Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Jarden (NYSE:JAH)

Q3 2012 Earnings Call

October 25, 2012 9:45 am ET

Executives

Rachel Schacter

Martin Ellis Franklin - Executive Chairman

Ian G. H. Ashken - Vice Chairman and Chief Financial Officer

James E. Lillie - Chief Executive Officer and Director

Analysts

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Charles Strauzer - CJS Securities, Inc.

Jason Gere - RBC Capital Markets, LLC, Research Division

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Reza Vahabzadeh - Barclays Capital Inc.

Karru Martinson - Deutsche Bank AG, Research Division

Paul Simenauer

Andrew Burns - D.A. Davidson & Co., Research Division

Operator

Good morning, ladies and gentlemen, and welcome to Jarden Corporation's conference call. This morning's call will begin with management making some formal remarks. When they have concluded, a question-and-answer period will follow. [Operator Instructions] I would now like to turn the call over to Rachel Schacter of ICR.

Rachel Schacter

Good morning, and thank you for joining us for Jarden's Third Quarter Fiscal 2012 Results Conference Call. In accordance with Regulation FD or fair disclosure, we are webcasting this conference call. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Jarden is strictly prohibited.

Before we begin, please take note of our cautionary statement regarding forward-looking statements at the end of our earnings press release issued yesterday. All forward-looking statements made during this conference call are based on currently available information. Our actual results could differ materially from those predicted. However, we undertake no obligation to update any such statements, whether as a result of new information, future events or otherwise. For more information, please also refer to the risk factors discussed in Jarden's Form 10-K.

Please note that the company has posted supplemental financial data slides to its website and is providing reconciliations of certain non-GAAP to comparable GAAP financial measures in its earnings release and on its website. The presentation can be downloaded on the section for investors from Jarden's website under the Presentations heading. And now I would like to turn the call over to Executive Chairman, Martin Franklin. Martin, please go ahead.

Martin Ellis Franklin

Thank you, Rachel. Good morning, and thank you for joining us to discuss our third quarter 2012 results. Hopefully you've had a chance to review our earnings release issued last night. With me on the call today are Ian Ashken, our Vice Chairman and Chief Financial Officer; and Jim Lillie, our Chief Executive Officer.

We're pleased to deliver another strong quarter at Jarden, which included several strategic advances toward our long-term goals. As you've heard me say in the past, at Jarden, we focus on 3 primary drivers in our efforts to deliver constant profitable growth for our shareholders. These are optimizing the performance of our existing businesses, effectively managing our capital structure and investing capital in our businesses including disciplined acquisitions.

First, with respect to the performance of our businesses, we once again delivered a solid quarter, reporting revenues consistent with our guidance, expanding margins and strong adjusted earnings and cash flow. Ian will discuss the financials in more detail, but our results demonstrate our ability to consistently meet or exceed expectations and serve as a further confirmation of the value of the strategic direction that we have pursued for the last 11 years.

Over this time, we've built a close to $7 billion global consumer products company with compelling brands and talented management teams who are passionate about their businesses. Our brand strength, coupled with diversification in our products, channels, customers and geographies, provide us with a powerful platform from which to grow well into the future.

In terms of our capital structure, we have always believed that it's better to access the capital markets on an opportunistic basis rather than when we actually need capital. In September, we announced the closing of a $500 million private offering of senior subordinated convertible notes. This was Jarden's first convertible note offering and it was extremely well received, pricing above the initial range with our stock price rising 2.6% during the one-day marketing period. The greenshoe was also fully exercised within a few days of the initial offering. We believe that the positive reaction of investors to the offering is a strong endorsement of our strategy of taking a long-term view of our balance sheet and the needs of our businesses. We are extremely pleased with the outcome of the offering and the added benefit of being able to simultaneously buy back a further $100 million of our shares in connection with the transaction. Year-to-date, we have bought back $537 million worth of our shares and we have approximately $150 million remaining in our buyback authorization. We plan to seek authorization for a new program once this is completed.

As Jim will discuss later, we have recently launched a major investment initiative for our winter sports business. Similar to the $25 million investment we made in United States Playing Card Company in 2008 and 2009, this investment will support our product innovation and the quality and efficiency of our manufacturing platform for the foreseeable future. As a leader in the winter sports equipment sector, we believe that this investment underscores our commitment to the category and our consumers who expect the best from our brands.

During the third quarter, we also completed 2 tuck-in acquisitions, that, while small in size, are important in the furtherance of our strategy of expanding our international businesses. In the U.K., we acquired a small business selling small appliances in Europe, primarily under the Breville brand. We plan to combine this business with our existing European Consumer Solutions businesses, which are also based in the U.K. While we believe that the European markets will remain sluggish for the foreseeable future, we're building a stronger foundation to serve the overall European market than either of the businesses could achieve on a standalone basis.

