrew and know their contribution will help in the ongoing evolution of Harbinger Group.

With that I would like to hand the call over to Omar Asali, the President of Harbinger Group, who will cover the operational highlights at HRG this past quarter.

Omar Asali

Thank you, Phil. Good morning, everybody. And thank you for joining us. I'm going to start on Slide 12 in terms of the third quarter highlights. And just to give you snapshot to stand our whole business. We had an outstanding quarter for Harbinger Group with record results on both the top line as well as total operating income. As Phil indicated all of our segments performed very well. And we are very pleased with those results. Just to hit on some key things in Consumer Products we had our 15th consecutive quarter of year-over-year growth and adjusted EBITDA. In Insurance, we had nearly 45% growth in our annuity sales while also trending adjusted operating income upwards. In Energy, our quarterly production is on track and our cost initiatives as well as CapEx spending are performing better than we expected. And then lastly in our smaller segment in Asset Management we had almost 60% revenue growth in addition to as Phil mentioned adding CorAmerica as part of our real estate platform. So in short a very nice quarter for us and we are pleased to report those results to you.

If we turn to Slide 13 and let me just delve into a bit more detail in each of our segments starting with consumer products. As many of you know that our 59% interest in Spectrum Brands, over the first three quarters of our fiscal year shares of Spectrum have outperformed the S&P by approximately 1,400 basis points. Spectrum is well on its way towards achieving a third consecutive year of meaningfully up place in the market as well as its peers. This is the same level of success that we are seeing in SPB frankly due to several factors that are -- some of our key principles in the segment. One, very strong business fundamentals and sound strategy which is Spectrum's value model and that's the core of our business. The strategy of same performance less price continues to resonate with consumers and continues to be the right strategy in this market place. Second, we obviously have solid and great relationships with our key retail distribution partners and continue to invest in those channels. We also continue to focus on our cost initiatives and cost improvement and that is evident in our key metrics including our adjusted EBITDA numbers as well as free cash flow and operating margins. We have a strong management team that is executing and we also have a great business that knows how to integrate tuck-in acquisitions as well as larger acquisition and we continue to look to identify synergistic acquisitions that we can integrate successfully in our platform. In terms of specific results for this quarter, that's your slide 14, Spectrum Brands reported across the board increases in revenue, EBITDA, free cash flow and EPS as compared to prior year. And we had a record best ever third quarter of revenue of revenue of approximately $1.13 billion which was up 3.6% from a year ago, but more importantly EBITDA or adjusted EBITDA was up more than double that reaching $202 million. The company is on track to achieving its seventh consecutive year of adjusted EBITDA margin growth. On gross profit margins we expanded those to roughly 37% and on adjusted EBITDA margins we reached 17.9% which is roughly 60 basis point increase from last year. These numbers are very, very important numbers that we are very proud of in terms continuing to push the profitability of the company and the margin expansion. Obviously the outcome of all that is the strong cash flow generation of the company. In fiscal 2013, the company generated about $254 million of free cash flow. This year we are on track to generate at least $350 million of free cash flow, and to also reduce our debt by approximately $250 million in this fiscal year to reduce our leverage to roughly 4.2x or less. This cash flow generation in Spectrum Brands is obviously very important for us and continues to help us to invest in the business, support dividend policy, pursue premium M&A acquisitions when they exist and continue to allocate and deploy that capital in smart ways that are enhancing our asset value.

Going forward you can expect us to and the management team at SPB to continue to focus on the value model. Invest a little bit more e-commerce strategies; expand geographically in Europe and internationally in new channels and with new products. And then of course where it make sense continue to look for the right M&A target and continue to execute on the M&A front.

Moving on to Slide 15 which is our Insurance segment. We also had a very strong quarter in this segment. This is represented by our 80% interest in Fidelity & Guaranty and our 100% stake in Front Street Re which is our reinsurance business. To give you some key stats, here total assets under management are roughly about $18 billion, GAAP book value for FGL increased 31% to $1.7 billion and that includes AOCI excluding that it increased to $1.3 billion which is a rise of roughly 18%. We had a very strong quarter in terms of our sales. As many of you have heard from the management during the IPO row increasing our market share, building our sales was a key initiative of ours. Very important, we wanted to do that as we are also improving profitability and we believe the company continues to execute on that strategy. In our market in the fixed index annuity market we continue to see favorable demographics. A very favorable competitive landscape and we believe that we will continue to execute on profitability increasing our market share as well as our sales. On the investment side, the average yield earned on assets that we purchased during this past quarter was roughly 5.29%, across the whole portfolio the average earned yield was about 4.63% which is an improvement of 26 basis points from last year. And that is largely driven by the repositioning of the FGL portfolio that the management team has embarked on and that repositioning is predominantly behind us, we executed on it. The portfolio continues to be in pristine condition and the average NIC rating is approximately 1.4x.

