Billabong: Restructuring News and Sale of West 49

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I got four pieces of information for you. If you’d prefer, you can read Billabong’s announcement which came out Monday their time. It’s the first item under “Recent News.” 

The most interesting, which they leave for last, is the pending sale of West 49 to YM Inc., “a leading fashion retailer with a number of highly successful stores including Stitches, Urban Planet, Sirens, Siblings, Suzy Shier and Bluenotes.” They are buying 92 stores for a total of between $9 and $11 million Canadian dollars. Billabong will keep six Billabong and two Element stores in Canada.
 
I recommend you take a few minutes and look over YM’s web site. They say what I think are a number of insightful things about operating and their target market. 
 
YM and Billabong also signed “…an initial two year supply agreement” under which Billabong brands will continue to be sold in West 49 stores. We don’t get any specifics about which brands or how much. At the end of the day, I assume that YM, like any retailer, will choose to carry the brands that sell best at good margins.
 
You will remember that Billabong bought West 49 in the summer of 2010 for $83 million Canadian dollars. At the time, West 49 had 140 store fronts. I can’t tell what the West 49 assets are presently carried at on Billabong’s balance sheet, so I don’t know what the accounting impact of this deal on the income statement will be. But its cash positive and, most importantly, it gets Billabong out from under the lease obligations of those 92 stores. West 49 will now be strictly a wholesale customer, so some margin and revenue goes away, but so do all the operating expenses.
 
We also learn that US$300 million of the previously announced US$360 million 6 year senior secured term loan was received and used pay off the US$294 million term loan and associated interest and fees previously received from Altamont. That gets Altamont out of the picture. 
 
Third, we learn that the seven person board of directors will consist of independent directors Sally Pitkin, Ian Pollard and Howard Mowlem. “The other directors are founder and substantial shareholder Gordon Merchant, Jason Mozingo (nominated by Centerbridge), Matt Wilson (nominated by Oaktree), and CEO Neil Fiske.” The two directors who had represented Altamont are out of there.
 
Finally, we’re told that “Billabong continues to work with GE Capital to provide an asset-based multi-currency revolving credit facility of up to US$100 million. This has been reduced from up to US$140 million in part due to the sale of West 49.”
 
That it’s being reduced because the sale of West 49 reduces their needs make sense. But that’s only “part” of the reason it’s being reduced and we don’t know what the other reason or reasons might be. I’m kind of interested to see that it isn’t done yet and would love to ask why.
 
Billabong’s restructuring and refinancing continues. I’m happy to see it moving forward, but I’m still waiting to understand the results of the customer and brand positioning analysis that started under former CEO Launa Inman. They can restructure and cut expenses till the cows come home, but customers still have to like the brands.

 

 

Billabong’s Deal. I Didn’t See This One Coming.

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I thought the Altamont deal would happen. I figured Billabong just had to get a deal done. That’s what they were doing until Centerbridge Partners and Oaktree Capital Management (we’ll call them the Consortium as Billabong does) asked the Australian Government’s Takeover Panel to take a look at the deal. 

Basically, the Consortium claimed that the deal with Altamont kept anybody else from bidding, and the Takeover Panel agreed. Billabong and Altamont changed the deal terms to satisfy the panel, and that opened the door for the Consortium to come in with what looks to me, and everybody else, like a better deal.
 
I imagine you’ve read the terms of the agreement in various places, so I’m not going to spend a lot of time on that. In Australian Dollars, Billabong is getting a six year $386 million term loan with a lower 11.9% interest rate compared to 13.5% from Altamont. They will use this to pay off the $315 million loan they previously received from Altamont.
 
They will sell $135 in equity to the Consortium and give existing shareholders the chance to buy another $50 million of shares at $0.28 per share. It will be interesting to see who goes for that. Depending on the success of that offering and Billabong’s cash flow requirements, some of that new equity will be used to pay down part of the term loan.
 
The Consortium will get 29.6 Billabong options exercisable at $0.50 a share. The $150 million asset based credit facility from GE Capital is still part of the deal.
 
Billabong will have to pay Altamont a $6 million breakup fee, and Altamont will continue to hold 42.3 million Billabong options that expire July 16, 2020. And Dakine is still sold.      
 
Okay, that’s enough. If you’re a shareholder, you care a whole lot about the specific terms of the deal. Hell, if you’re a shareholder you probably wish you’d never heard of Billabong. In any event, if you want more details here’s the link to the announcement on Billabong’s web site.   It’s currently the first item under “Recent News.”
 
Here are a few questions/comments I’m left with:
 
1)      We know West 49 is for sale. I wonder when that deal will happen and what the price will be.
2)      Will any other brands be sold? I expect new CEO Neil Fiske might undertake a strategic evaluation similar to what happened at Quiksilver and Skullcandy when a new CEO came in and the decisions will flow from that.
3)      Both Altamont and the Consortium will have seats on the Board of Directors for some time. That should be fun.
4)      For all the sound and fury and distraction of the deal cycle, the key question is what kind of market strength the Billabong brands will have going forward.
5)      What happens to the plan former CEO Inman started to implement? Will that, in whole or part, be out the window?
6)      What will be the specifics of the asset based credit line? That will have a lot to do with how much of the $150 million line is actually available to borrow at a given time.
 
I’m just glad the deal is finally done. I agree with Billabong’s Board of Directors, who put it like this in the release:
 
“The Board of Billabong decided that it was in the best interests of shareholders and all of the
Company’s stakeholders to conclude a long term financing as soon as possible. The Board of
Billabong had regard to the protracted period of uncertainty, distraction and disruption that had
been faced by the business and have entered into the long term refinancing so that the
Company can now focus on rebuilding the business and execute on its ambitions to improve
earnings.”
 
For those of us who don’t own shares, I suspect we’re mostly glad for our friends who have jobs there, and hope Billabong can just focus on building its brands and supporting the industry.

 

 

Billabong’s Annual Report

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Billabong released its results for the year ended June 30, 2013 a few days ago, and I’ve been plowing through the 200 or so pages of material and listening to the conference call.
 
My recent writings about public companies have been lamenting that they are public. Not just because they have to share their travails with us (though I kind of enjoy that), but because pursuing the strategy appropriate for our current market is in conflict with the growth requirements of a public company. It’s awfully hard to be an action sports based company and then have to grow, partly because you are public, into the broader youth culture and fashion market where the competitors have significant advantages and the new target customers may not value your story and brand.
 
We’ve seen this with Spy, Quiksilver, Skullcandy, and now Billabong. Reduce your growth targets (though don’t admit it), control distribution to build brand value, and be operationally efficient. The result, I’ve argued, is that you can improve the bottom line without big sales increases, but Wall Street doesn’t like that. It’s enough to make a company schizophrenic.
 
No doubt you’ve seen Billabong’s numbers. They reported a loss for the year of $863 million compared to a loss of $277 million in the pcp (prior calendar period). All numbers are in Australian dollars unless I say otherwise. Rather than go through the financial statement line items as I usually do, I’d like to highlight some issues that fall out of the data, but I’ll get back to the usual financial stuff later.
 