In a smaller vein, we acquired a Brazilian provider of housewares, including thermal bottles and coolers sold primarily under the Invicta brand name. In addition to an experienced management -- senior management team, Invicta has a strong distribution network which should serve a valuable platform for the distribution of products for other Jarden businesses. Invicta is being integrated into the Coleman business within our Jarden Outdoor Solutions segment.

Finally, I'd like to comment on the inclusion of Jarden in the S&P MidCap 400 Index, which was announced by Dow Jones in August. We are proud to be recognized by S&P for our financial accomplishments and have now set our sights on growing the business so that Jarden could be considered for inclusion in the S&P 500 Index.

With that, I'd like to turn the call over to Ian to review our financial results in more detail.

Ian G. H. Ashken

Thank you, Martin. As a reminder, consistent with our quarterly practice, we have posted a more detailed financial presentation of our performance during Q3 on our website. We've also continued to disclose both as reported and as adjusted results separately in our press release.

Net sales for the third quarter decreased 1.8% or $32 million on an organic basis, adjusting for foreign exchange movements, as well as certain exited and acquired businesses. As anticipated, organic net sales in JOS declined primarily as a result of the forecasted lower sales in our seasonal businesses. Organic net sales also declined in Consumer Solutions primarily as a result of reduced inventory reorders in the mass channel at retail. The 9 months ended September 30, 2012, organic net sales increased 1.5%. In Q4, we anticipate organic net sales growth in all our business segments.

Adjusted gross margins increased 80 basis points in both the third quarter and on a year-to-date basis compared to last year. We've consistently expanded gross margins throughout the year, with strong margin expansion being driven by manufacturing improvement projects, stable commodity prices, as well as new products and mix. Jim will discuss segment gross margin performance in more detail but our margins continue to benefit from our focus on introducing higher-margin new products, as well as a disciplined execution of those manufacturing and operational improvement programs throughout Jarden.

As adjusted, interest expense was $45.8 million this quarter as compared to $43.7 million in Q3 last year. The increase is due to the high level of debt at September 30, 2012, primarily resulting from debt incurred in February of this year in conjunction with our Dutch tender offer, as well as interest on the convertible notes offering completed last month, offset in part by lower average interest rates which were 5.1% in Q3 this year versus 5.4% in the prior year.

Adjustment in the interest expense is due to the noncash phantom interest we've recorded in excess of the actual cash coupon on our convertible notes to reflect the accounting for original issue discount or OID on the convertible notes. The amount of the adjustment in Q3 was only $400,000, and on a full quarter run-rate basis, it will be approximately $3 million per quarter over the life of the notes.

In addition to our normal adjustments to GAAP resulted for intangible amortization and now OID interest and the tax effective all the adjustments, during the third quarter, we adjusted for 3 additional items: first, the required normal inventory step-up adjustment for the acquisitions made during the third quarter of $6 million, which should be a 1-quarter-only adjustment; second, reorganization and other costs related to the closure of existing factories and the move to new manufacturing facilities, primarily in conjunction with the manufacturing network optimization of $18 million, which Jim will discuss in more detail. We anticipate accruing up to a further $10 million of costs in Q4 related to the MNO projects, which, together with the charges taken in the third quarter, should cover over 80% of the costs of the current MNO projects with the balance being incurred in either late 2013 or the first half of 2014; third, we incurred $9 million of charges relating primarily to ongoing integration initiatives and transaction-related costs and expect to incur up to another $10 million of similar charges in Q4 and nothing further related to these projects in 2013.

Segment earnings margins for the quarter increased 40 basis points to 13.8% compared to the prior-year period and increased 30 basis points to 12% on a year-to-date basis. This is the continuation of the trend we anticipated at the beginning of the year with some of the gross margin improvements starting to drop to the bottom line. Adjusted earnings per diluted share rose to $1.35, up approximately 14.4% from the prior year. For the year-to-date period, adjusted earnings per diluted share rose to $2.91, an increase of approximately 18.4% compared to the prior year.

As Martin mentioned, in September, we announced the closing of a $500 million private offering of senior subordinated convertible notes due 2018. The notes pay interest semiannually at a rate of 1.875%. Of the net proceeds of $487 million we used $100 million to repurchase approximately 1.9 million shares of common stock, through negotiated transactions with the investors in the convertible notes offering.

Cash flow from operations in Q3 was $78 million -- $78.2 million as compared to $49.2 million in the third quarter of 2011. Improvement in our cash flow compared to 2011 is primarily due to our focus on reducing and leveraging our working capital. We achieved this reduction without incurring risks to the continued growth of our businesses. We continue to expect cash flow from operations to be at least $430 million for the full year 2012.