If we go to our next segment which is your slide 16, that is the energy segment. Just as a reminder this is the joint venture that we own with EXCO Resources. And our strategy in this space to focus on long life assets, low decline properties with low geologic risk. The JV strategy continues to work very efficiently for us, and we continue to show maximize cash flow in this business. On the production side, this past quarter our production was consistent with our expectations yielding roughly 103,000 barrels of oil, about 125,000 barrels of NGL and 5,240 billion cubic fee of nat gas. Important to the production numbers as well if some of the cost initiatives that have been taken in JV under the leadership of Matt Grubb who is our CEO, and we continue to deliver attractive EBITDA numbers. This past quarter we delivered $20 million of EBITDA in this business which is more than double from where it was in 2013. Matt and his team have also been leading an initiative in terms of our capital investments and spend. And this past quarter there has been a big focus on re-completion and work over project as opposed to new drilling and those have yielded very attractive rates of return. One other thing just to mention in our energy area is we renamed this JV to Compass Production Partners. We believe this is an important step in helping the management team there to build their own standalone viable entity with our support and EXCO supporting going forward, so we continue to help them develop their own if you will company and vertical in that space.

On Slide 17 which is our last segment. And I'll touch on it briefly, that's the Asset Management area. Phil mentioned the CorAmerica acquisition today; our suite in Asset Management is complete with four key businesses that Salus which is our asset based lending, middle market business. Five Island which is our high yield manager. EIC which is our energy and infrastructure lender and CorAmerica, the recent addition which is our real estate lending platform. All these businesses in some cases like Salus and Five Island that have been around for a while continue to perform. And then our new businesses that we have in here they are on track to perform going forward as we deploy capital in their respected market. So we continue to feel good about this area and we look forward to updating you on our progress in all four segments of asset management and particular the new addition EIC and CorAmerica in the upcoming quarters.

On Slide 18 which is right before I turn it to Tom, I wanted to touch on our cap structure a little bit. This is something that Phil mentioned. This is something that we discussed with you in our last quarter. Today, what we have is a simple and balance capital structure. The balance sheet is healthy. It is a flexible balance sheet that reflects our ability to access the capital across the different securities in this cap structure. So that is roughly balanced between senior secured debt and unsecured debt and then obviously we have common stock and this simple capital structure is really important because it showcases our ability to access capital. And will enable us to execute on M&A when the environment is right. And as Phil mentioned, in today's environment we are being patient and disciplined. Many businesses are going for high multiple, and then we are seeing elements of frost in the M&A market. We will continue to execute on what you guys are seeing from us which is being a patient allocator of capital. When the opportunity arises we look forward to reporting to you on deals that we would be executing on. But very important to highlight that our balance sheet today is an asset that enables us to go on execute on that M&A strategy.

So with that let me turn it over to Tom Williams, our Chief Financial Officer.

Tom Williams

Yes, thanks, Omar. And good morning, everyone. Before we open the call for questions, I'll briefly hit the highlights of Harbinger Group's consolidated results for this quarter. I'll also provide you some context for the impact to our financials from the capital structure actions, Phil and Omar just described. And as usual I'll update our some of the parts calculation to reflect our performance for the third quarter.

