Horizon Global Corporation
Q3 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Horizon Global's Third Quarter 2016 Conference Call. My name is Maria and I'll be your conference operator today. As a reminder today's conference call is being recorded for replay purposes. I will now turn the call over to Vice President of Corporate Development and Investor Relations, Maria Duey. Maria you may begin.

[Maria Duey:]

Thank you, Maria. Good morning everyone and welcome to Horizon Global's third quarter 2016 earnings conference call and webcast. Hopefully everyone has had a chance to review the news release issued earlier. Our third quarter earnings release and the presentation slides that we will refer to during the call are available on the Investor Relations portion of our Web site. 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 report on Form 10-Q and other reports that we filed with the Securities and Exchange Commission. Today's presentation also includes non-GAAP financial measures. Any references to operating profit or earnings per share on today's call will be as adjusted, unless otherwise noted, with the reconciliation of these adjusted measurements to GAAP in our quarterly press release and presentation slides available in the Investor Relations section of our website at www.horizonglobal.com. Joining me on our call today are Mark Zeffiro, President and CEO of Horizon Global and David Rice, our Chief Financial Officer. Following our prepared remarks, the call will be opened for analysts' questions. If we are unable to take your question during the call, please feel free to call me directly at 2485938810. With that, I'll now turn the call over to our President and Chief Executive Officer, Mark Zeffiro. Mark?

[Mark Zeffiro:]

Thank you, Maria. Good morning to all and thank you for joining us today. Glad to be here with you after a very busy last eight weeks. We've made great strides in the transformation of our business and are excited to bring you to speed. Today we will share with you the progress on our key priorities, our strategic efforts associated with Westfalia and our outlook for the rest of the year. Our team remains focused on driving solid revenue growth, strong margin expansion and improvements of our capital structure. The third quarter results exceeded our expectation and we're aligned with the historical performance patterns. Please flip over to Slide 5 please. Let's talk about some of the trends we're seeing both in our industry and our business. The globalization of growth of OE continues and our business has continued to leverage the market shift to SUVs and truck sales. We had an outstanding quarter for OE growth which I'll talk about a little bit later. The distributors in our aftermarket channel faced some of the most significant changes with consolidation and cannibalization by ecommerce activities. We've seen this pressure materialize in some of our smaller customers. Consumer confidence while stable in the quarter has been declining as we face the uncertainty of an election year. Steel costs came down in the quarter and we continue to monitor commodities and adjust our purchasing patterns. Overall, some puts and takes in the quarter for us, but from a macro sense, we're exactly where we thought we'd be as we close in at the end of the year. As we talked about last quarter our 2015 quarterly results were affected by spin-off activities, the discontinuation of certain commercial discounting practices and distributor consolidation. Our 2016 quarterly results have been in line with historical sales and profit patterns. We generated significant cash in the quarter allowing us to bring our leverage ratio down to 2.7 times, the lowest level since our spin-off. We also included approximately $5 million in costs associated with Westfalia transaction which negatively impacted our results. Our focus remains tight; creating shareholder value through the execution of our key initiatives. Let's go to Slide 6, our three financial priorities remain consistent. Improved margins 10% and 10% at a segment and then enterprise level. Improved capital structure to less than 2x lever and drive sales growth 3% to 5% organically. This page includes the few of the initiatives that support our financial priorities and that we believe will deliver enhanced shareholder value. At Slide 7 you'll see how we executed against those priorities in Q3. We delivered an adjusted segment operating margin of 11.6%, an improvement of a 150 basis points in the third quarter. It is clear that we're realizing the benefits of our prior restructuring activities. North America adjusted segment operating profit margin improved to 12.8%; and the international adjusted segment operating profit margin improved to 8.3%. We're also focused on improving the company’s capital structure. We