Horizon Global (HZN) Q2 2021 Earnings Call Transcript

Horizon Global (HZN)
Q2 2021 Earnings Call
Aug 03, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to Horizon Global's second-quarter 2021 conference call. My name is Nick, and I'll be your operator for today's call. [Operator instructions] This call is being recorded at the request of Horizon Global. [Operator instructions] I would now like to introduce Mr.

Jeff Tryka with Lambert IR, Horizon Global's investor relations firm. Mr. Tryka, you may now proceed.

Jeff Tryka -- Investor Relations

Thank you, operator. Good morning, and welcome to Horizon Global's second-quarter 2021 conference call and webcast. On the call today are Terry Gohl, Horizon Global's chief executive officer; and Dennis Richardville, Horizon Global's chief financial officer. Earlier this morning, we announced our second-quarter 2021 results.

The release is available on many news sites, as well as in the investor relations section of our website at horizonglobal.com. Turning to Slide 2. Today's presentation also includes non-GAAP disclosures. These 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 horizonglobal.com.

Turning to Slide 3. I would like to remind you that statements in today's presentation will include our views about Horizon Global's future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We have described these risks and uncertainties and 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.

With all that being said, I would like to turn the call over to Horizon Global's chief executive officer, Terry Gohl. Terry?

Terry Gohl -- Chief Executive Officer

Thank you, Jeff, and welcome to all of you who are participating in today's call. On behalf of the complete Horizon Global team, Dennis and I will proudly present our second-quarter results for 2021. To our shareholders, we sincerely appreciate your support of the company and management as we remain laser-focused on sustainable growth and long-term value creation. To the many Horizon Global employees joining the call today, my message to you is a simple one.

Be extremely proud of the results being presented today and take great pride that these achievements and those yet to come are only possible through your hard work and dedication. We are extremely proud of our team. For those who have been following the earnings call conducted by this management team over the past six quarters, you will recognize that we always apply a theme to the quarter and to the state of the business as we see it. As we look at the business in terms of the task completed, results achieved and trajectory for the future, there is no better theme to describe our position today than stepping up.

During the second quarter and throughout this year, this team has stepped up and continues to do so. This quarter, again, was not short of challenges to overcome, drastically increasing commodity pricing, restricted material availability as demand outpaced supply, freight constraints due to congestion on the fees in the ports and on rail, weather-driven typhoons and flooding around the world and the continued overarching risk of COVID-19 and its new emerging variants. There were many opportunities to slip. We didn't.

The Horizon team stepped up and met the challenges regardless of what they were. We continue to strengthen our governance structure with the addition of Donna Costello to our board. Donna brings her tremendous financial and operational experience and is already making a huge impact. We are very fortunate to welcome her to our team.

We also continue to advance our ESG initiatives with improvements in our CO2 emissions, energy consumption and social related metrics. Our results reflect a growing business generating significantly higher margins as we continue to execute our operational improvement initiatives defined in late 2019 and 2020. Our team has stepped up, and it shows. Turning to Page 5.

Our second-quarter trailing 12-month adjusted EBITDA of $54.1 million reached its highest level in years. As you will see on the following page, this metric has continued to accelerate since we emerged from the COVID-impacted periods of 2020. As you recall, we defined early on that we would launch our improvement initiatives and phases. While multiple important global initiatives were implemented, we initially concentrated our operational improvement activities in our Americas manufacturing and distribution operations during the first year of our plan.

We are pleased to continue to report that these initiatives are on track and are generating solid results. A few metrics to consider relative to North America performance improvements are, the number of units produced during the first six months of 2021 at our two Reynosa manufacturing plants surpassed the total full year -- yes, that's full-year units produced in 2019, which represents the most recent normalized non-COVID-impacted period for comparables. A 100-plus production rate gain in production. The transformation of our Americas operations has been extraordinary, and it shows not only in the units produced, but also in many other supportive metrics, a few of which are a 53% improvement in our employee safety metric of total case incident rate throughout our North American sites, a 65% improvement in units produced per square foot as we continue to optimize our workflows and production methods, a 14% reduction in scrap per part produced as we optimize our production processes and product designs, our customer measure of defect rate or PPMs, improved 95% from 2019, a 31% reduction in cost per earned hour at our Reynosa Metals facility; and we achieved certification for all audits completed this year for ISO 16949 quality systems.

