Horizon Global (HZN) Q1 2022 Earnings Call Transcript

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Horizon Global (HZN)
Q1 2022 Earnings Call
May 05, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Horizon Global first quarter 2022 earnings results conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Jeff Tryka of investor relations. Please go ahead.

Jeff Tryka -- Investor Relations

Thank you, operator. Good morning, and welcome to Horizon Global's first quarter 2022 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 first quarter 2022 results.

The release is available on many news sites as well as 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 in 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 describe 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 the call today as we review our first quarter results for 2022. Today, we will focus on our Q1 2022 results and the challenges impacting our performance. We will also look ahead and provide an overview of the opportunities and challenges presented in our business today. As far as the quarter, we are extremely disappointed in our results and performance during the quarter.

There were many factors influencing our performance, some we couldn't control and some we should have controlled better. Our team is focused on improving performance going forward. Our business model was challenged by step changes in inflation and volume and we haven't managed it effectively or aggressively enough. This will improve.

OEM production levels during the quarter were negatively impacted by supply chain issues tied to the continued global semiconductor shortages across both Europe, Africa and North America, and for Europe, sudden and severe supply disruptions resulting from the Russia-Ukraine war. Operations were flex, but the impact was unavoidable. Currently, we are seeing recovery in assembly plant operating schedules across Europe and increased production forecast for the remainder of the year in North America. IHS full year production forecast for North America are projecting a 13% year-over-year improvement overcoming the Q1 negative performance of 1.8%.

Of note, Horizon did not impact production levels at any OEM throughout the period. During the quarter, there were also a significant shift in ordering patterns in higher-margin non-OE channels in North America from those seen in both 2020 and 2021. In Q1 2022, these markets radically shifted back to historical seasonality patterns. We didn't identify it early enough and we are taking steps to improve systems and procedures to correct that.

We planned for and positioned ourselves for 2020 and 2021 conditions that did not materialize. While we took action to flex our operations, retime purchases where possible, long lead items in transit continue to flow in at initial planning volumes. Leading into continue to support overarching market demand, albeit seasonally adjusted, including record levels of RV sales trailer production and the aforementioned increasing OEM forecast to name a few. On a positive note, our inventory is positioned to support seasonal needs and will optimize working capital throughout the second half of the year.

Material cost recovery actions while predominantly in place with our customers, continue to lag in recognition tied to the base implementation timing, coupled with the impact of lower volumes. We expect the benefit of our pricing actions to be fully recognized throughout 2022. This recovery, together with expected favorability in volumes and softening in steel and average freight cost inflation should positively impact our performance in 2022. Now let's turn to Page 5.

Key metrics on our quarter. Sales were down as compared to Q1 2021 by $18.3 million. This was driven by volume mix resulting from non-OEM channels, primarily in the Americas, returning to seasonal patterns and lower global OEM volumes due to the continued supply chain constraints, including semiconductor shortages and in Europe and Africa, part shortages coming out of Ukraine. Adjusted EBITDA was down $19.3 million as compared to Q1 in 2021.

Gross profit and adjusted EBITDA were negatively impacted by delayed or missed sales due to the aftermarket seasonal shift, OEM production volumes, critical component shortages, which delayed timing for completion of roughly $20 million in booked orders and the lag in pricing recognition described earlier. Inventory growth in the Americas of $41.7 million compared to Quarter 1, 2021 was driven primarily by $28 million of increased material costs and retime to lost sales due to supply chain constraints and/or customer interruptions. As mentioned earlier, our inventory levels position us to meet seasonal demand. This inventory will be reduced and monetized throughout the remainder of the year.

Again, while we flex where possible, we can and we will do better. Now let's move to Page 6. On this page, we present Q1 2019 through Q1 2022 net sales and adjusted EBITDA results. And we feel it is important to also present to you a view of our business today versus pre-pandemic and macroeconomic impacted periods.