ended Q3 with leverage ratio of 2.7 times, down from 3.6 times one year ago, reflecting our focus on improving profitability and reducing debt. Our operating cash flow improved to 14.7 million year-to-date and we ended the quarter with 41.4 million in cash on book. We still maintain our leverage goal of approximately two times even following the Westfalia transaction. Sales were down 1% in the third quarter, our global OE businesses experienced strong growth in the quarter with 11 new wins which should represent over $2 million in sales on a full year run rate basis. This is new incremental business. Volumes on existing awards are also growing. Our customer alignment efforts in this particular area, the OE continue to pay through growth in existing and new business awards. We expect that the Westfalia acquisition will only enhance these efforts. Our ecommerce business continues to experience strong growth, with sales up nearly 24% in the quarter and that's following a quarter of 40% growth. Our brand efforts and enhanced customer support efforts are realizing the benefits of our recognized brands through continued growth. Regarding retail we experienced some softening in this channel driven largely by new fulfillment systems and some inventory management efforts. We're pleased with our continued progress in all three of our financial priorities with year-to-date results demonstrating that organizational focus and alignment results in business improvement. Move onto Slide 8, this chart should be familiar to many of you; it highlights our progress on the programs we're executing to deliver margin improvement. The consolidation of the North America continues with the ERP implementation on track to go live as of 1/1 in 2017 enabling efficiency gains for that business. We'll implement a new distribution footprint in 2017 for North America which will add -- which will be added to the margin dashboard over the next quarter. We've completed the Juarez Closure in consolidated production at Reynosa and we'll start seeing the benefits in Q4 of this year. Our sourcing initiatives continue with plans to reduce to supply base by 20% over the next 24 months. Our brand consolidation efforts is positively impacting our customers who now benefit from a more vital and expended product line offering. In addition, this has allowed engineers to work on higher value added activities and continue to review design to shelf cycle time. A key competitive advantage for us. Future actions here will simply our branding outside the North American markets and are headed yet ahead of us. Product innovation continues to be a focus for us as we build the robust multi-generational product plan. That looks at new product introduction several years ahead. Our product innovation efforts are ramping up as we improve our cycle time on market -- to the market through custom fitments. As we've discussed in the past, we believe this efforts will add margin to our business. And of course last but not least, we've added Westfalia integration to the margin dash board. Our goals to fully integrate Westfalia into our European organization. We have set up a project management office and identified five work streams which I'll talk to you about on the next slide. The margin dashboard continued to track our progress and key programs that will drive margin improvement for us. We will continue to add additional programs overtime. As completed programs come off the dash board and just become part of the daily operating culture of our business. In total, we are on track with this efforts to deliver margin improvement in 2016 and beyond. If you pleased slip to Slide 9 of the deck, I'd like to take a moment to update you on the Westfalia transaction. We signed a definitive agreement to acquire Westfalia in August and closed the transaction in October. Which means the companies will be consolidated in the fourth quarter results. I spend two weeks in October visiting the largest facilities in Germany, France, Romania and sharing the horizon vision, mission and values. We have realigned the European teams and have clear organizational objectives. We established the PMO and have fiver work streams that will bring $10 million in synergies in the first year. We've made great strikes in 30 days and we'll keep you updated on our progress. We're happy to welcome Westfalia to the Horizon Global family. We have much work to do to integrate, align and embracement cultures and team members that we have. Our businesses will be stronger together with a winning culture for our customers and our shareholders. With that please turn to Slide 10, and I am going to turn it over to David Rice our CFO, who will go a little deeper into the financial performance of the quarter. Then I'll be back to wrap up and share our outlook for the balance of 2016.

