Horizon Global Corporation
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Good morning, everyone, and welcome to Horizon Global Fourth Quarter 2020 Conference Call. My name is Andrea 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 any 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 fourth quarter and full year 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 fourth quarter 2020 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. First on behalf of the complete Horizon Global team, I will proudly present our fourth quarter and full year 2020 results. In last quarter's earnings call, we described the momentum that we were experiencing as the company as we sprang back from the second quarter impact of the global COVID-19 pandemic. As we reflect on our performance in the fourth quarter and full year 2020, our theme can be best summed up in these two words, on track. 2020, as you all know, was a challenging one. It's hard to believe that it's been a full year since the global pandemic enveloped us all. And we were all faced with many new challenges that were brought from it. Challenges without the clarity of historical countermeasures or roadmaps to follow to lead us through it. Across the spectrum from our customers to our suppliers and to our incredible workforce, we should take pause and reflect on the incredible achievements and advancements we all have made in our industry, while being on the forefront of the development and implementation of COVID specific operational protocols that protect our employees as well as those in the communities we serve, while allowing us to continue to advance our businesses. Hats off to all of you. We at Horizon adapted. We defined our plan and we are extremely pleased to say that we remained on track. On track with our rate of change plans tied to addressing our company's weaknesses, and on track with our objectives tied to ensuring Horizon Global's position as the number one supplier of choice for our customers, the number one customer choice for our great suppliers, and the number one employee of choice for outstanding employees around the globe.

[Dennis Richardville:]

