Q3 2019 Earnings Call
Good morning, and welcome to the Horizon Global third quarter 2019 earnings Conference call.
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I would now like turn the conference over to Jeff Treichel Investor Relations. Please go ahead.
Thank you operator.
Welcome to our third quarter 2019 conference, calling webcast on the call today are John C. Kennedy Chair of Horizon Globals Board of directors carried goal rising global Chief Executive Officer, and Jamie Pierson calibration Globals Chief Financial Officer.
Earlier this morning, we announced our third quarter 2019 results.
Do you look to release is available on any new sites as well as the Investor Relations section of our website <unk> Dot com.
Turning to slide two I'd like to remind you that statements in today's presentation will exceed our views about rising globals future performance, which constitute forward looking statements.
These statements are subject to risks and uncertainties that could cause our actual results could differ materially from the forward looking statements you describe these risks or uncertainties in our risk factors are always 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 you used to scores are reconciled to GAAP and they tend to see is to our quarterly press release in the presentation, both of which are available on the <unk> Investor Relations section of our website at horizon Global Dot com.
All that being said I would like to turn the call over to rising goals Board Chair, John C. Kennedy job.
Thanks, Jeff.
I'm happy to be able to join the call to formally introduce Terry goal, our new CEO .
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 bones of a great company.
We try to operational challenges in the Americas.
Under successful efforts to fully integrate a large European <unk> acquisition.
A mass that's substantial amount of debt.
Im repeatedly underperformed the market expectations.
We knew we needed to decrease that rapidly we felt the best way to do this was the 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 pack business significantly reduced our debt.
So 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 Gol has a proven leader of capable restoring profitability in creating a culture of operational excellence at horizon Global.
Terry served as a CEO and another significant and successful operational turned around 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 and is driving change.
I'm traveling with him I believe terry's priorities are clear.
He will work tirelessly to accelerate the turnaround in 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 the identified issues are fixable and we are optimistic about our ability to show significant progress on these through 2020.
Jerry with that intro welcome to rise and I will now turn the call over to you.
Good morning, everyone and thanks, John for that very kind introduction.
I'm truly honored that the board has been trusted me to lead horizon global in its 4000 employees into the future.
I would also like to express my sincere gratitude to the men and women at the company to our customers into our suppliers for the positive reception and support that I have received thus far.
Thank you for that.
Even though I've only been in here that we're 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 executed on some already we're organizing and planning to fully implement them all.
Early actions are yielding results.
We have had an aggressive schedule over the past seven weeks says we've dug into all aspects of our business.
We've conducted onsite reviews at our North American manufacturing sites and most of our operations in Europe .
Improvement plans have I did 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 that 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 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 America performance remains disappointing.
While certain elements of the strategy are in place and others were in progress our fresh eyes assessments have identified many more areas for improvement.
Some of these examples are as follows.
Pricing actions have been implemented however, whether the timing of the slow season for RBS and marine.
Recent customer inventory reduction in initiatives.
And our internal performance deficiencies impacting inventory availability.
Impacted our ability to fully recognize the benefit of the pricing adjustments we've secured.
We know some metal operations assessment improvement work and started almost immediately upon my start date.
We reviewed the plants and plans on day, three and since that date.
I noticed as operations management has been upgraded and operational excellence method has been deployed.
Hi, throughput has increased the cost our core manufacturing cells.
Past due orders have been driven down significantly and capacity has increased through lean principles and equipment refurbishment.
We have also initiated reversing outsourcing the actions.
With the target of completing the in sourcing by the end of this year.
A comprehensive can turn continuous improvement.
Road map 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.
Well the believed that the issues driving fees and penalties are now defined and we will aggressively address these three root cause identification.
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.
Well the complete continuous improvement Ptv road map 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.
Reynosa operational performance improvements and revise demand in inventory planning processes are taking shape and will result in improved performance.
Favorable responses from those customers I met last week Sema show reinforced to us that our initial actions are being recognized and appreciate it.
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 deployed 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, a favorable contract negotiations and operational improvement actions.
Relative to our business practices and procedures, we have identified that in some cases, what we haven't places inefficient ineffective or both.
Standardization and improvement initiatives have begun in this area, which will lead to a leaner yet significantly more effective organization and cost structure.
We're examining our S DNA costs 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 we'll continue to do so as we move forward.
We view our products than the one stop shop capability that we provide to our customers that's presenting considerable value.
Many of our customer share this view with us.
Our relationships with customers needs to be mutually beneficial and in some cases, we believed that our value proposition is not properly valued are recognized.