[David Rice:]

Thank you Mark. In a commentaries to follow I will be discussing our performance in the quarter on an adjusted basis excluding special items which have been identified in the appendix of today's presentation. Also included in the appendix is a reconciliations of all adjusted non-GAAP results to the most comparable U.S. GAAP measure. Cash flow and balance sheet commentary will be on an as reported U.S. GAAP basis. With that please turn to Slide 11 for a summary of our third quarter results. The third quarter reflects our fifth consecutive quarter with improvement in operating margins at both the segment and enterprise level. It’s also important to note that this quarter represents the first quarter where have the comparative result as a standalone company although we were still in the process of fully developing our corporate functions in Q3 of 2015. During the quarter we were able to mitigate the impact on sales and profitability associated with our return to a historical distribution of segment operating profit. With the exception of cost incurred in connection with our acquisition of Westfalia, our continued margin expansion in Q3 reflects the impact of the margin improvement initiative that we've undertaken on our journey to a 10% operating income enterprise. With that I'll go through our performance for the quarter. Net sales decreased during [ph] the third quarter of 2015, primarily a result of a shift in aftermarket sales between the second and third quarter of last year in the North American segment. On this decline in net sales, segment operating profit increased 2 million to 17.5 million as compared to 15.5 million in the third quarter of 2015. Segment operating profit margin in the quarter was 11.6% representing a 150 basis points improvement compared to the same period in 2015. This performance was a result of lower input cost and margin improvement efforts partially offset by an unfavorable sales channel mix compared to the third quarter of 2015. On an enterprise level operating profit margin increased 20 basis points to 7.8% compared to 7.6% in the prior year. In the third quarter we incurred corporate costs of approximately 3.7% of sales compared to 2.5% in the same period last year. As I noted earlier during the third quarter of last year we were still in the process of building out our corporate structure, investments and certain strategic functions had been accelerated into 2016, such as our CIO and her focus on building a global IT infrastructure. We expect to leverage these investments in 2017. Through the first nine months of the year we generated 27.5 million of cash from operating activities, an improvement of 14.7 million when compared to the 12.8 million generated at the same point in 2015. Margin and working capital improvements drove this increase as our reported net income for the first nine months of the year decreased less than $200,000 despite 8 million in incremental interest costs and approximately 4.6 million of acquisition related costs incurred relative to last year. Total debt at the end of the quarter was a 190.6 million, a decrease from the prior year level of 203.7 million. Our net leverage bolstered by 27.7 million of domestic cash stands at 2.7 times, down from 3.6 times one year ago and consistent with our objective of de-levering the balance sheet to less than 2 times. This result is reflective of both the improved profitability and working capital management of our business as well as payments made on our term debt. Our focus on improving margins while de-levering the business remains unchanged. On Slide 12 I'll go through the performance of our Horizon North America segment. Third quarter net sales in our North America segment reflected timing of activity we described on our second quarter earnings call where we highlighted the unusual timing of segment operating profit in Q2 and Q3 of 2015. Sales in the quarter reflected decrease of 5.1% compared to the same period in 2015, mostly resulting from the impact of seasonal timing of sales in the aftermarket and retail channels. The impact of this decline was in part offset by continued growth in our ecommerce and automotive OE channels. Sales in our ecommerce and OE channel each grew 2.1 million relative to the same period in 2015. For the fifth consecutive quarter the North America segment reported improved margins achieving growth of 30 basis points over the prior year to 12.8% of net sales. The margin improvement was primarily the result of favorable input costs partially offset by investments to support growth initiatives in costs associated with the ERP implementation. Input costs were favorable based on lower commodity cost, labor saving due to the Mexican peso and the benefits of integration of the North American business. The team remained focused on the next steps in the integration of our Horizon North America business leveraging the investment made in our OE structure and redeploying engineering talent to product enhancement and innovation. Performance of our Horizon international segment is highlight on Page 13. On a constant currency basis, third quarter net sales in our international segment grew 10.4% as compared to the same period in 2015. As Mark mentioned in his comments, our team’s executions of a global OE strategy has continued to result in new program launches in the segment. Thailand, Australia, South Africa and Germany experienced growth in OE volumes driven both by new programs and strong market conditions. Offsetting this growth was weaker demand in Brazil and for our aftermarket business in the UK. Operating profits for the international segment nearly tripled to $3.6 million and operating profit margin increased 520 basis points to 8.3% of net sales. Most significant improvement in the segment came from productivity gains in Australia and the benefit of volume leverage. The international segment was spend significant energy on the integration of the Westfalia business to realize the identified synergies that Mark discussed. In addition, segment will continue to focus on OE program launches across the region while accelerating manufacturing productivity and integration activities. Managing growth in South Africa also remains a critical focus area for the team. Slide 14, is a view of our leverage and liquidity. As of September 30, we had approximately $117.4 million in total liquidity an increase of $19.3 million compared to the third quarter of 2015. Our leverage ratio of 2.7 times represents a reduction of more than one full turn since our launch. With the incremental data related to Westfalia acquisition, we anticipate our leverage ratio at the end of 2016 to approximate the level at the time we launched as a public company. In addition, the health of our working capital position has improved compared to the third quarter of 2015. We improved the velocity on our inventory by 6 days reflecting more normalized customer demand patterns, improved distribution networks efficiency and a reduction of inventory in transit that exists in the prior year as the results of West Coast post-strike. Accounts payable and receivables days were relatively flat over the third quarter of 2015. These items reflects our management’s ability to execute on our key financial and strategic priorities. In closing, I'd like to leave you with three take away from our financial performance. First, the timing of segment operating profit in 2016 is more in line with our historical pattern that net reflect in 2015. In spite of the impact this had on our top line, both of our segments generated improved operating profit margins reflective of the execution of margin initiatives we present every quarter. Second the acquisition of Westfalia, has further convinced us that commercial opportunities exit across all regions in which we operate and the benefits of working as one global team will continue to generate new program and new customer wins. And finally, cash generation resulting from enhanced operating performance and consistent working capital management should provide us with a flexibility to invest in our strategies and ultimately improved our capital structure. If you’ll turn to Slide 15, I will turn it back over to Mark who will cover our long term goals, discuss our full year guidance and wrap up our prepared remarks. Mark.

