Billabong Reports $883 Million Loss After Writing Down Value of Brands to Nearly Zero

Billabong International Limited, which is in the throes of refinancing its debt and has slashed 75 percent of its suppliers in the last year, reported a net loss after tax of AUD$859.5 million ($883 mm) for the year ended June 30, after AUD$867.2 million ($891 mm) of predominately non-cash significant items

Besides Billabong, the company's brands include Element, Von Zipper, Honolua Surf Company, Kustom, Palmers Surf, Xcel, Tigerlily, Sector 9, Dakine and RVCA brands. It also owns Canada's West 49 chain.

The Australian surf brand said sales revenue reached AUD$1.34 billion, down 13.5 percent, or 12.6 percent in currency-neutral (c-n) terms compared with the previous comparable period. The non-cash charges included AUD$604.3 million ($622 mm) non-cash impairment for goodwill, brands and other intangibles, including AUD$427.8 million ($439 mm) taken Dec. 31, 2012. Another AUD$129.6 million ($133 mm) was related to a non-cash write down of its investment in Nixon, which was also taken Dec. 31, 2012.

On an adjusted basis, the company reported EBITDAI of AUD$72.6 million ($75 mm)- down $14.3 million in reported and inconstant currency terms compared with the previous corresponding period. Adjusted EBITDAI is before significant items and after excluding Nixon from the prior year.

Dr Pollard said despite the significant distraction of managing multiple bid and refinancing proposals a number of major reforms have been completed or are well advanced, including:

• Agreements with Nixon to extinguish future purchase obligations (completed)
  
• Sale process of Canadian retail chain West 49 (advanced) 158 under performing retail stores have been closed
  
• Supplier reduction by over 75 percent, which drive cost savings, efficiency and improved quality control is ongoing.
  
• Business simplification underway including:
  
  
  
  • reducing European headcount by approximately 15 percent (in process)
    
  • restructuring Australasia wholesale operations and moving to a distributor model in sub-scale markets in Asia (done)
    
  • restructuring and refocussing to a core customer and brand proposition in South Africa and South America (H2 2014)
  
  
• Sales to close out channels reduced, particularly in the United States (well advanced, ongoing)

“We are nearing the end of a long process that has caused distraction, impacted on staff morale and has been very costly,” said Dr Pollard. ¡§The company looks forward to refocusing, reinvigorating its brands and rebuilding the business on a solid, long term financial footing.¡¨

Geographic results
The Americas Adjusted EBITDAI increased 0.8 percent in reported terms (0.6 percent in constant currency terms) on the back of a AUD$38 million ($39 mm)  (5.7 percent) decrease in sales following the closure of a number of underperforming stores and a strategic shift in channel distribution away from close out/distressed sales channels towards more long term and profitable channels, such as e-commerce.

In Europe, Adjusted EBITDAI decreased from AUD$19.4 million in the pcp to a small loss of AUD$100,000. While the European macro environment remains extremely challenging, including heavy promotional discounting in the retail sector, significant restructuring has and will continue to be undertaken in Europe. SurfStitch Europe start-up costs impacted an already weak performance and are being addressed.

Specifically the charges include;

• Impairment of intangibles including brands, goodwill and other intangibles – AUD$604.3 million;
  
• Impairment of the Group's investment in Nixon – AUD$129.6 million;
  
• Write off of fixed assets including certain real estate and fxtures/fittings in loss making retail stores – AUD$32.6 million;
  
• Provision for inventory and receivable losses, the majority of which relates to restructuring of operations in various geographies in accordance with the Group's plans to simplify its business model – AUD$32.0 million; and;
  
• Professional, banking and consulting costs associated with the various control proposals, refinancing and banking restructuring, and the Transformation Strategy announced in August 2012 – AUD$23.3 million.

Directors note the extraordinary circumstances which have existed for the Group throughout the last financial year and the resulting substantial cost. The vast majority of these significant items are non-cash but the cash costs of $33.2 million have materially impacted our cash flows for the year. Whilst the Group faces a period of rebuilding and reform, it is not expected that the significant items will continue at these levels.