Status of the Refinancing Deal
 
As you know, Billabong had a deal with the Altamont group which the Oaktree/Centerbridge group, also interested in a deal with Billabong, asked the Australian government to review for fairness. The deal was revised so that the Australian government choose not to review it and Billabong is moving forward with documenting the Altamont deal. That’s to be completed in “weeks.” In the meantime, Dakine has been sold to Altamont and the short term bridge financing is in place. The Oaktree proposal is “…being considered in its entirety in the context of director’s fiduciary duties and in the best interests of shareholders.” My guess is that the Altamont deal will be completed.
 
But it isn’t done yet. And just in case you didn’t already know it, watching what Billabong has gone through should have convinced you that putting this kind of deal together is subject to various uncertainty and surprises.
 
Management told their auditor (PriceWaterhouseCoopers) that if for any reason they can’t get the Altamont deal to happen, the Oaktree proposal would. I can just imagine that negotiation with Oaktree if Altamont fell through.
 
Price said, “Okay, we believe you,” and gave them a clean opinion on their audit. But they felt it appropriate to note in their letter that if for any reason neither deal closed, Billabong’s ability to continue as a going concern might be jeopardized.
 
I mention that so you know that I’m not the only one who thinks a deal isn’t done until it’s done no matter how much we expect it to happen. If you want to read the language of the letter yourself, go to this page, click on “Preliminary Final Report & Full Year Statutory Accounts” under “Recent News,” open the PDF, and go to page 151 (153 as Adobe counts pages in a PDF). Can’t believe I was still awake when I got there. I will refer to this document a number of times in this article.
 
Management Structure
 
It seems like every time Billabong hits a bump in the road, a few more apples fall out of its management tree. They’ve lost some people I’d consider important and I’d note that CEO in waiting Scott Olivet hasn’t jumped to become CEO or invest his own money yet. Like me, and like the auditors, I suspect Scott knows a deal isn’t done until it’s done. And of course if the Altamont deal should not close and a deal with Oaktree happened, who would be CEO then?
 
I expect the deal with Altamont will close, Scott will become CEO and, hopefully, he’s already talking with people he’d like to bring in to build the management team. But getting the deal done just gets Billabong to the place where it gets a chance to compete. After the carnage it’s been through, one hopes good people are enthusiastic about joining the team. The documents are silent on this issue, but rebuilding management and making it effective (not just at the senior executive level) will take some time.
 
Billabong implemented a short term retention plan for six key executives (see page 28 of the report I referenced above) but that doesn’t address the resignations at lower levels.
 
The Brands and Operating Strategy
 
How are the individual brands doing? Literally the only thing we’re told is that “RVCA, Xcel and Von Zipper continue to perform well” In the Americas and Billabong and RVCA are doing well in Australasia. They have never broken out sales by brand and I would not expect them to start now. But that seems like a small list of brands doing well, and implies the others are not outperforming and no brand is performing well worldwide. In addition to those brands, at June 30 the company owned Element, Kustom, Palmers, Honolua, Beachculture, Amazon, Tigerlily, Sector 9 and Dakine.
 
Billabong also had 562 retail stores worldwide at June 30. There were 168 in North America, 113 in Europe, 126 in Australia, 37 in New Zealand, 47 in Japan, and 24 in South Africa. These stores operate under at least ten different names. They closed 93 stores during the year.
 
I find it interesting that they are operating at retail under ten or more names. They say on page 9 of the document that they will, “Consolidate store banners and optimize fitouts.” Good. The list of retail names will, of course, go down by at least one once they sell West 49. They tell us that the selling process is “advanced.” We learn in the conference call that West 49 is not profitable on a standalone basis, but is improving.
 
In broad brush, the operating strategy hasn’t changed much since former CEO Launa Inman presented it. They are rationalizing their supply chain and have reduced the number of suppliers from 275 to 50. Hard to know exactly what that means without further information on how much was produced at the ones they eliminated, but I’d expect to see the results in a reduced cost of goods sold and perhaps a reduction in certain administrative costs.
 
They are trying to differentiate their brands “…in key areas such as product, experience, service, convenience and innovative product design.” Isn’t everybody. One of the ways they are trying to do this is by managing their distribution better. Specifically, they note that they are reducing close out channel sales, particularly in the U.S. They characterize this as ongoing and well advanced. They call it “…a strategic shift in channel distribution away from close out/distressed sales channels towards more long term and profitable channels, such as e-commerce.”
 
I was a bit surprised to see that because I didn’t know that those channels were a significant part of their business. We don’t know how significant, but since they characterize the shift as “strategic” it can’t be small numbers.
 
This is a step towards managing distribution better to boost brand perception and, hopefully, gross margin. But it also reduces the top line (depending on the impact on each brand) and so is in conflict with the public company requirement of growing revenues.
 
They also are simplifying the business by reducing the number of styles. They were going to start with 15% and go from there. Other companies in our industry are doing that as well, and I’m all for it.
 
There are other items around developing e-commerce, executing at retail better (It’s still 50% of their total business), and trying to be more rigorous about deciding which brands to invest in where. All good stuff.
 
Running the business better with fewer suppliers, styles, and retail names and a more cautious approach to distribution has a favorable impact on the bottom line all by itself. But they are recognizing, I think, that operating well is closely tied to better brand building and competitive positioning.
 
“Significant” Items
 
Billabong choose to identify in their annual report $867.2 million in expense as “Significant” items. Most of it, they are at pains to point out, are intangibles and not cash. What Billabong does is exclude all these charges that are on their actual income statement and present “adjusted” results that show an after tax profit of $7.7 million instead of a loss of $863 million.
 
Below, from the presentation they made during their conference call, are the items they identified as significant. 
 
 
There was also an associated tax expense of $26.2 million, which is how they get to the $867.2 million.
 
Just how reasonable is this approach? 
 
The BIG Number
 
Let’s start with the $636.9 million number, $428 million of which was taken in the first half of the year. I apologize for this, but I don’t know how else to do it but to reproduce a couple of charts from their report. This first one below (page 104 in the report) shows how much they wrote off in 2012 and 2013 in both brand value and goodwill for each brand. The write-offs for countries and regions are associated with their retail operations and rationalization of their distribution operations.
 
 
 
This next chart (page 103) shows the carrying values with these write-offs completed.
 
 
 
Remember these are as of June 30 when Dakine was still owned by Billabong.
 
Definitely non-cash, but not without impact and implications. If you were enough of a glutton for punishment to continue reading on pages 104 and 105 about how they do the analysis to determine these write-downs, you’d find that the process was technical but also involved some assumptions (dare I say guesses?) about values and future cash flows. The bottom line is that they wrote down these assets because they aren’t worth what they once were and because their future cash flow is not going to be what they thought. It may not be cash now, but it’s sure an indication of cash they won’t get later.
 