Our bank leverage ratio was 3.2x at the end of Q3, which compares to 3x at the end of the second quarter. The increase is due to our stock repurchases and tuck-in acquisitions in the third quarter. With our seasonally strong cash flow in Q4, we expect the ratio to be back to our target of 3:1 or less by year end.

As mentioned on prior conference calls, we had anticipated taking a charge in 2012 to repatriate cash from Venezuela not held for permanent reinvestment and restructure certain of our international manufacturing operations. We've outlined the charges under our MNO program on this call but are not taking any charges related to Venezuela through the first 9 months. It is still uncertain whether or not we will incur to the $25 million charge relating to Venezuela we discussed at the beginning of the year in Q4.

At the beginning of the year, we anticipated that our reported 2012 sales will be reduced by negative foreign exchange impacts of $80 million to $90 million. We revised this on our last quarterly conference call to the range of $125 million to $150 million for the full year. The foreign exchange impacts on our year-to-date results is approximately $100 million, and based on current projected rates, we now anticipate being within the range of $100 million to $120 million for the full year.

We continue to believe our average cost of borrowing will be fairly flat in 2012 compared to 2011 at approximately 5.1%, and that over time, capital expenditures will be at approximately the level of depreciation expense at 2% to 2.5% of sales. We anticipate our effective tax rate to be 35% in 2012 compared to 35.5% in 2011.

Based on the expected organic growth and continuing margin expansion in Q4, our solid results year-to-date for 2012 and the accretive effect of our buyback program, we are raising our "as adjusted earnings per diluted share" outlook range for the full year to $4.12 to $4.16 from the previously provided range of $4.04 to $4.14.

Now I'd like to pass the call over to Jim.

James E. Lillie

Thank you, Ian. As Martin and Ian stated, we are pleased with the performance of our business in the third quarter, as well as the progress we have made year-to-date. I'm pleased that our gross margin and operating margin initiatives continue to yield positive results during Q3, the cash generation continues to be strong and that we are raising our "as adjusted earnings per share" outlook for the year.

As you will recall, Jarden's annual growth objectives include growing organic net sales within our long-term average target range of 3% to 5%. As noted at the beginning of the year, most of our organic growth for 2012 was forecasted to be in Q2 and Q4, expanding gross margins by approximately 50 basis points, increasing adjusted earnings per share by at least 10%, increasing cash flow from operations through continued improvements in working capital management, as well as increases in our operating profits.

As Martin mentioned, we will make a significant investment in our winter sports business over the coming 2 years. We initiated our manufacturing network optimization project, or MNO, 3 years ago as an ongoing disciplined way to maximize the performance of our manufacturing facilities through continuous improvement programs and targeted investments. These investments are designed to help achieve a long-term competitive advantage while supporting our growth and innovation objectives to help improve gross margins, maximize operating efficiency and to selectively position facilities more effectively within our supply chain, relocating certain plants where possible closer to ultimate points of distribution, to minimize transit time, to improve proximity to suppliers and improve just-in-time activities while simultaneously improving working capital.

The winter sports initiative within MNO is focused on enhancing and creating the leading global winter sports manufacturing platform. Investments will include a new state-of-the-art manufacturing facility with more efficient facility designs, increased automation, improved material flow, enhanced product throughput in a more eco-friendly and energy-efficient infrastructure. We expect to spend approximately $40 million in capital in addition to the expenses Ian mentioned over the next 2 years on this specific project. As this project evolves, we will update you on important milestones in our progress.

Shifting to operating performance for the third quarter, we're particularly pleased to report continued gross margin expansion, and as discussed during the third quarter, we expect to comfortably exceed our 50 basis point improvement goal for 2012. Branded Consumables has had a strong year and posted organic net sales growth for the quarter of approximately 1% and gross margin expansion of approximately 150 basis points.

Fresh Preserving business maintained momentum from the first half of the year due to marketing efforts, favorable weather conditions, as well as our expanded presence at retailers. We continue to be pleased with the performance of Ball's FreshTECH electric appliance for Fresh Preserving. This product is designed to grow the market for Fresh Preserving by expanding the category to new, more urban consumers attracted by the ease of use of the appliance.

Our First Alert business is receiving very positive feedback on its new, smart bridge line of video security products with remote monitoring capability. In addition, I'm extremely excited about the upcoming U.S. launch in Q1 2013 of the world's smallest smoke detector, the First Alert Atom. Many of you have seen me carry this product around at investor conferences asking you to guess what the product is. So far, no one has guessed correctly. When you do see the product, you will not only see technological innovation, but also an example of what we call designer safety. It's innovative, aesthetically pleasing and compact, and we expect consumers to both buy or trade up to this product which is available in a palette of colors and finishes.

Outdoor Solutions, as I've mentioned throughout the year, had its organic growth in the third quarter impacted by both the mild winter from last year as well as the pull into Q3 from Q4 for approximately $30 million in 2011. This equated to a negative revenue comp of approximately $40 million in the quarter.

