Horizon Global (HZN) Q4 2021 Earnings Call Transcript

Horizon Global (HZN)
Q4 2021 Earnings Call
Mar 10, 2022, 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 fourth quarter and full year 2021 conference call. My name is Jamie, and I will be your operator for today's conference. [Operator instructions] This call is being recorded at the request of Horizon Global. If anyone has any objections, you may disconnect at any time.

At this time, I would like to introduce Mr. Jeff Tryka with Lambert IR, Horizon Global's Investor Relations firm. Mr. Tryka, you may proceed.

Jeff Tryka -- Investor Relations

Thank you, operator. Good morning and welcome to Horizon Global's fourth quarter and full year 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 fourth quarter and full year '21 results.

The release is available on many news sites as well as on 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'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 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.

With all that being said, I'd 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 our call today as we review our fourth quarter and full year 2021 results. As always, we welcome the many Horizon Global employees who have joined the call today. Thank you all for your unwavering dedication during these challenging times. We greatly appreciate your exceptional effort and continued focus on the execution of both our short and long-term initiatives.

As you are aware, we released Horizon Global's preliminary Q4 and full year 2021 results in February. The final results we will share with you today are consistent with those numbers disclosed at that time. We entered 2021 with tremendous momentum on the back of the first full year of our turnaround. The first half of 2021 did not disappoint as we delivered against strong demand and posted profitable growth in both operating segments.

The second half of 2021 was a completely different story. While the market demand remained high, macroeconomic headwinds throttled sales levels and drastically increased input costs. The impact of supply chain, logistics and material constraints was profound and resulted in Q4 performance that was well below our expectations. Today, we will focus on our Q4 and full year 2021 results and importantly, the global challenges impacting our performance.

We'll also look ahead and provide an overview of the opportunities and challenges present in our business today. Relative to the Russia-Ukraine conflict we have been -- all been following the news and watching the horrific events unfold simply gut wrenching. Relative to the business, we took immediate actions primarily in Europe and Africa in concert with applicable works council and supplier partners to flex production as much as possible in response to the sudden changes to OEM production schedules resulting from supply chain disruptions that we are facing due to the conflict. We remain in contact with our customers and will react to their planning going forward.

Now let's turn to Page 5. A lot for you to consume on this page but a few highlights. Sales were down as compared to Q4 2020 by $11.6 million, while full year sales were up roughly $120.9 million compared to 2020. Adjusted EBITDA was down as compared to Q4 2020 by $15.3 million, while full year adjusted EBITDA was up $9.3 million compared to 2020.

America's input costs were up compared to Q4 2020 by $16.9 million, and were partially offset with $12.7 million of pricing recoveries. Volumes were negatively impacted by freight constraints that impeded conversion against a strong order book representing available sales in the period of approximately $25 million being pushed to 2022. Inventory growth of $43 million driven by PPV impact of $28 million, and inventories impacted by components delayed which impacted the ability to convert associated inventory to finished goods and applied against are booked orders. Europe, Africa performance was driven by global semiconductor shortages and the associated impact in OEM production levels.

This impact was not only seen in overall sales impact of roughly $17.2 million lower sales, but the timing of the changes in releases negatively impacted their ability to flex down costs in response. Input costs in Europe and Africa were up $4.5 million compared to Q4 2020, primarily driven by 73% increase in steel costs. While it is impossible to predict when these macroeconomic headwinds will fully subside, we believe they are temporary in nature. Later in the call, we will review actions we are taking to mitigate these unprecedented challenges.

Let's move to Page 6. On this slide we present three-year comparisons for net sales and adjusted EBITDA for both Q4 and for the full year. Given the COVID impacted period in 2020, we feel it is important to also present you with a view of our business today versus pre-pandemic levels. On the chart on the left you can see our Q4 2021 results compared to both 2020 and 2019.

Net sales increased Q4 2019 approximately $22 million, or 16% while the comparison to Q4 2020 reflected the decline of $11.6 million, or 6.6%. Dennis will address our financial results further during his update but remember there was roughly $31 million in sales that were booked but not shipped due to supply and transportation constraints in the period. The drivers of adjusted EBITDA performance deterioration were tied to the significant increase in input costs experienced in the period. On the chart to the right, when reviewing our performance on a full year basis you can see the demonstrated improvement in adjusted EBITDA performance of 35% 2021 versus 2020, and 530% 2021 versus 2019 with net sales significantly increasing over 2019.

