Horizon Global Corporation
Q3 2019 Earnings Call Transcript

Published: 12 Nov 2019

[Operator:]

Good morning, and welcome to Horizon Global's Third Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions].I would now like to turn the conference over to Jeff Tryka, Investor Relations. Please go ahead.

[Jeff Tryka:]

Thank you, operator. Good morning, and welcome to our third quarter 2019 conference call and webcast.On the call today are John C. Kennedy, Chairman of Horizon Global's Board of Directors; Terry Gohl, Horizon Global's Chief Executive Officer; and Jamie Pierson, our Horizon Global's Chief Financial Officer.Earlier this morning, we announced our third quarter 2019 results. This release is available on many new sites as well as in the Investor Relations section of our website at horizonglobal.com.Turning to Slide 2, 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.Today's presentation also 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.With all of that being said, I would now like to turn the call over to Horizon Global's Board Chair, John C. Kennedy. John?

[John Kennedy:]

Thanks, Jeff. I'm happy to be able to join the call to formally introduce Terry Gohl our new CEO and provide some context of why we chose Terry to lead the Horizon team.When the new board was appointed in early 2019, we saw the bounds of a great company which had operational challenges in the Americas, unsuccessful efforts to fully integrate a large Europeanic acquisition, had a mass of substantial amount of debt in repeatedly underperformed market expectations.We knew we needed to decrease that rapidly and we felt the best way to do this was a sale of the Asia Pacific business. Our management team worked tirelessly on this sale process and brought us an absolutely great result. During the sale process, the board maintained strong oversight over management and the operations of the company.The sale of the APAC business significantly reduced our debt but we needed our continuing operations to perform to their full capability. Many operational improvement initiatives were identified but Horizon required strong data-driven operational leadership to execute these initiatives at a faster pace in order to get this business back to where it was just a few years ago.The board identified Terry Gohl as a proven leader of capable of restoring profitability and creating a culture of operational excellence at Horizon Global. Terry served as the CEO in another significant and successful operational turnaround and we are confident that he can do the same at Horizon Global.Terry's passion for operational excellence and the speed in which he operates is exactly what we need. Terry has already dug in deep in his driving change. From travelling with him, I believe Terry's priorities are clear. He will work tirelessly to accelerate the turnaround of this business and in turn maximize long-term value for the benefit of our shareholders, employees, and all of our stakeholders.As Terry will tell you, all of the identified issues are fixable and we are optimistic about our ability to show significant progress on these through 2020.Terry, with that intro, welcome to Horizon. I will now turn the call over to you.

[Terry Gohl:]