[Mark Zeffiro:]

Thanks Dave. Please turn to Slide 16. We introduced our long term strategic goal to the investment community at the beginning of 2016. The Horizon global team is committed to building a best in class business that supports customers and users of our products while providing employees with the opportunity to develop and grow. The thresholds set out on this page are an expression of our vision for the company, increased profit and substantial cash flow to support continued growth all while growing faster than the market and being an employer of choice. With the Westfalia transaction we are well on our way to that $1 billion in sales and have a clear path to our cash flow and profitability goals. We're also aligning our team to be able to achieve these goals. We added a CIO, Ruthanne Largent who has significant experience in Cyber Security leadership, IT Infrastructure and Process Management. We also added a Director of Global Sourcing, Sanjay Bava [ph] specifically to address sourcing for all of our European operations. In addition Denise Ilitch was elected as Independent co-chair of our Board. Sam Valenti, our previous co-chair continues to serve on the Board. I would like to thank Sam for his vision and mentoring during our incubational launch. His council was invaluable. I remain co-chair of the Board and look forward to working with Denise in her new role. We'll update our long term strategic plan over the course of next few months, laying the foundation to grow beyond the products and services we provide today and expanding our relevance to the markets through new technologies and adjacent opportunities. We look forward to communicating our plans with you in 2017. So, with that in mind, let's turn to Slide 17 to discuss our outlook. Given our performance year-to-date we're increasing our guidance for the core business for the remainder of the year. Note the implications and impact of Westfalia operations for the fourth quarter are not contemplated in our guidance. The structure of [indiscernible] really talks to the business improvement we expect to see for the year. We still expect to see growth of 3% to 5% in a constant-currency, gaining share and winning programs along the way, we now think segment operating profit will improve a 130 basis points to 150 basis points, up from 100 basis points. This income growth will more than offset our full year level of interest in standalone corporate costs. We expect to convert operating cash in excess of 2 times net income given our efficient working capital management and improved profitability. We're updating our tax guidance as well. Our tax rate for 2016 is now expected to be between 9% and 12% as a result of the transactional cost incurred. Wrapping up on Slide 18, we delivered a significant improvement in segment operating profit, operating cash flow and leverage reduction while making progress on our growth initiatives with our OE and ecommerce strategies driving sales growth year-to-date. The Westfalia integration is on track and we'll begin to announce specific actions over the course of the next six months. We're excited about the opportunities ahead, even with the uncertainty in consumer confidence in this election season. We remain committed to increasing shareholder value as demonstrated by our results. We continue to make progress on our key financial priorities. Our team is aligned and engaged at all levels to deliver this performance and our investment with strategy and structure of our global OE organization is resulting in program wins and the integration of Westfalia will only strengthen our OE business. I would like to welcome our new team mates and thank our employees across the world. As a continued to satisfy customers and deliver on our margin initiatives. Thank you to all of our stakeholders for the support and making Horizon Global a better company. At this point we will gladly take your questions.

[Operator:]

Thank you. [Operator Instructions]. Our first quarter comes from line of Matt Koranda of Ross Capital.

[Matt Koranda:]

I just wanted to start off with retail channels, was there any particular weakness in any one segment of retail guys, like so if you bracketed out for automotive retailer and [indiscernible] et cetera. Or was it essentially just across the board and then how do you square that with the OE channel strength which is arguably ultimately consumer driven as well?

[Mark Zeffiro:]

Yes for sure Matt. That's a very powerful question out. I will tell you that, when you look our retail partners, is not everybody implemented a new fulfillment systems. So those that are talking about that in their owner earning releases you can quickly understand who they are. I would tell you that the most -- the strongest performers have been the Home and Hardware channels in terms of that relative volume. The -- and how we square that with OE is recognize. We didn't have a purposeful strategy 18 months ago in terms of how we were going to penetrate the OE related efforts. We were fighting the fight on a day-to-day hand-to-hand basis. I will tell you that our ability to grow within that segments has been -- it’s only supported by the fact that we’re actually dealing with customers in a more professional fashion and we're dealing with customers in a way in which they expect us to deal with them. I'd add one more thing in their, Matt, is that, there is a shift and there is a mix shift vehicles. And then it's less pounced here in the United States, but more pronounced outside of the United States where the shift between traditional if you will, cars if you’re sedans if you will, to that of CUV's SUV's and trucks. And we're seeing that portion of the segment continue grow more quickly. Either A, through utilization of those kinds of vehicles and it really cannibalize in the other side of, if you will, production.

[Matt Koranda:]

Okay, that's helpful. Thanks Mark. And then in terms of guidance the segment guidance obviously looking at 150 basis points of segment margin improvement, but that still implies in Q4, the segment margins in the Horizon and International might be down year-over-year. Should they be down just given the margin expansion programs that you guys have [indiscernible], may be just talk a little bit about that is it in place to or is it to execute force [ph] specifically?

[Mark Zeffiro:]

Yes Matt I'll tell you this really goes back more to what we talked about in terms of normal distribution of our activities throughout the year. We had an unusually strong Q4 last year. And so if you watch where we are year to date with the guidance we are giving it for the full year. It does reflect how we view Q4 coming in.

