Horizon Global Corporation
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Good morning, everyone and welcome to Horizon Global’s First Quarter 2021 Conference Call. My name is Matt and I will be your operator for today’s call. I would now 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 first quarter 2021 conference call and webcast. On the call today are Terry Gohl, Horizon Global’s Chief Executive Officer and Dennis Richardville, Horizon Global’s Chief Financial Officer. Earlier this morning, we announced our first quarter 2021 results. The release is available on many news sites as well as in the Investor Relations section of our website at horizonglobal.com.

[Terry Gohl:]

Thank you, Jeff and welcome to all of you who are participating in our call today. On behalf of the complete Horizon Global team, Dennis and I will probably present our first quarter results for 2021. During the past earnings calls, we have themed our progress and described our position with terms like momentum and on track. Today, while we maintain that these descriptors still apply, we are now into the acceleration phase of our plans. Through great teamwork and solid plans, we have implemented the foundation of the lean operational vision we have defined for the company in late 2019. Our results even through the darkest COVID periods of 2020 highlighted the value and the importance of our operational initiatives. We drove meaningful improvements across all aspects of our business throughout 2020 as you heard in our last earnings call. We simply did not accept COVID-related shutdowns and volume loss in 2020 as an excuse to take our foot off the gas. We continue to improve the business each and everyday. Our plans to turn around the business never wavered from stabilization to foundation and standardization to now acceleration. We are now in that acceleration phase that we deploy the best-in-class method successfully implemented at our North American facilities to our facilities in Europe and Africa. We also defined to deploy targeted improvement initiatives across our global administrative business functions, which drove significant improvements in our processes and procedures and simplified the way we do business.

[Dennis Richardville:]