Outside of winter sports, some of the positives for the quarter within JOS includes team sports, taking meaningful advances on both new product introductions, as well as targeted growth initiatives. Our targeted growth initiative related to tail-gating yielded 30% year-over-year increased revenue in Q3. Our success is in part based on the fact that we are uniquely positioned to offer retailers a vast array of products, including grills, crock pots, collapsible chairs, shelters and coolers, all emblazoned with team logos under our licensing arrangements with the NFL, Major League Baseball and the NCAA.

Marmot continues to deliver against its aggressive growth goal. In Q3, Marmot opened its first retail mall location in North America in the King of Prussia Mall in Pennsylvania. The mall is one of the largest in the U.S. with an estimated 24 million visitors each year. An additional flagship retail location will be opened in November in Chicago on Rush Street. We continue to invest in Marmot retail locations as a top line growth vehicle, as well as an opportunity to showcase the Marmot brand and products.

Consumer Solutions segment recorded gross margin expansion of approximately 120 basis points and lower organic net sales of $20 million due primarily to lower mass retailer inventory reorders rather than any changes in POS. As Ian mentioned, we expect JCS to return to organic growth in Q4.

In the new product front, JCS had entered into an exclusive agreement with Anheuser-Busch to supply the durable appliance for A-B's Draftmark home draft tap system. Draftmark brings a true draft beer experience to consumers at home. This initiative leverages A-B's expertise in beer-brewing with Jarden's expertise in developing and manufacturing durable small appliances. The system was introduced in select test cities during 2012 with plans to roll out to other select markets in the coming year.

Based on NPD panel data, Mr. Coffee is now the #2 brand in single-serve coffee segment in small appliances. In addition to its #1 standing in the traditional automatic drip coffee appliance market, single-serve coffee is the largest and fastest-growing segment in all small appliances and we continue to see double-digit unit and dollar sales growth. To support this growth, JCS has launched a multimillion dollar campaign for the back half of this year which will carry over into 2013.

Internationally, our businesses continue to perform at or above expectations, due in part to appropriate budgeting in certain countries with known economic weaknesses. As we've indicated in the past, we believe that the seasonal staple and replenishment nature of many of our products is a great advantage to have in a difficult economic environment.

Turning now to commodities. The commodity environment is calm and we believe that it will remain so as we move into 2013.

Finally, we have healthy momentum across the businesses. Our growth plan for 2013, though not yet finalized, is very much aligned with our stated long-term growth objectives that I referenced earlier in my comments. Our 2013 plan is built on the foundation of our very detailed strategic planning process just focused on delivering revenue growth across geographies, margin expansion at both the gross and operating margin level, as well as continued strong cash generation. We look forward to discussing our 2013 growth plans in more detail on our year-ending call, but we are pleased with how the plan for 2013 and beyond is evolving.

With those comments and that update, I'd like to now turn the call back over to Martin for some final words.

Martin Ellis Franklin

Thanks, Jim. We are pleased with our year-to-date performance, and as we prepare to finalize our 2013 budget next month, we remain excited about the opportunities that the coming year will bring. While we must always be aware and abreast of the macro challenges that may arise, we remain focused on delivering the best product experience at the best value to our consumers while striving to outperform within the categories that we serve irrespective of how fast the category itself is growing.

I'd now like to open the call to any questions. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] And we will go first to Bill Chappell with SunTrust.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

I guess first on the Consumer Solutions side, you had talked about kind of a stoppage of orders maybe from one retailer at the end of the quarter. What are the inventory levels of that and why would they do it? And have you seen those orders come back as they've been in this quarter?

Martin Ellis Franklin

There was a phenomena at the end of the quarter where a mass retailer put the brakes on orders. It had more to do with the inventory position of other people's products. Our POS has been good throughout the year with this particular retailer, but I think they probably found themself in an over-inventory position with other products and so put the brakes on orders. Those orders subsequently picked back up to the first week of Q4 for us, so the overall motivation we're not quite sure of. But we feel that we're in a good position to continue to execute for that retailer.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then a couple on the outdoor side. I guess first, I mean, do you have kind of a final state of the state for the winter sports business for 2012 and kind of expectations of assuming normal weather what 2013 looked like? And then on the MNO, any idea if your spending $40 million to rework that? Is that a 1-year, 2-year, 3-year return on your investment? I mean what kind of cost savings you might get?

James E. Lillie

Sure. So on your first question, we don't have a view on the weather for next year, I think...

Martin Ellis Franklin

We have a hope, a little sense of view.

