Horizon Global Corporation
Q2 2020 Earnings Call Transcript

Published: 7 Aug 2020

[Operator:]

Good morning, everyone, and welcome to Horizon Global’s Second Quarter 2020 Conference Call. My name is Rocco, and I will be your operator for today’s call. All participants will be in a listen-only mode until we reach the question-and-answer session of the conference call. This call is being recorded at the request of Horizon Global. If anyone has any objections, you may disconnect at this time. 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 second quarter 2020 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 second quarter 2020 results. The results 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 includes 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 recent 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?

[Terry Gohl:]

Thank you, Jeff. And let me also start by welcoming you to Horizon Global’s second quarter 2020 earnings call. On behalf of the company and all of our employees, many of whom are on the call with us today, we thank you for attending this morning’s call, for your continued support and for your interest in the company. Quarter two 2020; what an incredible series of events we faced, personally, professionally and emotionally. The uncertainty brought on with the COVID-19 pandemic way back in March, presented a heavy burden on us all. But as with other crisis that we faced as people, and in this case as a member of the manufacturing and distribution community, we stood up, we showed up, we stayed focused, we rapidly adapted to new conditions and we performed. As a management team, we assess the situation as we knew it, then we plan for the worst, but at the same time, we set clear targets for the company with what we knew at the time, plans to continue to advance. These were simple. First, we would rapidly adapt to the health and safety demands tied to the virus. We would learn and adhere to local state, federal and internationally driven best practices. To us, there is nothing more important than the health and wellbeing of our employees. We have acted and continue to act accordingly. Second, we would rapidly and effectively transition or better said we would flex our operations to reflect a significant adjustment to the dramatic change in volumes presented to us via customer shutdown notifications and local or regional workplace restrictions that were enacted to slow the spread of the virus. Major changes which happened in a cliff like fashion with little to no time for advanced planning. And third, we would support our employees throughout the period. We would act as a team to protect the team. Our commitment was to protect the employment of our full time employees. And we did so with a collective set of concessions and wages and certain benefits across all the workforce, everyone stepped up. Besides, the simply being the right thing to do with the foundation of the remaining objective which we set, those beings that we would position ourselves to emerge from the crisis better and stronger than we entered it. And through solid planning, we would emerge at a restart pace faster than our peers; better operationally, as we set in motion and plants pull forward, continuous improvement and capacity enhancement initiatives that were set for later in periods; better financially through executing a solid set of actions to improve our liquidity position, even with the challenges tied to a lengthy shutdown or slow down period and considering the working capital demands of a rapid restart, which we hoped would happen. Simply put, we would leverage the situation and the opportunity it presented in terms of time. As many of you covering our space or who are invested in our company have noted, the industry is hitting stride with customer demand up as many have adapted to this situation by taking control of their travel and recreational freedom going forward. This has been reflected in realized increased RV, boat and ATV sales and forward-looking demand projections. Inventories of these products are low and demand continues to rise. The backlog of inventory replenishment outlook, this also remains strong. You will see this as we highlight our sales recovery during the quarter, and also provide you an early look at our July sales results at the end of the discussion today. Our global team across the board rose to the challenge during the period. Everyone showed up. They didn’t shy away from the challenge. And through the collective efforts of the entire team, we were able not only to weather the storm, but we were able to drive significant improvements throughout the business in a time of great turmoil. Let’s review some of the highlights starting on Page 5. As a preface to these bullets points, please consider that the sales impact of the global virus response was dramatic and rapid. During the quarter, we saw a decline in our net sales of $72 million or 37.5% reduction in sales compared to the same period in 2019. No small challenge to face for any company. Keeping with our base plan to improve our cash and liquidity performance, we went to work to react and to address the new conditions presented to us, and through that focus we ended up with some pretty impressive results. For the first half of 2020, we generated positive cash flow of $4.9 million through operations. This reflected a whopping $67.9 million improvement from the prior year, a $67.9 million improvement. A major driver of this performance was our continued focus on effective working capital management. We recognized $39.3 million improvement in working capital compared to Q2 of 2019. This is marked by significant improvements in inventories and accounts receivable. We also cut our gross debt period – over period by $172.8 million, primarily through a pay down of our first lien term loan of roughly $163 