Q2 2019 Earnings Call
Good morning, everyone and welcome to Horizon Global's second quarter 2019 conference call.
My name is Jamie and I will be your operator for today's conference.
Oh participants will be in a listen only mode until we reach the question and answer session of the conference call.
This call is being recorded at the request of Horizon Global.
If anyone has objections you may disconnect at anytime.
I would now like to introduce Mr., Jeff Treichel with labor I, our horizon Global's Investor Relations for Mr. Troy You May proceed.
Thank you Jamie good morning, and welcome to Horizon Global's second quarter 2019 conference call and webcast on the call today are Carl <unk>, President and CEO of Horizon, Global and Jamie Pierson Chief Financial Officer.
Earlier this morning, we announced our second quarter 2019 results. This release is available on many news sites as well as the Investor Relations section of our website at Horizon Global Dot Com.
Turning to slide two I'd like to remind you that statements in today's presentation will include our views about horizon Global's future performance, which include four which constitute forward looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements. We've described these risks and uncertainties in our risk factors and other disclosures in the company's most recent annual report on Form 10-K quarterly reports on Form 10-Q , and other filings with the Securities and Exchange Commission.
Today's presentation also includes non-GAAP disclosures. These disclosures are reconciled to GAAP in the appendices of our quarterly press release and presentation, both of which are available in the Investor Relations section of our website at horizon Global Dot com with all that being said I would like to turn the call over to our President and Chief Executive Officer, Carl Besides Carl.
Thank you, Jeff and good morning to all of you on the call today.
This morning, we will review our results for the second quarter 2019.
I will provide an update on our operations, including our ongoing efforts to refine our global operations I'm return our company to the historical levels of performance.
Following my comments, Jamie Pierson I recently appointed CFO will take us through the operational performance of the business and our current financial position.
After that we will open the call to questions from our covering analysts.
Allow me to formally to allow me to take a moment to formally welcome Jamie to the team.
We are fortunate to have him join horizon Global and then and the transition has been quick and smooth.
We expect to leverage his talent and experience in operational improvement as we continue our turnaround efforts.
Our team is intently focused on providing industry, leading towing and trialing products, achieving the quality and service levels demanded by our customers and improving financial results that will drive shareholder value.
[noise] the multi you turn around we began just over 12 months ago was designed to be flexible and responsive to changing events and market conditions.
This flexibility allows us to refine our actions and develop additional business improvement initiatives as conditions warrant.
Our leadership team and business unit heads continually evaluate every aspect of our business to identify incremental actions, we can take to further our turnaround efforts.
Slide four should be familiar as it outlines our strategic vision.
Throughout our efforts to transform our business and improve our operations.
We have remained one team focused on delivering best in class products to our customers and end users across all distribution channels.
This driving strategic vision forms the basis for everything we do.
And we will continue to shape, our actions to drive future performance.
We have strong and well established brands and favorable end markets as trades people and contractors utilize that products as they work and consumers continue to utilize that products as they play.
Turning to slide five.
During second quarter, we made progress in a number of key areas. As we have previously discussed we are committed to reducing our first lien term loan by $100 million.
To address this commitment we retained an investment bank to review various financial alternatives and decided to explore the potential sale of very specific business unit.
We are engaged in this process and have attracted a number of interested parties.
We will provide an update when appropriate.
To further our business objectives, we have hired a COO for the Americas business and a new president for our Europe Africa business, both of whom bring deep operational and automotive experience.
With Jamie onboard as our new CFO . We believe we now have the right team in place to lead her rods and global.
In the Americas sales were effectively flat despite a soft start to the prime selling season.
Europe showed consistent operational progress in the quarter as aftermarket stock availability improved from the prior year and was a customer volumes do not yet reflect that improvement.
The Asia Pacific business continued to post strong margins in the quarter driven by operational efficiencies.
We continue to control its DNA costs at the business units and corporate but we recognize that in a more meaningful opportunity lies in growing sales and gross margins over the long term.
In the Americas, our Kansas City aftermarket distribution center performed well and the new automated stock retrieval system is now fully operational.
We expect this new system when fully utilized will provide enhanced efficiency and labor productivity.
Enabling the team to build on their racing games in delivering custom orders on time and on budget.
You are confident in our teams ability to make the peak seasonal demand in the Americas and position us well for future growth.
[noise], the Americas posted slightly lower gross margins in the second quarter compared to a year ago.
As that price increases were offset by higher input costs, resulting primarily from tariffs.
The Americas team continues to balance pricing initiatives with input costs and the ever evolving competitive environment.
Please also keep in mind that while we remain consistent in passing on the impact of tariff related costs to end customers. The process is not easy and the timing is often not aligned.