James E. Lillie

But the winter sports business decline in revenue on a year-over-year basis is going to be consistent with the guidance that we've been giving for the last 10, 11 months, which is in the neighborhood of down $50 million on a year-over-year basis. You saw the impact this quarter. As far as MNO goes, now the spending is going to occur over the next 2- or 3-year period. And obviously, it has an appropriate return on investment. We're setting the stage. We're taking certain facilities that are decades old consolidating and so we expect to see gross margin improvement in the appropriate return on the investment.

Operator

And we'll go next to Charlie Strauzer with CJS Securities.

Charles Strauzer - CJS Securities, Inc.

Just picking up from where Bill left off, if you look at the gross margin improvement of 80 basis points year-over-year, obviously, you had the headwind this quarter from winter sports which is usually higher margin. You still were able to kind of get that 80 basis points. If we delve a little bit more into that and to kind of the dynamics behind what's driving the improvement there, is it really across the board or is it more commodity-related and what should we expect it going into Q4 to?

James E. Lillie

You're absolutely right on the gross margins. They're actually held down a bit because skis are a higher gross margin than the fleet average, and so you would have see more gross margin improvement in the quarter. If you look at -- sorry, Charlie, I forgot the second part of your question.

Ian G. H. Ashken

Charlie, for a second -- it's Ian. I mean in the quarter, it was basically a Consumer Solutions, and Jim, I think his comments, Consumer Solutions and Branded Consumables reach, one was up 120 basis points, the other was up 150 basis points. So if we're up average at 80 basis points, you can tell JOS didn't contribute to that and that is because of the mix within that division. So that makes us very optimistic as we start to look forward to next year that, as always, the diversification of Jarden will continue -- one of the cylinders may not be working at any particular time, but we're still able to deliver on our overall targets.

James E. Lillie

But the gross margin, Charlie, is built on a four-legged stool of manufacturing improvements, managing commodities appropriately, the mix of products and the fact that we're getting pricing within seasonal businesses.

Charles Strauzer - CJS Securities, Inc.

And just picking up from what Bill had asked you about the inventory levels with JCS, when you see them kind of go through this problem, this kind of inventory reduction, is it really more just kind of you're a victim of your own success where you're selling so well that they have to put the brakes on you to kind of clean out some of the weaker selling products?

James E. Lillie

We've had initiatives all year long to improve our inventory position at retailers and managing more on a JIT basis or just-in-time basis. It's hard to say what the inventory position of other people's are, but we're happy with our POS and we hope to get the orders relative to our POS performance.

Operator

And we will go next to Jason Gere with RBC.

Jason Gere - RBC Capital Markets, LLC, Research Division

Hey, I was wondering if you give a little bit more color on how we should think about organic sales expectations for the fourth quarter. I know you said, look, that they will certainly all be positive and it sounds like some of the third quarter shortfall in JCS will come back through. But you guys have always kind of bracketed everything to that 3% to 5% kind of outlook. It kind of feels like 3% probably is a stretch for this year, but -- so I just wanted to say if you can provide a little bit of color about the fourth quarter and maybe some of the -- if there is a range, what are the drivers there. And then next year, can you get back to that 3% to 5% as you still probably have a little bit of the ski issue here, but also comping against maybe fishing starting a little bit earlier this past year as well?

Ian G. H. Ashken

Jason, it's Ian. I think in terms of Q4, I think the Street said a round sales number of $1.8 billion which as we sit here in late October, we feel comfortable with. So and the 3% to 5% range, as with all of our ranges, I mean, these are where we expect the business to perform on a long-term average basis. I mean, obviously in the past some years we've done 6%, some years we've done negative 1%. We feel comfortable that the average run rate for Jarden will be 3% to 5%. And as we look forward to 2013, that's certainly our expectation. Obviously, we haven't finished the budget and within, again this diversification, I think we'll find that one of our businesses will outperform and one will underperform and hopefully we'll hit that average in '13.

Jason Gere - RBC Capital Markets, LLC, Research Division

Okay. And then within that $1.8 billion, how much should we account for the acquisitions? I know there's a little bit this quarter. We should probably get a full rate. What would be the net, I guess, amount for acquisitions.

Ian G. H. Ashken

Obviously, in the supplemental slides, we give the disclosure for the acquisitions and the net impact for in the Q3 was $11 million. On an annual run rate, the net impact is about $100 million. So those are the -- really the information.

Jason Gere - RBC Capital Markets, LLC, Research Division

Okay, fine. And then just the last thing, in terms of the investment in the winter, so can you just I guess provide a little bit more color just like the P&L effect here? What is that? How does that kind of play through? And clearly, obviously, there's other benefits that are coming through that should help kind of offset that, but I guess just a little bit more color would be helpful.

