'Treading water not good enough', says boss at Hart's packaging, autoparts empires

Wednesday 12th August 2015

New Zealand billionaire Graeme Hart's Reynolds Group Holdings packaging business and UCI Holdings, an autoparts business, are under pressure to cut and sustain lower operating costs after recent asset sales that reduced debt.

Briefing analysts on Reynolds' and UCI's newly published second quarter earnings, joint chief executive Tom Degnan said good progress was made last year at Reynolds and he would focus more on UCI this year.

Reynolds' Degnan added the role of CEO of UCI in June.

"While I was focused very heavily on Pactiv and Reynolds last year, I don't have to spend that much time this year, which turns out to be a good thing here at my role with auto," Degnan said at the UCI briefing. "I don't think treading water is good enough - when I talk about getting to low cost, we need to get to low cost, and the limitation on that may be capital."

Late last year Reynolds Group sold its SIG Comnibloc unit for 3.6 billion euros while UCI sold its Wells Vehicle Electronics business last month for US$251 million, with the proceeds used to pay some of the debt Hart's Rank Group used to build the companies. Reynolds had total debt of US$13.96 billion at June 30, while UCI's was a more modest US$717 million, according to their respective second-quarter earnings reports published last week.

Reynolds put three of its divisions under the microscope last year, stoking speculation the packaging group was being prepared for an initial public offering, while UCI embarked on a strategic review of its businesses in 2014 before amending its credit agreements to allow for asset sales this year.

UCI reported a loss of US$43.3 million in the six months ended June 30, wider than the US$38.1 million loss a year earlier, of which US$15.6 million came from its exited Wells business. Adjusted earnings before interest, tax, depreciation and amortisation from continuing operations dropped 40 percent to US$21.6 million, while sales edged up 1.1 percent to US$403 million.

Hart's Rank Group acquired UCI for US$980 million and FRAM Group for US$950 million in 2011 in leveraged buy-outs, at a time when Reynolds was near the end of building his global packaging empire.

Reynolds is still looking to reduce its debt ratio to 5.5 times adjusted earnings and is contemplating what to do with the US$1.55 billion cash and equivalents it's sitting on, including paying off more debt, chief financial officer Allen Hugli told analysts. The company's total debt ratio was six times adjusted Ebitda at the June 30 balance date.

"We like to have a little bit of extra cash around. We like liquidity," Hugli said. "Having said that, do we need as much as we have? Maybe not. We're considering all of the options, but we have made no decision at this point in time."

Reynolds reported a US$2.44 billion profit in the six months ended June 30, which included a US$2.89 billion gain on the sale of its SIG unit compared to a profit of US$12 million a year earlier. Adjusted Ebitda from continuing operations edged up 0.2 percent to US$961 million while revenue fell 3 percent to US$2.91 billion.

Degnan told the Reynolds conference call repaying debt will be a driving force for the company, and that Rank doesn't plan to get out of the business any time soon.

"We don't talk much about IPOs, so that's not really on the table. We have plenty of work to do to keep us busy in the next year to two - we're not really discussing exit strategies and things like that," Degnan said. "Probably what we've said in terms of debt paydown is one of the major driving forces here."

Hart began building the packaging empire in 2006 with the takeover of Carter Holt Harvey, going on to buy International Paper's beverage packing unit and Swiss company SIG the following year. He added Alcoa's packaging business in 2008. He then ramped up the expansion in 2010, spending US$6.5 billion on the leveraged buyout of Pactiv, and then US$4.5 billion for Graham Packaging in 2011.

Rank Group declined to comment.

BusinessDesk.co.nz

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