Good morning everyone, and thanks John for that very kind introduction. I'm truly honored that the Board has entrusted me to lead Horizon Global and its 4,000 employees into the future. I would also like to express my sincere gratitude to the men and women of the company to our customers and to our suppliers for the positive reception and support that I've received thus far.Thank you for that. Even though I've only been here for about 50 days, the magnitude of opportunities available to this company have become clear. We control our own destiny relative to the majority of these opportunities and while we've executed on some already, we are organizing and planning to fully implement them all.Early actions are yielding results. We have had an aggressive schedule of the past seven weeks as we've dug into all aspects of our business. We conducted onsite reviews at our North American manufacturing sites and most of our operations in Europe. Improvement plans have been identified for each site and work has begun.Let’s walk through several points highlighting the state and direction of the business. The critical goal of bringing debt down and providing the runway to promote further progress in North American Europe has been accomplished with the sale of our Asia Pacific business segment and subsequent amendments to our debt covenants.The focus now is squarely on improving our operations, generating cash flow and improving the overall performance of our business. Europe is seeing improvements as our new leader for that business is making good progress. Cost improvement while increasing capacity and balancing production demand across our operations are the keys to allowing us to capture the growth opportunities we see for the region.North American performance remains disappointing. While certain elements of the strategy are in place and others were in progress, our fresh eye assessments have identified many more areas for improvement. Some of these examples there as follows.Pricing actions have been implemented, however, weather, the timing of the slow season for RVs in Marine, recent customer inventory reduction in initiatives, and our internal performance deficiencies impacting inventory availability have impacted our ability to fully recognize the benefit of the pricing adjustments we've secured.We know some middle operations assessment improvement work started almost immediately upon my start day. We reviewed the plans and plans on day three and since that day Reno's operations management has been upgraded and operational excellence method has been deployed, our throughput has increased the cost our core manufacturing sales.Past two orders have been driven down significantly and capacity has increased to lean principles and equipment refurbishment. We have also initiated reversing outsource in actions with the target of completing the insourcing by the end of this year. A comprehensive continuous improvement roadmap plan has been developed for the location and it will be implemented throughout the upcoming year.Distribution center performance relative to shipping effectiveness while improving continues to present opportunities for continuous improvement. Would believe that the issues driving fees and penalties are now defined and we will aggressively address these [true] cost identification and permanent corrective action deployment.With respect to supply chain management, we have identified opportunities for improvement in our overall purchasing strategy as well as execution. While the complete continuous improvement TPD roadmap remains fluid, the base plan is being executed and is generating results. Maximizing our effectiveness in this area is a prime importance to the company and is being addressed accordingly.We did not have stock of certain items that left orders on the table and openings for our competitors. We lost sales due to our inability to sustain the right inventory of the right products at the right time in the right locations. Reno's operational performance improvements and revised demand in inventory planning processes are taking shape and will result in improved performance.Favorable responses from those customers I met at last week CEMA show reinforced to us that our initial actions are being recognized and appreciated. We have an inefficient logistics model with too many touch points resulting in inefficient routes and waste. We are working to optimize our transportation network and the freight modes currently deploy to support it.Operational improvements will also factor into our freight performance going forward. The team has been working hard and we are beginning to lock in improvements as a result of favorable contract negotiations and operational improvement actions. Relative to our business practices and procedures, we have identified that in some cases what we have in place is inefficient, ineffective, or both.Standardization and improvement initiatives have begun in this area which will lead to a leaner yet significantly more affective organization and cost structure. We are examining our SG&A cost and functions on a detailed level to ensure we are efficient effective and structured properly to improve our performance and competitiveness.We have taken actions and will continue to do so as we move forward. We do our products in the one stop shop capability that we provide to our customers and presenting considerable value. Many of our customers share this view with us. Our relationships with customers needs to be mutually beneficial and in some cases we believe that our value proposition is not properly valued or recognized.We do not say this lightly as we are focused on growing our topline and expanding our market share but asking a fair return for the value we provide the road back to profitability would prove to be increasingly more difficult. We will continuously review our products and service to ensure alignment with our objective of improving our topline but not at the expense of our bottom-line performance.With that I'll further turn it over to Jamie for his comments and come back around at the end for some important comments.

[Jamie Pierson:]