We did not say this slightly as we are focused on growing our topline and expanding our market share, but absent 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 objectives of improving our topline.
But not at the expense of our bottom line performance.
With that I'll turn it or turned it over to Jamie for his comments and come back around at the end for some parting comments.
Thanks, Terry and good morning, everyone and thank you for joining us that's when it goes without saying, but everyone. Appreciate the fact that that third quarter 2019th of several transformational events.
From selling Asia Pac for over $200 million to pay down over $180 million in debt to hiring a new CEO to lead the company into next phase of its journey.
These transformational events decide I do not want to lose sight or trivialize. The fact that we are forecasting to save over $25 million, an annual debt service and ended the quarter with over $60 million liquidity, which is the highest level since early 2018.
And before jumping back at the results like that when you usually do I wanted to remind everyone that what we're about to review will be our pro forma I'd. Excluding eight pack basis said directly ATAC is treated as discontinued ops for all periods reported and we will only focus on Americas and Europe Africa results.
Today and going forward.
With that I tried out of the way, let's get to it.
Third quarter of 2019 reported consolidated net sales of 177.9 million down 16.2 million and 194 million reported in three to 18.
On a constant currency basis, the moving 3.9 million an unfavorable currency translation impacts net sales decreased 12.3 million or 6.3%.
After adjusting for these currency translation impact and removing the 3.1 million from Threeq to 18 related to the company's one key 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 oh evolving in Threeq, you 19 compared to Threeq you 18.
In terms of operating income or loss, we reported an operating loss of 12.8 million compared to an operating loss of 29.9 million in Threeq, you 18, which included a $26.6 million goodwill impairment charge.
On an adjusted EBITDA basis, we reported at 3.1 million dollar loss, which is 12.9 million are slower than Threeq you 18.
The decline was primarily driven by lower sales volumes as previously mentioned.
The impact of sales mix sudden margins in other words lower sales in higher margin products versus the comparable period in 2018 and continued cost pressure from terrace, and other operational costs on a year over year basis.
Made them from the consolidated results to the individual segments net sales in the Americas, or 96.2 million, which is $19.3 million lower than Threeq, you 18, primarily due to lower shipping volumes your non OE channels.
Oh in volumes were slightly as compared to Threeq you to 18 inversely volumes were lower in the aftermarket industrial and retail channels, which drove a decline of 11.6 million 3.5 million and $3 million, respectively, or 18.1 to the 19 point.
2 million dollar decrease.
The Americas segment reported adjusted EBITDA of 550000, which is $13.7 million lower end up 14.2 million reported in Threeq you 18.
This decline was mainly driven by decreasing sales.
The revenue mix and 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 S. DNA savings related to prior years restructuring efforts that began to take hold late last year.
Moving onto your net sales in Europe Africa segment increased by 3.1 million JD 1.6 million compared to three Q1 8, but continued to be hampered by unfavorable currency translation on a constant currency basis net sales increased by 7 million for 8.9 for.
At.
This increase is primarily related to a 6.5 million dollar increase to know easily detailed based on higher year over year volumes, partially offset by $3.1 million decrease related to the impacts of the company's divestiture of a non automotive business and one Q Nike.
Like the Americas segment channel mix shift unfavorably impacted gross margin, but the reported results were favorably impacted by $4.3 million benefit from a commercial settlement related to potential products liability claim made by one of the OEM customers. However, it's important to note that there is no.
No impact on adjusted EBITDA as defined as we excluded the expense when originally incurred and we're excluding that benefit under the same premise.
Lower selling general and administrative expense, resulting from restructuring activities initiated during 2018 offset some of the headwinds are experiencing a quarter relative to the same quarter last year.
Europe Africa reported adjusted EBITDA, a 740000, an increase of 810000 compared to 70000 dollar loss in Threeq you 18.
Is it driven older higher sales volumes and decrease as gene a bit I previously mentioned.
Now moving on from the second results to the balance sheet working capital totaled 111.7 million at the into Three Q1 9, which represented an increase of 8.9 million as compared to Fourq, you 18, and increasing 2.9 million compared to three to 18.
Since our July 2018, refinancing, which we try to unpack. Your payables are working capital has remained relatively flat versus comparable periods, specifically accounts receivable decreased 13.1 million to 93.5 million from a prior year comparable period day sales outstanding was four.
He seven days a decrease of one day from the prior period.
Inventory increased by 2.4 million 241.2 from their prior comparable period and days inventory outstanding was a high didn't three days an increase of eight days from their prior year comparable period.