[David Rice:]

I’d also encourage you to go back out to the queue as it relates to actually, actually and this would have been a K as it relates to Q4 performance. there was nearly $2 million worth of things that were good guys that came our way as a result of either base line activities and some of them rolling out of the spend and not everything coming out of the spend was a challenge. Also the other implication here is that you've got overall increased interest costs, and also let's be clear that obviously wasn’t contemplated in the original result conversation and as we entered the year we'll be carrying obviously a significant amount more debt for the quarter here as a result of the Westfalia transaction and what's interesting is you also heard my comments towards the -- between 9% and 12% in terms of the tax rates, so we've got a push and a pull there.

[Matt Koranda:]

Just on Westfalia for a moment. I think you guys highlighted 10 million in synergies and you [indiscernible] 2017, does that imply that Westfalia could be doing roughly 29 million on EBITDA in 2017, I know that there were kind of on 19 million run rate and then maybe just could you highlight in much more granularity the sources for that 10 million, is that all cost driven like you've mentioned on the last call?

[Mark Zeffiro:]

Let me even backup a little bit for those that are newest to the conversation the Westfalia business obviously will present an 8-K with their view towards GAAP related financials, of course when we did the deal we provided financial statements as they stood supporting acquisition. That's a reference point Matt is I was making there in terms of the EBITDA that was being generated by the business at that point in time. When we go through that process you'll see an incremental step in terms of profitability out of that Westfalia oriented business of $10 million and that comes in the form of all your usual flavors and you're right Matt we're not contemplating new upticks in commercial synergies; I think we need to keep that in our pockets as we go to our customers and learn how we can better support them on a global scale. So, it's all things considered and [indiscernible] teams are out there and in terms of clarity its coming from plants effectiveness associated with plants, it’s coming from sourcing synergies, it's coming from organizational duplication and being more efficient in that respect. So, it's all the usual suspect. So we're not changing our views towards those work streams and in fact I would tell you what we’re finding is not less, but more synergies. The question is sequencing and frankly time scale associated with some of them, certain things they get accelerated, certain things may slide them from the timing, but we stay affirmed at $10 million incremental synergy gain in 2017.

[David Rice:]

Matt I just want to add one thing, the math of just taking the 19 million that we talked about in the business as earnings plus the 10 million doesn’t contemplate purchase accounting. So there is going to be amortization over that and that sort of things so you just got to be careful doing straight math to get to the endgame number and that's what we don't know in detail today.

[Matt Koranda:]

Got it, that’s helpful. Any sense for summer [ph] when guys will have that purchase accounting [indiscernible] and the 8-K and everything?

[Mark Zeffiro:]

Well the 8-K will be in probably mid-December some time. The actual date it has to be done is December 21st, the purchase accounting will be included in our 8-K so we'll -- I'm sorry not in our 8-K, in our 10-K so we’ll talk about it with our yearend financial statement.

[Matt Koranda:]

Okay got it. And then anyway you guys can kind of help us to about seasonality and as far as we start to model the impact in Q4?

[Mark Zeffiro:]

I would love to say that will know this businesses well as we know the rest of our business. It is a less seasonal business for so it's going to mute the implications of front half back half profitability and sales trends. But I would say it's not going to make us 25% every quarter, it will just be less drastic than what we are today.

[David Rice:]

Yes so the aftermarket piece of there is something we are still trying to understand form the seasonality perspective. The OE side which is you know as the majority of their sales activity really the way we're thinking about that in terms of production sales days in the quarter. So Q4 is going to be a slower quarter spend because you've got holidays in the quarter that's how we're thinking about it today. But we continue to learn more all the time about the business.

[Matt Koranda:]

Okay got it. May be one last one for me if I can squeeze on. 3.7% of sales I think was the corporate house backs. That's sort of legal run rate that we should be completing or was that just elevated given the ERP implementation and everything you have going on that?

[Mark Zeffiro:]

I will tell you that there was some decisions that we chose to accelerate into 2016 based upon our outlooks around be able to put the structures in place so we leverage those investments in '17. Part of it being for example the addition of the CIO and ERP implementation as part and parcel of that. I would tell you 3.7% is not where we're going to run the company. Will get significant leverage associated with the obvious new incremental sales from Westfalia as well as other related growth initiatives in the company. So we're still targeting that leading digit two as part of parcel of our SG&A as a percentage of overall corporate sales. There is one other thing that you need to put in context. Our shareholders I will hope that everybody has experienced the benefits associated with our share price running and obviously being at SERKA [ph] $20. That clearly have an effect on certain of the compensation programs that are in place. And quite frankly that's a little bit of a disproportionate hit we took you in Q3 as well.