This highlights the momentum and the performance seen in the first half of the year, the period prior to the impact of the elevated input costs in semiconductor impact on volumes experienced in the second half of the year. Turning to Page 7. This slide reflects the distribution of net sales across each of our sales channels for full year 2019 to 2021. Notably, in addition to the overall net sales growth compared to 2019 and 2020, this slide demonstrates our efforts to increase net sales attributable to higher margin sales channels including aftermarket and e-commerce.

America's aftermarket growth is dependent on our ability to add and recapture customers through performance and portfolio offerings. We have been successful in this regard and added 87 new customers over the last five quarters. Also we are pleased with our 2021 net sales growth in retail sales channel noting that while we strategically exited an underperforming product line during 2020, we demonstrated a strong rebound in 2021 with the expansion of our business in core products and with core customers. Moving to Page 8.

As you can see on this slide net sales in the quarter were disrupted by the previously mentioned constraints with primary impact being the OEM and OES sales channels, which were down from 2020 levels by $14 million, or 16%. As previously discussed, our open order book was strong at the end of the quarter which includes $31 million of delayed sales of booked orders due to global constraints. These delayed sales were primarily in the non-OEM/OES channels and represented the main driver of the decline in the aftermarket channel. These sales were not lost, but they were simply retimed 2022.

Moving to Page 9. While we have already referenced the factors impacting Q4 2021 performance, the next few slides provide specific examples of the impact throughout 2021. The table on this page is worth a thousand words. Looking at where steel prices began the year versus where they ended, it's hard to overstate the impact of rising steel prices in 2021.

From Q4 2020 to Q4 2021, the average price of steel in the Americas increased a staggering 145%, while steel prices in Europe and Africa surged 73%. We implemented commercial pricing recovery actions across all sales channels to offset the economics, but as mentioned before, there is a one or two quarter lag in recognition of the pricing actions to the bottom line. Steel prices in Americas have started to soften and we expect this to continue throughout 2022. In Europe and Africa, we experienced some softening, but there is some new uncertainty due to hostilities in the region.

To date, we have not been faced with any further increases in steel, but remain cautious. While we are generally pleased with our pricing recovery progress, there remains more work to be done. Remaining negotiations, primarily in Europe and Africa, are in progress and are targeted to be completed in the near-term. Turning to Page 10.

Another powerful chart which demonstrates the steep rise in America's freight cost throughout 2021. Q4 2021 overall freight cost increased 209% over Q4 2020. This driven primarily by increases in base container rates experienced in the second half of the year. While cost per container rates are projected to often during 2022, we are focused on controllable actions to reduce these costs and constraints, with the implementation of our multi-port strategy and a 3PL strategy in the Americas.

The Mexico Port implementation has been accelerated and while in ramp up phase is yielding a 24% reduction in cost and roughly a 15-day reduction in delivery timing. Our Canadian Port utilization is set to begin in 2022. Both of these actions will reduce our prior singular dependence on the Port of Long Beach. These items coupled with an expected reduction in imports in 2022, resulting from converting the 2021 year-end inventory in support of our sales plan, will drive reduced rate costs throughout 2022.

Moving to Page 11. As previously noted and worth mentioning again, our first half of 2021 exceeded our expectation and demonstrated what the business can achieve absent the uncontrollable factors we just walked through. The charts on this page reflect the performance variance between the first half and second half of 2021. While the much discussed headwinds are still present one way or another, we believe we will see our business return to first half run rates, which will then serve as a building block toward our long-term performance goals.

It is important to note that our second half performance was primarily impacted by Q4 where we saw our financial results most significantly impacted by freight and commodity costs. Ongoing commercial pricing recoveries will be recognized into and throughout 2022 as they tend to lag the recognition of input costs. A few other items of note, supply chain and material availability not only impacted product volumes but also negatively impacted sales mix and resulted in material deterioration. Delayed sales volumes and cost performance were impacted by increased inefficiencies tied to rapid OEM production changes relative to global part shortages.

