HRG Group, Inc. (NYSE:HRG)
Q3 2016 Earnings Conference Call
August 9, 2016 10:00 AM ET
James Hart - Senior Vice President of Communications
Omar Asali - President and Chief Executive Officer
Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the HRG Group, Inc. Third Quarter Earnings Conference 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. James Hart, Senior Vice President of Communications. You may begin your conference.
Thank you, Nicole, and good morning, everyone. Welcome to our quarterly conference 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 website 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 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. 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’ll begin by turning the call over to Omar.
Thank you. Good morning, everyone, and thank you for joining us today. I’m going to start on your Slide 5, with a high-level review of the quarter. In Consumer Products, Spectrum reported record third quarter results with solid organic top line growth. Home and garden and hardware and home improvement achieved very strong results and Global Batteries delivered excellent growth during this past quarter.
Spectrum achieved these record results despite challenging weather conditions in Europe and North America, in particular, in April and May, and tighter inventory management at certain key retailers. We continue to believe that Spectrum’s more and more and more strategy will provide pathways for further organic growth. And as a result, we expect Spectrum to grow free cash flow by more than 10% over fiscal 2015, and achieved record results for the 7th straight fiscal year.
Turning to insurance, closing FGL’s transaction with Anbang remains a priority at HRG. While we won’t comment in detail on the ongoing regulatory process, you should know that we are continuing to work closely with Anbang and are engaged with the regulators to secure the required approvals to complete this transaction.
In energy, the transaction we recently announced to sell our interest in Compass simplifies our business and eliminates the HRG’s exposure to the volatility of the oil and gas sector. The sale should provide sufficient proceeds to fully pay down the outstanding credit facility at Compass and eliminate the HRG guarantee on that debt. We think this is a decent outcome, given the very challenging and very difficult commodity price environment.
Over at asset management, the wind down at Salus is nearly complete and the outstanding ABL receivable is down nearly 80% from the start of the fiscal year, given our collection efforts. We further simplified our holding structure in asset management and the overall business by winding down the operations of energy and infrastructure capital, as we didn’t see a path forward for that business to achieve meaningful and profitable scale.
Finally at the HRG level, as we said on previous calls, we will discuss our plan for the FGL proceeds following the close of that transaction. But as I’ve said multiple times in the past, you should know that we remain very committed to pursuing strategies that will maximize shareholder value.
Turning to your Slide 6 for a more detailed look at Spectrum’s record third quarter performance, revenue increased by more than 9% on a reported basis or more than 10% without the impact of FX. The reported revenue reflects very strong performance across Spectrum’s diverse portfolio, including record results in home and garden and HHI, as I mentioned earlier.
Currency consistent organic growth, excluding the impact of M&A in the auto care grew – increased 3.7% over the third quarter in 2015. This impressive growth in the top line was matched by an even more impressive growth in profitability. Spectrum’s adjusted EBITDA increased 18% to $279 million this past quarter, while its adjusted EBITDA margin increased to 160 basis points to a very strong 20.5% margin.
Year-to-date, Spectrum has expanded its adjusted EBITDA margins by almost 200 basis points with increases in all lines of our business. We believe this expansion is due to Spectrum’s continued focus on optimizing its product mix, utilizing shared services and infrastructure, and seeking continuous cost improvements.
This quarter, gross profit margins increased 230 basis points from last year to 39%, as Spectrum continues to exit unprofitable areas of the business and management continues to perform very well at that company. Also in the quarter, SPV paid down its term loan by $250 million and we expect to end the fiscal year at below four turns of leverage.
Last quarter, we told you that we believe SPV is undervalued. Spectrum had a terrific quarter this past quarter and recently the stock price has performed well in response. But we still believe that Spectrum is undervalued and we continue to see significant upside in the stock.
Moving over to insurance on Slide 7, the net book value of Front Street increased modestly from the second quarter to more than $97 million, while FGL is reflected in our financials as an asset held for sale. We think it is important for you to understand that the management team at FGL continues to run the business very well and delivered a fantastic quarter.
Annuity sales, including FIAs and MYGAs were $832 million in the quarter, up more than $300 million from the third quarter last year. Over that same period, adjusted operating income nearly doubled to $48 million, and our ROE grow from 7% – grew from 7% to an impressive 13% year-over-year.
In addition, FGL grew its assets under management by more than 5% to $18.9 billion, and FGL’s portfolio is well-positioned, as FGL purchased roughly $800 million of new assets this past quarter at an average yield of 5%. Across its entire portfolio, FGL’s average earned yield increased 28 basis points from a year ago to 5.01%. Taking these strong results together, FGL’s GAAP book value excluding AOCI increased to nearly $1.5 billion, or $1.50 per FGL share to 25.05 book value per share.
As I mentioned earlier, we will continue to work on securing the remaining approvals and closing the pending merger between FGL and Anbang, and this remains a top priority for HRG, as well as FGL.
In energy on your Slide 8, the results this quarter reflect the impacts of decline in commodity pricing, as well as obviously the prior sales we have done that were completed in November of last year. As a result, revenue declined 60% in the quarter, but adjusted EBITDA has remained positive, both in the quarter and year-to-date at Compass.
But the real story here is about our recently announced transaction to sell our interest in Compass and eliminate HRG’s exposure to the commodity price volatility, which I mentioned earlier. We expect to close this transaction in the current quarter.
On Slide 9, turning to asset management real quickly, the progress we’ve made in unwinding Salus loan portfolio continues. The outstanding receivable is down nearly 80%, since the start of the fiscal year, primarily through recoveries of the outstanding loans. We continue to expect that the wind down will be substantially completed by the close of the calendar year.
During the quarter, we received the payment of $65 million on RadioShack loan with an additional $7.5 million expected. As we previously told you, we’ve been working to maximize the return of our capital from this transaction. And we are pleased that this recovery was greater than the carrying value of the loan in our books.
Lastly, wrapping things up with our traditional some of the past presentation on your Slide 10, keep in mind that this reflects the market values as of June 30, 2016, which shows an increase of 7% from our value at the start of the third quarter and an increase of 21.5% from the start of the fiscal year.
With that, I’ll conclude my formal remarks, and we’ll open up the call for questions. Operator, could you please provide the instructions.
[Operator Instructions] At this time we show no questions. I turn the call back over to James Hart.
Thank you, everyone. Thank you for joining us on our call today. Enjoy the rest of this summer. We look forward to reporting to you in the fall.
This concludes today’s conference. You may now disconnect.
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