[Matt Koranda:]

Okay got it. Thanks for the clarity on that Mark. I'll jump back in queue guys. Thank you.

[Operator:]

Our next question comes from the line of Robert Magic of CJS Securities.

[Robert Magic:]

On your tax rate guidance for the year of 9% to 12% can you just give us little more color on what's behind the drop there and then more importantly how sustainable is this lower grade going forward for the next few years?

[Mark Zeffiro:]

Yes so actually it's a raise. What we have talked about when we did our Q3 earnings was a tax rate not greater than 5% for the year on a full basis. And then the math's behind that is that we use a planning rate of about 20% and then we had some UTVs that flipped this year and that's why we guided to the 5%. That also is driven by a shift in where income is earning. So that's why it can move a little bit. But the raise for the 9% to 12% is completely associated with the Westfalia transaction and the non-deductibility of cost that we incurred that will be that transaction. So it's historic to the relationship between how we generate our income in our tax rate. [Multiple Speakers]

[Robert Magic:]

I’m sorry go on.

[David Rice:]

Are you going to say, the last part of your question is going forward. We still think about the base Horizon Business as a 20% or so tax rate, but with Westfalia today we're thinking about in terms of 30%. So how that blends together is something that we'll be able to share more granularly as we talk about our outlook in 2017 next year.

[Robert Magic:]

That’s helpful, thanks you. And following up on the previous question it's great to see that you're kind of on track to achieve the $10 million synergies goal for 2017, just looking out a bit further can you discuss what your 2018 target maybe and how we get there?

[David Rice:]

We really can't, because the timing -- we're still working obviously on the '17 pieces, but what we did talk about with Westfalia is the decrease in the multiply we paid down to that four times or so. So the timing of that between '18 and '19 is something we're still working on.

[Mark Zeffiro:]

Yes, it's a good question Robert, when we think about it we're feeling certain things that are going to advance, that were unplanned from the synergy perspective and it's giving us we feel greater opportunity to look more holistically at the business. It's one thing to have synergy plans that you're working at in a diligence room and through conversations with the manager, as we’re going through that diligent process. Day one, Paul Caruso and his entire leadership team actually lined out workstream-by-workstream, workcenter-by-workcenter, what it is that they needed to get done. And what was fantastic to hear was they had -- the management team at Westfalia had additional non-contemplated ideas as to how they could be more efficient and it wasn’t just, your traditional let's go sell more of this stuff in the United States; it was really about cost structures and how we can leverage our practices on a more global basis, whether it's best practice sharing or otherwise. So, more to come, let's celebrate 2017 when we get there. I would tell you that in order for us to get to a $10 million run rate you're going to have run at more than $10 million. So the implication obviously is you're going to have carryover effect in terms of '18 and I would tell you that '18 is going to be an important year and probably larger in terms of relative savings given what we know right now given what's ahead of us.

[Robert Magic:]

And just lastly from me, can you just quantify your volume changes by channel so to get a better sense of the trends in each?

[Mark Zeffiro:]

So, when we talked about it overall, OE is clearly what's the driving the top line on a global basis, so that's where we're seeing more consistent wins, the majority of the growth in the international market was all OE driven. And the -- probably half of what mitigated the timing change in North America was OE driven.

[David Rice:]

Let me help you here Robert, when you think about our markets it's just something that we don't traditionally talk about channel-by-channel. We try to give you a sense as to what's happening within those channels and give you some highlights associated with it. So when you think about the OE business that's clearly growing double-digit, as Mark may have mentioned ecommerce was 24% up from -- competing on a quarter that was up more than 40% and we felt softness in the retail side of the business with a slight retreat and that was really driven by areas really focused around fulfillment systems being implemented, as well as some if you will inventory management by certain of our customers. I would tell you that is holistically where this is coming from. In terms of relative magnitude the biggest contributor by significant amount is our OE growth. And the detractor would be obviously just means that the size of the businesses is U.S. retail business in terms of that retreat. Distribution health service, it was a little bit of uptick with some of the bigger customers offset by some of the short falls by smaller customers as I made mentioned. The cannibalization of certain of their sales as well as the pressures if you'll in terms of channel competition. So it's something that I think as ahead of us as we start to talk about the business not just regionally, but also by channel.

[Robert Magic:]

Okay thank you for that additional color I'll jump back in the queue.

[Mark Zeffiro:]

Thanks Robert.

[Operator:]

Our next question comes from the line of Walter Liptak of Seaport Global

[Walter Liptak:]

May be couple of questions. On the corporate expense, corporate expense look like they were about little over a 1 million higher than we were expecting. And I wonder if you could qualify for was that, was that about the amount that when you look extra deal cost the ERP implementation, does that flow through corporate expense?

