Reynolds Group Holdings, the holding company for Graeme Hart's global packaging group which is carrying about US$18.3 billion (about NZ$22.5 billion) of debt, has seen its equity deficit blow out to US$522 million (about NZ$644 million).
The figure is revealed in Reynolds' third quarter financial statements, covering the three months to September 30, showing the equity deficit has widened from NZ$131 million at June 30. On a conference call with analysts and investors, Reynolds CEO Tom Degnan said the group had launched a securitisation programme this month, securitising some of its receivables, and had drawn down US$540 million so far which will be used to repay debt. Degnan also said a €450 million bond due to mature in 2016 would be called early.
"We (Reynolds) are right where we had hoped we would be at this time," Degnan said.
The widening equity deficit comes with Reynolds reporting a US$103 million loss for the quarter, which is less than half the US$236 million loss the business recorded in the same period of last year. The improvement was helped by a US$385 million, or 13%, rise in revenue to US$3.454 billion. Cost of sales rose US$251 million, or 10%, to NZ$2.8 billion, leaving gross profit up US$134 million, or 26%, to US$650 million.
An income tax benefit for the Auckland headquartered Reynolds of US$87 million, versus one of just US$8 million in the September quarter last year, also helped the bottom line. Of this US$53 million was generated by using the New Zealand corporate tax rate of 28%. Although this was down from US$82 million in the third quarter last year, Reynolds benefited from improvements in other tax categories including "the effect of tax rate differences in foreign jurisdictions," "non-deductible expenses and permanent differences," and "unrecognised tax losses and temporary differences."
Focus on improving operating performance and deleveraging
Hart, who Forbes has estimated is worth US$5.7 billion, started assembling his packaging empire after completing his NZ$3.3 billion Carter Holt Harvey acquisition and delisting that company from the New Zealand stock exchange in 2006. Reynolds' largely US and European based businesses now include SIG, Reynolds Consumer Packaging, Evergreen, Closures, Pactiv and Graham Packaging.
SIG is a maker of aseptic beverage carton packaging (long life cartons) that allows the likes of juice, milk, soups and sauces to be stored for extended periods without refrigeration, Reynolds Consumer Products is the dominant US maker of foil, wraps and bags used for food storage and preparation, and Closures is the leading global provider of plastic bottle caps used for soft drinks and bottled water. Pactiv's products include Hefty garbage bags.
Degnan said Reynolds' diversity of geography and product lines was a strength.
"The cashflows we generate are steady and dependable. They come from products people consume everyday (and) we're in both mature and growth markets with excellent share positions," said Degnan.
"Going forward our focus will be on improving operating performance and deleveraging."
He said the group would continue to look for what were, by its standards, small 'bolt on" acquisitions - it made two in the September quarter - but didn't plan any more large scale transformative acquisitions in the near future. Chief financial officer Allen Hugli said Reynolds had spent a little over US$100 million on "transaction related fees" in the September quarter.
Debt at 6.2 times ebitda
Reynolds' quarterly net finance expenses rose US$68 million, or 13%, to US$587 million. The group's debt is split between "junk" bonds and bank loans. Credit rating agencies Standard & Poor's and Moody's Investors Service currently rate Reynolds' debt B and B3, respectively, with both ratings deep in speculative, or "junk", territory. See more on Reynolds Group's debt here.
The equity deficit came as total assets came in at US$22.5 billion and total liabilities at US$23 billion. Since June 30 liabilities are up US$500 million and assets are up US$200 million. The biggest chunk of Reynolds' liabilities is its US$18.3 billion of borrowings, and its biggest slice of assets is its US$12.3 billion of intangible assets including goodwill, trade marks, customer relationships, technology and software.
A management presentation accompanying the quarterly results shows Reynolds' debt at 6.2 times its pro-forma adjusted earnings before interest, tax, depreciation and amortisation of US$2.7 billion. This ratio is unchanged from June 30. The presentation also says the group refinanced US$6 billion of its capital structure in September resulting in about US$70 million of annualised cash interest savings.
For the nine months to September 30 Reynolds loss was US$61 million, down from US$474 million in the equivalent period of last year with profit from operating activities rising 70% to US$1.031 billion and income tax benefits doubling to US$129 million. This year's improvement largely stems from the US$4.5 billion, 2011 acquisition of Pennsylvania-based Graham Packaging, Hugli said.
(Update adds comments from Reynolds' CEO and CFO made in their conference call).
8 Comments
From a 5 min look at the financials it looks like they've grown EBITDA 50% year on year. There's an equity deficit because the balance sheet doesn't recognise the increase in market value of the operations as goodwill is only generated on acquisitions.
There looks like there's alot more positive to the results than headline suggests
As noted in the story: This year's improvement largely stems from the US$4.5 billion, 2011 acquisition of Pennsylvania-based Graham Packaging, Hugli said. But strangely enough their focus is on deleveraging...
And excuse me for being a bit sceptical of "pro-forma adjusted ebitda."
I find this article a bit irritating. The title is disengenious as the "equity deficit" that is referred to is simply the book value of equity - NOT the market value of equity, which is all that matters. The article implies Reynolds is underwater, which it is not.
Gareth you can be sceptical about "pro-forma adjusted" ebitda, but reported EBITDA is only 6% less that US$2.527bn, so the underlying quality of earnings is there. And the adjustments and proforma figures are all valid - and leveragable. When a company acquires another company partway through the year, the consolidated accounts will show 100% of the debt used to finance the acquisition, but only a partial year contribution of the earnings. This skews financial ratios - which is why banks want pro-forma figures - it isn't an underhand attack.
The only thing to remember is have a look at those earnings margins - they are double the industry average. Reynolds has some excellent branded consumable products...this is a very good business that clearly is able to service its debt.
And your highlighting in your comment that the group wants to deleverage - as if it is a sign things have gone wrong - is misinformed, and illustrative of the agenda you try to pursue instead of journalism. The focus on deleveraging is because that is how buyout firms make their money, through using free cashflow to paydown debt thus increasing the market value of equity. There are 3 ways to make money in LBOs...grow earnings, paydown debt, and achieve multiple arbitrage (entry multiple vs exit multiple). And obviously having a highly geared balance sheet exposes a company to more risk - but so far here, so good.
The great thing about all this is that it doesn't matter if Gareth / interest.co.nz / or its readers don't like what Hart is doing, or if they don't understand it...they don't need to for Hart to make his money. You can say untruths but that won't stop things from becoming a financial success. You dont have to like it but the world doesn't care.
Keyser, I highlight the deleveraging focus because the CEO did in the conference call. No question the business produces lots of cash, it couldn't carry that debt load if it didn't. And I'm not saying I don't like what Hart's doing, I'm just highlighting the scale of it and the risk he's prepared to take. That said, given his track record he's probably thinking several moves ahead of where you or I are and I wouldn't bet against him coming out of it smelling of roses.
I would. Hart's methods will work until one day they don't (which will probably co-incide with GFC part 2, the Euro Sanction). Then there will be much wailing and gnashing of teeth with many hoocoodanodes muttered. He dodged a bullet in 2008/9, he won't be so lucky next time. Don't be a stranger at interest.co.nz when it happens Keyser, there's a good chap.
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