Ian G. H. Ashken

The new facility won't be up and fully running until the '14, '15 season. So what we've done is we announced it internally yesterday, and those announcements, I think, were very well received because obviously this is a major investment and it's good for the business, it's good for customers everybody to see that we're raising the bar. And then the accounting really drives the expense because we've accrued something with the announcements into Q3. I've told you we're going to have something further in Q4. And then depending on when we hit the benchmark for the [indiscernible] to occur, which we think will either be the end of '13 or beginning of '14. Obviously, this is a global initiative and we're pretty excited by it, but there's -- it's a lot of money, but also, we have to execute right. And I think we've got a good track record doing these projects well, but we have a lot of resources aimed at making sure that this is a success.

Jason Gere - RBC Capital Markets, LLC, Research Division

Okay. So to better understand a little bit in '13, but probably more '14 when it's up and running.

Ian G. H. Ashken

Well I think about 20% of -- I think the numbers I gave was $18 million this quarter, there's $10 million next quarter. Then if you divide that by 0.8, it comes to about $35 million. So you got say a max for another $10 million that will either hit in late '13, early '14.

Operator

And we we'll go next to Joe Altobello with Oppenheimer.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Just first question, I wanted to follow up on an answer Ian you just gave to Jason on his earlier question about the cadence of your business and how it does bounce around from quarter-to-quarter because if I adjust for the pull-forward last year and the $10 million in this quarter, Outdoor Solutions organic sales were still down. And if I adjust for the lack of orders like in the quarter, Consumer Solutions organic sales were still down. So is there anything that's changing in terms of the consumer? It sounds like that's not the case. Or is there anything changing with regard to your retailers outside of this one mass retailer with regard to their willingness to hold inventory late in the year? Or is this just noise essentially?

Ian G. H. Ashken

No, I would say slightly differently. I think the Q3 comp was always going to be difficult. If you look at our Q3 last year, it was a really good quarter and that's why right from the beginning of the year, we always felt Q2 and Q4 would be easier. Putting aside these items that Jim described and you just went through, and obviously one of the things that we do when we do the budget is, we'll look at next year compared to this year and give you some guidance on which quarters we think will be the stronger growth quarters just on a comp basis outside of what we see going on with our business. But I think that's the main thing on Q3. Obviously, you see something in Branded Consumables where they were marginally up on an organic basis. But they had -- I mean, the largest foreign exchange impact was in Branded Consumables in the quarter. So I think that -- does that really sort of answer your question?

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Yes, it does, I think. I mean obviously, it just seems like even if you make those adjustments at the top line and those 2 segments overall were still somewhat weak, so I'm just curious. It just doesn't sound like there's anything structural, it's just...

Martin Ellis Franklin

No. I mean -- this is Martin. I think that our positions in retailers and our share of shelf and all of that are exactly where we thought they would be. We're perfectly happy with the overall. And as you know, as Ian said, Q3 last year was very, very strong, it was up 5% organic and which makes it a tougher comp. And the reality is, as we look at our business and retailer conversations for 2013 to get back to the organic growth range that we've described before, we think is very achievable and in the parameters of our budget.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Okay. And just secondly, in terms of your $5 EPS target for 2014 which you've talked about in the past, you've always kind of talked about a 13.5% or so EBITDA margin to get there. And obviously, you have done a fair amount of stock buybacks of late, which probably accelerate you to that goal. Is 13.5% by 2014 in terms of an EBITDA margin still feasible at this point?

Martin Ellis Franklin

I think just to clarify, it wasn't by 2014, it was in 2014 so the year end 2014, if you look back. In the metric that we built for our organic model to be able to achieve $5 a share of earnings, that was in as part of our model, obviously with the buyback, being able to achieve that, we might have more room and obviously -- and this is consistent with what we did 5 years ago. We create objectives for our business for the following forward call the real medium-term 5-year parameter. To some, that's long-term, some that's super long-term. But from our perspective, that's a medium-term parameter and we're getting close to that inflection point. And whether that's the end of 2013 or the end of 2014, as we get there, we'll obviously set a new set of directives for our businesses and objectives of how we get to the next level. So that -- go ahead.

James E. Lillie

Just on the margin front, I mean obviously, Joe, there's a lot of work to drive improvement in the operating margins across the business. And --

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Driven by MNO.

James E. Lillie

MNO is one of those things and that's why we're making those investments. You need to spend money to make money. And so we have businesses that are well above that 13% range. We have some that are under that range and there isn't one business in Jarden that we're not trying to make better. And ultimately, the fleet average we'd like to see to be in that 13%, 13.5% range, 15% on a consolidated but then taking out the corporate expenses so that's the target. And then when we hit that, we're going to focus on other targets.

Operator

And we we'll go next to Reza Vahabzadeh with Barclays Capital.

Reza Vahabzadeh - Barclays Capital Inc.

Just on the balance sheet, you have a fair amount of cash on the balance sheet, Ian, and obviously, the company generates very healthy free cash flow. Any thoughts on the use of the healthy amount of cash and cash flow on a go-forward basis? Is it acquisition, share repurchases, just on the balance sheet, anything?