Net sales increased from Q1 2019 by approximately $3.2 million or 1.8%, while the comparison to Q1 2021 reflected a decline of $18.3 million or negative 9.2%. The drivers of our adjusted EBITDA performance deterioration were attributable to approximately $14 million of reduced volume and mix as well as approximately $5 million of adjusted EBITDA impact due to the lag in pricing recovery recognition. Three factors contributing to this decline were: one, the return to seasonal ordering patterns for our non-OEM channels through the continued supply chain constraints and material costs that we recognized. And three, sudden OEM customer interruptions as described earlier.

We'll hit each of these points and their associated impact on the quarter later in this call. Now we'll turn to Page 7. The quarter was significantly impacted by customer assembly plant disruptions, primarily in our Europe-Africa operating segment. These disruptions are a larger industry issue.

They were initially tied to the semiconductor shortage and accelerated throughout the quarter due to the Russia-Ukraine War exacerbating supply chain constraints. Throughout this period, OE customer disruption was not caused by Horizon. As you can see in March, we experienced some level of disruption at 17 customer assembly plants that we supply in Europe, a significant impact to our business. While we are down from the peak disruption levels today, these customer interruptions negatively impacted our Q1 2022 performance in net sales by approximately $9 million and an adjusted EBITDA by approximately $3 million.

This adjusted EBITDA impact was largely attributable to operational performance. As discussed on the last call, we took immediate actions primarily in Europe and Africa to flex production as much as possible, including shutdowns, furloughs, and delaying purchases where possible. A majority of our customer assembly plants are back online with OEM production forecasted to increase throughout the remainder of 2022. Moving to Page 8.

As mentioned on our last call, we expected to see steel costs soften in Q1 2022 from second half 2021 peaks. A couple of important points here. The impact of our operational performance relative to steel cost is generally recognized in a one- to two-quarter lag. We fully implemented pricing recovery actions across our non-OEM business and are in the process of recovering material costs from our OE customers.

While our pricing actions have been largely successful, full run-rate recognition will not occur until later in the year. We expect steel costs in North America to be stabilized at a cost below the second half peak level values. Moving to Page 9. Similar to trends in the steel market, we expect to and began to see softening in freight rates in North America.

Our average container cost in Q1 2022 are down below second half 2021 peak rates. We expect recognition of this positive performance in Q2 2022, generally reflecting the one-quarter lag we discussed in the past. We continued execution of our port rebalancing strategy and has already led to reduced container cost and transit times as well as significant decrease in costly diversions. We will continue to execute our rebalancing strategy throughout 2022 as we optimize freight costs, transit times, and ultimately, delivery of our products to our customers.

We expect favorability during 2022 and average freight cost and transit times versus the second half of 2021, which included the peaks. Moving to Page 10. Our increased inventory was driven by a number of factors. As previously mentioned, we have seen our industry has shifted back to seasonal ordering patterns.

We expect to see increased order intake as the season progresses and the corresponding depletion of our inventory levels. This tapering of our inventory will be accelerated as we throw the purchasing levels for the remainder of the year and leverage inventory already in place. We are in a strong position to support seasonal demand, which could positively impact working capital in the second half of 2022. Additionally, commodity and other input costs remain significantly elevated as compared to Q1 2021 levels.

This has resulted in additional inventory costs on our balance sheet that will be recovered through our pricing actions as we progress through 2022. On the right side of the page, you see our net sales comparison by segment from Q1 2021 through Q1 2022. As previously mentioned, net sales for the quarter were negatively impacted by material availability, customer disruptions, and the return to seasonal ordering patterns for our higher-margin non-OE product. Q1 2022 net sales levels were also unfavorably impacted by a lag in recognition of price recovery actions.

As discussed, we expect the full run-rate benefit to occur during 2022. Now I'll turn it over to Dennis for the financial review, and I'll return in a few minutes to provide some final comments. Dennis?

Dennis Richardville -- Chief Financial Officer

Thank you, Terry. Good morning, everyone, and thank you for joining us. As Terry mentioned, First quarter results were impacted by continued supply chain constraints and material availability. We continue to focus on working capital and opportunities to mitigate these headwinds, especially in the Americas, throughout 2022.