Thank you, Terry. Good morning, everyone and thank you for joining us. To echo Terry’s comments, we are pleased with the first quarter results and we continue to work diligently to maintain our momentum, heading into the traditional selling season focused on earnings growth, liquidity and working capital management. Please turn to Slide 11 for a review of the company’s consolidated results for the first quarter of 2021. Consolidated net sales for the first quarter of 2021 were $199.2 million, an increase of $35.9 million or 22% compared to the first quarter of 2020. The net sales increase was primarily attributable to higher sales volumes in both the Americas and Europe, Africa operating segments driven by strong customer demand, combined with the initial impact of COVID-19 beginning late and the first quarter of 2020. Gross profit increased to $40.6 million, an improvement of $14.3 million compared to the first quarter of 2020. The higher gross profit was a result of the higher net sales, coupled with manufacturing and operating efficiencies across the business. We reported operating profit of $6.8 million, an improvement of $13.5 million over the first quarter of 2020 driven by the improved gross profit. Net loss from continuing operations was $15.2 million, an improvement of $1.3 million over the first quarter of 2020 despite a one-time $11.7 million loss on debt extinguishment recorded in the first quarter of 2021 related to our February term loan refinancing. We reported adjusted EBITDA of $12.7 million, an increase of $9.8 million over the first quarter of 2020. Improved adjusted EBITDA was primarily due to the increased gross profit and business performance previously mentioned. Consolidated adjusted EBITDA margin increased to 6.4% as compared to 1.8% in the first quarter of 2020. Let’s turn to Slide 12 to review the segment performance for the quarter. Net sales in the Americas were $109.8 million, $17.4 million or 18.8% higher in the first quarter of 2020. The net sales increase was primarily driven by a combined increase of $9.8 million in the automotive OEM and OES sales channels, coupled with a $4.9 million increase in the aftermarket sales channel. We reported operating profit of $11.8 million in the Americas segment compared to an operating profit of $2.7 million for the first quarter of 2020. The increase in operating profit was primarily driven by higher gross profit attributable to the increased sales volumes and operational performance improvements realized across the segment during the first quarter of 2021 partially offset by higher outbound freight cost attributable in a large part to increased sales volumes. Adjusted EBITDA for the segment increased to $12.9 million as compared to $6.1 million for the first quarter of 2020 due to strong operational results previously discussed. Adjusted EBITDA margin was 11.7% as compared to 6.6% for the first quarter of 2020 driven by the strong quarterly operating performance. Transitioning to our Europe, Africa operating segment, net sales were $89.4 million, an increase of $18.5 million or 26.1% over the first quarter of 2020. The net sales increase was primarily due to a combined increase of $10.8 million in the automotive OEM and OES sales channels as well as a $6.7 million increase in the aftermarket sales channel. We reported an operating profit for the segment of $1.5 million compared to an operating loss of $2.5 million for the first quarter of 2020. The improvement was driven by a $4.7 million increase in gross profit primarily attributable to higher net sales combined with favorable manufacturing costs. Adjusted EBITDA for the segment increased to $5.4 million as compared to $2.3 million for the first quarter of 2020. Adjusted EBITDA margin increased to 6% as compared to 3.2% in the first quarter of 2020. Now, moving on to our working capital liquidity and free cash flow position on Slide 13, freight working capital was $81.8 million for the first quarter of 2021, which represented an increase of $26.2 million compared to the end of the fourth quarter of 2020. Specifically, receivables increased $24.5 million to $111.9 million compared to the end of the fourth quarter of 2020. The change in receivables was driven by higher net sales in the first quarter of 2021 compared to the fourth quarter of 2020. Day sales outstanding, was 51 days, an increase of 5 days for the fourth quarter of 2020. Inventory increased $19 million to $134.4 million compared to the end of the fourth quarter of 2020. Days on hand inventory, was 76 days, an increase of 2 days from the fourth quarter of 2020. A higher inventory and represents a strategic build to position ourselves to meet significant booked order levels in customer demand in anticipation of our traditional peak selling season. This includes an increase in in-transit inventory related to international shipments of $2.6 million compared to the fourth quarter of 2020 and $10.9 million compared to the first quarter of 2020. Accounts payable increased $14.4 million to $113.9 million compared to the fourth quarter of 2020. Days payable on hand was 65 days, an increase of 1 day from the fourth quarter of 2020. Cash in availability or liquidity totaled $63.4 million for the first quarter of 2021, which is comprised of $38.8 million of availability under our credit facilities and cash on hand of $24.6 million. This reflects a $20 million reduction from the fourth quarter of 2020. Free cash flow was a use of $21.6 million at the end of the first quarter of 2021, which is $23.3 million lower than the prior year driven by the higher working capital, which is primarily the result of higher inventory levels related to our strategic build previously mentioned. Turning to Slide 14 for review of our debt and capital structure, our gross debt increased by $14.3 million to $280.4 million compared to $266.1 million at the end of the fourth quarter of 2020 primarily reflecting proceeds from the term loan refinancing completed during the first quarter of 2021. Moving on to debt maturities on Slide 15, at February 2021 refinancing allowed the company to address its near-term maturities in a cost-effective manner. In addition with the ABL amendment completed in April 2021, our maximum available credit under our ABL facility increased $10 million to $85 million. We believe these recent improvements to our capital structure, provides the company with the financial flexibility an extended runway to execute on its long-term strategic plans. With that, I will turn it back to Terry for his closing comments.

[Terry Gohl:]

