SPB - Spectrum Brands

[kab60]

Thanks for your thoughts on this one. I wonder how much is kitchen-sinking / conservative outlook just going forward.

Difficult to say. I was a bit disappointed since Maura seemed very upbeat on the last call and it sounded like the best was yet to come. Well, it still is. :) Anyway, say they cut interest in half with sales proceeds (should be more), lower capex due to divested ops and they should be near some 400m pretax FCF before WC next year. Pretty high yield on 2500m equity value but higher debt than expected, worse performance from ops and still some closing risk (I think Energizer are dumb here). They seem to do the right things, but another divestment wouldn't bother me.

[kab60]

Alright, so the EC approved the battery and lightning deal to Energizer the other day. Stock didn't react but I was pretty relieved.

 

The last set of results were an unmitigated disaster, as an analyst from Raymond James wrote, but the numbers looks interesting if they can get their shit together (and that's a big if, which is why I think we get a big fat discount here. Oh yeah, the CEO and members of management apparently plan to sell 20m worth of stock as well. Talk about terrible timing).

 

Anyway, some rough numbers: They have some 4,2b in net debt today.

 

They get 1,8-2b from battery and lightning division plus 1,25b from Autocare (some of it in stock, but I'm using rough estimates). Taxes should be pretty minimal.

 

Now, if all goes to plan, they could bring debt down to 950m or 1,66 times net debt/ebitda. But they target a leverage ratio of 3,5x or some 2b.

 

That means they should have some 1b cash to buy back stock which would buyback 40 pct. of shares outstanding.

 

It also means they're trading at around 5,7xev/ebitda while selling two divisions for more than 10xebitda (one of them struggling).

 

I think it's highly unlikely they buyback 40 pct. of shares outstanding (I've never seen that done before), but their debt is pretty cheap (when they take out an almost 8 pct. term loan), and if the stock stays down here I'd love for them to do it.

 

(I probably forgot to factor in a bit of leaking here and there and the numbers are very rough - a bit on the optimistic side probably (300m of sales proceeds are Energizer stock, and battery proceeds might come in a couple of hundred million lower due to amended agreement).

 

[kab60]

Clearly, this is a show me story, but they announced the other day autocare is on track to close in the beginning of 2019. Which means they get some 3b in cash in january/february vs a market cap of 2.2b today. They can take out very expensive debt, refi the remaining and possibly buyback a huge amount of stock. It's pretty easy to see the potential for a double if they get their operations in order and surprise a bit to the upside for once, while the very liquid balance sheet should offer good downside protecting (and lots of potential upside). I was too early (down 35%), but I like the case better today, since we're very close to closing.

 

Anyone else following?

[Broeb22]

Yes, still following this one. Still bullish, the interest savings from deleveraging by $2.7BN down to their targeted 3.5x leverage target would be approx. $180 mil. pre-tax ($135 mil. post-tax), off a base of a very rough $200 mil. FCF.

 

I say very rough because they are changing their continuing/discontinued operations from the way they were reported this year vs. how they will be reported going forward. Specifically Auto Care was in continuing ops this year and won’t going forward, while appliances was in discontinued ops but will be continuing ops going forward. So it’s hard to reconcile last years numbers to the go forward business with much specificity. Mgmt said on recent call that Appliances generated $119 mil. EBITDA last year vs. $117 mil. at Auto Care.

[kab60]

Doubled my position. Trades at <8xEV/Ebitda while selling two divisions for 12,6 and 13,7x last year. HY debt retired, leverage down to 3,5x and increased investments in marketing etc (profitability supposedly suppressed - revenue grew 2,7 pct organically in company Q2). Bought back 8 pct of outstanding shares in Q1 (company Q2). Will probably announce additional initiatives in Q3 and articulate more clearly how much cash they will generate after their total balance sheet makeover.

 

[Broeb22]

As a shareholder, competition from P&G in bug sprays is somewhat scary. I don't know how much distribution in LOW or HD that P&G has, but anytime a name like them gets involved in your niche, it's time to compete very hard.

[gfp]

P&G's bug spray products have absolutely terrible reviews.  I don't see them gaining any traction unless they are willing to drastically pivot.

 

As a shareholder, competition from P&G in bug sprays is somewhat scary. I don't know how much distribution in LOW or HD that P&G has, but anytime a name like them gets involved in your niche, it's time to compete very hard.