Thank you, Terry. Good morning, everyone and thank you for joining us. To echo Terry's comments, we are pleased with the fourth quarter and full year results. Despite the macro impact of COVID-19, the efforts of the Horizon Global team have contributed to positive financial results. And we are continuing to work diligently to ensure it continues as we focus on earnings growth, liquidity and working capital management. I would like to thank everyone for their contributions and dedication. Please turn to Slide 11 for an update on our refinancing. As Terry discussed on February 2, we successfully refinanced our existing term loan by entering into a new credit agreement with Atlantic Park for a 6-year $225 million term loan facility. The loan included an initial commitment of $100 million, which was fully borrowed at the time of the agreement and used to repay all the outstanding borrowings and accrued interest on the company's existing term loan. The new term loan also provides for a $125 million delayed draw facility that the company can borrow to repay our outstanding convertible notes. Reduced interest rate is LIBOR plus 750 basis points subject to a 1% LIBOR floor. The delayed draw facility has a 25 basis point ticking fee on the undrawn portion. The new term loan also provides for flexible financial covenants, including a $27.5 million capital expenditure covenant and a net leverage ratio covenant with the initial net leverage ratio test commencing with the quarter ending March 31, 2023. The new term loan is further evidence of the company's opportunistic approach and provides for financial flexibility and long-term stability to the capital structure to support the company's strategic initiatives. Please turn to Slide 12 for a review of the company's consolidated results for the fourth quarter of 2020. As a reminder, our results will be on a continuing operations basis. As a result of the company's sale of its APAC segment in the third quarter of 2019, APAC is classified as discontinued operations for all the periods presented in Horizon Global's financial statements. Therefore, they are not included in the discussion ongoing results. For the fourth quarter of 2020, consolidated net sales were $175.9 million, an increase of $33.6 million, or 23.6% over the fourth quarter of 2019. The increase was primarily attributable to $24.7 million of higher net sales in the Americas segment, but both operating segments reported net sales increases for the quarter. We reported an operating loss of $0.8 million, an improvement of $32.9 million over the fourth quarter of 2019. Increased gross profit as a result of increased net sales, coupled with manufacturing and operating efficiencies and $7.4 million of SG&A savings drove the favorability in the quarter. We reported adjusted EBITDA of $7.3 million, which is an increase of $23.8 million over the fourth quarter of 2019. Higher adjusted EBITDA was primarily due to both the increase in gross profit and favorable SG&A and previously mentioned. Consolidated adjusted EBITDA margin increased to 4.2% as compared to a negative margin of 11.6% in the fourth quarter of 2019. Now, let's turn to Slide 13 for a review of the segment performance for the quarter. Net sales in the Americas were $96.8 million, $24.7 million, or 34.3% higher than the fourth quarter of 2019. We reported strong demand and volume across virtually all of the Americas sales channels. The net sales increase was primarily driven by $13.3 million of higher net sales in the aftermarket channel, as well as a $7.5 million combined increase in the retail and eCommerce channels. Automotive OEM and OES net sales also increased $2.1 million. We reported operating profit of $8.6 million in the Americas segment compared to an operating loss of $16.2 million for the fourth quarter of 2019. The increase in operating profit was primarily driven by higher gross profit in the quarter from the increased sales volumes and manufacturing efficiencies across the segment, as well as reduction in inventory scrap and reserves compared to the fourth quarter of 2019. We also recognized $8.6 million of favorable SG&A which contributed to the operating profit improvement. Adjusted EBITDA increased to $10.9 million as compared to an adjusted EBITDA loss of $5.6 million for the fourth quarter of 2019. Based on the strong operating results previously mentioned, adjusted EBITDA margin increased to 11.3% as compared to a negative margin of 7.7% for the fourth quarter of 2019. Transitioning to our Europe-Africa operating segment, net sales increased to $79.1 million, up $8.9 million, or 12.6%, compared to the fourth quarter of 2019. This increase was primarily due to $5.9 million of combined higher net sales and the automotive OEM and OES sales channels, and $3.1 million increase in the aftermarket sales channel. We reported an operating loss of $2.4 million, compared to an operating loss of $12.2 million for the fourth quarter of 2019. The improvement was driven by $9.2 million increase in gross profit, primarily attributable to the higher net sales, as well as the lower material and labor efficiencies. Adjusted EBITDA increased to $2.5 million as compared to an adjusted EBITDA loss of $5.9 million for the fourth quarter of 2019. Adjusted EBITDA margin increased to 3.1% as compared to a negative margin of 8.4% for the fourth quarter of 2019. Turning to Slide 4, we show the full year consolidated results. Consolidated net sales were $661.2 million, a decrease of $29.3 million, or 4.2% from the prior year. Our net sales were impacted by the COVID-19 pandemic that began late in the first quarter and significantly impacted the company during the second quarter with business disruption and economic uncertainties in all our end markets. The net sales decreased from the prior year was primarily attributable to $38.8 million of lower net sales in our Europe-Africa segment, which included a decrease of $37.3 million in the second quarter of 2020. The consolidated net sales decrease for the year was partially offset by an increase in net sales in the Americas segment of $9.7 million over the prior year, despite a $34.8 million decrease in net sales during the second quarter of 2020, the period most significantly impacted by the pandemic. We reported an operating loss of $6.9 million and improvement of $50.3 million over the prior year. This improvement was driven by a higher gross profit of $24.3 million, despite the impact of COVID-19 on net sales in the first half of the year as well as $26.8 million of global SG&A improvement. Adjusted EBITDA for 2020 was $26.4 million, which is $34.7 million higher than the adjusted EBITDA loss of $8.3 million for 2019. Consolidated adjusted EBITDA margin increased to 4% as compared to a negative margin of 1.2% for the prior year. Now let's turn to Slide 15 for a review of the full year segment performance. Net sales in the Americas were $382.4 million, $9.7 million higher than the prior year. Despite the previously mentioned COVID-19 impacts, combined net sales in the aftermarket in eCommerce channels were $25.9 million higher than the prior year. This increase was partially offset by a combined $15.7 million decrease in the automotive OEM and retail channels. We reported an operating profit of $28 million compared to an operating loss of $10.4 million from the prior year. The higher operating profit is primarily driven by $24.2 million of higher gross profit for the full year due in a large part to the implementation of operational improvement initiatives across a segment as well as $13.6 million of SG&A savings. Adjusted EBITDA for 2020 increased to $38.4 million as compared to $8.4 million for 2019. Adjusted EBITDA margin increased to 10.1% as compared to 2.3% over the prior year. Transitioning to our Europe-Africa operating segment. Net sales decreased $38.8 million, or 12.2% to $278.9 million compared to the prior year. This decrease was primarily due to lower volumes in the automotive OEM, automotive OES and industrial sales channels, representing a decrease of $40.6 million in the aggregate, resulting from loss production days due to plant closures and economic uncertainties related to the COVID-19 pandemic, which primarily impacted the second quarter. Partially offsetting the lower net sales in these channels was $3.6 million of higher net sales in the aftermarket sales channel. We reported an operating loss of $8.4 million compared to an operating loss of $12.1 million from the prior year. The improved operating margin was primarily attributable to higher gross profit in the period, as well as $5 million of lower SG&A. Adjusted EBITDA for 2020 was $8.7 million, an increase of $5.9 million over the prior year. Adjusted EBITDA margin increased 3.1% as compared to .9% in the prior year. Now moving on to our working capital and liquidity and free cash flow position on Slide 16. Total trade working capital was $55.6 million, which represented a decrease of $34 million compared to the fourth quarter of 2020 and a decrease of $11 million compared to the end of the third quarter of 2020. Specifically receivables increased $15.7 million to $87.4 million from the end of the prior year. Days sales outstanding was 46, which is consistent with the end of the prior year. Inventory decreased $21.3 million to $115.3 million from the end of the prior year. Days on hand inventory was 74 days, a decrease of 20 days from the end of the prior year. The company focused on its inventory management during 2020, and the reported results demonstrate these efforts. Accounts payable increased $21.1 million to $99.5 million from the end of the prior year. Days payables on hand was 64 days, an increase of 10 days from the end of the prior year. Cash and availability or liquidity totaled $83.4 million at the end of 2020, which was comprised of $38.4 million availability under our credit facilities and cash on hand of $45 million. This reflects a $38.5 million improvement over year end 2019. Free cash flow totaled $25.8 million for 2020, which is $104 million higher than the prior year. Free cash flow for the fourth quarter of 2020 was $9.7 million, which is a $13.6 million improvement from the fourth quarter of 2019. The improvement in free cash flow for both periods is significant and demonstrates our focus on working capital management and overall strong financial results of the company. Turning to Slide 17 for a review of our debt and capital structure. Total gross debt increased by $25.2 million from $240.9 million at the end of 2019 to $266.1 million at year end 2020. This is primarily due to increased borrowings during the first and second quarter of 2020 to strengthen liquidity in response to the COVID-19 pandemic. As a note, at the time of our refinancing of the new term loan on February 2, 2021 gross debt was $280 million, which represents an increase of $14 million on a pro forma basis from the end of the fourth quarter of 2020. The initial borrowings and the new term loan was used to repay the existing term loan, accrued interest and other related expenses. Moving on to debt maturities on Slide 18. Our February 2021 refinancing allowed the company to address its near-term maturities in a cost effective manner with the nearest maturity being our convertible notes due Q3 of 2022. We believe the extended runway affords the company the ability to execute on its long-term strategic plans. Overall, our financial results for 2020 demonstrate what was in many ways a successful, but challenging year as we completed the first full year under the new leadership team navigating through the COVID-19 pandemic. Our operational improvement initiatives help drive the positive financial results during the year and provided the market confidence that led to the successful refinancing of our term loan. We remain focused on earnings growth, liquidity and continued working capital management to ensure that the cash flow from operations support the liquidity needs of the business. We look forward to continuing the momentum in 2021. With that, I will turn it back over to Terry for his closing comments.