You can see they wrote down the Billabong brand from $252 million to zero. They’ve also written Element down to zero. I guess those are the numbers the process led to, but obviously those brands are worth something more than zero. Brand write downs, by the way, are not something where your recover some value in the normal course of business like you would with written down inventory. But you would see a bigger gain if you sold the brand. We don’t know which, if any, additional brands Billabong might sell.
 
They don’t break out any write down for West 49, but I do see a $113 write down of good will in North America. Wonder if any of that is for West 49.
 
While taking these write down, they paid out during the year $69.7 million for “…purchase of subsidiaries and businesses, net of cash acquired.” An additional $10.5 million of deferred compensation is payable in the current fiscal year. Another $48 million is due in future periods. These numbers may decline to the extent they are associated with Dakine since it was subsequently sold, but we aren’t given that information. It would suck to still be paying for brands you’ve written down or off.
 
The Nixon Deal
 
That’s the $129.6 million on the significant Items list. Billabong has written its Nixon investment down to almost nothing.
 
We find out (page 100) that Billabong’s share of Nixon’s revenue in fiscal 2013 was $63.7 million. At June 30 Billabong owned 48.5% Nixon, so we can conclude that Nixon’s revenues during Billabong’s fiscal year were around $131 million. We’re also told that Billabong’s share of Nixon’s income was a loss of $5 million, so we can calculate that Nixon had a loss of just north of $10 million during that year.
 
Okay, here the reasons Billabong gives for writing down its Nixon investment. First, “the deterioration in the trading of Nixon…” and because they don’t expect it to do as well in the future as they thought it would. Second, it’s got $175 million in debt. Third, because of the terms of the joint venture they signed when they originally sold the equity stake. And finally, because they’ve renegotiated supply agreements with Nixon and this has reduced their interest in Nixon.
 
The first two are kind of self-explanatory, though I’d point out that the debt has existed since the deal was done. But the second two require some discussion. Let’s start with number three.
 
When they sold 48.5% of Nixon to Trilantic Capital Partners and 3% to Nixon management, Billabong got “Class A Common Units.” The buyers got “Class A Preferred Units.”
 
The commons only get paid when and if Nixon is sold after the preferreds get an unspecified return on their capital plus a “preferred return” of 12% on their capital.  Please read the following quote carefully.
 
“Hence in the event of poor performance and consequently lower sale proceeds, the returns to the Common Units will be less than those on the Preferred Units. In the event of significantly lower sale proceeds, the return to the Common Units could be zero. Conversely, in the event of very strong performance and consequently high sale proceeds, the returns to the Common Units can be greater than those to the Preferred Units.”
 
I guess right now it looks like strong performance and high sale proceeds are unlikely events.
 
On to the renegotiated supply agreement. When Billabong sold 48.5% of Nixon, they made an agreement with Nixon to buy a certain amount of product over four years. Don’t know exactly how much or when. On July 23, 2013, they made a deal with Trilantic to reduce these purchase commitments. Under the terms of that agreement, they now have to make payments totaling $14.2 million during the year ending June 30, 2014. They are going to get $9 million in product from Nixon during the year. 
 
In exchange for this Trilantic got enough Billabong units in the joint venture to reduce Billabong’s share of the Nixon joint venture to 4.85%. They are going to surrender those shares in December 2014 rather than make a final payment of $3 million at that time, and then Billabong’s share of Nixon will become zero.
 
So Billabong is going to pay $17.2 million and get out from under a supply contract in exchange for its 48.5% share of Nixon. Is Billabong no longer going to carry any Nixon product in its stores? Obviously, they are going to carry less because they are closing stores. Does the payment include the cost of purchasing the $9 million in product? Are they effectively paying $17.2 million for $9 million worth of product?
 
Billabong characterized their contract with the Nixon joint venture as “onerous” and at June 30, 2012 took a charge because they expected the required product purchases to be in excess of the group’s requirements.
 
But it was only in spring 2012 that Billabong sold the share in Nixon. And a month or two later they are finding out that the contract is “onerous” and taking a charge for it? I wonder what the product pricing in that contract was like. Meanwhile, Billabong retained 48.5% of Nixon, but given the difference between the common and preferred units, it’s hard to conclude that Billabong retained 48.5% of the projected earnings stream.
 
Billabong got cash it needed at the time they did the deal with Trilanatic, but I wonder (however Australian accounting works) if it was reasonable to characterize their stake as 48.5%. And I wonder if the terms of the supply contract didn’t favor Trilantic and the joint venture. Unfortunately, all I can do is wonder. 
 
All the Other “Significant” Charges  
 
Sometimes in accounting, when things are really, really bad, you decide that as long as the news is going to be god awful anyway, you might as well make it a little worse and write off absolutely everything you can to completely clean up the balance sheet. I’ve heard this called “The Big Bath Theory” and seen it in action.
 
Not all such write-offs generate income in subsequent accounting periods, but let’s look at one that does. Let’s you’ve got some lousy inventory. You think you can sell it, but for less than the cost you are carrying it at. When you sell it you will get cash, but recognize an accounting loss. But if you’re already writing off everything that isn’t nailed down and this lousy inventory is a small part of that, you say, “Oh the hell with it- let’s write that off too.” It’s now on the books at zero. You get the same cash when you sell it you got before you wrote it off, but you now recognize an accounting profit on it in the future period in which you sell it. And it’s a big profit, but you’ve effectively got a cost of goods sold of zero.
 
Not saying this is what Billabong did. Just want you to be aware of the concept. I hope they did do it.
 
It’s not just Billabong, of course, that adjusts for so-called one time charges in various forms in an attempt to make things look better- ah, I mean to try and present a better picture of the company’s operations. But when I see “inventory clearance below cost and receivables losses” of $32 million excluded, just as an example, I question it even as I understand the rationale. 
 
In the presentation during the conference call, management said that the significant items reflect, in part, “…charges arising from the difficult trading conditions experienced by the Group…” Just because times are tough doesn’t mean those charges aren’t part of real operating costs.
 
I’ve never seen a company say, “We got some breaks this year because of a strong economy, a favorable exchange rate and some lower commodity prices, so here’s a proforma that shows a worse result.”
 
In the conference call, Billabong noted that they were “learning to live with a lower Australian dollar.” That brought a smile to my face because it wasn’t too long ago that Billabong was blaming the strong Australian dollar for some of their problems. Apparently, weak or strong, the Australian dollar is just a problem.
 
There can be value in adjusted financial statements. And they don’t always favor the company. For example, Billabong’s adjusted EBITDA in its Australasia segment improved 120% as reported, but only 17.3% as adjusted. It’s up to you to figure out what the adjustments mean and whether they produce an adjusted financial statement that’s useful, and there’s no right answer. 
 
The Usual Financial Stuff
 
Billabong’s total revenue for the year was$1.34 billion, down 6.8%. As reported, they fell 15.1% to $637 million in the Americas, 16.5% in Europe to $232 million, and grew 9.7% to $472 million in Australasia.
 
