Q3 2021 Horizon Global Corp Earnings Call

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Good morning, everyone and welcome to Horizon Global Stared quarter 2021 Conference call. My name is Emily and I will be your operated for todays call all participants will be and listen only mode until we reached the question and answer session of the conference call. This calls.

Being recorded at the request of Horizon Global if anyone has any objections you may disconnected anytime I would now like to introduce Mister Jeff Treichel with Lambert I R Horizon Globals Investor Relations firm Mr. Strikeout. Please proceed.

Thank you operator, good morning, and welcome to Horizon Global third quarter, 20th 21 conference call and webcast on the call today are Terry goal, Verizon Globals, Chief Executive Officer, and Dennis Richard Bill, Verizon Globals, Chief Financial Officer.

Earlier this morning, we announced our third quarter, 20th 21 results the releases available on many new sites as well as the Investor Relations section of our website at Horizon Global Dot com.

But he just liked to today's presentation also includes non-GAAP disclosures disclosures are reconciled to gap in the appendices to our quarterly press release and presentation, both of which are available on the industrial relations section of our website, otherwise and global Dot com.

Learning to slide three I'd like to remind you that statements and today's presentation will include our views about horizon globals 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 are risk factors and other disclosures in the company's most recent annual report on Form 10-K quarterly reports on Form 10-Q, and other filings with the Securities and Exchange Commission.

With all that being said I'd like to turn the call over to Verizon Globals, Chief Executive Officer, Terry goal Terry.

Thank you, Jeff and welcome to all of you who are participating in our call today as we review our third quarter results for 2021.

As always we welcome to numerous horizon employees, who have joined the call today.

I usually say thank you. Thank you for your perseverance dedication and your flexibility as we continue to navigate through the challenges faced throughout the year.

Our performance is a direct reflection of you.

And you should be proud.

As noted throughout the industry. Many companies are reporting negative impacts tied to worker availability.

We are not experiencing this as our employees at all levels continue to step up and show up.

During our second quarter call, we highlighted the multitude of challenges impacting our industry and in particular Verizon global.

These challenges included.

Drastically increase in commodity pricing.

Restricted material availability as demand outpaced supply.

<unk> constraints due to congestion on the water in the ports and unreal.

And continued overarching risk of COVID-19, and it's new emerging variance.

So what has changed during the third quarter.

Simply put not much.

Marty prices continue to increase as an example steel prices escalated to over $2000 a ton of roughly four times 2020 levels.

The global semiconductor constraint continued to impact auto production driving year over year production levels down by 27% in the primary markets we supply.

Great constraints continued during the quarter and at times worse, and with peak Cosper 40 foot container raising by over five to six times over the 2020 levels in transit times increase from an average of roughly 30 days in 2022, a peek over 70 days during the third quarter.

And Covid continued president health and safety risks and impacted production from supply in certain areas around the globe.

Add to that new challenge is tied to energy constraints and costs and you see what the industry and our team continued to face.

No small task how.

How do we do and what were the underlying actions we took to address the situation.

Let's did get dig into these questions on page number fine.

An intro R Q3 results can best be summed up in the following high level points.

Material economics were largely offset by commercial pricing agreements.

<unk> efficiencies, partly offset by volume declines.

Leaving booked order deferrals tied to material availability on logistics constraints as the primary driver of our results.

R Q3, 2021 net sales of 196.5 million represented a decrease of $5 million from Q3 2020.

Putting some texture around the logistics constraints in semiconductors shortage impact on our net sales for the third quarter consider the following.

During the quarter, we had roughly $40 million a book orders that were deferred out of the quarter due to these two issues.

First we experienced the 30 million dollar impact that America's net sales tied to port congestion and the associated in transit delays.

The good news is that these orders remained intact and we expect to deliver against them during the fourth quarter and beyond the bad news is that they were available to us in the third quarter and this deferral resulted in substantial increase in inventory, which negatively impacted their working capital.

Relative to the semiconductor shortage and its impact on net sales during the quarter. We also experienced roughly 10 billion dollar sales impactite to late changes to production releases that Oems as they dealt with daily submit semiconductor supply constraints.

These orders were called off in many instances within 48 to 72 hours of scheduled delivery, which compounded the impact to us on the EBITA, an inventory sides by limiting our ability to flex operational costs and production planning in advance.

Next are 232021, adjusted EBITDA was 13 million and reflected a decrease of 3.1 million for Q3 2020.

Compared to 2020 unfavorable volume mix and increased input costs, including materials afraid negatively impacted the performance of the quarter by approximately $28 million.