[Terry Gohl:]

Thanks, Dennis, and thank you and your team for driving meaningful improvements throughout the finance organization and processes throughout 2020. Great job and again, thank you. Turning to Page 19. To provide some insight into 2021, we look again at our two key products in North America, hitches and brake controllers. Relative to hitches we are showing here a total picture inclusive of aftermarket and OEM performance. Through February year-to-date in 2021, our sales are up 19% for this product line and increasing to 29% in February in comparison to the same period in 2020. We are truly capitalizing on the capacity increases we implemented along with the strength of the market and demand for our products. Add to this, our order intake increases through the period, which has resulted in an increase in orders to be filled of 21% from January to February. This results in a strong outlook for this product. Relative to brake controllers, our sales show a similar story. Year-to-date through February, sales are up 30% with February alone being up 35% as compared to the same period in 2020. New OEM platform launch volume increases coupled with an increased market penetration in the aftermarket channel are providing a solid foundation for this product going forward. We have a solid order book associated with our brake controllers, and we expect to further capitalize on that demand, with increased capacities being introduced during Q1 and Q2 this year. Another bit of good news. On Page 20, you see our top level initiatives for 2021. These are broad and lean a bit more to our European operations and customers, all while continuing the foundation built in the action set during 2020 in the Americas. We have already been active and successful early this year in execution of our plans regarding refinancing, commercial initiatives and organizational strengthening in our European operations. We have one significant new business in Europe aligned with our targets. As we move forward through the year, we will focus on further optimization and performance in our logistics worldwide as well as our production capacity in both Europe-Africa and North America. We expect to leverage our capacity enhancements to further our vertical integration or accretive and to further our capacities and market position beyond our base strategic plan, we will begin to assess certain accretive bolt on acquisitions, organic expansions or collaboration to support it. We also expect it to advance our capabilities through advanced business ERP and warehouse management systems to be deployed in North America. We have a solid plan and we will continue to be on track to achieve it. Finishing on Page 21, we leave you with these metrics. For the fourth quarter, liquidity better than prior year by $38.5 million; adjusted EBITDA better than prior year by $23.8 million; operating profit better than prior year by $32.9 million; and sales better than prior year at $33.6 million. For the full year, cash flow from operations better than prior year by $107.6 million; adjusted EBITDA better than prior year by $34.7 million; and operating profit better than 2019 by $50.3 million, all this with a major pandemic occurring in 2020. As a final note, the strength of our sales order book in North America, we continue to highlight positive market and customer demand for our products and brands. Our sales are up 7% year-over-year through February 2021 in spite of material constraints tied to global electronics and with port constraints seen in Q4 2020 and into 2021. We have taken actions tied to addressing these constraints which only act to retime our book sales. Thanks to great work by our purchasing, logistics, manufacturing teams. We are seeing improvements to both of these issues entering March. A final note, is that our order intake through February 2021 resulted in open orders to be filled at 104% greater than what was in place in February of 2020, a significant indicator of the strength of the market and demand. Another great time and we sincerely appreciate our great customers around the globe. In conclusion, we are on track to our plans, and as you heard today we're just getting started. Thank you. And I will turn it back to the operator for questions.

[Operator:]

Q - A -

[Terry Gohl:]

Well, given no questions, let me say thanks again for joining the call today and that we look forward to speaking with you very shortly again as we present our first quarter results for 2021. And with that, have a great day and thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.