Thanks, Terry. And good morning and thank you for joining us. I trust that it goes to that saying that everyone appreciates the fact that the third quarter of 2019 are several transformational events. From selling APAC for over $200 million to paying on over a $180 million in debt to hiring a new CEO to lead the company into the next stage of its journey.These transformation of [indiscernible] side, I do not want to lose sight of or trivialize the fact that we are forecasting this save over $25 million in annual debt service and ended the quarter with over $60 million in liquidity which is the highest level since early 2018.And before jumping back into results like I would usually do, I want to remind everyone that what we're about to review will be on our pro forma i.e. excluding APAC basis. Said directly, APAC has exhibited discontinued ops for all period reported and we will only focus on America's and Europe-Africa result to-date and going forward.With that, now I try that we'll let's get to it. For the third quarter of 2019, we reported consolidated net sales of $177.9 million, down $16.2 million from $194 million reported in 3Q'18. On a constant currency basis, from moving $3.9 million of unfavorable currency translation impacts, net sale has decreased $12.3 million or 6.3%.After adjusting for these currency transaction impacts and removing the $3.1 million from 3Q'18 related to just Japanese 1Q'19 divestiture of its non-automotive business in Europe Africa, core business net sales decreased by 4.7%. the decrease is primarily related to lower fill rates and aftermarket volumes partially offset by increased OE volumes in 3Q'19 compared to 3Q'18.In terms of operating income/loss, we've reported an operating loss of $12.8 million compared to an operating loss of $29.9 million in 3Q'18 which included a $26.6 million goodwill impairment charge. On an adjusted EBITDA basis, we reported a $3.1 million loss which is $12.9 million as lower than 3Q'18.The decline was primarily driven by lower sales volumes as previously mentioned, the impact in sales mix and margins, in other words lower sales in higher margin products versus the comparable period in 2018. And continued cost pressure from tariffs and other operational costs on a year-over-year basis.Moving from the consolidated results to the individual segments. Net sales in the Americas were $96.2 million which is $19.3 million as lower than 3Q'18 primarily due to lower shipping volumes in our non-OE channels.Our OEM volumes were slightly up compared to 3Q'18, inversely, volumes were lower in the aftermarket, industrial, and retailer channels which drove a decline of a $11.6 million, $3.5 million, and $3 million respectively or $18.1 million [indiscernible] the $19.2 million decrease.The America segment reported in adjusted EBITDA, a $550,000 which is $13.7 million lower than the $14.2 million reported in 3Q'18. This decline was mainly driven by a decrease in sales, the revenue mix in related margin impacts which I previously discussed, all combined with the operating cost pressures and tariffs and other material manufacturing cost inefficiencies partially offset by SG&A savings related to prior years restructuring efforts that began to take hold late last year.Moving on to Europe, net sales in the Europe Africa segment increased by $3.1 million to $81.6 million compared to 3Q'18 but continued to be hampered by an unfavorable currency translation. On a constant currency basis, net sales increased by $7 million or 8.9%.This increase is primarily related to a $6.5 million increase in OE related sales based on higher year-over-year volumes partially offset by a $3.1 million decrease related to the impacts of the company's divestiture of the non-automotive business in 1Q'19.Like the Americas segment, channel mix shift unfavorably impacted growth margin but the reported results were favorably impacted by a $4.3 million benefit from the commercial settlement related to a potential products liability claim made by one of our OEM customers.However, it's important to note that there is no impact on adjusted EBITDA as defined and we excluded the expense when originally incurred and we're excluding the benefit under the same [purpose]. Lower selling general and administrative expense resulting from restructuring activity we've initiated during 2018 offset some of the headwinds we've experienced in the quarter relative to the same quarter last year.Europe Africa reported an adjusted EBITDA of $740,000 an increase of $810,000 compared to a $70,000 loss in 3Q'18. This was attributable to the higher sales volumes and decreased SG&A that I've previously mentioned.And moving on from the segment results to the balance sheet. Working capital totaled a $111.7 million at the end of 3Q'19, which represented an increase of $8.9 million as compared to 4Q'18 and an increase of $2.9 million compared to 3Q'18. Since our July 2018 refinancing which we caught up on past few payables, our working capital has remained relatively flat versus comparable periods.Specifically, accounts receivable decreased $13.1 million to $93.5 million from our prior year comparable period. Day sales outstanding with 47 days, a decrease of one day from the prior period. Inventory increased by $2.4 million to a $141.2 from the prior comparable period and days inventory outstanding was a 103 days, an increase of eight days from that prior year comparable period.Ending with accounts payable, it decreased by $14.1 million to $79.4 million and day's payable outstanding decreased five days to 46 days when compared to the prior comparable period.Turning to capitalization, leverage and liquidity, as a result of the APAC transaction and our recent liquidity management efforts gross debt decreased by a $173.6 million from $388.5 million at the end of 3Q'18 to $214.9 million at the end of 3Q'19 which included a massive pay down on the first lien term loan as in a $162 million at out of the $187 million outstanding.Also included a sizeable reduction in ABL balance offset by the addition of our second lien term loan placed in the first quarter of this year. All fills, again we decreased leverage by over a $170 million on a year-over-year basis. As for liquidity, at the end of 3Q'19, it totaled $60.9 million which was comprised of $44.5 million of availability under our ABL facility and cash on hand at $16.4 million. This is our highest liquidity level since early 2018.Now, I'll take a breath, let you guys tune back in and talk about a few items that I think are meaningful on a go forward basis. Since this is only my second earnings call with you and Horizon, and we're still funding our cadence, I generally like to share a few points of light every quarter to make certain we hit the high and sometimes even the low points so they were all grounded in the hear now.So, without further ado, point one. 1) The APAC field would stand attributable for us. The ability to deliver by over a 180 million and part another 35 million in additional liquidity on the balance sheet even exceeded my expectations. 2) No○ one and I mean no one is pleased with our results. Thus Terry's recent appointment in areas of focus. 3) With our renewed commitment to our customers and associated service and fill rates, we are looking forward to the coming months to end quarters as we win back their trust and their business.And finally, 2020 know that will be a busy one for us. But from my perspective, an exciting one. And we're assuring a new area of process, efficiency, accountability and focus on customer service and ultimately getting this swagger back in our step, getting off the roads and delivering a couple of body blows of our own.In closing, and since this is our first earnings call together, I would also like to welcome Terry to home and look forward to work with him shoulder-to-shoulder as we return this once priority and profitable business back to the market leader that it once was.I've been personally been involved in turning around large complex businesses such as this for the past 10 to 15 years, I don’t want anyone thinking that the results will improve in a linear fashion. Sometimes, it's three yards in a cloud of dust, some other times it's in upward at a 90 degree angle and then some even other time it is one or two steps backwards before progressing again.Regardless, the team estimated there is new blood in the organization that just needs a little time to make the changes necessarily to right the battleship that is Horizon Global. With that, I'll turn it back over to Terry for his closing comments.