ISO 14001 environmental systems, ISO 45001 Phase 1 health and safety systems and for our customer VDA audits for manufacturing controls. These results highlight the foundational robustness of the systems and processes we have deployed. Based upon the strength and the effectiveness of these initiatives, we are moving forward beyond fixing to capitalizing on our achievements to generate further margin improvement. It's absolutely great work by this team.

Turning to Page 6. As referenced already, our 2021 Quarter 2 trailing 12-month EBITDA was $54.1 million. On this chart, you can see the rate of change in the history of this metric over the past seven quarters. Our team was substantially put in place at the start of the first quarter of 2020 and immediately went to work.

The team acted effectively and aggressively to lead us through the COVID-19 shutdown high-impact periods while continuing to drive meaningful change in terms of continuous improvement across all aspects of our business. These actions continue to be executed and are building upon one another to generate significant period-over-period performance improvements in trailing 12-month adjusted EBITDA, as well as adjusted EBITDA margins, a great trajectory. This chart not only reflects the team stepping up, but the actual results stepping up as well. Turning to Slide 7 and 8.

Slide 7 is presented as a reminder of the work completed in 2020, our first full year of the turnaround and the fundamental actions that have led to the results you are seeing today. We won't review these in detail as we have presented them in the past, but believe it was important to include this for your reference. As we move to the road map for 2021 and beyond on Page No. 8, here, we are highlighting some of the key initiatives underway or planned and a few points are as follows: we remain with a multiyear plan.

Significant actions have been completed year to date as the velocity of our improvement initiatives continues to increase. We continue to increase capacity in our American facilities and are now doing the same across our Europe and Africa facilities. We continued streamlining our operations in alignment with our strategy and the divestiture of our Brazilian operations during the quarter. We successfully and strategically increased our supply base to solidify material and component availability to improve quality and to manage costs.

And we initiated select vertical integration opportunities as a result of increased manufacturing capabilities throughout our global operations. As we look forward to the remainder of the year and beyond, logistics and supply chain solutions will remain a primary focus for further optimization and innovation. We will be globalizing certain elements of our regional portfolio where accretive in terms of customer offerings and value. We will be deploying state-of-the-art business systems, inclusive of enterprise resource planning, ERP systems with integrated warehouse management systems as well.

We will also advance our e-commerce platform as we move forward through 2022 and 2023. A significant amount of planning and development and testing has already occurred on these initiatives in 2021 as we work to plan for 100% success. We will assess and execute where beneficial, acquisitions, alliances or partnerships to advance our strategic objectives and to accelerate the creation of long-term shareholder value. We have demonstrated the ability to manage complex and multifaceted business transformation initiatives at all levels and based upon that success, we are highly confident in executing all of the new initiatives scheduled for 2021 and beyond.

Turn to Page 9. In the chart at the left, we present a historical comparison of second-quarter net sales and adjusted EBITDA over the last three years. Our second-quarter 2021 net sales of $222.1 million and corresponding adjusted EBITDA of $18 million reflects the best performance for these measures over the last three years. Adjusted EBITDA margin increased to 8.1% for the quarter despite material, supply chain and logistics headwinds.

The team did a great job navigating a challenging environment to generate this result. On the chart to the left, you can see the same three-year comparison. Only on this chart, we look at the first half, January through June as a comparison period. Comparing this view against the second-quarter comparisons, we show an even more dramatic improvements against prior periods for both net sales and associated adjusted EBITDA levels when looking at it first half to first half.

Our adjusted EBITDA in the first half of 2021 of $30.7 million surpassed the entire-year performance of 2020 and improved a whopping 174.1% over the comparable period in 2019. We have demonstrated good progress and trajectory on both net sales and adjusted EBITDA margin as the second-quarter margin performance increased to 8.1% versus the year to date at 7.3%. The second quarter outperformed the first, an excellent quarter-to-quarter trajectory here as well. Turning to Page 10.