In England accounts payable it decreased by 14.1 million 79.4 million in days payable outstanding decreased five days to 46 days when compared to prior comparable period.
Turning to capitalization leverage and liquidity as a result of the APEC transaction and our recent liquidity management efforts gross debt decreased by 873.6 million from 388.5 million at the end of Threeq you 18 214.9.
9 million at the industry to 19, which included a massive pay down on the first lien term loan as in 162 million out at 187 million outstanding also included a sizable reduction in ABL balance offset by the addition of our second lien term loan placed in the first quarter of this year.
All told again, we decreased leveraged by over $170 million on a year over year basis.
As for liquidity at the industry to 19, it totaled 60.9 million, which was comprised of 44.5 million of availability under our ABL facility in cash on hand at 16.4 million. This is our highest liquidity level since early 2018.
No.
I'll take a breath that you guys tune backend and talking about a few items that I think a meaningful on a go forward basis.
Since this is only my second earnings call with you and horizon, and we're still finding or cadence I generally like to share a few points of like every quarter to make certain we hit the high and sometimes even the low point. So they were all grounded in the here now so without further Ado 0.1.
The apex deal with a standard triple for us the ability to do you ever by over 180 million and park. Another 35 million in additional liquidity on their balance sheet, even exceeded my expectations.
You know one and I mean, no. One is pleased with that results. That's Terry's recent appointment in areas of focus.
Third well that renewed commitment to our customers and associated servicing fill rate, we're looking forward to be coming on to in quarters as we win back their trust and their business.
And finally 2020, no doubt will be a busy one for us, but from my perspective and exciting one as we actually are in a new era of process.
Efficiency accountability and focused on customer service and ultimately getting this slacker backing out of stat getting off the roads and delivering a couple of body blows up around.
In closing if this is our first earnings call together I would also like to welcome traded at home and look forward to work with him shoulder to shoulder as we returned as once proud and profitable business back to the market leader that it once was.
Having personally been involved in turning around and 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 the linear fashion, sometimes it's three yards in the cloud of dust.
The other times, it's an upward at a 90 degree angle and then to me even other times. It is one or two steps backwards before progressing again.
Regardless the team is committed there's new blood the organization that Jackie the little time to make the changes necessarily to write the battleship that good horizon global.
With that I'll turn it back Rytary for his closing comments.
Thank you Jamie and closing at the company has been through a lot in recent past acquisitions.
What did he crises leadership changes in 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.
Well that's behind US. It has now time for us to complete focus our efforts on 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 our 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 is 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.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before price and the keys to withdraw. Your question. Please press Star then to at this time, a pause momentarily to assemble a roster.
Our first question comes from Josh Nichols with B. Riley FBR. Please go ahead.
Yeah, Hi, Terry and first of all in a welcome to the horizon pain. Good good to have you.
Oh, thanks, guys.
<unk> one is a little bit if you could provide a little bit more information.
On a that the softness in the quarter regarding the Americas, giving it the that segment has historically been like improving over the last several quarters. After some rightsizing of operations I like the KC distribution facility, what what are some of the actual items that really caused the shortfall regarding inventory and how long is that going to take to correct.
Josh <unk> again, when we did look at what you you termed a softness that some of this was self inflicted wounds as I mentioned in my opening statement, Yeah, We didnt have the right inventory at the right location. So we.
We have gone to work pretty aggressively in our Mexico operations, we've improved our so far we've improved our hedge production capacity by 60% in the last seven weeks. So our throughput is up a that means we can feed more effectively going forward.
We will not continue those efforts I got another 30% to add on top of that as we look going into <unk> first quarter of next year. So sizable increase in our throughput there as well as are our heavy duty products. Its fifth wheels in particular, we're going to be doing the same thing there in Mexico.
<unk> as well so yeah. Our message is we're going to we're going to provide the products to the field, we've gotten very favorable responses from.
The independents that we met with that at the Sema show, saying, let's give me the products, where we're searching for your products. If it's not available yeah. We're forced to go other other locations or other directions, we don't want to do that Ah. So we'd like to stick with you. So our effort is to fix their operations to make sure that were clean and and.
And have inventory available for solicitations better customers.
But big Big moves that we're making.
Thanks, Terry and then could you talk a little bit more about what you're seeing one a in the macro environment in Europe Africa, and also as far as the companies operating performance and expectations for how that could improve in the coming quarters.
Yeah, and as far as Europe , I mentioned that we've been to some not all I haven't been to the that France location. If there's people in that on the phone from our France location I apologize for that we're going to write that before the end of the year, but what we have seen as 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, we have opportunities to grow that business.