EBITDA grew 151.6% in the Americas to $19.5 million from a loss of 37.8 million in the pcp.  In Europe, it declined 113% from a loss of $11.7 million to a loss of $25.1 million. In Australasia, it improved 120% from a loss of $21.5 million to a profit of $4.4 million. On a consolidated basis, EBITDA fell from $133 million to a loss of $1.9 million. Recognize that these numbers included Nixon in the pcp, but not in the year ended June 30, 2013. 
 
Australia was 67% of Australasia revenues and the U.S. was 56% of the Americas. France represented 86% of European revenues. That’s an interesting number, as I think things are going to get worse in France. As I mentioned earlier, retail was 50% of revenues. It was 71% of Australasia, 44% of the Americas, and 28% of Europe.
 
Revenues in the Americas was impacted by the 73 stores closed since February, 2012 and by comparable store sales that fell by 2.9% in the full price stores and 4.9% in outlets. Store closures and warehouse rationalization helped them reduce overhead.
 
In Europe, the macroeconomic environment pretty much stinks, and that required some store closings. There are fewer wholesale accounts and a lot of promotion. They reduced overhead by $9.3 million, but that wasn’t fast enough to keep up with revenue decline. SurfStitch startup losses were $7.6 million.
 
In Australasia, wholesale sales were softer, they closed some stores, and some wholesale accounts went out of business. The Billabong brand, as well as RVCA, is performing well. Their simplification programs are responsible for the improving EBITDA.
 
The gross margin fell to 51% from 52.7% in the pcp. There’s no discussion of the decline, but I assume it’s partly due to inventory write-downs ($31 million this year compared to $72 million in the pcp).
 
Selling, general and administrative (SG&A) expenses fell 16.3% from $645 to $540 million. They don’t give us a breakdown of what’s in here, but if you go to note 8 on page 90, they show the significant items that are included in the category. The interesting thing is that last year the total significant items were $117 million. This year, they were $49 million. That represents $68 million of the total $110 decline in SG&A. Using Billabong’s logic, and removing those significant from both year’s SG&A expense, we find they’ve fallen by 7% from $528 million to $491 million; not the 16.3% reported. And of course, there are no Nixon expenses in the 2013 SG&A and I can’t tell if they are part of the significant expenses or not (I’d expect not). So what should I conclude about Billabong’s efforts to reduce its SG&A operating expenses? Hard to tell.
 
Interest expense for the year was $13.4 million. Total interest and finance charges were $26.7 million (note 7, page 89). During the conference call we learn that interest costs under the Altamont deal will be between $43 and $48 million annually depending on the exchange rate. I don’t quite know which number to compare that to, but it’s quite an increase.
 
I suppose I should spend some time on the balance sheet, but with the Altamont financing hopefully imminent, it doesn’t seem like a good use of time. It would have been great if Billabong had, or would, provide a proforma balance sheet assuming the deal happens.
 
Final Thoughts
 
Sometimes Australian accounting leaves my head spinning and my sojourn through Billabong’s fine print hasn’t done anything to change that. I guess that’s my problem and I should move to Australia and study accounting.
 
Let’s move on to CEO Ian Pollard’s comments at the end of the press release. “We are nearing the end of a long process that has caused distraction, impacted on staff morale and has been very costly.” No argument there. One way or the other, it’s going to come to an end.
 
He goes on, “The Company looks forward to refocusing, reinvigorating its brands and rebuilding the business on a solid, long term financial footing.” I’d like to see that too.
 
To evaluate the possibilities, I’d like to see that proforma balance sheet I already referred to and, more importantly, I’d like to know more about the market position and potential of the company’s various brands. There are, I continue to believe, a host of cost reductions from operating better that won’t hurt any of the brands. In fact, they may help them and I applaud Billabong’s plan to reduce off price sales. But our market is changing madly. Legacy brands seem to be having a hard time getting traction and growing. You can read every word Billabong provided and not really get a better sense of where the brands stand. At the end of the day, that will be the most important thing.

 

 

A Brief Update on Billabong

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As you are probably aware, Billabong yesterday published a press release announcing the expected resignation of Launa Inman as CEO and of Paul Naude as a director and employee. It also said that, “Discussions with Scott Olivet regarding his appointment as CEO are continuing but have not been finalised as we await the outcome of the Takeovers Panel’s deliberations.” 

In the meantime, Scott is a consultant to Billabong and Peters Myers is acting CEO. You can see the press release here.  It’s the first item under “Recent News” called “Billabong Management Changes.”
 
Scott Olivet is the executive Altamont is bringing in as part of the overall deal with Billabong. One would assume that the deal with Scott was finalized before Altamont’s deal with Billabong was closed since Altamont wants Scott as CEO. You may also recall that Scott was investing a couple of millions of his own dollars in Billabong as part of the deal. I’m guessing here, but I can imagine that maybe Scott doesn’t want to commit his own funds until he knows what the Takeover Panel decides.
 
The investors who owned Billabong’s debt were paid off by Altamont when the deal with Billabong closed. They appealed to the Australian Takeover Panel because they didn’t like the deal. “Didn’t like” probably means they were hoping for a better deal themselves than just getting paid off.
 
Here’s a link to the Takeover Panel. When they publish a decision, we’ll be able to see it here. According to the site, “it takes a little over 2 weeks (16 days) for the Panel to make a decision on an application.” The average days from deciding to review to publishing their decision has been about 10 days in 2013. Billabong says it may be a week or more until we have that decision.
 
Meanwhile, Billabong has announced that their preliminary earnings presentation for the year ended June 30 will be released on August 27th. As I’ve said, I’ll be very interested to see their balance sheet.  Seems to me that in the past, they haven’t called it ‘preliminary." 
 
Okay, that’s it. I really wish this wasn’t all going on and that Billabong was just going about business, but it sure is interesting. 

 

 

Billabong Deal Completed

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Billabong announced today that the interim financial deal with Altamont and its partners and the sale of Dakine to the same group had been completed. They also announced that their syndicated debt liabilities had been paid off in full and that the two proposed Altamont directors would join the board. Here’s the announcement on the Billabong investors web site. It’s the first item under “Recent News.” 

Okay, so now what? Well, Scott Olivet is the new Managing Director and CEO, and Launa Inman is gone. The interim financing has to be turned into permanent financing by the end of the year when the interim loan from Altamont is due. I’m not quite clear on whether or not the asset based line from GE Capital is now in place or not. Billabong has to hold a shareholders meeting to approve various parts of the deal. I assume that will happen as quickly as possible so they can approve the options granted to Altamont and get the interest rate on the additional AUD $44 million convertible note down from 35% to 10%.
 
Questions include:
 
What additional brands, if any, will be sold?
 
Which parts of former CEO Inman’s plan will be retained? I’d expect that some of her operational rationalization will continue.
 
When will West 49 be sold? I assume it’s still for sale.
 
When will Billabong present their results for the year ended June 30? In the past, the date would have been announced by now. I really want a look at the balance sheet.
 
