Horizon Global Corporation
Q2 2022 Earnings Call Transcript

Published: 13 Aug 2022

[Operator:]

Good morning, everyone, and welcome to Horizon Global's Second Quarter 2022 Conference Call. My name is Jamie, and I will be your operator for today's conference. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. This call is being recorded at the request of Horizon Global. If anyone has any objections, you may disconnect at this time. At this time, I'd like to introduce Mr. Jeff Tryka with Lambert IR, Horizon Global's Investor Relations firm. Mr. Tryka, you may proceed.

[Jeff Tryka:]

Thank you, operator. Good morning, and welcome to Horizon Global's Second Quarter 2022 Conference Call and Webcast. On the call today are Terry Gohl, Horizon Global's Chief Executive Officer; and James Zhou, Horizon Global's Chief Financial Officer. Earlier this morning, we announced our second quarter 2022 results. The release is available on many news sites as well as in the Investor Relations section of our website at horizonglobal.com. Turning to Slide 2. Today's presentation will include non-GAAP disclosures. These disclosures are reconciled to GAAP in the appendices to our quarterly press release and presentation, both of which are available on the Investor Relations section of our website at horizonglobal.com. Turning to Slide 3. I'd like to remind you that statements in today's presentation will include our views about Horizon Global's future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We've described these risks and uncertainties in our risk factors and other disclosures in the company's most recently filed annual report on Form 10-K, quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission. With all that being said, I would like to turn the call over to Horizon Global's Chief Executive Officer, Terry Gohl. Terry?

[Terrence Gohl:]

Thank you, Jeff, and good morning to all of you who are participating in today's review of our second quarter results. I would like to start off expressing our gratitude to our shareholders, employees, customers and to our suppliers for your continued support as we collectively navigate through the many industry challenges faced during the quarter. Thank you all for your continued dedication to the company. Yesterday, the company issued a press release announcing that the Board is reviewing strategic alternatives for the business. As noted in the press release, we have received multiple inbounds, and the Board's review reflects its commitment to maximizing shareholder value. Strategic alternatives could involve the sale of a portion or of the entirety of the business. While this review occurs, management remains focused on unlocking the deep value associated with our innovative products, iconic brands and long-standing customer relationships. Today, we will address our results for the second quarter and the actions we are taking to solidify our commercial position, improve our operations and mitigate controllable spend. The second quarter was challenging with many external factors negatively impacting our business, including, notably, sales volumes and volume mix. During the quarter, consumers experienced the impact of inflation on pricing across virtually all consumables. They faced uncertainty associated with the trajectory and duration of that inflation, continue to witness geopolitical conflicts and rising tensions around the world and continue to endure the impact of supply chain constraints on product availability. When you add in heightened inventory levels held at our non-OEM customers at the beginning of the quarter, it resulted in a significant impact to our top line and margin. Our assessment is that consumers represented in our marketplace pulled back on purchases during the quarter as they assess the impact of the changing economic factors I just described. During our last call in May, we emphasized our commitment to improving the company's performance. We remain committed, and despite a number of uncontrollable external factors, management is focused on the business and positioning it for success. Turning to Page 5 for an overview. James will present the financials in detail, but maintaining consistency with prior releases, we are summarizing our quarter performance on this page. Some overall comments relative to the quarter. Sales were driven down primarily due to three factors

[Jian Zhou:]