[Spekulatius]

P&G's bug spray products have absolutely terrible reviews.  I don't see them gaining any traction unless they are willing to drastically pivot.

 

As a shareholder, competition from P&G in bug sprays is somewhat scary. I don't know how much distribution in LOW or HD that P&G has, but anytime a name like them gets involved in your niche, it's time to compete very hard.

 

The reviews for P&G bug sprays aren't terrible:

https://www.homedepot.com/s/zevo%2520pest%2520control?NCNI-5

 

Haven’t tried them myself, so no personal opinion.

[kab60]

As a shareholder, competition from P&G in bug sprays is somewhat scary. I don't know how much distribution in LOW or HD that P&G has, but anytime a name like them gets involved in your niche, it's time to compete very hard.

If that is what sent the stock from 65 to 50 recently, I think it is discounted already. ;)

[Broeb22]

The threat of P&G entering may be discounted but them gaining traction likely is not. Obviously too soon to tell if they move market share.

[kab60]

Isn't it just normal competition as one would expect? Again, trading @less than 8xEV/Ebitda while selling two divisions for 12,6 and 13,7x last year. And that's while investing margin to drive sales.

 

[Broeb22]

It's a medium sized position for me, so I'm not trying to be negative just for the sake of being negative. It's probably not even likely that P&G succeeds, but its a medium-sized risk.

 

I am perhaps giving it more weight because the bug spray section seems to be a pretty cozy duopoly/oligopoly at any home improvement store I've been to. You can see that in the EBITDA margins of the various segments SPB has left.

 

It's not their only segment, but no one is going to be exchanging high-fives if the EBITDA margin in their highest-margin segment faces headwinds.

 

That's a potential $15 million EBITDA headwind on a $130 million EBITDA base for Home and Garden (assuming the targeted products are 30% of the segment and EBITDA margins in those product categories fall by half). Not a company killer by any means, but it could mean this wasn't as cheap as I originally thought.

 

With that said, they have made a lot of unforced errors in the last few years, which they are in the process of correcting, so even if some headwinds materialized, it's hard to see last year's EBITDA as anything but a trough level.

 

 

[kab60]

Don't get me wrong, I definately appreciate the input and think you're much more into the details than I. And agreed it's a negative, but I just think we're very much compensated at these levels. Apart from GARP there is optionality in M&A or a sale of the whole company  (NOLs might make that tricky short term). SPB @ 7,8x ev/ebitda, P&G @ 17,9. SPB bought back 8 pct of shares in company Q2 at these levels. Hopefully they keep going. FCF yield should be big in 2020, and they already expect to be at 3,5 leverage end of Company Q3, so it might already be starting to throw off a lot of cash (and they also have that energizer stake).

[kab60]

These guys came out with some pretty good numbers yesterday and have been rewarded. There's obviously a lot going on internally - fixing a whirlwind of historical M&A and focusing on day to day ops instead of corporate finance - but if they're able to execute and grow both top and bottom line next year, as they expect, we could be in for a nice surprise. It's cheap already on an ev/ebitda basis and even moreso if one buys their argument, that they're investering margin to grow sales - and then you have plus 1B of NOLs as well as a stake in Energizer (which unfortunately has been hammered recently - but indicates David Maura wasn't the sucker at the table when he sold them the battery business).

[kab60]

Just a small update after the runup to 55/share.

 

There's no FCF estimates from analysts according to Sentieo, but consensus ebitda is pegged at 589m. Interest is 135m, cash taxes 40-50m and capex 60-65m. So around 345m FCF (if working capital is steady) on a 2,7b market cap or a FCF yield of almost 13 pct. for fiscal 2020.

 

Some of their new products have gotten pretty good reviews at Amazon, which is an increasingly important sales channel.

 

They also have close to 300m of 6,625 2022-bonds outstanding which can be called in around two months. I'd probably prefer buybacks, but leverage is still somewhat high, and if they take out the bonds and equity markets stabilize it could set them up for a refi which would lower interest costs.

[thepupil]

courtesy of JEF, I'm now an SPB shareholder.

 

Is this not stupid cheap? I don't really get it.