This was predominantly offset with commercial pricing and operational improvements limiting the impact of 3.1 million.

As you recall during our previous earnings calls you have implemented several rounds of pricing adjustments throughout the past three quarters to address the commodity price escalations presented by the global market.

While we remain in discussions with a few customers at this time the team has done a very good job conducting transparent reviews with our customers, which has resulted in satisfactory commercial agreements to essentially offset the impact of material economics realize thus far.

We are working extremely hard to employ true partnership approach with our customers and dealing with a significant economic challenge.

A reminder, that the $10 billion in late OEM call off experienced during the quarter predominantly in Europe also impacted our performance negatively as late notice is limited our ability to collect their operations, we absorb those costs.

Looking at a performance from a year to date standpoint R. Q3, 2021 year to date net sales love 617.9 million.

Reflected an increase of 132.5 million over Q3 2020 lovelies.

Particular, no relish.

Relative to our sales performance is the growth that we are experiencing or aftermarket channels.

On a Q3 year to date basis or aftermarket sales have increased by 37.4 million or 26% from the 2020 comparable period and $42.5 million from a non COVID-19 impact in 2019 year to date measure.

We have upped our game relative to manufacturing capabilities, a new product launches specifically focused on growing our aftermarket business and we're seeing favorable response from our customers.

Recent capacity games, and our European aftermarket production of approximately 100 and 150 per cent at a units per day basis present similar rate of improvement to what we have seen in the early phases of our North American segment last year as a result of the deployment of lean operating methods.

Recall that we laid out our plan, where the Americans lean transformation was the focus of 2020 or you're one of our plan.

Followed by Europe, and Africa region being the focus of 2021.

Are operating team continues to do an outstanding job transforming our manufacturing sites and to truly leading facilities.

Significant book order supported by strong order intake volumes and conquest business continued to fuel this growth.

And the Americans alone we exited the Dakota was 64.1 million and booked orders with roughly 30 million of that which were deferred due to transportation constraints tied to port congestion and associated in transit delays.

The Americans aftermarket and relative position in this important channel remains strong and we will continue to work focused on for the growth into this channel as we move forward.

R Q3, 2021 year to date, adjusted EBITDA of 43.7 million or 7.1% of net sales reflected an increase of 24.6 million or 310 basis points over Q3, 2020 year to date numbers.

Both regions posted positive margin improvement bolstered by strong operational performance improvements S. T. A optimization efforts and favorite would likes tied to aftermarket growth.

Commercial price increases on a year to date basis, essentially offset material economics and increase freight costs again on a year to date basis.

Re received strong customer support for our Europe Africa manufacturing footprint rebalancing plans with successful new business wins of seven OEM awards secured thus far.

We continue to invest in leverage our manufacturing site, Romania to drive competitiveness uncertain OEM platforms, while increasing focus on our aftermarket business at R U K German and French locations.

Investments and facility improvements are already underway.

R Q3, 2021, trailing 12 month, adjusted EBITDA was $51 million or 6.4% adjusted EBITDA margin prior.

Prior year Q3, trailing 12 month adjusted EBITDA as a comparison was 2.6 million or essentially breakeven.

A major change driven by implementation of our 2020 and two <unk> 2021 roadmap in spite of macroeconomic and supply challenges.

As we look at the market demand for our product. We see continued positive demand on a go forward basis. This is supported by several factors.

Oh, we haven't finished goods is extremely low while demand remains high the key will be to the continued inventory management through the semiconductor shortages, which we see continuing throughout 2022.

Harvey and Marine are also reporting strong demand leading to significant backlog while inventories remain low.

Retail demand remains strong coupled with restocking requirements leads us to a positive outlook.

Campgrounds remain highly book throughout 2022, highlighting that the outdoor focus consumer lifestyle is sticking in.

And was not a one time COVID-19 reaction in 2020.

We are gaining new conquest customers every day and will continue to do so.

And we continue to advance our capacities and will flex appropriately as material channels open up in the future.

Turning to page six.

We ended the third quarter with trailing 12 months adjusted EBITDA 51 million.

As shown on this graph, we have improved the condition of the company by 600 basis points or $48.4 million from our trailing 12 month adjusted EBITDA at the end of Q3 2020.

Considering that material economics has in the most part then offset by commercial pricing. During this year. This improvement has been driven by fundamental improvements in operations product mix improvement and S. G and a conversion.

The foundation of our business continues to improve with results only tempered by sales deferrals, driven by global supply chain and logistics constraints.

Turning to page seven.

Add with each update we present the status of the actions that we have previously laid out in our plan.

Notable items tied to Q3 2021 word.