Thank you, Terry. Good morning, everyone. I would like to thank Terry and the Board for this opportunity. I am excited to join Horizon Global as the CFO and to be here with you today. Please turn to Slide 11 for a review of the company's consolidated results for the second quarter of 2022. Consolidated net sales for the second quarter of 2022 were $181.2 million, a decrease of $40.9 million or 18.4% comparing to the second quarter of 2021. The net sales decrease was primarily attributable to lower sales volume in both the Americas and Europe-Africa operating segment. The decrease was partially offset by customer pricing initiatives implemented to recover the impact of increased input costs, including material and other inflationary costs. This pricing recovery are generally recognized on a one to two quarter lag. Gross margins decreased to 11.4%, down from a gross margin of 21.3% for the second quarter of 2021. The decrease in gross margin was primarily driven by the lower sales volume, coupled with a significant mix shift to lower-margin sales channel, product and increased manufacturing input costs. We reported an adjusted EBITDA of loss of $3.9 million comparing to the adjusted EBITDA of $18 million during the second quarter of 2021. This was primarily due to the lower gross profit margin performance Terry has mentioned. Negative operating leverage from reduced production in this quarter significantly affected EBITDA. Now let's turn to Slide 12 to review the segment performance for the quarter. Net sales in the Americas were $110.9 million, $17.5 million or 13.6% lower than the second quarter of 2021. The decrease in net sales was driven by lower volume in the aftermarket and retail sales channel, partially offset by customer pricing recovery initiatives. Adjusted EBITDA for the segment decreased to $3.4 million compared to adjusted EBITDA of $18.5 million for the second quarter of 2021. The decrease was driven by reduced production as a result of lower sales volumes, a significant mix shift to lower-margin sales channels and products, and increased manufacturing input costs, including elevated commodity and logistics costs. Transitioning to our Europe-Africa operating segment. Net sales was $70.3 million, a decrease of $23.4 million or 25% from the second quarter of 2021. This decrease was primarily due to lower sales volume in the automotive OEM, automotive OES and aftermarket sales channel, as well as unfavorable currency translation of $8.7 million. The decrease was partially offset by customer pricing recovery initiatives. Adjusted EBITDA loss for the segment was $1.5 million comparing to adjusted EBITDA of $5.1 million for the second quarter of 2021. This decrease was driven by a lower net sales, coupled with a significant mix shift to lower margin sales channel and product, unfavorable manufacturing input costs and operational inefficiencies due to automotive OEM customer disruptions. Now move on to our working capital, liquidity and free cash flow on Slide 13. Total trade working capital was $106.2 million in the second quarter of 2022, which represented a decrease of $2.6 million compared to the fourth quarter of 2021, an increase of $5.2 million comparing to the second quarter of 2021. Specifically, receivables increased $18.2 million to $98.9 million compared to the fourth quarter of 2021. Days sales outstanding was 50, an increase of 5 days over the fourth quarter of 2021. Inventories increased $2.2 million to $165 million compared to the fourth quarter of 2021. Days of inventory on hand was 94 days, a decrease of 7 days over the fourth quarter of 2021. Accounts payables increased $23.3 million to $125.5 million compared to the fourth quarter of 2021. Days payable outstanding was 71 days, an increase of 8 days from the fourth quarter of 2021. Cash and availability or liquidity totaled $46.5 million for the second quarter of 2022, which was comprised of $20.1 million of availability under our credit facilities and cash on hand of $26.4 million. This reflects a $7.3 million increase compared to the fourth quarter of 2021 and a decrease of $15.5 million compared to the second quarter of 2021. Free cash flow year-to-date 2022 was a use of $33.4 million comparing to a use of $37.6 million during the same period in 2021. The use was primarily related to company's financial performance in the first half of 2022, generally in line with the use of free cash flow during the same period in 2021. Turning to Slide 14 for a review of our current capital structure. During the quarter, we issued $41 million of redeemable preferred stock in exchange for settling $40 million of convertible notes. Total gross debt plus redeemable preferred stock increased in aggregate by approximately $139.9 million from $300.9 million at the end of the fourth quarter of 2021 to $440.8 million at the end of the second quarter of 2022. Please note, this number reflects $85 million of convertible notes that were paid off on July 1, 2022, or in other words, the first day of the third quarter. Excluding convertible notes paid off on July 1, 2022, our gross debt increased approximately $14 million from the end of the fourth quarter of 2022, which was primarily due to increased ABL borrowings. With that, I will turn it back over to Terry for his closing remarks.

[Terrence Gohl:]

In closing, the second quarter of 2022 was a challenging quarter for us. Performance was driven by many factors, but for the most part, volume and mix of sales realized, we retained a strong order book as we closed the quarter at over $50 million in the Americas. We are advancing our commercial and competitive position with innovation, new product introductions, footprint positioning and further investments in our operations to support our long-term objectives. We are on the front line and deeply engaged with our customers as they look for innovative ways to optimize semiconductor usage and efficiency to address global constraints. Our operational improvement initiatives continue to result in increased capacities and lower cost to manufacture. We are leveraging this for further in-sourcing actions throughout the quarter, with more targeted actions planned for the remainder of the year. We continue to optimize our logistics and supply chain with new supply partners being added and new carriers and routes being implemented to optimize the cost of transportation. We have achieved our best results in the company's history in our performance metrics on quality, and are advancing all measures of sustainability. Our operations continue to build on its foundational strength, and we will leverage that through increased competitiveness and increased portfolio, and the recognition from our customers that we relentlessly work with them to protect their supply and to provide them the highest quality products in the market. We are Horizon Global, and we represent the industry leadership in the towing market. Again, thank you to all who've joined and for your continued support. I'll now turn it back to the operator for questions. Operator?

[Operator:]

[Terrence Gohl:]

Again, as I said at the beginning, I want to express our appreciation as a company to all of you who continue to support the company and to have interest in joining the call today. We look forward to our Q3 earnings call later this year, and we'll talk to you then. Thank you.

[Operator:]

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.