We are presenting the distribution of our net sales by channel for the first half of 2021. During the first half of 2021, we experienced gains in e-commerce and aftermarket over the same period in 2019, partially offset by a decline in the retail channel as a percentage of the total during that same period. Please recall that last year, we worked with our retail customers to exit the cargo tie down portion of our portfolio, which we viewed as noncore and underperforming. This was strategic, intentional and beneficial to the company.

Our net sales in each channel increased in absolute dollar value during the first half of 2021 versus the comparable period in 2020 and with the exception of retail versus the comparable period in 2019. With the exception of retail, we continue to gain market share. This was supported by the successful addition of 66 new North American customers from the fourth quarter of 2020 through the second quarter of 2021. Positive trajectory for our core products in each of our sales channels.

Turning to Page 11. On this chart, we continue to illustrate the impact of our focus on distribution efficiency. Our June 2021 gross sales per unit of $23.68 represented a 60.8% year-over-year improvement out of our Edgerton Central distribution center in the Americas. A multitude of actions have contributed to the steady improvement in this metric with some of them listed on the box to the right.

We have generated a favorable mix with increased production capacities of our higher-value products, which has been supported by increased sales for these products. Reynosa plants are producing more, and we are selling more. We continue to optimize our contracts relative to minimum order quantities and freight programs. We continue to drive optimization through SKU rationalization, and sales dollars per unit was positively impacted by our pricing initiatives beginning in late 2020 and during the first half of 2021.

Please note that an incremental pricing initiative in North America has been implemented with the impact to be realized in the third quarter of this year. This in response to commodity price increase is being seen across the market. Turning to Page 12. Sales remain extremely strong with our customers for hitches and brake controllers in North America.

Our operational improvements are yielding more product and enabling higher sales for both product lines. On the chart to the left, you'll see our hitch units sold versus prior-year comparable periods. As an example, the second quarter in 2021, unit sales were up 77.7% from the comparable period in 2020. While we would expect improvements from the COVID-impacted 2020 period, this is not a onetime occurrence.

For example, when comparing the fourth quarter of 2020 to the comparable period in 2019, we had a dramatic increase as well. There was 58.6%. So you can see we are continuing to build sales period over period and year over year. This has been a great story, and we will continue to refine and add capacity for these product lines to support the strong market demand for our products.

It is important to note that we are deploying the same road map for operational improvement in Europe and Africa as we target growth in the aftermarket channels there as well. To the right, a very similar story is presented for our North American brake controller units. When comparing second-quarter 2021 to the comparable period in 2020, unit sales were up a dramatic 102.3%. This was bolstered by incremental OEM content, compared to shutdown periods experienced in 2020 and even with the impact of chip shortages impact on production volumes experienced during the quarter in 2021.

Similarly, the increase here is not isolated to the COVID-impacted periods. Fourth-quarter 2020 brake controller unit sales increased 43.6% over the comparable period in 2019. Turning to Page 13. The North American market remained strong as evidenced by the company holding $70.2 million in booked orders exiting June.

This represents a 77.5% increase over the end of June 2020. This figure is impressive considering that gross sales for June 2021 are up 32% over June 2020 and second-quarter 2021 gross sales are up $21.8 million or 18.5% over the first quarter of 2021. So while we are selling more, our order book continues to hold at record levels. Our market and our position in it remained strong.

I'll now turn it over to Dennis for the financial update before returning to walk you through some of our go-forward initiatives and objectives. Dennis, take it away.

Dennis Richardville -- Chief Financial Officer

Thank you, Terry. Good morning, everyone, and thank you for joining us. As Terry mentioned, we are pleased with our second-quarter results. Despite the macroeconomic headwinds relating to rising commodity cost, global supply chain and logistics that have impacted our industry and the global economy.