million. Overall, we improved our cash and availability to a resulting $45.5 million at quarter end, all of this while absorbing unprecedented shutdown and taking on the working capital challenges with restarting our operations and supply chain, which accelerated in May and June. During the past quarter, we also refinanced our first and second lien term loans into a single term loan facility. This provides an extended maturity date at a consistent rate. This significant action provides us with stability as we execute our strategic plan. This result demonstrates once again that we are operating as a team this time between our debtholders and the company. Our efforts to minimize the impact of the sales decline also included aggressive cost improvements, which helped us drive positive EBITDA for the quarter and for year-to-date. Dennis will provide further details during his portion of the presentation, but a significant result in light of the challenges presented by the pandemic. Moving to operations, please turn to Page 6. We kept our foot on the gas during the pandemic. We held course with our continuous improvement plan; accelerating initiatives, where opportunities were presented to us, and drove significant improvements throughout all areas of operations. I felt this listing, as you see on the page, would be an effective way to cover a lot of ground. As you can see, a lot of work has been completed and results are taking hold. During my first earnings call with you last fall, I presented an assessment of the key areas of focus that management would have on improving our results. There was a lot to do. At that time, we were underperforming in operations as we were not producing at a competitive rate, our distribution centers were burdened with ineffective technology, processes and equipment, and we are losing the confidence of our customers. We have made significant progress since then. A few items to highlight regarding this are; first, our SG&A costs have improved by 23% year-over-year or defined further $7.7 million. We have improved our labor cost position through effective lean deployment, negotiated a new labor agreement with our Rheda, Germany employees, which we expect to generate between $7 million and $9 million in full year run rate savings for the company. We relentlessly pursued and implemented Kaizen generated improvements across the globe with 21 events and outcome actions deployed in our Reynosa Metals facility alone, this all during the second quarter. Second, production throughput improvements have been significant at our Reynosa, Mexico facility, thanks to great leadership team and a well-defined plan. We have through deployment of lean principles and minimum investment in renovation and incremental capital of four presses at a month $300,000. We’ve been able to recognize significant throughput improvements for our core products. Hitch capacity is up over 200%. Coupler capacity is up 52%. Jack capacity is up 50%. These are big changes for sure. The impact of the four presses will only be fully recognized as we progress into August, so more to come on these metrics, as a constraint tied to further capacity gains is eliminated with the increased capacity provided by these presses. Our renewed focus on workplace and the workforce has paid significant dividends in Reynosa as well. Our employee turnover rate has improved by 73% year-over-year, while our absenteeism rate has also seen similar dramatic improvements, this at 52%. Our management brought leadership and our employees stepped up as partners as we transform this operation. Third, please note that our emphasis on throughput was not only in units, but also with overriding metric of the quality of those units. At the start, our quality systems needed revamping as evidenced by high defect rates, internal and external with our customers, poor customer satisfaction and resulting fines and charges. We hit this hard over the past month, generating systemic improvements. The progress is evidenced by the green status results of 100% in all 11 surveillance audits completed during this period, a significant improvement. These process improvements have led to a 95% year-over-year improvement in North American OEM nonconforming products; yes, 95% improvement, and equally impressive 80% reduction in shipping binds and penalties over the same period in 2019. Great results, while also reducing COGS as cost of good sale, and SG&A related costs as we became more efficient and more focused. Through all this, we kept our commitment of maintaining our workforce. In the U.S. we did not place a single person on furlough, not a single individual and the full count of our full-time employees have in most part returned to the workplace around the globe or will soon. It was a good quarter for operational improvements with more to come. For a detailed look at the sales for the quarter, please turn to Page 7. Referring the chart including on this page, the red line represents 2019 net sales by month, while the blue line represents 2020 net sales. As you can see, we are outpacing prior year sales in January and February before COVID-19 pandemic swept through Europe and then onto the Americas. The total area between the lines represents the cumulative decline in sales year-over-year during the period. March through June, year-over-year net sales were down $72 million or 37.5%. As I said earlier, the rapid and severe sales decline was no small task to address. As you can see with the slope of the lines, the impact was significant and rapid, but as you also can see, the recovery is equally sloped this in a positive direction. We have seen a 208% recovery in net sales since the height of the shutdown in April. Momentum continues to build. In June we were back to 83% of the 2019 run rate with significant open new orders of roughly $40 million in the queue as we entered