With that let's begin by looking at revenues. We reported $1.59 billion in consolidated revenues this quarter. This is an all time quarterly record for Harbinger Group reflecting an increase of more than 13% from the third quarter of 2013. Our growth in the quarter was driven all lines of business except energy where year-over-year revenues were always be somewhat challenged given the natural production declines that are inherent in the underlying oil and natural gas assets presented that are presently own by our JV. Looking across this segment is worth calling your attention is 3.6% growth in consumer products which is consistent with its performance all year, an indicative of Spectrum's solid execution of its strategy. The strong growth in insurance revenue with or without net investment gain as FGL continues to see strong consumer receptivity for its core products and continues to manage its investment portfolio very well. The strong performance on the top line helped to translate to record consolidate quarterly operating income at Harbinger. Overall, our operating income of $229.1 million was up more than 25% or $46.5 million from the third quarter 2013 driven by growth in all business segments with particularly strong performances from consumer products and insurance. And looking at the preferred measures of profitability for each segment such as adjusted EBITDA or adjusted operating income as appropriate, as this slide shows we recorded increases in all segments except energy which modestly decline by less than $1 million. Consumer products reported its 15th consecutive quarter of year-over-year growth in adjusted EBITDA. Our adjusted operating income for insurance more than doubled from last year. And asset management continues to operate profitability even as we make start up investment to build out and diversify our capabilities in this vertical.

These increases in operating income resulted in an increase in diluted net income attributable to the common and participating preferred stockholders of $0.28 per diluted share as compared to $0.25 per diluted share year ago. To provide you with more details on income statement. There were two impacts for our financial statements for the conversion of what had been our Series A and Series A2 preferred share into common stock this quarter. First, we recorded a $38 million non-cash gain from the typical mark-to-market of the equity conversion feature. The relevant period was from the start of the quarter through May 15th which is date of conversion. This is the same entry we made each quarter since the preferred were issued and reflects the inverse relationship between the movement of HGI stock price during the quarter and the value of the preferred equity.

Second, this gain was offset by a non-recurring, non-cash charge of $44 million in the quarter to reflect the loss on the conversion itself. This loss is reflected in the $49.3 million that was recorded in the preferred stock dividend and accretion line. Approximately $5 million difference reflects the actual cash dividends that were paid to holders of the preferred equity prior to the conversion as well some amortized expense for the original transaction fees. We believe this transaction has several benefits. It is meaningfully reduces our cash interest obligations as a preferred were cash cost of more than $33 million last year. It creates greater liquidity which we would expect make our equity a more attractive investment vehicle for certain types of investors. As Phil and Omar discussed, during the quarter we also successfully completed a debt exchange offer. $320.6 million of senior secured notes were exchanged for $350 million in aggregate principal of new senior unsecured notes. This transaction which was heavily oversubscribed extended the maturity of the exchange portion of this debt by three years from 2019 to 2022. It shifted more than $300 million of debt to a slightly lower interest rate, continuing our multiyear trend of reducing what had been a 10.625% blended cost of debt in 2012 to approximately 7.8% as of today. Increased flexibility at the secured level of the capital structure should future transactions contemplate using debt financing.

Turning to our cash position. We ended the quarter with corporate cash and investments of more than $417 million at the Harbinger Group and Harbinger Group funding level. This was a decrease from the second quarter balance due to several investments and acquisitions activities including the repurchase of one million shares of HGI at a price of $12.10. A reclassification of what has been $12 million investment in Frederick's of Hollywood, now that we begin to consolidate that entity as part of our corporate and other segment. Also, investments in central garden and pet securities, investments in other toe hold positions and the acquisition of controlling interest in CorAmerica. With our cash and investments position of $417 million, we believe we have sufficient dry powder to meet our operating and investment needs, but also remain comfortably within our ability to access capital mark as and when we need to.

As our result currently shows, it was a very strong quarter for Harbinger. And given our stated goal of creating long-term shareholder value, our achievement shouldn't be measured by the financial statements alone. And accordingly we calculated the estimated net value of our some other parts. And we do that on a regular basis. Through the valuation in any quarter -- so the valuation in any quarter may fluctuate due to certain macro factors that are beyond our control we believe our long-term performance can be adequately measured by the creation of this net estimated value. Given their status as long-term investments for the public equity, our holdings in Spectrum and Fidelity & Guaranty Life are based on the volume weighted average price for the 20 day trading period ended June 30th. All other securities held at ECI funding are value using market prices. Everything else including our cash, cash equivalent and corporate debt are measured on book value. Taken together, our estimated value as of June 30th is $15.16 per share relative to our March 31st valuation; this reflects an increase of 2.3% or $0.34 per share of additional value created. Although we aren't managing this business on quarter-to-quarter basis, we are pleased to see this type of steady increase in some of it for its valuation. The 16% discount in our June 30th common stock price is higher than we would like but a bit lower than it has been in recent quarters, demonstrating progress and closing the gap. We will continue to work with the investment community to better educate investors about not only the value of the assets we manage and hold, but also the philosophy and processes they guard our investment decisions. This is because we believe that a business with sustainable, free cash flow generating assets, a strong management team, a disciplined approach to acquisitions and a clear commitment to long-term value creation, merit evaluation that reflects both the market value as well as the premium for expertise that we bring to the table in identifying undervalued assets and taking the time to build sustainable, free cash flow over long term.