Due to the business disruption impacts of the COVID-19 pandemic in the second quarter of 2020, we will be discussing comparative results for the second quarter of 2021 to the second quarter of 2019. We believe this is the most representative comparison period as it provides a meaningful view of the status of our turnaround and extraordinary financial improvement made over the last two years despite the intervening global pandemic. Please turn to Slide 14 for a review of the company's consolidated results for the second quarter of 2021. Consolidated net sales for the second quarter of 2021 were $222.1 million, an increase of $29.4 million or 15.3% compared to the second quarter of 2019.

The net sales increase was primarily attributable to higher sales volumes in both the Americas and Europe-Africa operating segments. Net sales also increased as a result of the 2021 pricing initiatives implemented, primarily in the Americas to counterbalance increased material economics from rising commodity prices, such as steel, as well as freight and logistics cost. Gross profit margin increased 21.3%, an improvement of 250 basis points, compared to the second quarter of 2019, primarily related to increased sales volumes and mix, coupled with savings and efficiencies realized from our operational improvement initiatives. We reported adjusted EBITDA of $18 million as compared to $12.3 million during the second quarter of 2019.

Improved adjusted EBITDA was primarily due to higher gross profit margin performance, as previously mentioned. Adjusted EBITDA margin increased to 8.1% as compared to 6.4% for the second quarter of 2019, which represents the 170-basis-point improvement. Now let's turn to Slide 15 for review of the segment performance for the quarter. Net sales in the Americas were $128.4 million, $19.4 million or 17.8% higher than the second quarter of 2019.

The net sales increase was attributable to higher net sales of 11.7 and $5.3 million in the aftermarket and e-commerce sales channels respectively, primarily driven by volume and the previously mentioned pricing initiatives. Adjusted EBITDA for the segment increased to $18.5 million as compared to $12.1 million for the second quarter of 2019, which represents a 53.2% improvement. The increase was driven by higher net sales volumes, mix and improved gross margin performance. Adjusted EBITDA margin was 14.4% as compared to 11.1% for the second quarter of 2019.

Transitioning to our Europe-Africa operating segment, net sales were $93.7 million, an increase of $10 million or 12% over the second quarter of 2019. The net sales increase was primarily due to a $6.1 million increase in the aftermarket sales channel and a combined $2.3 million net increase in the automotive OEM and OES sales channels. Adjusted EBITDA for the segment increased to $5.1 million as compared to $4.4 million in the second quarter of 2019, which represents a 15.9% improvement. The increase was driven by higher net sales volumes, mix and improved gross margin performance, which is partially offset by increased other variable operating and support cost.

Adjusted EBITDA margin was 5.5% as compared to 5.3% for the second quarter of 2019. Moving on to our working capital, free cash flow, liquidity and net leverage ratio on Slide 16. Freight working capital was $101 million in the second quarter of 2021, which represented an increase of $45.4 million, compared to the fourth quarter of 2020 and a decrease of $13.7 million, compared to the second quarter of 2019. Specifically, receivables increased $28.8 to $116.2 million, compared to the fourth quarter of 2020, driven by higher net sales and decreased $9.2 million, compared to the second quarter of 2019 as improved collections more than offset the increase in net sales.

Day sales outstanding was 48, an increase of two days over the fourth quarter of 2020 and a decrease of 11 days from the second quarter of 2019. Inventories increased $29 million to $144.4 million, compared to the fourth quarter of 2020, driven by a planned inventory build to address booked orders and continued significant sales volume momentum, coupled with inventory management to address macroeconomic factors such as rising commodity costs and global supply chain constraints. Inventories decreased $9.1 million, compared to the second quarter of 2019 due to improved inventory management and purchasing practices despite the macroeconomic factors mentioned above. Days-on-hand inventory was 75 days, an increase of one day over the fourth quarter of 2020 and a decrease of 14 days from the second quarter of 2019.

Accounts payable increased $12.4 to $111.9 million, compared to the fourth quarter of 2020 and increased $14 million as compared to the second quarter of 2019. Days payables on-hand was 58 days, a decrease of six days from the fourth quarter of 2020 and an increase of one day over the second quarter of 2019. Free cash flow was a use of $37.6 million at the end of the second quarter of 2021, which was an improvement of $31.1 million, compared to the second quarter of 2019 and was driven by improved profitability and working capital management. Cash in availability or liquidity totaled $62 million for the second quarter of 2021, which was comprised of $37.3 million of availability under our credit facilities and cash on-hand of $24.7 million.