After this rather turbulent period, I hope Mr. Olivet can get employees refocused on running the business. Just like with Quiksilver, the industry needs Billabong to be strong and successful.

 

 

The Billabong Deal- A Second Offer Appears and is Rejected

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There are various articles flying around (and on Billabong’s web site) that tell us Oaktree Capital Management LP and Centerbridge Partners LP made an offer for Billabong yesterday (or the day before- I get confused about what day it is in Australia). As you know, the Altamont Consortium made, and Billabong accepted, an offer to buy Dakine, provide short term financing to pay off debt and, by the end of the year, roll that into a longer term loan. Here’s my article on that deal. 

In late June, Oaktree and Centerbridge, both distressed debt funds according to the articles, bought $289 million in Billabong loans at a discount from the original lenders. These are to be paid off by Altamont’s interim financing. According to this article from Bloomberg, Oaktree and Centerbridge “…“very much had a view that they were going to make money” through a debt-for-equity swap, Ben Clark, a portfolio manager at TMS Capital Pty., said by phone from Sydney. “They’ve been blindsided by Billabong’s intention to pay that debt back straight away” through the deal with Altamont.”
 
They bought the debt from Billabong’s banks at some discount, so are already positioned to make a profit when Altamont repaid it. But not being satisfied with that, they made their own offer for Billabong. That offer, according to the same article, “…would instead see A$189 million of the loans canceled in exchange for a 61 percent stake in Billabong, with the balance of A$100 million repaid using a six-year loan with an interest rate of 8 percent. The Australian company would retain its DaKine brand and the funds would seek a majority of board seats.”
 
This article says that Billabong has agreed to study this new proposal.  It further says that incoming CEO Scott Olivet would remain in that position. It’s not clear if he has agreed to that, or if it’s just an offer or assertion by Oaktree and Centerbridge.
 
 They also asked the Australian Takeover Panel to review the deal, saying it was “…anti-competitive and coercive.” The panel declined to stop the deal but said they could review it, as reported here. I don’t know what the possible outcomes of such a review are. Here’s what the panel actually said. “A sitting Panel has not been appointed at this stage and no decision has been made whether to conduct proceedings. The Panel makes no comment on the merits of the application.”
 
Meanwhile, we’re told in yet another article (you may not be able to access this unless you set up an account) that:
 
“Since Tuesday’s unveiling of the Altamont deal, Centerbridge and Oaktree have ramped up the pressure on Billabong, saying the company had refused to see their representatives despite a team of 10 or more flying in from the US to pitch a proposal.
 
Billabong chairman Ian Pollard has been intransigent.
 
He has said Centerbridge and Oaktree were invited many times last week to submit a proposal but refused on every occasion.
 
In the end, the chairman said Billabong had "executed the only executable transaction", which was the Altamont deal.
 
Despite Centerbridge and Oaktree claiming their proposal was superior and unconditional, Billabong said on Thursday it was subject to conditions that could not be satisfied, making any refinancing "far less certain" than the deal with Altamont.”
 
Here’s Billabong’s official response to these media reports from a release on their web site:
 
“The position is as follows:
1. The Company has received today a proposal from the Centerbridge/Oaktree Consortium.
2. This proposal was received by the Company after the Company had entered into the binding
bridge facility and DaKine sale agreement with the Altamont Consortium announced on 16
July 2013, which themselves followed an exhaustive process undertaken by the Company.
3. Prior to the Company entering into the transactions with the Altamont Consortium, the
Company made numerous requests to the Centerbridge/Oaktree Consortium to submit a
refinancing proposal. Despite those requests, the Centerbridge/Oaktree Consortium failed
to do so.
4. The proposal that has now been received from the Centerbridge/Oaktree Consortium is not
an offer that is capable of acceptance. The proposal is subject to conditions, a number of
which are incapable of satisfaction, and others which would make any refinancing far less
certain than under the Altamont Consortium transactions.”
 
What I think is going on here is that Centerbridge and Oaktree wanted to use the leverage from the debt they’d bought, which I believe was due and payable, as a way to get a chunk of equity in Billabong. Altamont’s offer to Billabong, which would have resulted in that debt being paid off next Tuesday or so, would keep that from happening, and they aren’t happy about that.
 
I guess what will be interesting to see is whether Centerbridge and Oaktree have created enough uncertainty on the part of Altamont and its partners to cause this transaction to be delayed. Remember, they have signed a deal with Billabong and I have no idea what that deal might or might not say about conditions under which the closing can be delayed. 
 
I kind of hope the deal just gets done so Billabong can get back to running its business.

 

 

The Billabong Deal

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As you have no doubt heard, Billabong has reached a deal with “…entities advised by Altamont and entities sub-advised by GSO Capital Partners1 (the credit arm of the Blackstone Group, and  together with Altamont, the “Altamont Consortium”)” to sell Dakine to Altamont, get bridge financing to pay off its existing syndicated bank debt, put together long term financing with Altamont and GE Capital, and to hire former Nike executive and Oakley CEO Scott Olivet as Managing Director and CEO of Billabong, replacing Launa Inman. 

Before we get into the all the gory details, here’s the link to the announcement on Billabong’s web site. It’s the first item under “Recent News.” And here’s what I wrote when we had an update from Billabong in early June.
 
I also want to remind you that it’s a little hard to evaluate the strategic significance of this deal because we don’t have Billabong financial statements, especially a balance sheet, to use. The fiscal year ended June 30, but we don’t yet know when the report will be released.
 
I’m going to use Australian dollars unless I say otherwise.
 
First, the Altamont Consortium is going to provide a bridge loan of $325 million. $289 million will go right out the door to pay off the banks. They are also going to buy the assets of Dakine for $70 million. That plus the part of the bridge loan not being used to pay off the banks means that Billabong gets $106 million in working capital.
 
Dakine was acquired by Billabong in August, 2009 for US$100 million. At the time, that was something like $120 million in Australian Dollars.  I’ll be curious to see what Altamont does with Dakine.  Wonder if they might not flip it to VF which, you remember, was a partner with Altamont early in the evaluation of Billabong.
 
The bridge loan and sale of Dakine are expected to be completed by this coming Monday, July 22. The loan expires on December 31, carries an interest rate of 12% and is to be replaced with the term loan discussed below. As part of the bridge financing, Billabong will issue 84.5 million options to the Consortium. That’s 15% of the company’s fully diluted capital. The option price will be $0.50 a share. The first tranche of options for 42.3 million shares was issued July 15th. The rest are part of the long term financing and each tranche will expire seven years after they are issued.
 
If the company is sold or makes a deal with somebody else before January 15, 2014, they’ve got to pay off the Consortium with a 20% principal premium. So I’m kind of guessing the deal will be with the Consortium. 
 
Okay, that wasn’t too bad. On to the long term financing.
 
Billabong has signed another commitment letter with the Consortium to provide a five year term loan of $281 million. This will include a “base commitment” $221 million and an “upsize” commitment of $60 million. The base commitment will carry an interest rate of 12%, but they can pay up to 5% of that “in kind.” That is, it can just be added to the loan principal rather than paid in cash. The upsize commitment carries an interest rate of 10% and has to be paid in cash. They will use this loan to pay off and replace the bridge loan.
 