To do so effectively and and from a profitable position we need to contain that within the operations that we currently have by driving more manufacturing efficiency into that.
Into the current a four walls of the operations that we have selective investment, but mostly just leveraging that we currently have.
And could you also talk a little bit about some of the trend that you've been seen across the companies like Oh easy aftermarket and like retail vertical broadly speaking.
Yeah right between that if we didnt get to look at them differently in different regions right. So you know we're we're about 70 30 say aftermarket to Oh, we in North America, and it's just reversed of that in Europe .
By buying practices and OE practices associate with products that we produce have we capitalized on expanding our OE business in North America, No Oh, we really haven't I mean, we're selective with David there's been selective success.
Here in North America that we would like to expand the pounds. So there's there's opportunities for us we believe to address that market to grow that market in North America.
The European business.
Primarily consists of Oh, we based products.
And in the volumes associated with what we're talking about there as an capacities has been taken up by by the OE business. So we really haven't we haven't really haven't pushed and we haven't been [noise].
In a significant growth mode up to this point on the aftermarket segment in Europe that provides us opportunity that provides is pretty significant opportunity in Europe .
<unk>.
Thanks, and then last question for me you know given the ships that are 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 for Q1 Q as you kind of inter or what is typically a seasonally slower period relative to like Threeq, you or on a year over year basis.
So you're working to implement all these changes.
Jamie let me jump in there.
Obviously, we don't give guidance, especially during times like out we're going through right now in terms of the restructuring that we've got going on but what I wouldn't say is that from a macro environment. You know you six or unemployment remains at about 50 year low maybe 49 year low.
The consumer sentiment index remains an incredibly high number.
But you compare and contrast that with the RV sales that are down about 17% for men 18 level, which I wouldn't say is probably a good a portfolio of products that we have with you know kabi aftermarket ended retail sales, maybe even decile being down and you've got answered part of that question, but we supplement.
That or kind of buttress the floor with a good offering of Oh E M and Oh, yes products. So in terms of for Q1, Q any future I'm less concerned about the exact isn't event that we cannot control, but really focused on the events that we can control.
Which is focusing on the customer that fill rates there rather than in the operational excellence that Terry is driving.
I guess, just I know 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 this restructuring here.
Well I'd say from my perspective, having done this for a couple of years is we have a renewed focus on free cash flow. So it's not just a you know EBITDA. Adjusted EBITDA. There is we are focusing hard we had a team is 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 a in the coming month, if not the most I guess near term.
Inventories can take a little bit longer with 11000, skews and arguably a $140 million plus or minus and inventory around the globe. That's can take a little bit longer to get inline with what we want to not only from a bill rate basis, just because we don't want to stocked out of our aim the items, but that very high velocity, but.
We need to make certain that we rationalize those C and D items that we don't move that often and use that inventory and use that cash to actually supply a this customers up at the I guess, the north into that range. So what I would say is continuing to aggressively manage primary working capital with a a myopic focus.
Free cash flow even over adjusted EBITDA.
And then and Josh I mean, you have you use you have in that the statements are our Dsos depot and deal.
Metrics and you can pretty much ascertain where we're going to focus our.
Our attention on with that Jamie mentioned, the 11000 skews and we we have initiated just a seven weeks ago the analysis of.
Of our skew performance a there was 11000 will be the ended the year will be about nine and we will further rationalize that as we go through 2022 forecast of 7000, so we're addressing that complexity issue as well as we move forward.
Great. Thanks, guys.
I'd now like turn the call back over to management for closing remarks.
Prior to prior to closing Jamie Jamie has got a clarification, we'd like to put out there yeah things that I have real quick on R&D a gross debt piece you actually include the current portion.
So that you compare apples to apples in Threeq was 18 to Threeq you 19 due to 18 gross debt a was 388.53 to 19 was closer to $240 million. So the reduction in gross debt on a year over year basis, it's closer to $150 million. When you include the Kwan Kim portion.
That you'll be able to see it a in the perpetual easily looks balance sheets, just want to make that everyone was level set on the exact reduction and get our year over year basis.
And then with that I'd like to say, thanks to everybody for joining today as it can tell we're very focused Oh, we are organizing very aggressively to.
To address the challenges that we have enough opportunities that we have we've.
Doug in pretty deep into the elements of deficiencies that we we have within the company and we'll continue to do so and we are acting at we're acting wisely, but very aggressively to address these are fill rates and margins. Our principal focus at the moment and I think the statements that we made real.
Enforced that the actions that we're taking and 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.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect [noise].
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