This reflects a $26.3 million increase over the second quarter of 2019. For the second quarter of 2021, our net leverage ratio computed on a trailing 12-month basis, as defined in the presentation and our term loan credit agreement improved to 5.2 times as compared to 9.1 times for the fourth quarter of 2020. Turning to Slide 17 for review of our current debt capital structure and debt maturities. Total gross debt 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 ABL borrowings to support the previously mentioned working capital needs and business growth, as well as a higher term loan balance from the proceeds from our refinancing and payoff of our prior term loan completed during the first quarter of 2021. In the second quarter of 2021, we completed an amendment to our North American ABL facility to increase our maximum credit availability by $10 million to $85 million, coupled with certain increased inventory supplements. These measures increased our liquidity, which support our working capital needs to address increased demand and market share growth. As we turn to the second half of 2021, we continue to maintain our momentum and focus on earnings growth, liquidity and working capital management.

With that, I will turn it back over to Terry for his closing comments.

Terry Gohl -- Chief Executive Officer

Thank you, Dennis. Great job. Turning to Page 18. We highlighted in our introduction that we've established our next step financial and operation goals.

And on this page, we define them. Combining the improvement in performance, trajectory driven off our initiatives, along with the expansive opportunities we have in front of us, our objectives for us to achieve are as follows: consolidated EBITDA margins at above 10%, consolidated net sales greater than $1 billion and to achieve a net leverage ratio of less than two and a half times. Our road map and timeline at the bottom of the page highlights the macro level initiatives set to achieve these objectives. The three overriding themes of our plan include: general market growth, combined with increasing product sophistication, presenting substantial opportunities for Horizon.

Product-level sophistication aligned with Horizon's product development expertise, providing revenue and margin expansion opportunities, and third, continued margin expansion through continuous improvement initiatives across our global operations and overhead structure. We expect to capitalize on these opportunities through securing higher revenues and margins through differentiating horizon from our competitors with superior performance and product innovation, product quality and delivery. And through the driving operational lean transformation throughout our Europe and Africa operations in 2021, while continuing to increase the capacities and capabilities of our operations year over year, we expect to be the premier manufacturer in our space. Turning to Page 19.

We believe our current addressable core market is roughly $3.5 billion, and it's growing. The cornerstone of our current product portfolio with hitches referred to as towbars internationally, which are forecasted to grow at a rate of 3.6% CAGR through 2027. Incremental product line sophistication and content is expected to increase volume, sales dollars per unit and corresponding margin. As we bucket the addressable market, the OEM, OES market in North America and European markets represents roughly 33% of the overall content.

High concentration of OEMs accessorizing in Europe is driving this value, and we are positioned very well in that channel with roughly 32% of the market as you see on the right-hand side of the page. The aftermarket channel represents approximately 30% of the addressable market and at roughly 22% of the market, we have significant room to grow and have made strides to do so. The e-commerce channel continues to grow. And while we have grown in this channel through collaboration with customers and on our own, we have significant opportunities to increase our market share there going forward.

The retail channel growth efforts have been successful as we continue winning business with targeted customers that present long-term strategic alignment for both our product lines and our brands. The industrial channel is projected to significantly grow on the strength of the forthcoming infrastructure investments. We continue to experience growth in this channel, primarily with jacks and couplers, and we believe further volume and portfolio expansion is possible. In addition to our existing portfolio, we see substantial opportunities in adjacent markets that align with our channel management and supply capability, including, but not limited to common manufacturing processes.

We have begun to assess these opportunities for organic and strategic profitable growth options through acquisitions, alliances or partnerships that would improve our performance while generating incremental shareholder value. We believe that the addressable core market and the adjacent markets that we could participate in could expand our current market scale by two to four times its current size, dependent on the markets we would choose to engage in. Turning to Page 20. In addition to a growing overall market size, we highlight the growing complexity and sophistication of our product.