Deployment of our America's Multiport initiative, which I will do in a few few moments.

Marshall agreements tied to material economic recovery that will complete as in Europe and Africa.

Incremental vertical integration in sourcing in Europe, and Africa made possible deployment of Arlene methods.

An aftermarket capacity increases in Europe, and Africa tight again to lean implementation.

We also launched 53, new programs in the quarter increased low cost country back office in engineering capacity in India.

To advance our overhead and a fishy fish and see initiatives. We added 12, new American aftermarket customers during the third quarter <unk>.

He advanced at our performance in E. S. G sustainability metrics and we facilitated vaccination efforts to bring our employee vaccination rate in the Americas to over 90%. In addition to dancing those rates and all of our locations globally.

We remained on track with our plans regardless of the macro issues that we face during the quarter, we kept focus move.

Moving to page eight.

I work as far from being done here.

Here, we are highlighting some major initiatives, we have plans for the short term period, leading into and through 2022.

As mentioned earlier, where you are in the midst of transitioning Ah Romania facility to support OEM production.

The team has done an excellent job in business process in manufacturing capability readiness, resulting in successful I T F and customer audits.

Positive audit results in competitive price positioning resulted in seven new OEM program awards to be launched in Romania with more to come.

Investments to support these programs will advance through 2022.

There have been meaningful changes to every shop floor, we have as it pertains to Arlene vision with significant advancements across Europe Africa facility, so far in 2021.

We have significant more work to do through 2022. The further implementation of these lame methods, which resulted incremental efficiencies repeat ability and quality improvements.

We will last North America in select European E O P and warehouse management systems in the first half of 2022, and it and expect to launch a global E. Commerce platform later in 2022.

We have been operating with a milk with multiple unproductive systems, which has resulted in significant inefficiencies an additional overhead to run our business.

Our new ERP system, and it's integrated warehouse manager platform will be launched first in Q1 2002 in the Americas and followed by select European locations to support the business growth later in 2022.

We have taken an extremely thorough approached or E. R. P launch planning and advanced testing with roughly a year under our belt, including multiple short burst testing runs occurring prior to going live.

We are continuing to clean up art and consolidate our European legal entities for simplification efficiency and cost improvements are.

Our structure in Europe will be simplified throughout 2022 on top of what we've already achieved.

We have progressed with test marketing and field evaluations of our modified European bite care of your product light in North America.

And have garnered interest in our hidden hitch European products put in North American market.

This includes mechanical detachable and electromechanical options.

We are not standing still as we continue to match our advanced product development initiatives in support of the industry's transition to Emobility and eat trailing application.

We have some great products in development.

Moving to page nine.

On this slide represents for your comparisons for net sales and adjusted EBITDA for both third quarter in third quarter year to date.

While relevant there it was significant disruption in 2020 tied to Covid. So we wanted to ensure a longer historical view was presented to you. Therefore, we added and included 2019 results.

And the chart to the left you can see a Q3 2021 results compared to both 2020 and 2019.

Net sales increase Q3, 2019 by approximately 10.5%, even with roughly $40 million a book sales being deferred out of the quarter due to the aforementioned supply chain logistics and semiconductors semiconductor constraints.

On the chart to the right when reviewing I performance on a Q3 year to date basis, you can see the dramatic improvements in adjusted EBITDA performance of 128.7% 2021 versus 2020 and a 433%.

2021 versus 2019.

We continue to improve each year of our plan.

Turning to page 10.

The distribution of our 2021 sales to date can be seen in the Pie chart on this page.

Of note in these results aside from the overall growth from 2019 is approximately 12.5%.

Are the advancements of our aftermarket E Commerce, and Oh, yes channels.

These were the focus items for us and reflect sales mix increases of roughly 410 basis points 180 basis points and 190 basis points, respectively for the aftermarket Oh, yes, and e-commerce channels.

Please recall that we strategically exited non-performing product lines in the retail channel during 2020, which is reflected in the roughly 290 basis points decline in this channel.

As noted earlier, we continue to add a recapture customers in the aftermarket channel in North America.

With the 12 added in the quarter, we know total 78, new customers added in the space over the last four quarters.

These achievements have been supported by significant improvements in manufacturing distribution, along with a steady volume of new product launches each and every month.

Moving to page 11.

You have all had had a steady diet of information relative to port congestion and its impact on the economy and on the industry results Big.

Beginning in the fourth quarter of 2021, there were 46 ships or 50 per cent of the total volume anchored offshore awaiting Bert.

The number spike roughly 70 over the past weekend.

Actions have been put in place relative to extended chord shifts in an effort to alleviate this congestion.

Dennis will identify the impact of trapped inventories that are working capital, but as mentioned earlier the constraints in the port of long Beach resulted in deferred sales of roughly $30 million during the third quarter.

Moving to page 12.

Here, we are simply highlighting that we bring in roughly 2000 containers per year through this court. So the continued congestion remains a significant point of concern for us.

This is the definition of the problem. So what are we done about it.

Let's move to page 13.

Here, we illustrate our plan to diverse diversify away from a single port approach to a five port of entry strategy to provide optionality to secure inbound materials.

Note that we have implemented a reporting strategy for roughly 35% of their container volume to alternate ports, including Vancouver, Norfolk, Newark and man's meal.

We planned and initiated this action over the past several months with initial shipments arriving this month.

The team did a great job security needs alternatives, and we expect the increase of velocity of inbounds going forward.

Moving on to page 14.

We have noted that the order intake and retention of booked orders remain strong as we exited the third quarter.

The Americans ended Q3 2021 with open booked orders of 64.1 million, reflecting an increase of 70.2% compared to September 2020.

And 165.9% increase compared to September 2019.

As the industry emerged from the initial Covid shutdown period in Q3 2020, there was some concern that the surgeon orders and associated sales would be short lived and only represented a residuals demand build up from the preceding shutdown period.

With the results we are presenting along with the industry indicators be highlighted in our opening we continue to see heightened demand for our products a year later and believe the demand will remain strong going forward is consumer lifestyle and be pagers have changed.

I'll now turn it over to Dennis for the financial review and will return with some closing comments after he's finished Dennis.

Terry Good morning, everyone and thank you for joining us.

That's Terry mentioned, we are pleased with our third quarter results. Despite the continued macro economic headwinds relating to rise in commodity cost and supply chain constraints that have impacted the global economy, our industry and our business.

Please turn to slide 15 for review of the companies consolidated results.

For the third quarter of 2021.

Validate a net sales for the third quarter of 2021 for $196.5 million, a decrease of $5 million from the third quarter of 2020.

And that sales decrease was primarily attributable to lower sales volumes and both the Americas and Europe Africa operating segments.

The decrease was primarily offset by 2021 pricing initiatives implemented to recover the impacts of increased material economics from rising commodity cost such a steel as well as supply chain constraints and other increased input cost driven by macro economic factor.

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Gross profit margin decreased to 19.7% decline of 180 basis points from the third quarter of 2020, primarily driven by lower volumes in the Americas and Europe Africa.

Segments due to the macro economic headwinds Perry previously discussed.

Reported adjusted EBITDA of $13 million as compared to $16.1 million during the third quarter of 2020.

The decline and adjusted EBITDA was primarily due to lower gross margin performance as previously mentioned.

<unk> adjusted EBITDA margin decrease to 6.6% as compared to 8% for the third quarter of 2020.

Now, let's turn to slide 16 to review the segment performance for the quarter.

Net sales in the Americas were $115.9 million $3.2 million or 2.8% lower than the third quarter of 2020.

And that sales decrease is primarily driven by lower sales volumes and the aftermarket OEM and retail sales channels as well as a 1.3 million dollar sales impact attributable to the companies Divesture.

It's Brazil business in the second quarter of 2021.

The decrease was partially offset alright, the previously mentioned pricing recovery initiatives.

Just leave it today for the segment decreased to $14.5 million as compared to $15.5 million for the third quarter of 2020.

Decrease was driven by lower net sales volumes mix and lower gross profit.

Adjusted EBITDA margin was 12.5% as compared to 13% for the third quarter of 2020.

Transitioning to Ah Europe Africa operating segment.

Sales were $80.7 million a.

A decrease of $1.8 million from the third quarter of 2020.

And that sales decrease was primarily driven by lower sales volumes and the aftermarket and automotive OEM sales channels harsher.

Partially offset by higher sales volumes in the automotive Oh, yes sales channel.

The decrease was also partially offset probably the previously mentioned pricing initiatives as well as $1.1 million a favourable currency translation.

Jesse Your day for the segment decreased to $3.4 million as compared to $6.1 million for the third quarter of 2020.

The decrease is driven by lower net sales volumes mix and lower gross profit.

Jessie J margin was 4.2% as compared to 7.3% for the third quarter of 2020.

Now moving to or working capital free cashflow liquidity and that leverage ratio on 517.

Total trade working capital was $109.5 million in the third quarter of 2021, which represented an increase of $53.9 million over the fourth quarter of 2020, and an increase of $42.9 million over the third.

Order of 2020.

Specifically receivables increased $8.9 million to $96.3 million compared to the fourth quarter of 2020.

Days sales outstanding was 45, a decrease of one day from the fourth quarter of 2020.

Inventories increased $49 million to $164.3 million compared to the fourth quarter of 2020 driven.

Driven by the macroeconomic factors related to global supply chain constraints and rising commodity cost.

These aspects drove the higher days on hand inventory to 96 days, an increase of 22 days over the fourth quarter of 2020.

Accounts payable increased $11.8 million to $111.3 million compared to the fourth quarter of 2023.

Days payable on hand was 65 days, an increase of one day over the fourth quarter of 2020.

Free cash flow for the third quarter, what's the use of $7.8 million.

Which is a decline of $24.5 million compared to a source of $16.7 million during the third quarter of 2020.

The impact of the global supply chain and logistics constraints and rising commodity costs resulted in approximately $48 million additional inventory carried on our balance sheet at the end of the third quarter of 2021 as compared to the third quarter of 2020, which <unk>.

Actively impacted our free cash flow during the quarter.

Cashman availability or liquidity totalling $54.9 million for the third quarter of 2021, which was comprised of $37.5 million availability under our credit facilities and cash on hand of $17.4 million turning to slide 18 for.

A review of our current debt capital structure in debt maturities.

Total gross that increased by approximately $30 million to $296 million compared to $266 million at the end of the fourth quarter of 2020.

This is primarily attributable to additional a b L borrowings to support the previously mentioned working capital needs and business growth S.

As well as at higher term loan balance from the proceeds.

ER refinancing and pay off of.

A R. Prior term loan completed during the first quarter of 2021.

Cause we head into the fourth quarter, we are doing so with a focus on our working capital and utilizing our current inventory levels to deliver on open orders mitigating the impacts of the macroeconomic headwinds previously described.

We believe this focus will drive future earnings growth liquidity and effective working capital management.

Then I will turn it back over to Cherry first closing comments.

Thanks, Dennis some great job and closing, let's start with page 19.

We remain committed to the objectives laid out on this page we continue to improve operational performance through the deployment of lean methods and provide best in class service to our customers.

And we are leveraging the heightened demand levels for our products.

On page 20.

Here, we provide the performance status gauge is tied to a key initiatives supporting our improvement objectives.

As you can see an AD you as you have heard we continue to advance an improvement initiatives across the company.

Each cage tied to each initiatives contains a green arrow to picking progress towards the objected the cheap during the last period.

A few highlights relative to the actions of Q3.

Majority of <unk> material recovery negotiations were successfully completed as I mentioned 53, new programs were launched in the quarter.

We also lost our global costing process with standards <unk>.

<unk> transformation Saddam major plant improvements throughout Europe, and Africa, resulting inefficiency throughput in in sourcing.

Global sustainability metrics and ratings continue to improve relative to S. G.

We added capabilities for back office in engineering in India to advance or overhead equivalent of objectives. We.

We continue to work with our customers to optimize the siting of each one of <unk> S. K used to provide optimal delivery costs and times and we deployed are multi court initiatives.

As with all quarters. This has been a busy one but we continue to stay on track with our initiatives.

Finally on page 21 will leave you with the following.

The team continues to deliver solid performance despite significant macroeconomic headwinds we will not distracted.

We are achieving our portfolio growth objectives in the aftermarket space with big performance gains from 2020, and likewise from 2019.

With more to come.

While market conditions and demand tied to our products remain strong we expect to continue to experience the impact of the semiconductor shortage and logistics constraints as we move through the remainder of 2021 and into 2022.

We continue to take actions.

We are seeing great support for eastern European growth and OEM production to Romania with significant new program wins for that site.

We have a solid plan and it's being recognized by our customers and.

And lastly, I would like to acknowledge our team members again for the great work and dedication they bring the horizon each and every day.

Nice job everyone.

I'll now turn it back to the operator for questions.

We will now begin the question and answer session to ask a question you May press start then one on your Touchtone phone. If you are using a speaker phone. Please pick up your headset before pressing the keys. He said anytime. Your question has been addressed and you would like to withdrawal. Your question. Please press Star then too at this time, we will.

<unk> and I'm entirely to assemble our roster.

We don't seem to have <unk>.

Any other or any questions for today I would now like to turn it back over.

She Mr. Turrical Forest closing statements. Please go ahead.

Well I Wanna. Thank you all for joining the call today and for your continued interest in the company and we look forward to talking to you all in the future as we review our queue for in full year performance. The results and I just want to say thank you again for joining the call today. Thank you.

This conference has now concluded. Thank you for attending today's presentation, you mean down disconnect.

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