Thank you for joining us today. We would now like to open up the call for your questions. Operator, please provide the instructions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Charles [Pushkar] from L S Partners. Your line is now open.

Charles Pushkar - L S Partners

Good morning, gentlemen. And congratulation on a very solid quarter. Spectrum continues to operate at a very high rate, but I was most impressed with the strong result with Fidelity & Guaranty this quarter. Can you talk about the sustainability, those results as we move through 2014 and 2015?

Phil Falcone

Yes, sure. Thank you, Charlie. It's Omar.

Omar Asali

We continue as we said in my remarks we feel very good about the outlook for the space that we are in. And that's driven by the demographics that we own, 10,000 plus people entering retirement age. Many people being under invested and under saved in today's market. Plus the competitive landscape where we are seeing some volatility whether due to M&A or to strategic initiatives from some of our competitors. Where we are seeing them sometimes press on the sales, gas pedal sometimes on the brake and creating issues with the marketing organization and the agents and the distributors. Where we've been successful in our relationships with the distribution channel and engaging them and selling sort of our product at a steady pace, but also at a pace where we are comfortable with the internal rate of return. So we are focused on the top line growth that is helped by some of these macro and micro factor I mentioned. As well as certainly the bottom line profitability. So on the sales front, we believe and management believes at FGL that we will continue to see a nice run in that area. Now on the asset side and that's another reason why you are seeing us hit some nice AOI numbers, is the repositioning of the portfolio that has helped increased our yield. So for example this past quarter we put money at work 5.29% to increase yield of the whole book to 4.63%. And the way we are doing that is we are investing more in areas that we like, like emerging market. And certain private placements in some highly rated structure securities. We continue to be disciplined on duration. But where the market gives us the opportunity we are I think out there trying to capture that opportunity and that will depend on market conditions. So the profitability that you are seeing Charlie and the trend that we think will continue is driven by both the top line, increase in sales that we think can be with us for while, as well as how we would position the portfolio which now we think is in much better spot.

Charles Pushkar - L S Partners

Terrific. If I could switch over to Salus. Could you talk about the credit metrics and how are you seeing the business today for new loans?

Omar Asali

Yes. So in Salus, our focus is on middle market company that are in need for asset based lending, what we are seeing when you talk about credit metrics as we continue to see a very robust pipeline with companies that we are very comfortable with in terms of the collateral value. Whether it's inventory, receivables or other assets that we are comfortable taking as collateral, we see a very strong credit metrics on that fund. We continue to see a pipeline that is robust from a pricing standpoint. So these companies are coming to us sometimes because of relationships, sometimes because of quick execution that we can do. Our reputation in the market place and we continue to see pricing that we are very comfortable with both on the deal front as well as in terms of the coupon of some of the transaction. The companies themselves obviously on a cash flow basis many of them can be in a challenged position, but really are bread and butter in that business is the value of the collateral, understanding that using our own conservative estimates on that front and Charlie what we are seeing is still a very strong pipeline with very healthy metrics on that front.

Charles Pushkar - L S Partners

Terrific. If I could ask one another question so could you talk about one of you -- regarding Frederick, how do you see sort of turnaround and what are the couple of things that you are hoping to accomplish there to make it a better business?