On this page and in the following page, we highlight a couple of new development products that demonstrate our focus on innovation and next-generation offerings. Our combined Europe and Africa and American teams are working seamlessly on advanced product development. And as a result, we have a cache of new products that we believe will position us going forward. We have developed what we consider to be best-in-class program management system and as a direct result, we are launching more products than ever, more efficiently and in less time.

There were 104% more products launched during the first half of 2021 versus the first half of 2020. And please remember that we never stopped or suspended our product development activities in 2020. We have also reduced our concept of validation time by 44%. Specific to this page, we are presenting our trailer towing assist sensor solution.

Through patented integrated sensor technology, our product presents a highly accurate angle signal data that is processed within the OEM vehicle systems, enabling intelligent, automated trailing reverse steering controls. This has been successfully launched and is in production in the European market and is a testament to the engineering capabilities and collaborative methods that Horizon team brings to the table. Anyone who has ever backed up a trailer can appreciate the value of this innovation. On Page 21, we are showing another patented application being built to service the OEMs and end-user needs.

In this case, verification of nose load through our trailer load assist application. Regulatory requirements matching maximum load to vehicle specifications are being implemented across Europe. Our solution, again, based upon advanced sensor integration technologies presents real-time verification of compliance. On the illustration, you can see options that can be built onto our retractable towbar solutions to add value, functionality and compliance.

Rate innovations reflective of the tremendous engineering talent we have across our company. These are clearly not our parents trailer hitches any longer. Turning to Page 22. The third overriding theme of our plan to achieve our financial objective is to continue with the significant improvements we have made in portfolio management, manufacturing, supply, distribution and logistics and overhead optimization.

As you can see and would expect, we are further along in North America as we focused on this region during Year 1. While significant work has been completed, you can see the pie chart depictions there as it remains a great deal of more work and opportunities to be captured from each area of focus. That being said, with the actions completed thus far, we have improved our adjusted EBITDA performance in the Americas from the first half of 2019 of 6.6% to the first half of 2021 to 13.2%, a 660-basis-point improvement and great progress toward the consolidated double-digit margin performance we had set as a threshold as we mentioned on the prior page. For Europe and Africa, we've begun in earnest in January of this year with operational transformation and lean deployment.

Momentum is building with this initiative as the teams have embraced the plan and recognized a significant positive transformation that has already taken place in North America, proven success. While Europe and Africa's adjusted EBITDA margin has improved by 90 basis points to 5.7% in the first half of 2021, we are just in the early stages of this initiative with much more to follow. So in closing, on Page 23, we are halfway through Year 2 of our plan. We are on track with that plan as evidenced by our performance metric improvements across the board.

We have weathered significant challenges and continue to manage headwinds associated with material economics, along with supply chain and logistics constraints. We have built a talented team of leaders, each with a wealth of experience to drive meaningful change across the organization. Our commitment to operational excellence in servicing our customers is being recognized with new business awards and collaboration efforts toward future technological advancements. We are expanding our "fixed focus" to a broader view of profitable growth options, including both organic and inorganic options.

We intend to strategically increase our existing market share while defining and assessing opportunities to accelerate or expand that growth target through expansion into our adjacent accessory markets. Thank you. And now I'll turn it back to the operator for any questions.

Questions & Answers:

Operator

[Operator instructions] Thank you. At this time, there are no questions. I would like to turn the call back over to Mr. Terry Gohl.

Please go ahead.

Terry Gohl -- Chief Executive Officer

Thanks, Nick, and I'll close with the following: number one, our market is growing; number two, our market share is growing; number three, we are developing and launching record numbers of new products; and finally number four, we remain on track to our plan, a plan which is set to improve all aspects of our business. Our sales are up and our profits are up. Thank you to all who joined us today, and we look forward to speaking with you again with our third-quarter results. Thank you very much.

Operator

[Operator signoff]

Duration: 39 minutes

Call participants:

Jeff Tryka -- Investor Relations

Terry Gohl -- Chief Executive Officer

Dennis Richardville -- Chief Financial Officer

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