Despite the Kansas City distribution center cost more to operate than its predecessor footprint.
The Americas team was still able to decrease its gene I expenses.
This improvement was primarily the result of cost savings and synergies, resulting from a previous efforts surrounding the restructuring action plan that were completed over the past year.
Given the foundation that is now in place.
Any incremental volume through this facility should result in improved operating leverage.
In Europe Africa, South were adversely impacted by the weaker euro and improvements in OE sales, partially offset decreases in aftermarket volumes.
Gross margins were lower during the quarter due to higher input costs and the mix shift in the business.
On a positive note we saw improvements in its DNA costs as the impact of that previous restructuring efforts begin to show results.
[noise] Asia Pacific remained a solid contributor to our overall results for the quarter.
The spot slightly softer sales for the quarter compared to the prior year. The team was able to generate improvements in gross margins through operating efficiencies.
Let me now turn into a business improvement initiatives and the next steps we are taking.
When we started that turnaround efforts just over a year ago, we recognize that the path to improved performance might not be direct.
And if we could expect challenges that might alter that Pos.
Throughout the process, we remain flexible and responsive to changing conditions, leading us to where we stand today.
We have made progress on our business improvement initiatives in Europe Africa, as well as the action plan, we completed in the Americas.
But we realize that more needs to be done to return our business to historical levels of profitability.
These initiatives will focus initially on optimizing our cost structure, which was an essential priority at the start of this process.
As that turnaround evolves and the journey continues we are moving beyond the cost cutting and indirect cost productivity enhancements to customer service and sales enhancement.
We are taking a hard look at our customer relationships and what actions we can take to strengthen these relationships.
Now that we have stabilized our operations, we are working diligently to reassure our customers that we still have the best product in the market and I still the best partner to supply the towing and try to bring needs.
We continue to invest in new products technologies and innovations that address the emerging demands of our customers and end users.
I want to emphasize that as we move into the next phase of our business improvement initiatives.
Our business unit leaders and their respective teams will continue to develop and implement specific and measurable goals for improving their financial results.
As we refine these planes the singular focus of our team is the effective efficient and profitable operation of our business.
[noise] [noise].
Similar to our efforts to improve the European business, our overarching theme for all of our efforts is a core focus to simplify the operations and unwind unnecessary and unprofitable complexity across all of our business.
As we have said consistently.
We remain convinced that the operating challenges in our business ultimately fixable.
And we continue to review and refine our focus on these turnaround efforts.
As we embark on the next phase of our business improvement initiatives. We are confident that we will establish a global business that is fundamentally stronger.
With the potential for higher and more profitable growth in the longer term.
If we turn now to slide six Jamie will take us through the financials and segment results.
Thanks, Carl and good morning, everyone.
Before I get started having been here for all his seven with you at this point I simply wanted to share with everyone of what an honor to be part of Tetra proud organization.
I had been blown away by the priding carried at the frontline employees, taking their products in which they design.
Engineer build in Finnish distributor and ourselves it's no wonder why the brands are as revered as they are now that doesn't mean that we are performing as we shared obviously we are not.
However, we absolutely as Carl said earlier have the foundation on which to build.
We just need to get the swagger back our staff and performed like we did just two short years ago.
With that preamble added way, let me voice you some of the numerical rendition of what you probably have already read and by the way what an unfortunate name.
Our conference call operator to also be named Jamie. This is actually Jamie Pierson CFO not Jamie the conference call. Operator, if you go through this to skip that Matt.
Paycheck.
A presentation I'll walk you through the company's consolidated results for the second quarter.
We reported consolidated net sales of $223.2 million down $10.2 million from the 233.3 million reported in the second quarter of 2000 2018.
This decrease was primarily due to $7.2 million of unfavorable foreign currency translation.
On a constant currency basis, net sales only decreased $3 million or 1.3%.
And outside of currency impacts the decrease in net sales was primarily related to lower aftermarket volumes when compared to the second quarter of 2018.
In terms of consolidated operating results.
We reported operating profit of $7.1 million compared to an operating loss of $64.1 million in the prior year comparable period.
Our 2019 second quarter operating profit of 7.1 included $3 million in adjustment as compared to $77.9 million in the same period last year.
This quarter's adjustments primarily comprised of 1.4 million in support of the APAC disposition and another $1.6 million in other costs, primarily related to professional fees supporting a debt issuance and other costs.
The prior year comparable period adjustments consisted of $55.7 million goodwill impairment charge in Europe Africa segment.
$9.1 million of brink transaction termination expenses and a collection of other nonrecurring expenses that we've covered in previous calls.
Accounting for these items, our adjusted operating profit was $10.1 million for Two Q2 19, compared to $13.8 million in Twoq or 18.