[Mark Zeffiro:]

And this case Walt, it’s two things that we've mentioned. Obviously the additional some additional staff in the quarter, as well as the effects associated with certain of our incentive programs and having a recognized the uptick in terms of relative equity value. So I will tell you those are, one you digest as part and partial of the leverage of your overall structure cost, the obviously is an uptick as result to where the traded value of the company is. I would tell you that we form a recurring perspective gave you views towards SG&A with and without the transaction cost. You should be able to see that in the foot notes associates with the earnings release and I would add just one other thing is that all other spend in large part is in line with what we expected.

[Walter Liptak:]

Okay, can you qualify staff and incentive then?

[David Rice:]

It basically makes up about you million bucks between those -- between a couple of those things.

[David Rice:]

Those are the really variances Walt, the 3.7% I talked about excludes the $4.6 million of transaction cost, we pulled that out for discussion purposes.

[Walter Liptak:]

I didn't know if that as in that corporate expense line if there was [indiscernible] maybe travel hotel swings that you couldn't --.

[David Rice:]

Some of that Walt, but I wouldn't consider it the Lion’s share. So if you break it out you have the implication of some incremental staff, the two positions I made mentioned. As well as some of that additional travel cost spend, that’s $100,000. I mean it's 10% of that variance, so it's significant in that context, but that’s kind of the contributors associated with that variance.

[Walter Liptak:]

Okay, great. And then the cash flow working capital was very good this quarter. What are you thinking about for the fourth quarter, we get a working capital cash inflow because of some of the productivity and focuses there?

[David Rice:]

We’ll get a -- the productivity gains continue come through the income side. What I would say is typically what you see in Q4 is inventory will probably relatively flat and AR is what drops and that's what generates the working capital that we get in Q4. Because the sales volume obviously is lower in Q4.

[Walter Liptak:]

Okay, maybe I can ask the question this way, what do you -- we can model it out, but what's your number for where you think you'll end with debt at the end of December including the new debt from Westfalia?

[David Rice:]

I've given you where I think we'll land from a ratio perspective, a leverage ratio perspective, but we're not giving specific numbers at this point on the pieces.

[Walter Liptak:]

Okay fair enough. And then, you talked a little bit about the growth in OE, what else you can give us an idea of what kind of impact that that might have on 2017? As the core Horizon Global business will that get growth as a result of OE growth and Westfalia, do they have projects and new programs that will provide a lead growth?

[Mark Zeffiro:]

When we get to 2017 guidance we'll obviously go a lot deeper. Our strategic objectives are our long term view here, that we can grow this business 3% to 5% on an organic basis and all those wins are going to make sure that we can deliver on that continued objective. So, if you think about all the things that we made mention of, it's -- the numbers in terms of number of new programs and how quickly they're ramping, you can go through our previous earnings. But I would tell you this is that there's a good chunk of top line growth and let's call it between -- let's call it about $30 million that you'd expect to see as a result of these programmatic wins as well as other related wins within the OE segment. So, it's going to be the largest contributor to our growth. More to come in terms of the Westfalia implications of that and we'll obviously get much more granular as the year comes to an end and we have clarity around order volumes and the like from our OE partners.

[Walter Liptak:]

Just a couple on fourth quarter revenue, you called out maybe some consumer disruptions because of the elections that we could all understand that, but it’s also been warmer weather, and I'm wondering if you're getting any like distributor channel partners doing unseasonal reorders?

[David Rice:]

That was part and parcel of the historical practice and no we're not really seeing anything other than people being very mindful of the inventory levels. And being they feel just conservative with their spending of cash towards those inventory elements within their business. So, nothing unusual at this point.

[Walter Liptak:]

And when you talk about the revenue from Westfalia, should we just take that run rate of revenue that we're expecting and divide by four or we'd thinking that it's going to be below that for seasonal reasons or whatever in the fourth quarter?

[Mark Zeffiro:]

As David mentioned we're going to come out with the K that will provide a view here towards the middle of December around the actual financial results on the U.S. GAAP related basis. I would tell you that if you think about Q4 there's less production days from an OE perspective for this business. So you can do your structural math’s saying it's much heavily weighted towards OEs and therefore you should see a relative haircut in terms of relative volumes in Q4. We haven’t heard of any specific dislocation in any of the major customers out of Europe around slowdowns in production or anything like that. So I would tell you that, that run rate analysis that your thinking about doing just make sure you think through the number of productive days because we’re getting towards the end of the year. So there is some seasonality, as you close out to the holidays and the like.

