Harbinger Group Inc. (NYSE:HRG)
Q1 2016 Earnings Conference Call
February 05, 2016 10:00 AM ET
James Hart - SVP of Communications
Omar Asali - President and CEO
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. First Quarter Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]
Thank you, I will now turn the call over to James Hart, Senior Vice President of Communications. You may begin your conference.
Thank you, Mike and good morning everyone welcome to our quarterly call. With me today are Omar Asali, President and CEO of HRG Group; and George Nicolson, CFO.
During today’s call a presentation will accompany our remarks. This presentation may be accessed through the webcast that is available on the Investor Relations section of our website. 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 Litigations 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 the reports filed by HRG with the Securities and Exchange Commission.
During the call management will provide certain information that will constitute non-GAAP financial measures under the SEC rules, such as adjusted EBITDA and adjusted operating income. Certain information required to be disclosed about these non-GAAP measures, including reconciliations with the most comparable GAAP measures is available in the earnings press release we issued this morning.
With that, we’ll begin by turning call over to Omar.
Thank you, James good morning everyone and thank you for joining us. Let me start at your slide five I’m going to spend a few minutes talking about the overall state of our different businesses. Starting with consumer products, we had another very strong quarter this past quarter. We had organic top-line growth on a currency consistent basis with very positive momentum in various key product categories. The integration of Armored AutoGroup acquisition is progressing very much as we had expected and the assumed synergies of that acquisition are being realized as we speak and are on track.
For the remainder of fiscal year 2016 at Spectrum we expect to have free cash flow grow to somewhere between $505 million to $550 million. We also expect to have high single-digit range increase in sales, which obviously maybe partially offset by the negative FX impact. But overall, we’re very excited about the very strong start of the year and we are expecting another year of record performance at SPV.
In insurance, the transaction with Anbang that we announced past quarter is progressing on track. And we expect to close this transaction in the second quarter of calendar year 2016. As I stated in prior quarters we expect to realize our proceeds from this transaction in a tax efficient manner. In the meantime FGL continues to perform well as the fixed index annuity space continues to space at a very attractive rate. And FGL remains the top 10 FIA provider in the marketplace.
In energy, despite the volatility and the slide in oil and gas prices, we remained profitable on an EBITDA basis and we’ve done so by managing the operations of Compass efficiently and focusing on very aggressive cost cutting measures. During the quarter, we also significantly reduced our leverage by selling assets, which raised approximately $152 million in proceeds at Compass. We use those proceeds and the cash on hand to reduce the term loan balance by more than 50%.
So our term loan is down from $327 million to approximately $160 million and this has also reduced the AGI funding guarantee from $80 million down to only $30 million. So I think we have done a very good job in terms of deleveraging and showing up our balance sheet at Compass and we will continue to look for other opportunities for monetization as well as deleveraging in the segment.
Over to asset management, the wind down of Salus continues and that’s on track and in addition to that we have reduced our G&A across the segment quite meaningfully. And just one final comment on the slide at the HRG level our management team remains very focused on simplifying the business. Our top priority is obviously closing to FGL transaction and we are very focused on that and following the closing of the FGL transaction we will outline our plan for use of proceeds. But I can tell you now that we remain very committed to deleveraging our balance and we will pursue strategies that will maximize shareholder value and obviously more to come on that in the upcoming months after we close the FGL deal.
Turning to slide six to give you a bit of more detailed flavor on what happened at Spectrum this past quarter revenue increased 14% on a reported basis and nearly 20% without the impact of the FX headwinds. Our adjusted EBITDA increased nearly 18% to $207 million and importantly our adjusted EBITDA margin, which you know we’re always focused on, was up about 50 basis points to approximately 17%.
On a currency consistent organic basis revenue grew at 6.3% over the first quarter of 2015 with a positive contribution from many areas of our business. We had record results in Home and Garden with more than 20% revenue growth. We also had record results in hardware and home improvement. Batteries have done very well and have recovered from the recent challenges. We’ve talked about some of those in prior quarters, but this past quarter batteries made a very nice come back with double-digit growth in North America.