The decline was mainly driven by lower sales volumes.
The impact of sales Mark mix on margins, partially offset by SGT savings that were realized from the prior year restructuring activities.
Now if you turn to page seven we can talk about some of the segment performance.
Net sales.
In the Americas segment was essentially flat compared to the prior year comparable period.
The price increases we are able to achieve our almost all offset by lower unit volumes lower net sales in the retail and aftermarket segments, along with the industrial channel declined 7.6 million on a combined basis. These decreases were mostly offset by higher E Commerce, and OEE net sales, which increased 4.9 and $3.9 million, respectively, when compared to the same period in 2018.
The Americas segment reported an operating profit of $9.8 million, which is 800 grand lower than the 10.6 million reported in the second quarter of 2018.
The decline was mainly driven by revenue mix and related margin impact on previously mentioned, partially offset by SG and savings related to prior year restructuring efforts.
The 7.1 million decrease in net sales in Europe Africa segment for the quarter was driven primarily by unfavorable currency translation.
On a constant currency basis revenue only declined 2%.
The vast vast majority of the principal decrease is primarily related to a $1.5 million decrease related to the company's divestiture of a non core business and one to 19.
And like the Americas channel mix shift unfavorably impacted gross margin. However.
Lower SGN expense, resulting from the restructuring activities initiated during 2018, mostly offset the gross margin decrease.
After adjusting for the items I previously mentioned the Europe Africa segment reported an adjusted operating profit for the second quarter of this year of 1.6 million down $1 million from the 2.6 million reported during the prior year comparable period.
The Asia Pacific segment reported lower net sales during the quarter, which was impacted by unfavorable currency translation as well.
And on a constant currency basis, net sales decreased 6.2% when compared to the comparable period in 2018.
The fundamental decrease was primarily result of lower shipment volumes in the E channel.
The net sales decrease was offset by operational efficiency improvements and other cost savings initiatives.
As a result, the operating losses mitigated and was only down 200 grant from the second quarter of 2018.
Conversely, adjusted operating margin actually improved from 14.1% of net sales in 2018% to 15.4% this quarter.
As has been the case for some time now the APAC segment continued to deliver very strong operating margins.
And moving on from the operating segment performance to the balance sheet related items on page eight.
Debt increased $41 million from $364.5 million at the end of the year to $405.5 million at the end of the second quarter. This year.
The increase reflects the addition of our second lien term loan of $53.2 million, an increase in local borrowings and other credit facilities offset by approximately $10 million less outstanding on our ABL.
On a gross basis, our total debt was $448.2 million at the end of this quarter.
Turning to working capital increased 38.9 million to $141.7 million into the quarter when compared to the end of the year.
This increase is driven by higher DSL and a reduction in past due accounts payable as we made some catch up payments after closing the second lien debt raise earlier in the year.
Our total liquidity at the end of the second quarter, which includes borrowing availability under our ABL and cash on hand was $45.7 million, which was down $7.1 million in the ended the year.
And now before turning it back the back over to Carl Let me close with a few thoughts let me start with repeating my opening salvo to say how blown away I am by the pride that frontline employees, taking what they do.
After visiting a couple of the company's larger facilities. It has become clear to me that the proudly wear the companys brands as a badge of honor.
Secondarily. It is no secret that we are not performing to the levels that were not only capable of but at levels that we have actually performed in the recent past.
As most if not all of you know turnarounds of this nature are not linear and do not and you do not turn of battle ship on a dime.
Which is to say our journey and it will absolutely be a journey will not be a nine smooths line, but we'll follow more of a stair step trajectory. It's almost it's also to say that the company is a battleship as a force to be reckoned with in this industry.
Finally.
Let me say, thanks, I'm honored to be a part of this team and look forward to locking arms with them and seeing what we can do.
With that I will turn the call back over to Carl for his closing comments.
Thanks, Jamie.
Turning to slide nine.
We recognize the difficult work ahead of us and our team is intensely focused on managing the areas. We can control in order to accomplish our strategic goals.
Despite the challenging market conditions to start the year, we remain confident in our underlying business, our products and brands and our team.
Since I became CEO , we have made significant progress in transforming our business and setting the stage for long term growth.
We have removed complexity and simplify their business.
Enhancing productivity and efficiency.
We restructured our operations to reduce operating costs and eliminate waste.
These efforts are at the core of our multiyear turnaround effort as we work diligently to return our company to historic levels of profitability.
Our team is aligned as one team with one goal.
We have the right leadership team in place with the necessary drive and determination to overcome past actions.
And deliver long term success for all of our stakeholders.
I will now turn the call over to the operator, so that we can take questions from our covering analysts operator.