Our inability to rapidly flex costs was especially prevalent in Europe and Africa during the second half of the year. Looking at Page 12, here we present the linkage between delayed sales and the related inventory build year-over-year we experienced in 2021. Inventory levels in America has increased compared to Q4 2020 by $43 million. This increase was driven by three primary contributors; First, inventory value increased by approximately $28 million due to PPV and primarily steel and freight costs; Second, approximately $15 million of that was trapped due to missing components which inhibited our ability to ship against booked orders; And third, also included in the $15 million was strategic production of other high volume finished SKUs that were built to support 2022 seasonal demands.

The line chart on the right shows this impact on our seasonal net sales trend from Q4 2020 through Q4 2021. As a reminder, the Americas experienced $25 million of delayed sales in the quarter due to supply chain and material constraints. In addition, Europe-Africa's net sales were impacted by approximately $17 million from semiconductor and other material constraints impacting OEM production volumes. Despite these factors, the Americas has greatly exceeded pre-pandemic sales levels in Q4 2021, which reflected an increase of $30 million, or roughly 42% over Q4 2019.

And as discussed earlier, our elevated inventory is positioned to deliver on our strong open order book and seasonal demand levels. Now I'll turn it over to Dennis for the financial review and I'll return in a few minutes to provide some insights and the status of our actions as we continue into 2022. Dennis?

Dennis Richardville -- Chief Financial Officer

Thank you, Terry. Good morning, everyone and thank you for joining us. As Terry mentioned, during the fourth quarter, we continued to face industry wide headwinds related to global supply chain and logistics constraints coupled with rising commodity and other operating costs. These headwinds negatively impacted our operational and financial performance and as a result, fourth quarter 2021 financial results fell below our expectations but in line with our pre-release.

Please turn to Slide 13 for a review of the company's consolidated results for the fourth quarter of 2021. Consolidated net sales for the fourth quarter of 2021 were $164.3 million, a decrease of $11.6 million. or 6.6% compared to the fourth quarter of 2020. This decrease was primarily attributable to our Europe-Africa segment, partially offset by an increase in the Americas segment.

Gross profit margin decreased to 9.7%, a decline of 900 basis points compared to the fourth quarter of 2020, primarily driven by lower sales volumes combined with supply chain and logistics constraints, material availability including semiconductors and commodity pricing pressures that negatively impacted both segments. Reported and adjusted EBITDA loss of $8 million as compared to an adjusted EBITDA of $7.3 million during the fourth quarter of 2020, this was primarily due to the lower gross profit margin performance previously mentioned. Company's adjusted EBITDA margin decreased to negative 4.9% as compared to a positive margin of 4.2% for the fourth quarter of 2020. Let's turn to Slide 14 to review the segment performance for the quarter.

Net sales in the Americas were $102.4 million, $5.6 million, or 5.8% higher than the fourth quarter of 2020. Net sales increase was driven by an increase in the retail and industrial sales channels. Further, the increase was primarily attributable to pricing recoveries partially offset by a decrease in sales volumes. Adjusted EBITDA for the segment decreased to $3.5 million as compared to $10.9 million for the fourth quarter of 2020.

The decrease was driven by supply chain constraints, material availability, and commodity pricing pressures which more than offset higher net sales. Adjusted EBITDA margin was 3.4% as compared to 11.3% for the fourth quarter of 2020. Transitioning to our Europe-Africa operating segment, net sales were $61.9 million, a decrease of $17.2 million from the fourth quarter of 2020. The decrease is primarily driven by lower sales volumes and the automotive OEM and OES, and aftermarket sales channels partially offset by an increase in pricing recoveries.

Adjusted EBITDA loss for the segment was $7 million as compared to adjusted EBITDA of $2.5 million for the fourth quarter of 2020. This decrease driven by lower net sales volumes attributable to OEM, sales call offs experienced because of the semiconductor, and other supply chain constraints, coupled with unfavorable supply chain costs, material availability, and commodity pricing pressures. Turning to Slide 15, we show the full year consolidated results. Consolidated net sales were $782.1 million, an increase of $120.9 million, or 18.3% over the prior year.

The increase was driven by net sales increases in all our major sales channels, as well as pricing recovery initiatives implemented in 2021. Gross profit margin in 2021 remained consistent to 2020 at 18.2%. The increased net sales were offset by unfavorable material, supply chain, and other manufacturing input costs previously mentioned. Adjusted EBITDA for 2021 was $35.7 million as compared to $26.4 million for 2020.