Thanks, Dennis and complements again to you and your team for continuing to drive the process improvements that we have seen throughout the financial organization and the company as a whole. Thanks as well for your outstanding leadership on the refinancing in the ABL expansion actions completed during the quarter, once again great job. Turning to Page 16, here on this page, we are providing a preliminary view of our April gross sales for the company. As you can see we have dramatic increases for both operating segments on a year-over-year basis 2021 versus 2020. The Americas segment is positive 39% with Europe and Africa being up 55.5%. Specifically, when looking at gross sales on an April 2021 versus April 2020 basis, we are up year-over-year in the Americas by 202% while Europe and Africa led the way with year-over-year improvements of 359.1%. Our booked order levels also increased in North America significantly as you will see when we flip to the next page. Let’s turn to Page 17. North America order intake and our sales level performance continued to improve throughout April. Gross sales for April 2021 were up 201.6% for North America, over April of 2020, while our booked orders increased to $74.2 million at the end of April, 2021. The year-over-year ending book orders for April 2021 reflected an increase of 222.6%, again presenting evidence of the strength of the market and the incredible demand for our brands and our products. This improvement was built out incremental organically driven sales growth supported by significant operational improvement. On to Page 18, now we will summarize the key hot topic that circle our segment and highlight our focus response the issues we face. Commodity prices are up and demand is stressing the market. We have taken what we consider to be final result with price increases to offset commodity increases for the likes of steel, copper, resins and electronic components. Most of the impact of these increases will be recognized post Q1 2021 as we honored booked orders that were in place before our announcement to our customers. We will continue to assess the commodity situation as we move out through the course of the year. As I noted earlier, we have added capacities in conjunction with our current suppliers as well as onboarding with 30 new production material and component suppliers during the first quarter as referenced earlier in the presentation. We are also capitalizing on operational improvements made internally to our manufacturing operations with in-sourcing of select products and process where it made sense to either increased supply to optimize costs or both. As far as supporting the growth we have in booked orders in our long-term projections, we continue our capacity increase initiatives in North America and are aggressively driving improvements throughout Europe and Africa as was always the sequence in our planning. The next steps and yield improvement in North American metals capacity will be introduced this quarter. We laid the foundation for operational flexibility during 2020. This is paying dividends for us as we navigate through the impact of shifting production plans at the OEMs, as the market deals with the global microchip supply constraints that are still prominently reported in the news. Shifting to and from OEM to aftermarket demand is allowing us to somewhat level the impact of those issues. Finishing on Page 19, we will leave you with these metrics. For the quarter as compared to Q1 2020, net sales were up 22%, adjusted EBITDA is up $9.8 million or 331.7%, cash and liquidity is at $12.6 million, gross profit is up $14.3 million, gross profit margin is up 430 basis points. Production capacity is in an all-time high for the company with more to come. Booked order strength in North America continues to grow even with significant year-over-year sales increases being realized. Booked orders at the end of Q1 2021 were 169.6% better than at the end of Q1 2020 and increasing 222.6% at the end of April 2021 versus the same period in 2020. Even considering the staggering overall gross sales increased globally for month of April at 247.6%. Our debt has been favorably restructured and our ABL facility has been improved. We launched a significant level of new products during the quarter. We generated an impressive and successful results with our audits performed throughout the quarter. We are recognizing some great new business wins tied to our customers recognizing the improvements, our team has implemented. We are truly in our acceleration mode and look forward to reviewing our Q2 performance when we get back together later this summer. Thank you. And I will now turn it back to the operator for any questions.

[Operator:]

Our first question comes from Matt Koranda with ROTH Capital. Please go ahead.

[Matt Koranda:]

Hey, guys. Thanks so much for taking the questions. Just wanted to start on Slide 17 very helpful monthly cadence for North America, I was just curious if you could speak a little bit more about the gross sales cadence into April. It looks like typically, it should be ticking up sequentially seasonally and there was – it looks kind of flattish in April. Obviously, the order book looks very strong. Is that just supply constraints that are sort of holding back production and delivery as an outbound shipping like talk a little bit about the gap there in terms of the order book growth versus the sales growth in April?