The area where we had a little bit of challenge has been in the small appliance area, which the management team at SPB is working on addressing. FX continues to provide a headwind overall and SPB has successfully mitigated the impact through very strong cost controls, strong channel management and improved product mix. As a result of these efforts our overall gross profit margins increased 150 basis points from last year and now our gross margin stand at 36.2%.
So the bottom-line with SPB is it was a record quarter, very good start for the year and we expect to have a 7th consecutive year of record financial performance and we think the management team, the story and frankly the stock at SPB continues to be under appreciated in this marketplace. But our team continues to deliver very strong results.
Moving to insurance, which is on your slide seven. Let me start by just a technical point here that’s important to highlight for this quarter, which is in accordance to GAAP we have classified our investment in FGL as an asset held for sale on the balance sheet and what that means is FGL results are reflected now as a single line item under “discontinued operations” in our income statement and we no longer reflect the detail of FGL in our insurance segment, which now only reflects the results of Front Street Re and obviously that’s in light of the announced deal with Anbang.
But to give you a flavor of what happened at FGL this past quarter we reported a very good quarter. We think the business is doing very well and is well positioned for the future. FGL’s adjusted operating income increased about 15% from the first quarter of 2015 and assets under management increased 6% to more than $18 billion. Kudos to the team at FGL in terms of managing the profitability of this business as well as managing the portfolio extremely well. We purchased about $1.1 billion of new assets this past quarter at an average yield of 5.5%.
Across the entire portfolio FGL’s average earned yield increased about 4.87%. Our annuity sales approached roughly $0.5 billion this past quarter and we continue and will remain disciplined in terms of market share and our sales demanding what the deal management team is to focus on the profitability of these sales and we’ll maintain that discipline until the deal closes with Anbang. But in summary with all these strong results FGL GAAP book value excluding AOCI increased to about $1.5 billion.
Moving on to your slide eight, which is our energy segment obviously the environment continues to be very, very challenging in the space, the price of oil and gas is down roughly 40% from the first quarter of last year. From an operational perspective, which is only piece of that we and the management at Compass do control we continue to manage the business very efficiently. We continue to cost both in the field and in our G&A and these actions have helped us manage this tough environment and we remain profitable on an adjusted EBITDA basis.
As I mentioned earlier during the quarter we did derisk ourselves by selling a number of our assets and these sales have reduced our debt to $160 million to term loan as well as have reduced our HGI guarantee and we will remain focused and disciplined here on our costs on our G&A and obviously when the opportunity arises on monetizing the right assets and deleveraging this balance sheet.
In terms of operational performance our quarterly production levels declined this past quarter as a result of the sales that I mentioned, but to give you a flavor of our production, which continues to be within our revised targets. This past quarter our average daily production was about 71 million cubic feet equivalent. And for the whole quarter we produced 106,000 barrels of oil about 129,000 barrels of NGL and 5.1 billion cubic feet of natural gas. So the team continues to do really well on the production side resting that decline by clearly the challenges to commodity price itself.
Turning to your slide nine, in asset management really the only noteworthy thing to mention here is the unwinding of the Salus loan portfolio continues and it’s on track. We’ve made very good progress there our portfolio has been reduced to less than $200 million outstanding as you remember a year ago Salus was about probably $800 million in outstanding. So the team there has done a good job in reducing our exposure and recovering the capital.
But in-light of this reduction in this segment our results for the quarter were down given the smaller book and the smaller interest income. We will continue to focus on recovering the remaining loans and we feel very good about the efforts the team at Salus has been performing and doing and we also obviously are very focused on reducing our G&A in this segment. So I think in asset management things are on track in terms of unwinding the Salus portfolio.
So wrapping things up on your slide 10, which is our usual sum of the parts valuation here on a blended basis we reflect the values of SPB, FGL and HGI funding based on market values and then the other areas are reflected based on book values, which is consistent with what we’ve done in prior quarters. And you’ll see our estimated value as of the end of the quarter was about $15.04 and that reflects a 7% increase this past quarter from the September 30 value.
So with that let me conclude my remarks and maybe open the call up for questions. George and I are happy to take any questions you might have. Operator could you please provide the instructions?
All right thank you Mike, thanks everyone for joining us today. We appreciate it we look forward to communicate to you next quarter. Thank you.
This concludes today’s conference call. You may now disconnect.
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