The bridge loan, you will recall, is $325 million. The term loan is a total of $281 million so by itself it’s $44 million short of paying off the whole bridge loan. But wait! There’s more!
 
Billabong has also signed a commitment letter to issue a $44 million convertible note to the Consortium. There’s the rest of the money Billabong needs to pay off the bridge loan. The note will be convertible into “Redeemable Preference Shares” (RPS) once approved by Billabong’s shareholders. The interest rate on this note will be 12% and up to 5%, can be payment in kind. That is, it can just be added to the principal balance of the note.
 
Until the shareholders approve the RPS, the note will carry an interest rate of 35%, 25% of which may be payment in kind. With that kind of interest rate, we should expect to see Billabong scurrying to do a shareholders’ meeting for the approval. Once it’s approved, the RPS will be convertible into Billabong commons stock at $0.235 a share and will represent 25% of all shares outstanding (including options and the RPS). The RPS will pay a dividend of 12% of which up to 3% can be paid in common stock.
 
Of the 84.5 million options which are part of the overall deal, another 29.6 million will be granted on completion of the term loan with the balance of 12.7 million will be granted when the required shareholder approval is obtained.
 
The last piece of this is a Billabong commitment with GE Capital “for an asset-based multicurrency revolving credit facility of up to US$160m (A$177m) (“Revolving Facility”), subject to holding sufficient eligible accounts receivable and inventory as collateral.” I think that facility is available as quickly as they can get it into place, but it’s not quite clear.
 
My read on the change in Managing Director from Inman to Olivet is that the people providing the financing required an executive with extensive industry experience who would be immediately credible to everybody involved. In spite of Ms. Inman’s qualifications and significant accomplishments as an executive, it appears that what she accomplished during her tenure at Billabong wasn’t enough to create that perception. Altamont will also get two seats on Billabong’s Board of Directors.
 
Okay, so where does this leave us? If all this happens, the Consortium’s share in Billabong will be between 36.25% and 40.49%. That’s a lot of dilution for existing shareholders. We also know that Billabong will be paying a lot more interest expense. Working capital will increase by $106 million and they will have the asset based line from GE available.
 
None of this reduces the liabilities for store leases on the balance sheet, and I still expect West 49 to be sold. As to further asset sales, I have no idea. Ms. Inman had presented plans to streamline operations and reduce expenses substantially. From her description, I believe there’s money to be saved there, but we haven’t heard anything since the presentation of the plan.
 
Is all this “enough?” Altamont and the Consortium apparently think so and believe the debt load is manageable given their evaluation of the brands and their potential. But they are allowing some interest to be paid in kind just in case there are rough spots.
 
Of course, “the brands and their potential” is ultimately the only thing that matters. Perhaps we’ll learn something about that when they release their results for the June 30 year end.

 

 

Billabong Update: The Deal is off, or at Least Changing

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What We Know 

Billabong announced yesterday that there would not (at least at the present time) be a sale of the entire company to either the Sycamore Consortium (which includes Paul Naude) or to the Altamont/VF group. The company further announced that they were still talking to both groups “…regarding proposals presented to the Company for alternative refinancing and asset sale transactions, the proceeds of which would be used to repay in full the Company’s existing syndicated debt facilities.”
 
Billabong also lowered its guidance again, indicating they now expect EBITDA for the year of $67 to $74 million AUD (Australian Dollars). That’s before any “…share of Nixon NPAT and before Significant and Exceptional Items.” The last guidance the company offered was in February, when they indicated an EBITDA of $74 to $85 million AUD including $4 million AUD from their share of Nixon at the upper end. Ignoring Nixon and taking the midpoint of both ranges then, guidance has been reduced by about 9%.
 
They especially point to poor conditions in Australia and startup losses of $4 million AUD higher than expected for SurfStitch in Europe. Australian wholesale is on plan, but retail declined. Comparable store retail sales are 5.4% below “…the previous corresponding period and gross profit is 2.3% below…” The Americas are noted to be slightly ahead of plan and Europe remains weak, especially for the Billabong brand as was anticipated in February.      
 
You can see the announcement here. It’s under “Recent News” and is called “Company Update.” Trading in the stock started again and by the close of the day (Australian time) it had fallen to $0.23 a share in (AUD) on very high volume of 65 million shares.
 
The other information we have is that there are ongoing layoffs, West 49 is up for sale and, according to Billabong Chairman Ian Pollard, they are “…aggressively reducing costs across all our global operations.” Restructuring and reducing costs, of course, has been part of the plan since Launa Inman became CEO, but it’s starting to feel less like a strategy and more like a financial necessity.
 
The other thing I think we know is that the banks, which have Billabong’s assets as collateral for its loans, wants to get paid off and will “encourage” deals that contribute to that end.
 
What We Don’t Know
 
The first thing we don’t know is why there was no deal. Obviously the reduced guidance had something to do with that. It might be that the required lease payments on all the stores (that don’t show up on the balance sheet) were also a concern.
 
But strategically, if I were a potential buyer, the most important thing to me might be the prospects for the Billabong brand itself. I’d know that if I bought the whole company, I would expect to sell some brands, but I’d have to believe I could maintain and grow the Billabong brand or why make the deal?
 
For its part, the Billabong Board of Directors might not have wanted a formal offer if it was really low. If they thought such an offer reflected only current circumstances and not the fundamental value of the company and its brands, they wouldn’t want to disclose and then reject it. Assuming, of course, that they think they have a choice.
 
That choice pretty clearly doesn’t include selling more stock right now. But, given the conversations we’re told are now going on with Sycamore and Altamont/VF, Billabong’s choices may include selling assets and raising some more expensive debt that lets them pay off their banks.
 
Actually, I guess their choices do, not may, include selling assets; the question is just at what price. Billabong would certainly prefer not to be selling under these circumstances, while Sycamore and Altamont/VF (and other potential buyers that might pop out of the woodwork if certain brands are for sale?) will hope they can get a great deal.
 
Meanwhile, lenders like Sycamore and Altamont/VF might be thinking, “Well, I’m not ready to be all in on this one at any purchase price we can negotiate, but if I lent Billabong some money in the form of convertible debt, it might work out.”
 
The lender would earn a nice interest rate and be in a position to control a chunk of stock when the company recovered. If things went south, they’d be a lender and not a common equity holder protected to some extent by the value of the assets they’d have as collateral.
 
Now this all depends, as it does in any deal, on the cash flow making sense for Billabong based on the asset purchase prices, the interest rate, and the amount lent. We have no idea how that looks. Still, it feels like Billabong and either of these two potential partners might be more likely to have a meeting of the minds in a debt and asset sale scenario than a purchase. I don’t know why I said “feel.” That’s what Billabong told us in their update. Maybe now you understand a little better why.