[Dennis Richardville:]

Yes, Matt, first of all it’s great to have you on the call. Second, when we look at April and that’s not a shift in momentum. I mean if you look at the European side, you got 3 extra days or 3 fewer days between March and April and your average in the $1.6 million a day and shipments going out. So it lined up with additional holiday days during that period. So it brought it down little bit. North America, you saw the backlog order business that we had leaving out of the $74 million. So there is a bit of an extension on inbound materials that are coming in for buy-sell, but that’s not the real story, I mean that’s part of the story, that’s probably another $20 million sales possible in the month of April, but really when you look at this, we had some really strong sales in the last several days of the month that you don’t recognize until they are received at the customer. So that’s part of that, but truly, it’s just the timing. We had – we have an extension probably up to 9 weeks. There is a 9 week time shift or timing from port-to-port coming from international and that’s exacerbated a bit by port constraints in getting product off the dock onto rail into our facilities. So again, it’s mostly – it’s almost all timing and as I mentioned, those get pushed into the second quarter. So, April and May, June, have a very strong order book to fulfill

[Matt Koranda:]

Okay, very helpful. And then I thought Slide 7 was also relatively helpful just going through the cadence of hitch unit sales and brake controller sales. Talking to mine, what I was looking at that though and I’m wondering if you could maybe speak to what do you think your market share is in each of those categories? Are you winning market share in North America in those categories with the growth that you have highlighted in Q1?

[Dennis Richardville:]

Yes. And again, our OE business has grown tremendously. We have the Ford truck business that has really pressed the brake controller content up on the OE side. But we – with the additional capacity that we’ve generated, some new products that we’ve launched, our aftermarket business in brake controls is also significantly up and we are conquesting business and our North American hitches. I’ll leave it at that, but we are growing our position in a growing market.

[Matt Koranda:]

Okay, great to hear. Last one from me and then I’ll jump back in queue. But on the price increase front, so you mentioned announced price increases, you’re ordering the old order book and still sort of you start delivering on products later this year. Just curious how you’re thinking about raw material inflation, especially as it pertains to steel and resins and how you may consider taking price for the remainder of the year, just like to get your thinking of how that plays out for the rest of 2021?

[Dennis Richardville:]

Yes, can I put it in perspective, Matt? I mean the steel prices, quarter one to quarter one year-over-year is up 41%. So it’s not a small shift in raw material prices. We have added – again we have gone out to do everything we possibly can to mitigate those expenses. So we don’t pass it down relative to pricing, right. So we have added multiple steel suppliers, component suppliers that converts deal for steel products for us to gain additional capacity but also to drive pricing options where possible, but we don’t see that mitigating itself very soon. So the steel is an issue in the marketplace. It’s going to be there for a while. Copper again as we look at – the use in our electronic components, copper prices are up 60% year-over-year. So these are real tangible changes. Now what we did is we did an increased last year in the latter part of the year. And then given this shifting and material pricing and working with our customers as well, I mean we adopted new pricing effectives, we announced it early, early in the quarter and we made an effective April 1 for any – for new orders that came in, so there wasn’t – as minor new orders that came in during the period. I think our pricing amounted to about $2.4 million during the quarter, a bit, right. So it was very limited impact in the first quarter and so the expectation and what we’re looking at is that the flow-through of that is to be seen in quarters two through quarters four. But, we have to be flexible and we will be flexible. It is our last last course of event to raise prices. And we are working very diligently with our customers for alternates to mitigate costs on all fronts, just not materials, to avoid price increases, but if we have to do that, we will, but we will do it in conjunction with a good strong communication link with our customers.

[Matt Koranda:]

Okay, makes sense. Thanks for taking the questions, guys.

[Terry Gohl:]

And one thing just to follow-up, we’ve put in 11 new steel suppliers during the quarter. It’s not like we’re just tiptoeing into this to find alternatives, we’re being very aggressive, we’re being smart, but we’re being very aggressive.

[Operator:]

We are showing no more questions, I would like to turn the conference back over to Terry Gohl for any closing remarks.

[Terry Gohl:]

Well, I want to thank everyone for joining the call. I didn’t get a roster yet, but I will and I know we have significant amount of follow-up calls over the next couple of days. Look forward to those. Again to the people in the company that are on the call, there is a lot of them and I want to say thank you again for the great work and dedication that you put to the company and to our customers. So we look forward to talking to you at the end of quarter two and we have good trajectory, and we are looking forward to that conversation. Thanks.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.