Balance sheet
As at June 30, 2013 net debt was AUD$207 million, up from AUD$161 million in the pcp, reflecting the payment of deferred consideration on prior period acquisitions, the proceeds from the retail component of the June 2012 capital raising, and the cash flow from trading and significant items for 2013.

Gross debt was AUD$320 million as at June 30, 2013. The Group also had obligations for deferred consideration on various acquisition arrangements amounting to A$58 million.

On July 16, 2013, the company announced that it had entered into various agreements with Altamont Capital Partners and GSO Capital Partners to re-finance the majority of the Group's debt facilities. On August 21, 2013, following intervention by the Takeovers Panel, further announcements were made which outlined plans to implement a long term re-financing package including:

• a five year term loan of US$310 million (AUD$343 million);
  
• the issue (subject to shareholder approval) of US$60 million (AUD$66 million) of Redeemable Preference Shares, the proceeds from which will be used towards the prepayment of the term loan; and
  
• a commitment by GE Capital to provide an asset-based credit facility of up to US$160 million (AUD$177 million), subject to holding sufficient eligible accounts receivable and inventory as collateral.

Together, these new arrangements, totaling $470 million (AUD$520 million), will effectively replace the majority of the Group's credit facilities that were in place at June 30, 2013. They will provide the Group with a flexible capital structure to allow it to stabilise the business, address its cost structure, and pursue a growth strategy. The new arrangements will include cash borrowings sufficient to meet the Group¡¦s peak seasonal requirements, as well as a range of trade credit and other guarantee facilities.

These arrangements, when finalised, will see the Group's funding costs increase and it is estimated that on a full year basis borrowing costs will increase to US$43 million – $48 million.

On Aug. 23, 2013 the company confirmed that it had received an alternative refinancing proposal from Centerbridge Partners and Oaktree Capital (the “Centerbridge/Oaktree Consortium”), which it would consider having regard to the best interest of shareholders and consistent with Billabong's previously stated intentions to finalize the long term financing package as soon as practical and to focus on rebuilding the business.

Sale of DaKine
Since the end of the year the company has sold the DaKine brand to Altamont Capital Partners for a cash price of AUD$70 million as part of the transactions agreed with Altamont on July 16, 2013. The proceeds were used to reduce debt and provide working capital. There are no material ongoing obligations for the Group under the transaction documents.

Restructuring of Nixon
Since the end of the financial year the Group has restructured various arrangements with Nixon Investments, LLC (Nixon) and the other principal shareholder in Nixon, Trilantic Capital Partners (Trilantic) as follows:

• The Group's commitment to purchase previously agreed volumes of product from Nixon has been reduced from US$152 million over the period from 2014 to 2017 to US$9 million in FY14, with no further commitments beyond that date;
  
• The Group has agreed to make cash payments to Nixon totalling US$14.2 million during FY14; and
  
• Nixon will issue additional Class A Units (to Trilantic), such that the Group¡¦s interest in the Nixon Joint Venture is diluted from 48.5 percent to 4.85 percent. As at June 30, 2013, the company wrote down the value of its investment in Nixon to nil, having written down the value to approximately US$30 million at December 2012. The business relationship with Nixon remains strong and the Group continues to sell Nixon product through its extensive retail network.

Dividends
As foreshadowed in the half-year update, there will be no dividend paid in respect to the 2013 financial year.

Outlook
We have a portfolio of world class brands, led by Billabong, that continue to win product and industry awards, along with events and athletes that are the benchmark in the action sports industry.
The process of securing the company¡¦s short and long term financing to fully develop and reinvigorate those assets is coming to a conclusion.

In the next 12 months the company will drive product innovation, improve our presentation of product and brand stories across all channels, and continue to refine our processes and reduce costs in areas such as supply chain. We are soon to transition to a new capital structure and a new CEO who will be leading ongoing reform and rebuilding over the next 24 months. Accordingly, the focus will be on sustainable restructuring and improvement rather than solely short term performance and accordingly we are not providing EBITDA guidance.