July. Towing accessory take rates continue to rise in the U.S. and Europe as consumer behaviors continue to shift to outdoor activities. Our sales improved, our order book continued to improve even beyond that. We also took certain commercial steps with our customers during the quarter as well. We were saddled with significant and complex legacy free freight programs with our customers in North America. We strip these down by 93% drive efficiency and cost improvements. We also took aim at the legacy inefficiencies tied to multiple order quantity options offered in our portfolio. In the quarter, we reduced over 3,100 of multiple option SKUs by restricting the buy quantities to standard or skid pack offerings only. You are sure to appreciate the efficiency and cost improvement that we expect to recognize with the elimination of these multiple order options. We’re on a good trajectory with these initiatives, thanks to our productivity and through the support of our customers. The steps we took are expected to strengthen the company and our position as a long-term reliable partner to our customers. Turning to Page 8. Relative to our response to the COVID-19 pandemic, you’ll recognize many of these points from our quarter one earnings deck. We identified and attacked the issue early through deployment of stringent health and safety protocols aligned with CDC and industry best practices, along with the applicable federal state and local mandates. We continue to adapt and improve each and every day to provide our employees with a safe working environment. We took significant steps as I mentioned during the period to shore up liquidity as the pandemic impact was being felt. We secured grants loans and participated in government sponsored tax deferral programs in Europe and secured SBA, PPP loan in the U.S., all representing actions afforded in response to the COVID pandemic. We took proactive measures relative to wages and benefits through reductions to protect all of our employees. Our employees have been outstanding and adhering to the protocols implemented to secure not only their individual health, but also to respect and protect the health of their fellow employees; is a great team effort and a source of pride for us all. Moving to Page 9. We have spoken a great deal about the actions in North America and rightly so as much has been accomplished there, but we don’t want you to lose sight of the work being done in Europe, Africa area as well. Over the period, we attacked this region hard in terms of continuous improvement, even while the principally OEM-based business was for the most part completely shutdown in terms of production demands. Our run of attracting top level talent into the company with that center stage in Europe as we continued to strengthen our team with key leadership hires in finance, operations, purchasing and human resources. We are assembling a formidable team. We continue to relocate and rebalance programs during the period in concert with our customers to maximize our effectiveness, utilize our internal capacities across the region and to mitigate the premium costs we were incurring as volume spiked in our French location. We have relocated a significant volume of tow bars throughout the region, leveraging capacities to support not only the processes that were strained in our French location, but also to optimize costs through vertical integration opportunities, which were presented through these new locations. Great work by the European team and great support from our customers with this initiative. We, as you would expect, have a focus team assembled and tasked with driving significant improvement strategies and tactical actions for the region. We have our objective set with one of them being to drive the EBITDA performance through the double-digit levels I constantly speak of during our earnings calls. Our European team throughout all levels is hammering away at this, highlighted by the actions that I just mentioned, but also through other significant foundation actions to drive costs that were completed during the period. We completed the SG&A optimization plan tied to organizational optimization, which will result in between US$2.5 million and US$3 million in annual cost reductions. We through great teamwork with the rank and file employee at our Rheda, Germany facility, ratified a new more competitive labor agreement that will result in labor-related cost improvements between US$7 million and US$9 million per year. A dramatic outcome and one that adds roughly 400 basis points to the bottom line while increasing our flexibility and competitiveness as we move forward in pursuit of new business. We were running in January and February at 5% EBITDA levels in the region before the pandemic impact, with an incremental 4% increase, which has generated by – work done by the team on labor-related matters. This was significant continuous improvement roadmap items yet to be completed. Our goal is well within reach. Turning to Page 10. In early July, we successfully refinanced our first and second lien term loans into a single facility at an equivalent interest rate, while extending the maturity date to June 30, 2022. Covenants remain aligned with our business plan. Additional flexibility or opportunity resulted from our lenders releasing collateral that we now look to put to work to further optimize our financing situation in Europe. Dennis will take you through the specifics tied to the refinancing, but recognize that through this action we have secured a further runway as we execute our continuous improvement plans. This, as I stated earlier, is another example of great work – teamwork between our company and our debtholders. I will come back later for a look at July sales and some closing comments, but for now, I’ll turn it over to Dennis for the financial section. So Dennis, take it away.