Phil Falcone

Sure. We believe that in looking at this business, the gap, one of the things that really attracted me to Frederick was the gap between the top producers and the industry and kind of everyone else. There is no real solid number too, that in itself presents an opportunity. Clearly this company has been run on since last five years and they haven't been able to do much of anything from end marketing perspective. That being said, the company still manage to keep a pretty decent top line without introducing any new products, without advertising, without spending any money on marketing. So I think that's indicative of the brand name, how long it's been around and the metrics associated in the industry and how important branding is. That being said, we felt like that this needed -- there are needed to be a couple of things that were changed within the company. We are working on bringing in new management. We do have a number of people that we are in discussion with. We have essentially signed somebody up as the CEO which is not yet been announced. I think that you will find that this person comes with a phenomenal pedigree. She is in the process of building her team and she is talking to a number of other different people to bring on to the team. But before we announce who that person is, we want to make a couple of additional changes within the organization. But that was the key for us was to bring in a new leader. And with all due respect that former CEO had a pretty tough job considering that there was -- he didn't have much capital to work with. This is going to take a little bit of capital because there are as I mentioned a number of things that need to be changed. But we believe that there is a phenomenal opportunity to turn this thing around. And again the key for us to get the right leadership. We believe that this person that we did sign up to be the Chair and CEO is probably second to none when it comes to -- when it came to possible partners for us. So we are very thrilled about that. We do have our work cut out with this company. But again we believe that there is -- just because of the market in a bit itself that there is tremendous opportunity as we look to build this category out.

Charles Pushkar - L S Partners

That's great, Phil. And if I could ask one more question. I know I have taken up a lot of time but how do you think about the timing of the CorAmerica investment given where we are in the real estate cycle?

Omar Asali

Yes, Charlie, this is a long term play if you will. This is not an opportunistic transaction where there is this location and real estate lending that we are trying to capture. What we are thinking is a building a real estate lending platform that is a mix up and down the cap structure and the rating environment meaning home loans, CMBS, maze a capability as well as opportunistically investing in equity and real estate. So expect that's the business that we will grow depending on market conditions and depending on what happens out there in the real estate market over a period of time. But today the business that we acquired already has some assets, is already profitable. So it's a nice platform that we can build on when market conditions are right.


Your next question comes from [Nazir Khan from Turbo Land]. Your line now is open.

Nazir Khan - Turbo Land

Hi, guys, good morning. Thank you for taking my question. Congratulation on the great numbers. Just maybe one quick clarification. In the presentation which is hard to catch because of the speed, it seems like it showed abut 28 million shares of Spectrum Brands owned by FGI and according to Form 4 filed, it seems like Harbinger holding almost 31 million shares. Could you just explain what's the difference is?

Tom Williams

Yes, hi, this is Tom William. In some of the part chart you will see the footnotes where we do have $27 million that is held us collateral against our debt obligation. But you also see in the footnote inside HGI funding that we hold another 3,186,000 shares so together we own roughly 31 plus million shares, approximately 59% of the equity. So you will see the two buckets in the some of the part chart.

Nazir Khan - Turbo Land

And so one bucket is Spectrum Brands. Where the remaining $3 million?

Tom Williams

The remaining piece in the fourth slice or the pie called HGI funding where we call not Spectrum Brands common stock but we also hold other positions.

Nazir Khan - Turbo Land

Got it. And then obviously you guys bought back a million share at a pretty significant discount to your NAV, that leads a lot of authorization remaining and your stock trades at very significant discount through your NAV and you guys obviously I think a lot of Spectrum shareholders believe there is a lot more value there to be had, what are your thoughts on accelerating the buyback and being more aggressive and -- doing -- a tender to take the valuation of the stock somewhat.

Phil Falcone

We are great if there is an opportunity from a valuation perspective. And we continue to look at as something that our objective over the long term is to close that gap. We haven't made any final determination or announcements regarding any accelerated buyback. As we mentioned, we do have a $100 million -- we did incorporate a $100 million buyback of which we executed $12 million in the recent quarter that it is still open. We will continue to be opportunistic as we see fit. But have not made any announcements regarding any changes in that. That being said, we do believe that and our objective over the long term is to get the trading at book value and even a premium that comes with time, we have to be patient but it is clearly an important part of the way we think about things here.

Nazir Khan - Turbo Land

That's fair. And have you guys been blacked out at all during any period of time over the last quarter? And if so when can you possibly be back in the market repurchasing shares?

Tom Williams

I mean certainly with the release of the financials, there would be no material enough public information that would prevent us from continuing to opportunistically execute against this buyback plan.


There are no further questions at this time. And this concludes today's conference call. Thank you.

Phil Falcone

Well, just to end up and wrap up the call. Thank you very much for your participation today. We do appreciate your support and look forward to talking to all of you again in the coming months. Thank you very much.

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