[Terry Gohl:]

Thank you, Jamie. In closing, and that the company has been through a lot in recent past. Acquisitions, liquidity crisis, leadership changes and management as well as to the board, refinancing, and most recently the successful sale of our APAC operations.All of this during 2018 and 2019. With this behind us, it is now time for us to completely focus our efforts and taking care of our customers with the highest levels of products, availability, operational effectiveness and effective channel management.We are reemphasizing the promotion of our iconic brands and are aggressively driving operational improvements throughout the company to achieve our objective of returning Horizon Global to its position as a clear product and supplier of choice for all of our customers current and new.We have much to do as you can see but the entire team has committed to achieving our objectives and we are grateful to our investors, customers, and suppliers for your continued support.With that, I'd like to turn it back to the operator for questions.

[Operator:]

[Operator Instructions] Our first question comes from Josh Nichols with B Riley FBR. Please go ahead.

[Josh Nichols:]

Yes hi, Terry. And first of all, welcome to the Horizon team, good to have you.

[Terry Gohl:]

Thanks, Josh.

[Josh Nichols:]

Now from, I want to ask a little bit -- if you could provide a little bit more information on the softness in the quarter regarding the Americas, given that segment has historically been like improving over the last several quarters after some rightsizing of operations like the KC distribution facility.What are some of the actual items that really caused the shortfall regarding the inventory and how long is that going to take to correct?

[Terry Gohl:]

Well Josh, and again when we you'd look at what you termed as softness and some of this was self-inflected wounds as I mentioned in my opening statement. We didn’t have the right inventory at the right locations. So, we have gone to work pretty aggressively in our Mexico operations.We've improved our so far and we've improved our hedge production capacity by 60% in the last seven weeks. So, our throughput is up, that means we can feed more effectively going forward. We will not continue those efforts, again another 30% that add on top of that as we look going into let's say the first quarter of next year.So, sizeable increase in our throughput there as well as our heavy-duty products and fifth wheels in particular we're going to be doing the same thing there in Mexico as well. So, our message is we're going to provide the products to the field, we've gotten very favorable responses from the independence that we met with that the CEMA show saying let's get me the products.We're searching for your products, if it's not available we're forced to go other locations or other directions, we don’t want to do that, so we like to stick with you. So, our effort is to fix our operations to make sure that we're clean and have inventory available for felicitations by our customers.Big moves that we’re making.

[Josh Nichols:]

Thanks, Terry. And then could you talk a little bit more about what you're seeing, one in the macro environment in Europe Africa and also as far as the company's operating performance and expectations for how that could improve in the coming quarters?

[Terry Gohl:]

Yes. And as far as Europe, I've mentioned that we've been to some not all, I haven’t been to the France location and if there's people on that on the phone from our France location. I apologize for that, we're going to right that before the end of the year.But what we have seen is we've seen operations that while they have opportunities associated with them, our position is we have more volume growth opportunities to utilize the facilities. Driving operational efficiencies and creating that capacity is our focus.So, we look to grow that business and we have opportunities to grow that business. To do so effectively and from a profitable position we need to contain that within the operations that we currently have by driving more manufacturing efficiency into the current four walls of the operations that we have.Selective investment but mostly just leveraging that we currently have.

[Josh Nichols:]

And could you also talk a little bit about some of the trends that you've been seeing across the companies like the OE aftermarket and like retail vertical probably speaking?

[Terry Gohl:]

Yes. Between if we -- we got to look at them differently in different regions, right. So, now we're about 70/30 say aftermarket to OE and North America and it's just reversed to that in Europe just by buying practices and OE practices associated with products that we produce.Have we capitalized on expanding our OE business in North America? No, we really haven’t. I mean, we're selective, we -- there has been selective success here in North America that we would like to expand the palms, so there is opportunities for us we believe to address that market and grow that market in North America.The European business primarily consists of OE based products and the volumes associated with what we're talking about there has and the capacities has been taken up by the OE business. So, we really haven’t pushed and we haven’t been in a significant growth mode up to this point on the aftermarket segment in Europe.That provides us opportunity, that provides pretty significant opportunity in Europe.