 

 

Naude/Sycamore Bid $0.60 for Billabong, but Deal Not Done Yet

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Paul Naude and Sycamore Partners (“NS”) have made a non-binding bid of AUD $0.60 for each share of Billabong yesterday, down from their preliminary bid of $1.10. Billabong has given them an exclusive period of ten business days to complete their investigation and finalize the bid. You can read Billabong’s press release here. It’s the “proposal update” under “Recent News.” 

And before we get into the details, you might also want to read this article, which was published over the weekend in Australia. Ms. Knight does an excellent job of encapsulating Billabong’s history and the forces and decisions that lead the company to its current situation. I wish I’d written this. Thanks, you who sent it to me!
 
Here’s what we know from the press release:
 
Sycamore is going to form a new company which would legally be the entity buying Billabong. A seller of Billabong shares can either take $0.60 a share or shares (they call it scrip) in the new company. I don’t know if scrip is something different from stock under Australian law.
 
It’s a condition of the proposal that at least 15% of shares accept scrip and that insiders Gordon Merchant and Collette Paull and their families take the scrip unless they get a better offer. Together, they own about 16% of the Billabong shares, and they’ve indicated they’ll take the scrip. What this means is that NS has to come up with less cash then they otherwise would. The fact that they got this provision accepted is to me an indication of Billabong’s need for a deal.
 
I don’t know what will happen, but if I’d paid, say, $5.00 or more (or maybe less) for my Billabong shares and was about to get $0.60 a share, I might just take the scrip and hope Paul and his team can do good things.
 
NS is also going to “…engage an internationally recognized accounting firm to complete a confirmatory quality of earnings analysis typical of an acquisition debt financing.” Not a surprise given the number of times Billabong has reduced its earnings expectations in recent months.
 
Also, the “…conditions of the bidder’s debt funding” have to be satisfied. We don’t know how the debt is being funded or what those conditions are. Could be Sycamore’s money, could be a third party, maybe Paul’s putting in some cash or maybe some combination of all three. In any event, as the press release makes clear, the deal isn’t done and right now neither party has an obligation to go through with it. I suspect the quality of earnings analysis will have a lot to do with satisfying the lenders, whoever they are.
 
We don’t learn whatever happened to the VF/Altamont offer. Maybe they didn’t make an offer or maybe they offered less. As I wrote when their interest was first made public, I thought they might have a hard time agreeing who got which piece of Billabong at what price.
 
As you are probably aware, Billabong’s assets are pledged to their bankers and, basically, that gives those bankers a lot of influence. As bankers, they aren’t so much concerned at this point about Billabong growing and prospering as they are about getting their money back. So it’s reasonable to assume they are in favor of any deal that gets their loans paid off or at least improves their security.
 
Billabong, for its part, can only not make this deal (or some other deal not in evidence) if, with the support of those banks or from another source, they have the working capital to cash flow their business while current CEO Launa Inman’s strategy is implemented. Remember she said at their half yearly presentation that while they were working on it and had already seen some results, the real benefit wouldn’t show up until next year.
 
Unless the quality of earnings analysis turns up something pretty bad, I think the odds are that this deal will happen, though I have no opinion as to what the final price per share will be.           

 

 

Billabong’s Half Yearly Report. Now What?

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I listened to Billabong’s conference call yesterday and have spent part of last evening and this morning going over the detailed financial reports. I lead an exciting life. There’s a lot going on at Billabong, and I want to start with an overview before we get to the financial nuts and bolts. All numbers are in Australian Dollars. 

An Overview
 
The first thing everybody no doubt wants to know is whether or not there’s any news on the company being sold. There is not. All we’re told is that due diligence with both parties is in “an advanced stage” and should be completed in March. Whether there will be a firm bid when the due diligence is complete, what price the bid will be at, or whether Billabong’s board would accept a bid is not known.
 
You’ll recall that both potential buyers preliminarily offered $1.10 per share. Given the half year results, deteriorating business conditions, and Billabong’s lowering of its guidance for the full year from an EBITDA (before significant items- we’ll get to those) of $85 to $92 million down to $74 to $85 million, I’ll be interested to see if they still feel that the $1.10 offer is appropriate. 
 
Meanwhile new CEO Launa Inman is pursuing the transformation strategy she described some months ago. You may recall that there were a lot of things I liked about that strategy. It seemed like there were a bunch of costs that could be reduced. Some of those savings have been realized, but others will take some time and there’s significant expense required to realize them.
 
119 retail stores had been closed as of February. Forty more will be closed by June. Starting in March, the number of suppliers will be reduced from north of 270 to 50. That has to be worth a lot of money but of course you don’t see the benefit until you’ve actually been through the product cycle with just 50 suppliers. Their process of reducing SKUs is also ongoing, but we didn’t get any specifics on that.
 
The organization is moving from a regional to a global reporting structure and there’s a global information technology strategy is place and being rolled out in the middle of this year. In the conference call we’re told that IT used to report through to each region. Billabong has now hired an IT director who reports to CEO Inman and is tasked with pulling it together. The comment that most caught me by surprise was her statement that Billabong does not have a true general ledger across the whole business.
 
I suppose that’s a hangover from the days of “Buy good brands with good management and let them run their operations.” Perhaps an appropriate strategy for a different economic reality and, in any event, lacking a companywide general ledger, you had no choice.
 
It sounds like there are a lot of changes in reporting relationships and responsibilities going on.  Wonder how it will all impact the people running the various brands. No doubt they are wondering the same thing. The described changes are necessary in my opinion, but also disruptive. Peter Meyers, the CFO, has been there only four weeks speaking of drinking through a fire hose.
 
Remember when Gary Schoenfeld became PacSun’s CEO and turned over the entire senior management team? We talked then about how there had to be a settling in period measured in months. I don’t know how extensive the changes will be at Billabong, but it’s the same concept. Some patience is required.
 
So there are a plethora of ultimately good and necessary changes and a certain level of organizational musical chairs going on. Accomplishing all this costs some money. Meanwhile, cash flow is impacted by weak business conditions and the bank is nervous enough to make Billabong move to an asset based line of credit. And then there are two potential bidders for the company. What happens to which brand if one of them is successful? The stock closed at $0.86 a share yesterday, down from $0.92 before the announcement, so it looks like the market is not quite sure, after yesterday’s results, that a deal will happen at $1.10.
 
CFO Meyers noted that of course the company had to watch its cash flow, but he said he was comfortable that they have the cash flow to continue the transformation strategy. I wonder if that’s true if business conditions worsen more.
 
The best thing that could happen to Billabong is to resolve the issues of whether the company is going to be sold. The disruption, uncertainty, and general organizational angst surrounding just the transformation strategy is adequate without the addition of due diligence and the possibility of a new owner. If there is a firm offer to purchase Billabong, I suspect it will be accepted (or not) based on how Billabong’s board perceives the company’s financial ability to implement the transformation strategy.
 
Numbers
 
Let me start by giving you the actual income statement numbers. Then I’ll go through various explanations, adjustments, and qualifications you’ll want to know about.
 