Martin Ellis Franklin

The answer is yes. Reza, it's Martin. I mean look, I'm going to say what I said before. Obviously, we're going into our biggest cash flow quarter. We do $430 million plus of cash from operations. We've got to generate about $350 million of cash in the fourth quarter. Where we stand today, we think that we're in line with that. So you know what our cash balance is on the last announcement, and obviously, it'll go up from there. So we'll likely close the year with a significant cash balance, as you know. What we do with that cash is part of our job. We can -- if we think we have acquisition opportunities that have higher and better use for driving shareholder value, we're not afraid to do that. We haven't been afraid to in the past. The reality is, is that we've seen that with our company trading at about 11x earnings or whatever the number is, we still see our stock as the most attractive use of capital. We want to keep our leverage ratio 3x or below. You'll see that we have every expectations that by year end, we will be below that ratio. How much below will depend on the year-end cash flows. But the reality is, we've got lots of room and we're not going to rush to judgment on what to do with our capital, but we will put it to use sometime early in the next year if we -- based on our own objectives I guess.

Reza Vahabzadeh - Barclays Capital Inc.

Right. Obviously, speaking of acquisitions, you made some smaller bolt-on acquisitions in the third quarter. Just broadly speaking, are you seeing more targets out there available in the overall pool of opportunities? Or is it about the same and you just happen to find the right price and the right target in this third quarter?

Martin Ellis Franklin

If you saw my desk in our little office here in Rai it's about 2 feet high, maybe 3 feet high of different books of different presentations on different things. I got a little theory on it, which we talk about here which is if you look at the earnings curve after the collapse of the economy, every company has gone to the market to try and sell themselves, look with a sort of hockey stick on the right. But really, if you went back a further 3 years, it's much more of a U shape because their earnings fell with the contraction of the economy and then they picked back up again in 2010, '11 and their forecast for '12. So there's all this -- people are trying to hit the market on rosy expectations, extrapolating from what was really a recovery. Does that make sense to you, do you understand what I'm saying? And for that reason, a lot of companies have been put out there. And typical for Jarden, we look at a lot of things. The public only see very few things because we are very disciplined on acquisitions. There are a number of things, some small, some not so small, that we have not bought simply based on valuation, and that will continue to be the case. I think there is a lot of product out there, but we haven't seen anything sufficiently compelling on a valuation basis to move on it. The international acquisitions were very much driven by the strategic initiatives for growing our international platform and helping our businesses drive into new markets to achieve the long-term growth objectives that we're looking for them. But as I've said before and I'll say it again very clearly, we do not need to do any deals to make the numbers that we have put out there for public expectation and that continues to be the case.

Reza Vahabzadeh - Barclays Capital Inc.

Got it. And then Maybe a bigger picture question for you and Jim. I mean, obviously, organic sales trends for you have ebbed and flowed, but your long-term target remains the same. How do you see the U.S. consumer out there, the state of the U.S. consumer out there just given the mixed factors that is affecting the consumer?

Martin Ellis Franklin

I'm probably the least biased because I can't vote, so I'll give you my view. It's Martin. Look, I think that no matter who wins this election in November, I think there is a very good possibility that 2013 is actually going to be a good year for the U.S. economy. And one of the reasons that I say that, and did you know we've been pretty good prognosticators of the macros, the economy and how we've therefore, treated our business really over the last 5 years or more. The reason for, in my view, is very simply that housing is on the rise in the sense that there is a lack of inventory for the demand that's out there. And in the same way that the U.S. economy came down on the back of housing and all of the derivatives of housing, I think you will find that a lot of the uptick in this U.S. economy is going to be driven by housing, no matter what the politicians do to try and screw it up. So, I think there's a good possibility that 2013 and whether it'd be 2013, second half of 2013 or 2013 and 2014, have really good opportunity to be healthy years for the U.S. We're not obviously being rose-colored glasses in our budgeting process, but there is room to overperform. I think that as soon as the economy tightens and things get stronger, as you know, the U.S. can't control long-term rates. The Fed can control short-term rates, not long-term rates, I think there's a possibility that you'll see some inflation. And if you see some inflation, obviously you'll see more organic growth. So I think that's the rosy picture. Obviously, there are a lot of macros and black swans and all various things that people talk about that could get in the way. But as we sit here today, the U.S. economy is in a relatively healthy state and we think that there's opportunity for 2013 to actually be a pretty good year for the consumer.

Operator

And we will go next to Karru Martinson with Deutsche Bank.

Karru Martinson - Deutsche Bank AG, Research Division

Just to follow up on the use of cash, you guys discontinued the dividend kind of in favor of share buybacks and looking for acquisition. I mean, are there any plans to change that or are we still comfortable where we are?