[Walter Liptak:]

Okay, thanks for that and just the last one on the fulfill system that you called out, is there more to come in the fourth quarter from that retail customer? May be more delays in stocking or [multiple speakers]?

[Mark Zeffiro:]

I would submit this is that. I look towards 2017 and look towards the order rates that we expect to come out of those customers. It's really too soon to tell in terms of what may transpire here, but let me say this is the it's not every customers it's certain customers and I think we're feeling that those systems are getting more naturally used by their purchasing folks, so that they understand there on shelves as well as their safety stocks. What we have to do is remain as vigilant as we can with those customers and identifying the inventory gaps that they may have and be as thoughtful and helpful as we can around, making sure that they have useful product on shelf for those users. I don’t expect any significant or protracted dislocation here. For the most part these new order systems are actually. Going to do what I think is healthy and that is better align user demand with fulfillment requirements and that's something that we’re particularly adept at doing in terms of making sure that we're aligned with shipping according to real demand.

[Walter Liptak:]

Okay, great. Thanks for taking my question.

[Mark Zeffiro:]

Absolutely well. You have a great day. Thanks a lot.

[Operator:]

[Operator Instructions]. We have time for one more question from the line of Rudy Hokanson of Barrington

[Rudy Hokanson:]

I just want to ask a question about in North American segment, I mean a great deal has been focused on Australia [ph] and in the International. And I was wondering are there cost synergies there that you're still working on and anything that's measurable. Or should we think of North America right now having been sort of, I don’t want to say maxed out, but that as we look at improvement in 2017, the focus of the company is going to be on taking in Australia, and that that's where we going to see the synergies and margin improvements?

[Mark Zeffiro:]

Great question Rudy. The realities of it are, is no, they’re not done. There are two areas that I think are still ahead of them. Number one is they need to finish the implementation of CMS and that will give us back room as well as organizational efficiencies as a result of that system being implemented across both businesses and that really will eliminate that either physical or electronic barrier between the two businesses in terms of how they operate. So [indiscernible] and team are very much aware of that and the second thing that this does as you put all the inventory in one place, so to speak, one logical place. With this implementation of ERP you can now do a better job of fulfillment and as in my comments in my prepared remarks, we’ll put a 2017 distribution footprint optimization program on the deck for -- that recognizes one of the next initiatives that John [ph] and the team have there. This team has done a tremendous job in mining the opportunities and I would tell you that cultural integration and even though that they were the same company they were two very different businesses in terms of how they went to market. It's been very much led by his energy and his passion for making this team a great team and we're seeing the benefits associated with that, and frankly he's doing a tremendous leadership job for us. So the implication here is that -- is we'll have back room synergies that we got to go get, basic organizational efficiencies that we got to go get and the second piece of this is basically a distribution footprint. Those are two big enough programs, that's what we should be talking about for North America at this point. And that then also just points to -- year two of the plant Rudy, you know this better -- probably better than most. Year two of a plant is a hell of a lot more productive than year one. So, they're going to make sure that that Reynosa business now that it’s got enough production history associated with the Westfalia [ph] products and the Westfalia volumes, we're going to see obviously significant efficiencies out of the Reynosa team.

[Rudy Hokanson:]

Can I just ask, I mean this is a serve straight math question? But of your 10 million in synergies expected in 2017, and realizing this isn't from your first quarter through to the fourth quarter and even amounts or anything, but roughly what percentage of the 10 million would you attribute to North America?

[David Rice:]

That's -- zero. That is surely Westfalia and the implementation of synergies for Europe.

[Rudy Hokanson:]

So, you're keeping the potter dry? Or you're leaving stuff to surprise us with in 2017?

[Mark Zeffiro:]

You bet, we haven't talked about our guidance for 2017, but this is going to be a tremendous year ahead of us. I'm looking forward to it. We will otherwise absorb our corporate structure, we'll have absorbed our full year interest rates and interest costs as a company and we'll see yet even better EPS leverage in terms of 2017.

[Operator:]

That was our final question. And I'll turn the floor back over to management for additional or closing remarks.

[Mark Zeffiro:]

This is Mark, and the reality of this is I'm incredibly passionate about this business. And it's driven not just by me, it's driven by an entire staff that sees change as an opportunity, not a threat. We as an organization have taken on tremendous change in the last year, establishing us as a real standalone business and putting results up that all should be proud of. That excitement will continue. That passion for change and that passion for improvement in the business is what drive's us all to make our business better each and every day. I want to thank everybody for their hard work and thank you for your attention today.

[Operator:]

Thank you ladies and gentlemen; that does conclude today's Horizon Global's third quarter 2016 earnings call. You may now disconnect and have a wonderful day.