 

$4500 EV

 

$560mm guided EBITDA less $60mm capex = $500mm EBITDA-CAPEX = 500/4500 =11% to the enterprise value, mid teens to the equity. If we assume they blow out of their energizer at a 25% discount to the current price, that'd add another 50 bps of yield on the EV (500/4350) = 11.5%

 

I understand it's a diversified portfolio of also-rans and mediocre businesses, but doesn't that also reduce the risk of a huge negative inflection in earnings power?

 

For those that own this or looked at it but passed, what's the bear case? Is it simply that management has no credibility from past misdeeds and therefore the burden of proof is on them? Or have you been able to identify something more tangible?

 

Also, there shouldn't be a "discount for leverage" here. 3.5x with 5%-6% debt on its way to becoming 4% debt and 4-5x coverage seems very reasonable.

[Broeb22]

I agree that the market doesn't believe management right now.

 

There are perhaps a few other points bears would point to:

 

tariff sensitivity

new competition in duopolistic insecticide market (Spectracide) from P&G

lack of interest in the appliances business that they tried to sell but couldn't do at a respectable valuation (this anecdote kind of justifies a lower valuation for the whole portfolio in bears' minds)

CEO Maura distracted by his SPAC, Mosaic Acquisition, which is acquiring Vivint from Blackstone

 

[kab60]

I run the numbers a bit differently thepupil and look at FCFE and thus you'll have to take into account interest and taxes. As for taxes, remember they have a billion of NOL's.

 

Broeb raised some valid issues, but I also agree it's cheap. If they return to growth next year, it should do well.

 

Here's some housekeeping items I got from IR recently;

 

Spectrum Brands has about $1 billion of usable NOLs that, barring any changes in the ability to use some of them, should enable the Company to not have to be a U.S. federal cash taxpayer for probably the next 5 years or possibly a bit longer, driven largely by the amount of U.S. federal pretax income annually.  The Company used to have nearly $1.2 billion of NOLs back in 2009-2010 and used them for many years in the same way.  Based on the current geographic composition of Spectrum Brands, our best guidance now is that you should estimate $40 to $50 million annually of cash taxes, predominantly non-U.S. and most driven by our very international Home & Personal Care business unit.

 

We decided not to guide on free cash flow in fiscal 2019 due to the complexity and difficulty of the numbers from having discontinued businesses for 4 months of the year.  It is likely the Company will resume free cash flow guidance for fiscal 2020 as it used to do for many years until the past year due to the asset divestitures.

 

As a rule of thumb, you should think about cap-x annually as about 2% of annual net sales, plus or minus, depending on the year.  Cash interest payments of over $200 million will likely come way down in fiscal 2020 due to significant paydown of high-cost debt earlier this year.  Perhaps $125 million or lower.

 

-

 

So 570m ebitda less 45m cash taxes, 125m interest, capex 62,5m = 337,5m FCF before WC or 14 pct. FCFE yield (this would be "normalised" 2019 numbers).

 

And supposedly (but management has screwed up before) this should be during a transition year where they're investing margin to accelerate sales.

 

It's obviously cheap if they can be trusted, and the market doesn't seem to think so (and perhaps some technical selling now from Jefferies shareholders?).

 

I like what they've been doing though it was obviously a bummer that they couldn't sell the appliance business and now have to fix it. And looking at it in a historic perspective it has obviously been a crazy stupid strategy to buy a bunch of brands with no synergies and smack an expensive corporate layer on top. But something something about a puck and where it's going.

[WneverLOSE]

....

So 570m ebitda less 45m cash taxes, 125m interest, capex 62,5m = 337,5m FCF before WC or 14 pct. FCFE yield (this would be "normalised" 2019 numbers).

....

 

Actually last FY they had ebitda of 355m, the 570m of their mid range guidance is "Adjusted ebitda" (bullshit earnings as charlie has called it in the past)

 

I unlike management think that Share based compensation is a real expense for example and it is a joke to call it anything else but an expense to shareholders.

 

Recalls are also an ongoing expense that is part of doing business, why should investors ignore it ? does GM investors overlook warranty expenses and recall costs ?

 

Restructuring is also an expense that is part of doing business (Buffett once said something of the like that Berkshire has been in restructuring since the day it began operating and companies can't survive without continuous change), while some of the cost they incurred in 2018 might be one time in nature I know that some of it is a real cost of doing business.