Martin Ellis Franklin

No, I think that shareholders, and if you look at how the stocks perform, I think shareholders have spoken and their extreme preference is buybacks. Let me caveat by keeping the leverage ratio at 3x or below, buybacks and acquisitions are I think where we're going to be focused.

Karru Martinson - Deutsche Bank AG, Research Division

Okay. As you guys look at inventory at retail, if others are kind of falling short, I mean, is there an opportunity for you guys to consolidate some of that shelf space, some category management of taking over categories? What's the outlook there?

James E. Lillie

Well, we always have ongoing conversations. If a retailer has a category that they think that we could do a better job in, we're happy look at that from an M&A or an organic development standpoints. There are other weaker people out there. Dovetailing off from Martin's comments about the improving economy, it's still incredibly incumbent upon us to come out with new products that are innovative, market-leading to give people a reason to come into the aisles and that's why we've been as successful as we have because we help retailers pull consumers into the stores. So we're always looking back to your first point about, are there other categories where we can do better job and perform better and partner with the retailers.

Karru Martinson - Deutsche Bank AG, Research Division

And then just lastly, with raw material costs stable, does that include what we're seeing on labor and shipping? Or is that just -- are those separate?

James E. Lillie

Well, we look at labor separately. When we look at our raw materials, we also look at transportation and we're in a good position on transportation all the way from ocean cargo. There are fuel surcharges that come up and come down depending on the price of diesel in a given market. But we're very comfortable with the outlook. We think things are relatively calm. It doesn't mean there's some shorter wavy lines among certain commodities like butane and things like that, but we feel good about the commodity outlook.

Operator

And we will go next to Carla Casella with JPM.

Paul Simenauer

This is Paul Simenauer for Carla Casella. Just a follow-up questions. First, how's inventory in the trade for ski season?

James E. Lillie

Inventory in the trade for ski season obviously is up on a year-over-year basis due to the lack of snow pretty much everywhere around the world. That inventory isn't necessarily our inventory. We're actually in a pretty good inventory position. But as many people know, we primarily build to order, so there's very little upside potential if you have a good start to the winter. We can run some of the factories in the month of December, but we're not going to risk having aged inventory in the hopes that it snow and that's really why we feel pretty confident that it's a $50 million or so impact to the season.

Paul Simenauer

Got it. And then second, in your household products, are you guys seeing any change in consumer behavior at mass merchants or any weakening or trade-down?

James E. Lillie

No, I think we're building products and delivering products that people both want and need. And to my earlier point, as long as we're innovative, I think that people are going to continue to give us a lift. Our POS has been very good this year, and our outlook for next year, as we talked about earlier, we feel good about directionally where the business is heading. We've got good momentum heading into 2013. And on the back of some pretty exciting new products like that A-B Draftmark system and the First Alert Adam that I referenced, and Martin was on Kramer last night, so he had one in his hand if you want to check the file.

Operator

And we have time for one more question. We'll go next to Andrew Burns with a D. A. Davidson.

Andrew Burns - D.A. Davidson & Co., Research Division

The winter sports initiative is exciting news. Could you maybe step back from the P&L implications on -- direct P&L implications, and talk more about the capacity changes net-net when it's completed? And also, any product quality or market or time-to-market enhancements perhaps the ability to run factories closer to season or anything in that manner?

James E. Lillie

Well, look, I don't want to tell the world the capacity of what we're planning on doing with the new operation that we're building, but it creates a lot of efficiency. It creates a lot more effectiveness running that on a more year-round basis, which will help with absorption and everything else. And there's going to be some automation. It's going to be eco-friendly, as I've mentioned. And I think if you look at the ski industry, there isn't one company out there that has made this kind of investment probably in the last 10 or 20 years. And so I think it's going to be distinct competitive advantage in delivering great products at an appropriate price within a more effective JIT system, which ultimately will benefit working capital. So we're really excited about what this will bring to the market, into our customers, into the ski -- or the winter sports industry in general. When we speak winter sports, we're talking snowshoes, bindings, snowboards and ski. And to have all of that effectively running under one roof is a great opportunity for us and for the industry.

Andrew Burns - D.A. Davidson & Co., Research Division

And one quick follow-up. On the working capital, great improvements in 2012. Are there large opportunities still left out there? Or how should we think about working capital efficiencies in the coming year?

James E. Lillie

If you went to all the businesses, I would think that they are quite familiar with those 4 points I pointed out at the beginning of raising our sales 3% to 5%, improving gross margins, improving net income 10% and extracting more cash out of working capital. They probably mumble that in their sleep. And so there's always opportunity. Okay thank you.

Martin Ellis Franklin

There aren't any more questions, I like to thank everyone for joining us and look forward to reporting our full year results in the new year. Thank you for your time. Bye-bye.

Operator

Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect, and thank you for participating.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Jarden Management Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts