Q3 2022 Horizon Global Corp Earnings Call
Good morning, everyone and welcome to Horizon Global's third quarter 2022 Conference call. My name is Sarah and I will be your operator for today's call Greg.
All participants will be in a listen only mode.
After today's presentation there'll be an opportunity to ask questions.
This call is being recorded at the request of Horizon Global and if anyone has objections you may disconnect at this time.
This time I would like to know do you bought by Horizon, Global's, Chief Accounting Officer, and primary Investor Relations contact Mr. Meyer you May proceed.
Thank you operator, good morning, and welcome to Horizon Global's third quarter 2022 conference call and webcast on the call today are Terry Gohl Horizon, Global's, Chief Executive Officer, and James out Horizon, Global's, Chief Financial Officer.
Earlier this morning, we announced our third quarter 2022 results. The release is available on many news sites as well as in the Investor Relations section of our website at Horizon Global Dot Com.
Turning to slide two today.
Today's presentation will include non-GAAP disclosures.
Disclosures are reconciled to GAAP in the appendices to our quarterly press release and presentation, both of which are available on the Investor Relations section of our website at horizon Global Dot com.
Turning to slide three 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 risk.
And uncertainties that could cause our actual results could differ materially from the forward looking statements. We describe these risks and uncertainties in our risk factors and other disclosures in the company's most recently filed annual report on Form 10-K.
Orderly reports on Form 10-Q, and other filings with the Securities and Exchange Commission.
With that being said I'd like to turn the call over to Horizon, Global's, Chief Executive Officer, Terry Gohl Gary.
Thank you and welcome to all of you who are participating in our call today as we review our third quarter results for 2022.
As always we welcome the many horizon global employees, who have joined the call today.
Thank you for all your efforts and dedication in providing support.
As we continue to address our company initiatives in the face of an extremely challenging business environment.
We'd also like to extend our thanks to our stockholders lenders and other key stakeholders.
We have faced a lot of adversity throughout 2022.
Your continued support is meaningful and greatly appreciate it.
Turning to slide five for an overview of today's presentation.
In August we announced that we would be undertaking a broad review of strategic alternatives.
With the ultimate objective being to maximize shareholder value.
This could result in the sale of some or all of the company.
This process is ongoing and we will provide an update when appropriate.
They however, the focus will be on our Q3 2022 results and the aggressive actions, we are taking to improve margin performance overall cost structure and to position the underlying business for profitable growth.
We will address these items in detail in the coming slides.
Turning to slide six.
Simply put our Q Q3, 2022 performance was disappointing.
On the right side of the page you can see the company's net sales and adjusted EBITDA progression from Q3 2019 through Q3 2022.
Our net sales and adjusted EBITDA are down $47 5 million.
$18 9 million respectively.
From Q3 2021.
The major takeaway here is volume softness during the quarter.
Primarily in our higher margin non OE sales channels.
The historical selling season in Americas that we've discussed throughout the year never came to fruition.
As mentioned last quarter, our customers were holding heightened levels of inventory going into the historical season, and with lower than expected market demand customers continued to destock during Q3 2022.
As a result order intake was lower from certain of our large non OE customers.
This significantly impacted sales volumes in our high margin non OE channels.
This negative mix, along with operational inefficiencies driven by reduced volumes.
Resulted in gross profit and adjusted EBITDA underperformance in this segment.
As we will discuss later in this presentation and the primary focus is shifting our sales mix to the more profitable not always sales channels.
As inflationary measures ease in.
And large customer restocking ramps up.
We expect this mix to shift and to enhance our margin profile.
While we are currently in the off season, we expect to reap significant benefits as the market demand returns.
In our Europe Africa segment market conditions also drove lower than expected sales volumes and an unfavorable sales mix.
Majority of the volume of underperformance in the independent aftermarket sales channel again are higher margin sales channel.
We are also focused on sales mix in this segment and as described later optimizing our geographic footprint.
Turning to page seven.
As our Q3 2022 results suggests we are still facing significant market headwinds as well as other challenges throughout our business.
We are addressing these challenges head on and making every effort to improve our commercial position and enhance our cost structure of the business.
Our commercial position generally remained strong.
We believe that our entire industry has been significantly impacted by market pressures.
Within that we have not lost any meaningful market share in any of our sales channels.
As noted prior quarters, we built significant inventory in anticipation of 2022 selling season.
As previously mentioned Didnt materialize.
Our heightened inventory levels should serve as a competitive advantage and allow us to provide best in class fulfillment.
As our large non OE customer demand patterns return.
Customers continue to attribute value to our brands innovation and quality.
Customer acceptance of our pricing initiatives and reflects the strength of our brands and products.
This is critical to the viability of our business during times like these.
While we continuously evaluate pricing versus market dynamics for the time being we are fully implemented pricing recovery actions with there not a way customers.
Further we have either implemented pricing or remain in active discussions with our OE customers.
While pricing generally comes with a lag time, we expect the benefit of our implemented pricing actions to be fully recognized in Q1 2023 with the exception being certain specific economic price recoveries in Europe expected to be secured in Q4.
Further we continue to launch new and exciting products and secure new businesses.
We mentioned in our last quarterly call that we launched a record number of products during the first half of 2022.
This activity continued in the third quarter with an additional 57 product launches.
These launches are aligned with their profitable growth expectations.
We continue to receive new OEM awards in connection with the ramp up of our Brasov, Romania facility.
Our capital investment plan is well underway, including successful implementation and certification of our state of the art paint line.
This is an example of investments made in support of significant awards secured for future platforms.
All this being said our OEM customers have been quick to recognize <unk> ability to function as a world class tier one facility.
And our ability to deliver best in class products.
Under a competitive cost structure.
Brush off transformation and so it's that story for us and will take lessons learned from this action and apply them as we continue to assess our global footprint.
In the Americas segment, we have also been rewarded.
Additional OE program Awards.
Most notably a significant expansion of an existing program in our higher margin the electrical business.
At the same time certain legacy low margin programs will run off in late Q4 2022.
Key business initiatives continued across the organization in Q3 2022, including.
The refinement of our supply base and identification of opportunities with third parties to new geographies and where possible vertical integration.
L C C locations.
We expect these actions to largely mitigate material availability issues.
With the exception of semiconductors, and then importantly result in cost savings.
Our port rebalancing initiatives, including ceilings directly into men's new Mexico is complete and resulting in lower freight costs and reduce transit times.
The reduction of an additional 1700 skus targeted for 2022 is virtually complete and on track for the remainder of the year.
Our SKU rationalization initiative, which has resulted in a reduction of 5900, skus or 53% of our product portfolio since 2018.
Continues to reduce complexity throughout our organization.
This initiative was focused on low margin slow moving products.
We are executing on our strategic initiatives to profitably increase direct import business.
For the Americas.
Primarily for the retail sales channel.
This is proving mutually beneficial for both horizon and its customers and has resulted in margin improvement due to lower handling expense and reduced working capital based on titled transferring upon departure from port of origin.
We continue to flex our workforce discretionary spend and global purchases to reflect the significant reduction in sales volumes.
These actions include.
20% reduction to our workforce in North America from Q3, 2021 to Q3 2022.
Year to date, SG&A reduction of $12 1 million or 13% from the same period in 2021.
Continued optimization of cost efficiencies through shift patterns and operational work days in our North American manufacturing facilities.
Total costs had been flex down 14% from manufacturing overhead perspective.
A $31 million reduction in North America purchases in Q3, 2022 versus Q3 2021.
Furlough actions in various geographies to align our workforce with market demand.
All workforce related decisions are extremely challenging and there be taken lightly. However, we are focused on positioning this business to serve the market when sales demand returns to historical levels.
Turning to page eight.
On this slide and the next we will look at to macroeconomic tailwind that will positively impact performance going forward.
Feel free.
It's been a while since we've seen tailwind in these areas and we believe they will positively impact our performance going forward.
Specifically in relation to steel.
Deal costs significantly softened in Q3 2022 from peak levels.
Based on industry projections, we expect this trend to continue.
The impact on our operational performance relative to steel cost is generally recognized on a one to two quarter lag and we will experience the benefits of these cost reductions going forward.
We continue to monitor the steel market in light of the global economic and geopolitical issues.
Steel costs, you present, a tailwind going forward and together with our sourcing initiatives should be viewed as another opportunity to improve our margin performance.
Moving to slide nine.
Decreasing freight cost presented another tailwind.
Similar to trends in the steel market, we saw softening in freight rates throughout North America.
Our average container cost in Q3, 2022 is down well below second half 2021 peak rates.
We expect recognition of this positive performance in Q4 2023.
Generally, reflecting the one quarter lag we discussed in the past.
As previously mentioned, we have implemented airport rebalancing strategy to improve freight costs transit times and customer fulfillment.
This strategy should supplement any market freight tailwind and positively impact margins going forward.
Now I'll turn it over to James for the financial review I will return in a few minutes to provide some closing comments James.
You Terry and good morning, everyone.
Please turn to slide 10 for a review of the company's consolidated results for the third quarter of 'twenty to 'twenty two.
Consolidated net sales for the third quarter of 'twenty, 'twenty, two well $149 million a decrease of $47 5 million.
Or 24, 2% compared to the third quarter of 2020 one.
The net sales decrease was attributable to lower sales volumes.
In both the Americas, and Europe Africa operating segments.
Primarily due to lower sales volumes in our non OEM business.
And that self decrease also included $11 5 million of unfavorable currency translation in Europe Africa.
The decrease was partially upset by customer pricing initiatives.
Implemented to recover increased input costs.
Clothing material and other inflationary costs, we have experienced.
Gross profit margin decreased to 11, 2% down.
From a gross profit margin of 19.7% in the third quarter up 2021.
The decrease in gross margin was primarily driven by the lower itself volume.
Coupled with our significant mixed shift from higher margin sales channels to lower margin sales channels.
We reported an adjusted EBITDA loss of $5 $9 million.