[Dennis Richardville:]

Thank you, Terry. Good morning, everyone, and thank you for joining us. Please turn to Slide 10 for an update on our refinancing. On July 6, 2020, we executed an amendment to refinance the outstanding balances of our first and second lien term loans into a combined term loan. Interest rate is LIBOR plus 10.75% similar to previous rates, with a maturity date of June 30, 2022 and a springing maturity of 91 days in advance, if our existing convertible notes which currently are due July 1, 2022 are not retired. While the secured net leverage ratio covenants remain unchanged, the fixed charge coverage ratio covenant was amended to require an FCCR of 1.1

[Terry Gohl:]

Thank you, Dennis. Turning to Page 17, inflection point that is exactly what July represented a continued surge of recovery volumes that resulted in both the Americas and Europe-Africa regions exceeding the 2019 net sales levels. Americas had net sales of roughly 40 million smash sales compared to the prior year by over 26%. This while also securing and holding open orders leading into August of over $44 million. That stat alone highlights and supports the strength of the market, its demand and the traditional buying season it truly is being extended. We continue to see favorability in OEM mix and takes rates for our products, all pointing to a strong continued sales outlook. Europe-Africa is presenting much of the same sales story. We call our business makeup in the region is roughly 70% OEM. These recovered well during the period and in combination with significant increases in aftermarket and e-Commerce businesses, we were able to outsell compared to 2019 by 6%, a great month on a sales line, great book-to-order condition leading into August. Turning to Page 18, here we are illustrating the backlog of North American open orders at the end of each month. Each month, we have shown you an increase in our net sales. So we are shipping at an increased pace. As you can see, the order intake continues to outpace the sales rate, with the increased capacity implemented in Reynosa, along with strong support from our supply partners, we are well positioned to execute on these orders and our customers recognize that. What you will see on the summary page I turn to next is that these orders to fill represent a 34% increase to the company’s North American 2019 full-August gross sales, this with orders in place in the last day of July, order-intake continuing at a strong pace since then. So in summary on Page 19, the pandemic hit hard. We reacted extremely well. We are providing a safe and secured work environment for our most critical asset, our people. The Horizon team drove significant operational improvements in capacity, efficiency and quality during the period. Take the time to review on Page 6 when you have it, the metrics that we presented, this truly represent great work by the team. Our SG&A has been streamlined resulting in a 23% improvement in spend. We reset our debt maturities and significantly improved our liquidity position through solid working capital improvements and successful executed refinancing options. We have laid the foundation for a solid recovery in our European performance with significant actions completed to address SG&A and COGS going-forward, outstanding work by the team on that. We are rising to the challenge of delivering increased volumes in the marketplace through increased capacity that we’ve generated and we’ve improved our quality operating metrics. We streamlined our distribution methods, in-short we have achieved a great deal. We have a roadmap for much more, and we have not and will not take our foot-off the gas. Thank you for your attention and your continued support. I will now turn it back over to the operator for questions.

[Operator:]

And ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the conference back over to Terry Gohl for any final remarks.

[Terry Gohl:]

Well, in closing I’d like to say thank you very much again for your attention and your support. Some of you we’ve had – we will have follow-up calls with over the next day or two. So we look forward to those. But for everyone, please stay safe, stay healthy and let’s keep this momentum going. Thank you very much.

[Operator:]

Thank you, sir. This concludes today’s conference call. You may now disconnect your lines and have a wonderful day.