Consolidated adjusted EBITDA margin increased to 4.6% as compared to 4% for the prior year. Now, let's turn to Slide 16 to review the full year segment performance. Net sales in the Americas were $456.4 million, $74 million higher than the prior year. The increase was driven by higher sales volumes across all major sales channels, as well as pricing recovery initiatives previously mentioned.

Adjusted EBITDA for 2021 increased to $49.2 million as compared to $38.4 million for 2020. Adjusted EBITDA margin increased to 10.8% as compared to 10.1% for the prior year. Transitioning to our Europe-Africa operating segment, net sales increased $46.8 million, or 16.8% compared to the prior year. This increase was primarily due to higher sales volumes across all major sales channels, as well as the pricing recovery initiatives previously mentioned.

The increase also included $15.3 million of favorable currency translation. Adjusted EBITDA for 2021 was $6.9 million, a decrease of $1.8 million from the prior year. Adjusted EBITDA margin decreased to 2.1% as compared to 3.1% for the prior year. Now moving on to our working capital, free cash flow, liquidity, and net leverage ratio on Slide 17.

Freight working capital was $108.8 million, which represented an increase of $53.2 million compared to the fourth quarter of 2020, and a decrease of $700,000 compared to the third quarter of 2021. Specifically, receivables decreased $6.7 million the prior year to $80.7 million. Day sales outstanding was 45 days, a decrease of one day compared to the prior year. Inventory increased $47.5 million over the prior year to $162.8 million driven by the macroeconomic factors related to global supply chain and logistics constraints, as well as rising commodity pricing of which approximately $28.1 million was due to additional year-over-year material and logistics costs included in our inventory in the Americas segment that Terry previously mentioned.

In addition, we experienced rising inventory levels in both segments where we were missing components required to complete and ship a finished good. These factors drove higher days inventory on hand to 101 days, an increase of 27 days from the prior year. Accounts payable increased $2.7 million over the prior year to $102.2 million. Days payable outstanding was 63 days, a decrease of one day compared to the prior year.

Free cash flow reflected the use of $63.2 million for 2021, $89 million lower than the prior year. The cash flow for the fourth quarter of 2021 reflected a use of $17.8 million, which is a decline of $27.5 million compared to a source of $9.7 million during the fourth quarter of 2020. This was primarily related to the underperformance of the business and the increased inventory compared to the prior year. Cash and availability or liquidity totaled $39.2 million at year-end 2021, which was comprised of $27.4 million of availability under our credit facilities and cash on hand of $11.8 million.

This reflects a $44.2 million decrease compared to the year-end 2020 and a $15.7 million decrease compared to the third quarter of 2021. Turning to Slide 18 for a review of our current debt capital structure and maturities. Total gross debt increased by $34.8 million to $300.9 million at year-end 2021. This was primarily attributable to additional ABL borrowings to support the working capital needs amid rising cost, supply chain, and material constraints, as well as a higher term loan balance from our refinancing completed during the first quarter of 2021.

Also, the February 2022 refinancing, we announced in our preliminary press release allowed us to address our working capital needs and to fund low cost expansion in Eastern Europe, with an increase of $35 million of our senior term loan credit agreement. Additionally, the commitment letter executed with core partners management to issue $40 million of Series B preferred stock solely at our option provides us with the certainty of funds to repay the company's outstanding convertible notes at maturity, as well as access to additional liquidity if needed, for general corporate purposes. With that, I'll turn the call back to Terry for his closing comments.

Terry Gohl -- Chief Executive Officer

In closing, let's start with Page 19. As we look ahead, we see a series of tailwinds and headwinds that impact our business in 2022. We have talked about our actions around commercial pricing. We have either implemented or in the process of implementing pricing initiatives to recover the economic impact and input costs we experienced in 2021.

These commercial actions cover all sales channels across our organization. As previously mentioned, a recovery lag is approximately one to two quarters, so we will recognize the majority of the impact of pricing throughout 2022. Highlighted earlier, we project reduced transportation costs driven by our actions and by general softening of transportation costs throughout the course of the year. Relative to steel, we see average CRU projections representing a softening throughout the course of the year.