[Josh Nichols:]

Thanks. And then, last question from me. Given the shifts that are going on, I appreciate that you've only been on the job about like six weeks here but how should we think start thinking about 4Q and 1Q as you kind of enter what is typically seasonally slower period relative to like 3Q or on a year-over-year basis that you're working to implement all these changes?

[Jamie Pierson:]

Hey Josh, this is Jamie. Let me jump in there. Obviously we don’t give a guidance especially during times like we're going to announce some restructuring and that we've got going on. But what I would say is that from a macro environment, you say or unemployment remains at about 50 year low maybe 49 year low.The consumer sentiment index remains an incredibly high number but you're comparing can trust that with RV sales that are down about 17% from an 18 level which I would say is probably a good portfolio of products that we have with kind of the aftermarket and the retail sales maybe even industrial being down I think that answers part of that question.But we supplement that or kind of fetch us the floor with a good offering of the OE, OEM and OES products. So, in terms of 4Q, 1Q and their future, less concerned about the exaggerations and events that we cannot control but really focused on the events that we can control which is focusing on the customer, the fill rates there are and in the operational excellence steps Terry is driving.

[Josh Nichols:]

I guess just, you don’t provide any specific guidance and appreciate the timing of it. But any high level commentary you can make about expectations at least from a cash flow perspective given you may have some inventory build but also some expenses associated with working through this restructuring now.

[Jamie Pierson:]

Well, I'll tell you from my perspective having demonstrated a couple of years, is we have a renewed focus on free cash flow. So, it's not just EBITDA or adjusted EBITDA thereof, is we are focusing hard, we have things mobilized that are incredibly focused on what I call the primary working capital accounts, accounts receivable, inventories and accounts payable.I think you'll see us continue to manage accounts receivable fairly aggressively in the coming months if not the most I guess near term. Inventory can take a little bit longer with a 11,000 skews and arguably a $140 million plus or minus in inventory around the globe, that can take a little bit longer to get in line with what we want.To not only from a fill rate basis, Josh, because we don’t want to stock out all of our A&B items with that very high velocity. But we need to make certain that we rationalize those C&D items that we don’t move that often and use of that inventory and use of that cash to actually supply these customers at the FBE I guess they're not into that range.So, what I would tell you is continuing to aggressively manage primary working capital with a myopic focus on free cash flow even overall adjusted EBITDA.

[Terry Gohl:]

And then, Josh, I mean you have in this statement our DSO, DPO, and DIO matrix and you can pretty much ascertain where we're going to focus our attention on with that. Jamie mentioned the 11,000 skews and we have initiated just seven weeks ago, the analysis of our skew performance.There was 11,000, we'll be at the end of year we'll be about nine and we'll further rationalize that as we go through 2022 forecast of 7,000. So, we're addressing that complexity issue as well as we move forward.

[Josh Nichols:]

Great, thanks guys.

[Operator:]

I would now like to turn the call back over to management for closing remarks.

[Jeff Tryka:]

Prior to closing, Jamie's got a clarification we'd like to put out there.

[Jamie Pierson:]

Yes, thanks Jeff. And yes, real quick on the gross debt fees, it actually if you include the current portion so that you compare apples-to-apples in 3Q'18 to 3Q'19, 3Q'18 gross debt was $388.5, 3Q'19 was closer to $240 million. So, the reduction in gross debt on a year-over-basis is closer to a $115 million when you include the current portion of that.You'll be able to see it in the press release when you look at the balance sheets. I just want to make sure that everyone was level set on the exact reduction in debt on a year-over-year basis.

[Jeff Tryka:]

And then with that, I would like to say thanks to everybody for joining today. As you can tell, we're very focused, we are organizing very aggressively to address the challenges that we have in that opportunities that we have. We've dug in pretty deep into the elements of deficiencies that we have within the company.We'll continue to do so and we're acting wisely but very aggressively to address these. Our fill rates and margins are our principle focus at the moment. And I think the statements that we made reinforce that the actions that we're taking in that we're planning are really tailored towards addressing those issues, that both support our customers but also our shareholders and investors.So with that, thank you and thanks for joining the call.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.