Comparing to adjusted EBITDA of $13 million during the third quarter of 2020 one.
This was primarily due to the lower gross profit and performance P. M yesterday mentioned.
Now, let's turn to slide 11 to review the segment performance for the quarter.
Net sales in the Americas were $79 $2 million.
$36.6 million or 31, 6% lower than the third quarter of 'twenty or 'twenty one.
The decrease in net sales was driven by lower sales volumes in the aftermarket e-commerce and retail self channels with certain customers using their existing inventory to satisfy.
Consumer demand coupled with material availability constraints.
However, this was partially upset by consumer price recoveries.
Adjusted EBITDA for the segment decreased to an adjusted EBITDA loss of one point for.
Million dollars comparing to adjusted EBITDA of $14.5 million during the third quarter of 2021.
The decrease was driven by lower south volumes as well as a significant mix shift from higher itself margin channels for more margin self channels, coupled with the continuation of elevated material supply chain and other manufacturing input costs.
Transitioning to our Europe Africa operating segment net sales were $69 $8 million, a decrease of $10.9 million or 13, 6% from the third quarter up 2021.
This decrease was primarily due to Lord soft volume in the aftermarket and automotive oes sell channels as well as unfavorable currency translation.
$11.5 million.
The decrease.
Was partially upset by customer pricing recovery initiatives.
Adjusted EBITDA loss for the segment was $22 million comparing to adjusted EBITDA of $3.4 million for the third quarter of 2021.
This decrease was driven by lower sales volumes as well as a mix shift from higher margin sales channels to lower margin sales channels and unfavorable manufacturer.
Input costs and operating inefficiencies.
Now I'll move onto our working capital liquidity and free cash flow on slide 12.
Total trade working capital was $99 $9 million in the third quarter of 2022.
Which represented a decrease of $8 $9 million comparing to the fourth quarter of 2021 and a decrease of $9 $6 million comparing to the third quarter of 2020 one.
Specifically receivables decreased $5 1 million.
275.6 million comparing to the fourth quarter of 2021 day.
Days sales outstanding or DSO was 47.
An increase of two days over the fourth quarter of 2020 one.
Inventories decreased $7.2 million to $155.6 million comparing to the fourth quarter of 2020 one.
Ace of inventory on hand was 108 days, an increase of seven days over the fourth quarter of 'twenty or 'twenty one.
Payable.
Increased $4.5 million to $106 $7 million comparing to the fourth quarter of 2021.
This payable outstanding O D. Peel was 74 days, an increase of 11 days from the fourth quarter of 2020 one.
Cash and availability or liquidity totaled $17.5 million for the third quarter of 2022.
Which was compressed of $9 $7 million of availability under our under our credit facility and cash on hand of $7 $8 million.
This reflects a $21.7 million decrease comparing to the fourth quarter of 2020, one and a decrease of <unk>.
$37.4 million comparing to the third quarter up 2020 watt per.
Primarily attributable to the use of cash flow from operations doing 2022.
Free cash flow year to date 2022 was a use of $49 million comparing to.
Use of $45.4 million during the same period in 2021.
They use was primarily related to the company's financial performance doing 2022 but generally in line with the use of free cash flow during the same period in 2021.
Turning to slide 13 for a view of our current capital structure.
Total gross debt plus redeemable preferred stock increased in aggregate by approximately $51 million from $300.9 million at end of the fourth quarter of 2021 to $351 $9 million at the end of the third quarter of 2022.
This is primarily attributable to the redeemed preferred stock that was issued during the second quarter of 2022 coupled.
Coupled with increased ABL borrowings.
With that I'll turn it back over to Terry for his closing remarks.
Thank you James moving to slide 14 and clothing.
Our review of strategic alternatives is in process.
The objective here is clear to maximize shareholder value.
We look forward to providing an update when appropriate.
Our financial performance in Q3, 2022 was driven by a significant volume shortfall.
We anticipated a strong 2022 summer selling season consistent.
Consistent with historical patterns.
But the season never came.
We're disappointed in our results.
While we feel secure in our commercial position, we're looking inward and taking aggressive action to optimize our operations.
And cost structure to position the company for success.
We are focused on margin improvement and this is driving the actions we're taking.
In addition to key business initiatives and cost optimization measures.
All of which we've addressed at Lake we.
We'd like to further stress our belief that we are well positioned to service the non OE sales channels as our large customers begin to restock.
And progressed efforts to favorably shift our sales mix to these higher margin channels.
Taken together, we expect these actions to position the company for long term.
Payable growth and ultimately meet our double digit margin target.
Thank you for your attention and I'll now turn it back to the operator for questions.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone.
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Withdraw your question. Please press Star then to you at this time, we will pause momentarily to assemble a roster.
Having no questions. This concludes our question and answer session I would like to turn the conference back over to Terry Gohl any.
Any closing remarks.
Thank you and thank you all for joining US today are we sincerely appreciate your continued support and for those joining me here at the company today. Thank you for your continued efforts to improve the company. We look forward to our next call, where we'll do present their Q4 results as well.
Full year results and we will see you then thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.