For Europe and Africa, while initial indicators show a softening of steel costs, we would be remiss if we didn't acknowledge the potential headwinds with the Russia-Ukraine conflict, including potential impact on steel. Semiconductor constraints have continued to date as we maintain daily allocation reviews with our suppliers for the products that we produce and adjust our production planning to reflect volatility seen in OEM production schedules tied to the same issue. This has caused and will continue to cause inefficiencies in manufacturing operations as we process materials on an expedited basis to support our customers. However, we will flex operations accordingly and to the extent allowed under these conditions.

Moving to inventory, we are well-positioned with our current inventory to support upcoming seasonal demands. We have instituted reduced purchases to reflect this inventory position, but we will remain flexible to address incremental market demand beyond what is already heightened levels. While we've made improvements, relative critical material shortages throughout Q1 2022, there's more work to be done. Demand in the Americas aftermarket sales channels remains high in this driving order intake volumes to our open order book of 57 million at end of the year.

This reflected a 14% over Q4 2020 and a rough 105% over Q4 2019. The previously mentioned impediments tied to transportation and critical component supplier being addressed and will lead to converting the order book as we enter the 2022 selling season. Looking at Page 20. In our third quarter 2021 earnings release we provided this format to highlight the areas of improvement and the status of implementation of actions built into our plan.

We'd like to share some updates with you today. Relative to portfolio management we continue to address underperforming and outdated SKUs with another 1,400 SKUs to be removed in 2022. Operationally, we continue access to vertically integrate our Europe-Africa operations which we expect to drive meaningful production efficiencies and reduce costs. We achieved full compliance in IATS 6949 certifications across all of our global locations.

Relative to business practices, we significantly advanced our ESG practices resulting in significant improved performance ratings in social and environmental categories. This is supporting our commitment to sustainability across our operations. We also continue to focus on product development efficiencies. In particular, we have reduced our Americas aftermarket hitch first to market concept to production pounding by 38%.

This enhances our value proposition going forward as we position ourselves to be the best in servicing our customer demand and ultimately the end customer. For our supply chain we have mentioned throughout this presentation the issues we faced primarily in the fourth quarter. While we have not changed our objectives relative to our long-term strategy to optimize our supply chain, our focus in Q4 shifted to addressing material supply shortages. That being said, actions initiated in Q3 and early Q4 of 2021 tied to new supplier onboarding and vertical integration continued as planned.

Regarding distribution and logistics, which we have spoken extensively about in this presentation, it is worth noting we adopted a new 3PL strategy for our Americas logistics platform. This will generate additional efficiencies and associated costs benefits throughout the various aspects of logistics tied to inbound, intercompany, and outbound logistics. It's a very good result. Turning to the last page and in closing.

Let's reflect on the year. We came out of the gate strong in the first half of 2021, but headwinds quickly took shape and significantly impacted our second half performance. Our first half results reflected the capabilities of the business, even in the relatively early stages of our continuous improvement game plan. During the first half of 2021, we demonstrated momentum as our continuous improvement actions were deployed leading to improved customer performance, associated sales, and profitability improvements.

The headwinds described in this call have not fully subsided and we are mindful of the ever evolving geopolitical landscape but remain focused on controlling the controllables and we believe these efforts will be reflected in our 2022 performance. While we were largely consumed throughout the quarter with short-term challenges, we are not wavering on our long-term objectives set for the company. As seen in the first half of 2021, we have continued to build a solid foundation for our business and we'll continue with our plan moving forward. One thing to remember is that, despite the fourth quarter results, we continue to show year-over-year profitability improvements since we started our initiatives in late 2019.

We have taken action to address cost and to secure recoveries, and we are positioned to convert on our inventories as we enter 2022 to deliver on strong order book that's already in place. Thank you for your attention and I will now turn it back to the operator for questions.

Questions & Answers:

Operator

[Operator instructions] And ladies and gentlemen, at this time I'm showing no questions. I'd like to turn the floor back over to Mr. Terry Gohl for any closing remarks. 

Terry Gohl -- Chief Executive Officer

Given that there's no questions, I want to thank all of you that participated today, and we look forward to our next call as we review Q1 2022 results. Thank you very much everyone.

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Jeff Tryka -- Investor Relations

Terry Gohl -- Chief Executive Officer

Dennis Richardville -- Chief Financial Officer

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