 

While I see the potential of SPB as an investment there is the question, will it materialize ?

I have seen a lot of companies with potential and 90% of the time there is a reason that all I saw is potential and not results, there is a reason why companies get to a state of "potential" and not to a state of market leading results.

 

 

[kab60]

....

So 570m ebitda less 45m cash taxes, 125m interest, capex 62,5m = 337,5m FCF before WC or 14 pct. FCFE yield (this would be "normalised" 2019 numbers).

....

 

Actually last FY they had ebitda of 355m, the 570m of their mid range guidance is "Adjusted ebitda" (bullshit earnings as charlie has called it in the past)

 

I unlike management think that Share based compensation is a real expense for example and it is a joke to call it anything else but an expense to shareholders.

 

Recalls are also an ongoing expense that is part of doing business, why should investors ignore it ? does GM investors overlook warranty expenses and recall costs ?

 

Restructuring is also an expense that is part of doing business (Buffett once said something of the like that Berkshire has been in restructuring since the day it began operating and companies can't survive without continuous change), while some of the cost they incurred in 2018 might be one time in nature I know that some of it is a real cost of doing business.

 

While I see the potential of SPB as an investment there is the question, will it materialize ?

I have seen a lot of companies with potential and 90% of the time there is a reason that all I saw is potential and not results, there is a reason why companies get to a state of "potential" and not to a state of market leading results.

Fair point on SBC and recalls, I agree (and was being lazy with the numbers - also had the market cap higher so FCFE is probably a tad higher).

 

I think the restructuring point is somewhat meaningless here.

 

2018-2019 has been one major restructuring of the whole group including the merger with HRG Group, the sale of two divisions, one failed sale of a division and the extinguishment of a ton of debt.

 

Apart from a potentiel refi post 2020 guidance the heavy lifting should be done and focus should be on OPS (while leverage levels and maturity schedule are fine, they could probably shave off a meaningful amount of interest expense with a refi when the story is cleaned up - and capital markets are calm).

 

That's the question mark in my opinion; tariffs and execution.

 

[kab60]

Strong set of results, despite the large pop I think it's probably a better risk/reward than before. They're executing very well but there should be room for a lot more OPS improvement considering the constant M&A that has been going on in prior years. Solid guidance despite 100m hit from tariffs and 100m restructuring, FCFE a bit low, but it is set up nicely for 2021 and beyond. Maura owes up to past mistakes, but jeeesh stuff must've been bad internally. Says all the right things and numbers seems to suggest they actually deliver.

[Broeb22]

Where do you see FCF going in 2021? I had estimated that FCF would have been well north of $300 million, so $250 million doesn’t make it seem screaming cheap.

 

I feel like I’m now betting on them performing operationally as well as Trump ending the trade war more than I am betting the stock is undervalued.

 

Part of me felt they kind of sandbagged guidance because they should be able to further reduce interest costs by refinancing (and executing well). Looking back at where I got things wrong, their pro forma interest costs are much higher than I anticipated because they didn’t pay off their highest interest debt first. They paid off the term loan with a 4.4% interest rate instead of some debt north of 6%, but this higher cost debt should be refinanced over time.

[kab60]

Where do you see FCF going in 2021? I had estimated that FCF would have been well north of $300 million, so $250 million doesn’t make it seem screaming cheap.

 

I feel like I’m now betting on them performing operationally as well as Trump ending the trade war more than I am betting the stock is undervalued.

 

Part of me felt they kind of sandbagged guidance because they should be able to further reduce interest costs by refinancing (and executing well). Looking back at where I got things wrong, their pro forma interest costs are much higher than I anticipated because they didn’t pay off their highest interest debt first. They paid off the term loan with a 4.4% interest rate instead of some debt north of 6%, but this higher cost debt should be refinanced over time.

I'm also negatively surprised by the interest expense, and it doesn't quiet square with the numbers I got from IR (I had runrate interest around 100-125m). The 250m FCF includes a large part of the cash restructuring (100m - hopefully this is the last, otherwise one has to consider it recurring), a 100m hit from tariffs and the use of less factoring. So hopefully those two first go away post 2020. It is a play on operationel improvement now, but their numbers suggest that's very possble, and if they can keep taking share and grow revenues, I don't think it should trade at these levels