Revenues from continuing operations were $702.3 million, down from $764.3 million in the PCP for a decline is 8.1%. As you would expect, cost of goods fell from $360 to $335 million and gross margin was down from 53.4% to 52.1%. Selling, general and administrative expenses fell from $297 million to $268 million.
 
Okay, now here’s the biggie. Other expenses rose from $96 million in the PCP to $624 million this year. I guess I’d better stop and explain that.
 
As we’ve discussed before, companies are required to evaluate their intangible asset values and adjust them if those values have changed. Impairment charges they are called. I consider the process to be valid. If you don’t expect to earn as much with an asset as you did before, it’s certainly worth less. But doing the calculations is arcane as hell and it’s tough to say if the numbers you arrive at really reflect market value. Impairment charges for brands and goodwill are noncash charges.
 
Billabong ended up having to take big write downs on the goodwill and brand values they had on their balance sheet. By far the biggest chunk was for the Billabong brand, whose carrying value was reduced from $252 million to $30 million. Billabong took total brand and goodwill charges of $427.8 million. The charge for Nixon was an additional $107 million and it took its carrying value down to $29 million.
 
Including those charges, Billabong called out “significant charges” that totaled $567 million pretax. You can see the list on page 12 of the Half Yearly Report Presentation. Click on it on this page to open.
 
The charges include $1.9 million for inventory clearance below cost, $3.1 million for specific doubtful debts, $5.8 million for takeover bid defense, $6.3 million for the transformation strategy, $11.7 million for Surf Stitch, and $3.5 million for a supply agreement they had to pay as part of the Nixon deal. They then proceed to show their results as though these costs hadn’t been incurred, arguing that these are unusual, one-time costs. You can decide for yourself which of these you think should or should not be excluded. $1.9 million was included in cost of goods sold, and $16.2 million in selling, general and administrative expenses.       
 
The bottom line, including all these charges, was a net loss of $537 million compared to a profit of $16 million in the PCP.
 
Nixon
 
 Let’s take a short detour to examine the impact of the Nixon deal on the income statement. Total revenue in the PCP was actually $850 million. But remember they sold 51.5% of Nixon in April, 2012. Accounting treatment required that their share of Nixon’s revenues no longer shows up as revenue on the income statement. We just see their share of Nixon’s after tax profit for this year. For the PCP it’s carried as discontinued operations and the $86 million in revenue is excluded from the top line. Nixon’s $18.4 profit after tax is shown as a separate line item called profit from discontinued operations. For the six months ended December 31, 2012, there is a loss shown of $2.44 million. This is a one-time cost they had to pay to get out a contract when the deal was done and doesn’t have anything to do with how Nixon is doing.    
 
However, Billabong’s share of Nixon’s profits in the most recent six month period was $1.142 million, “materially down” from what it was expected to be at the time of the transaction and 30% to 40% down compared to last year. During the question session, there was some concerned expressed about the debt on Nixon’s balance sheet ($175 million) but we were assured there was no recourse to Billabong for that debt.
 
Looks like the timing of the Nixon sale was pretty good. Probably wishing they’d sold the whole thing. Boy, I didn’t see that one coming.
 
Segment Results
 
Billabong reports its results for three main segments; Australasia, Americas, and Europe. The headline is that revenue and EBITDAI as reported were down in all three segments. These numbers include the Nixon revenue of $86 million in the PCP. I’ll give you the numbers without Nixon after this.
 
In Australasia, revenue fell from $296 million to $276 million or by 6.8%. In the Americas, the decline was 20.2% from $401 to $320 million. Europe was particularly bad (not a surprise) falling 30.7% from $150 to $104 million.
 
Here are the EBITDAI numbers. Australasia fell 48% from $27 to $14 million. The Americas was down $30 to $13 million, or 56.7%. Europe went from $16 million to a loss of $799,000. When you include third party royalties, Nixon, and that bad contract they had to pay, we’re left with total EBITDAI falling 66% from $74 million to $25 million.
 
Now here are the numbers, but without Nixon. It’s kind of overkill, but I think it’s important. Without Nixon, revenues in Australasia fell 2.5% from $283 to $276 million. In the Americas, they were down 7% from $344 to $320 million.  Europe fell from $135 to $104 million, or by 23%.
 
EBITDAI without Nixon fell from $21 to $14 million or 33% in Australasia. The Americas went up slightly from $12.2 million to $12.5 million. Europe’s EBITDAI fell from $10 million to a loss of $799,000. Total EBITDAI excluding Nixon fell from $45 to $28 million.
 
As you can, the comparisons look better without Nixon and, in fact, the EBITDA is $3 million higher.      
 
In the CEO’s presentation, we learn that the sales decline in the Americas was led by retail which fell US$ 19.1 million. This was “driven by negative comparative store sales growth in Canada and store closures.” Wholesale revenue fell US$ 4.2 million. $US 3.9 million of that was in Canada. Future orders are up in the U.S., but down in Canada. West 49 was down 8% for the six months. Retail sales in the Americas were down 6%. 
 
There was also a comment that they did substantial closeout business in the Americas including to TJ Max. They are hardly alone.
 
In Europe, action sports distribution continues to shrink, there’s pressure on margins, and heavy promotional activity. CEO Inman noted they lost 25% of all their accounts in Europe last year either because they went out of business or due to credit hold. There were also some accounts that reduced orders due to stock left from last year.
 
In Australasia, the sales decline was driven by store closures, but the online business is growing. Wholesale forward orders are “not where we’d like.” 
 
The numbers are a bit different in constant currency, but not enough to justify me laying them out here.
 
So these results are not specifically too good. How might Billabong management give us a little different perspective? 
 
Here’s what Billabong says on page four of their Half-Year Financial Report. You can see the report here. Just click on the link and open it as a PDF.
 
“Given the impact of the Group’s transformation strategy announced to the market on 27 August 2012 and the impact the difficult global macro trading conditions have had on results this half-year, the Group’s results have been presented on an adjusted basis to exclude the significant items to enable a more representative comparison to the prior year as detailed below.”
 
Calling the transformation strategy costs one time I can see, though I don’t expect they are done with those costs. But certain costs that result from the “impact of difficult global macro trading conditions” can be adjusted for? How can those possibly not be normal operating costs? Maybe I just don’t speak Australian English. A company doesn’t get a “do over” because the economy sucks. That’s what you’re supposed to manage through.
 
Anyway, if you eliminate all those costs they have labeled as significant, the adjusted EBITDAI is shown to fall from $83 million in the PCP to $57 million. Net profit is down from $38 to $19 million, which is a bit better than a loss of $537 million.
 
The balance sheet has gotten smaller but, thanks to the sale of half of Nixon and the raising of capital, not gotten much weaker. Cash generated by operations has fallen from $87 million to $29 million.
 
As much as I like Billabong’s transformation strategy, I’m left wondering if they’ve got the time and financial capacity to implement it, especially if the world economy should stay soft or even get worse.