Ladies and gentlemen, we will begin the question and answer session.
To ask your question you May press Star and then one.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your questions you May press Star ensue.
Once again that is star and then one to ask a question.
Our first question today comes from Josh Nichols from B. Riley FBR. Please go ahead with your question.
Yes, Thanks for taking my question and welcome to the to the team Jamie.
Yes, no problem just want to ask good to see the.
The actual sales increase.
In the Americas, and Holden to operating profit strong in Asia Pacific could you talk a little bit about what the trends you're seeing.
In Threeq you across the different segments, and then for the business as a whole given that.
Three q. is another key quarter for the company.
Yes so.
I'd say that we're actually probably holding strong in the segments that we then have been performing well year to date, which is mainly in the Asia and Europe Africa areas little bit softer in the American Saturday equation, especially in.
The aftermarket retail play strong sell in E.
And then.
I wanted to ask you Im sure its going to come up but.
The tariffs the new tariffs can you talk about the impact and I know you mentioned that there is a lag.
But could you help us kind of quantify how much that could be to the company on the near term for that passed along.
Yes.
On the new tariffs very negligible the vast majority of the impact that we've had it has already come through we're actually is coming through.
The incremental 10% affected a very very small piece of our business.
I wouldn't I wouldn't say I would say, it's not meaningful at all Josh.
Right perfect and then.
I guess I was a little bit.
I was expected inventory decrease plus saw that number.
Bump up a little bit quarter over quarter.
Could you talk about the trends that you can see there and the expectations for working capital pilot, that's going to impact cash flow for the remainder of the year.
So as I think you are aware, we we tend to build inventory at the beginning of the season to align with our expectations.
As the season unfolds, we will constantly correct inventory levels to ensure that we have what we believe in appropriate inventory level by the time, we we exit the main selling season of the back into the third quarter and ultimately to the fall so.
I would expect that to be aligned in the ordinary course over the next couple of quarters.
If I if I could add if you talk about working capital as a more holistic piece, Josh I'd say that we've got a fair amount of cash that we can clip off the balance sheet as you see on the slide that shows the results slide eight shows working capital actually going it dsos increased on a year over year basis to a point, where it's probably the highest it's been in the company's history.
Im just getting in there you can start taking apart getting to the root cause of what it is.
I feel confident that we can actually drive that number down at least on a DSL bases on the aggregate.
By the end of the year, but it's too early to tell what that number will be right now.
Thanks Evan.
Last question for me.
I don't expect to provide too much detail about it since its undergoing but if you could talk a little bit about the strategic alternatives and potential sale the Asia Pacific business at least how far along are you in that process is early stages or is that something that you think could be wrapped up in the next quarter.
Im just some.
I think as we've mentioned before we will provide an update when it's appropriate.
The process has kicked off.
We have a number of interested parties in that business. It is obviously a high quality business that has attracted interest from a number of.
Elements of the community the business community and we expect.
We expect that transaction will will.
We'll follow its normal course, and we'll provide an update when appropriate.
Great and then last question from me regarding.
The APAC businesses, great to see that the operating margins are actually improving but could you provide a little bit more info on the 6% decrease in sales on a constant currency basis, and and really whats driving that and is that expected to kind of continue what's the update for the region.
I am.
It really gets down to.
Our exposure to new vehicle sales and there is there has been a.
Short term, but recent softening of new motor vehicle sales both in industry trend in New Zealand, which are actually towing markets.
Again seasonality environmental conditions.
The underlying strength of that business is clear for everyone to see.
That business has gone through a number of cycles through its history and retains its key market positions and strong operating performance.
Obviously, the top line is one impact.
To that business's profitability, but the team has always shown a way of.
Delivered its operations to deliver bottom line results.
Okay always Clint please.
And just if I can add.
I think some of it is a comping issue as well as 2018, probably was one of the best volume.
Market that New Zealand has ever had so if you think about this going from the second quarter of 18 does that go of 19, it's not the second quarter was naturally so fast it may have been at the second quarter of 18 with a strongly there was an add to that at all of Easter fell in April this year.
In Australia, which was a was a holiday issue, which was not the case in 2018, so I would add that dependent that one Edwin first come back and see how the third quarter performs.
But I think it's less about 2019, not being as strong as it was 28, you maybe be a historic highs.
Thanks that makes sense, our hub back in the queue guess.
Thanks, just.
Thank you at this time, we have no further questions I would like to turn the conference call back over to Mr. Carl person.
Thank you to all on the call today and I look forward to speaking with you again soon thank you.
Okay.
On behalf of Horizon Global I would like to thank you for joining us today and we look forward to your joining us on our third quarter conference call in three months.
You may now disconnect your lines.