Please turn to Slide 11 for a review of the company's consolidated results for the first quarter of 2022. Consolidated net sales for the first quarter of 2022 were $180.9 million, a decrease of $18.3 million or 9.2% compared to the first quarter of 2021. Net sales decrease was primarily attributable to lower sales volumes in both the Americas and Europe-Africa operating segments. The decrease was partially offset by 2022 pricing initiatives implemented to recover the impacts of increased material costs, including steel and other input costs.

These pricing recoveries relative to material costs are recognized on a one- to two-quarter lag. Gross profit margin decreased to 11.2% compared to the first quarter of 2021, primarily driven by the lower sales volumes, increased input cost, and the timing of price recoveries described above. We reported an adjusted EBITDA loss of $6.6 million compared to $12.7 million during the first quarter of 2021. This was primarily due to the lower gross profit margin performance previously mentioned.

Now let's turn to Slide 12 to review the segment performance for the quarter. Net sales in the Americas were $101.9 million, $7.9 million or 7.2% lower than the first quarter of 2021. The decrease in net sales were driven by lower volumes with the seasonal shift of higher-margin non-OEM business impacting performance. This impact was partially offset by pricing recovery initiatives.

Adjusted EBITDA loss for the segment was $2.3 million compared to $12.9 million for the first quarter of 2021. The decrease was driven by lower net sales, coupled with unfavorable material costs, partially offset by customer pricing recoveries, just previously mentioned, lag recognition of the input cost by one to two quarters. Transitioning to our Europe-Africa operating segment. Net sales were $78.9 million, a decrease of $10.5 million or 11.7% in the first quarter of 2021.

This decrease was primarily driven by lower sales volumes in the automotive OEM and aftermarket sales channels as well as unfavorable currency translation. The decrease was partially offset by pricing recovery initiatives. Adjusted EBITDA for the segment decreased to $1.5 million compared to $5.4 million for the first quarter of 2021. This decrease was driven by lower net sales, coupled with unfavorable manufacturing input costs primarily material cost, and operational inefficiencies due to rapid customer disruptions.

Now moving on to our working capital liquidity and free cash flow on Slide 13. Trade working capital was $111.2 million in the first quarter of 2022, which represented an increase of $2.4 million compared to the fourth quarter of 2021 and an increase of $29.4 million compared to the first quarter of 2021. Specifically, receivables increased $14.9 million to $95.6 million compared to the fourth quarter of 2021. Days sales outstanding was 48%, an increase of 3 days over the fourth quarter of 2021.

Inventory increased $16 million to $178.8 million compared to the fourth quarter of 2021 driven by the unfavorable material costs, supply constraints on critical components, and a return to seasonal ordering patterns. Days on-hand inventory was 100 days, a decrease of one day over the fourth quarter of 2021. Accounts payable increased $26.5 million to $128.7 million compared to the fourth quarter of 2021. Days payables on hand was 72 days, an increase of nine days from the fourth quarter of 2021.

Cash and availability or liquidity totaled $47.4 million for the first quarter of 2022, which was comprised of $17.7 million of availability under our credit facilities and cash on hand of $29.7 million. This reflects an $8.2 million increase compared to the fourth quarter of 2021 and a decrease of $16 million compared to the first quarter of 2021. Free cash flow during the first quarter was a use of $23.3 million compared to a use of $21.6 million during the first quarter of 2021. This was primarily related to increased inventory and receivables, slightly offset by increased accounts payable compared to the prior year.

Turning to Slide 14 for a view of our current debt capital structure and debt maturities. Total gross debt increased by approximately $42.8 million from $300.9 million at the end of the fourth quarter of 2021 to $343.6 million at the end of the first quarter of 2022. This is primarily attributable to $35 million of incremental borrowings under our term loan. With that, I'll turn it back to Terry for his closing comments.

Terry Gohl -- Chief Executive Officer

In closing, we have hit on a few major themes throughout the call. First, in addition to continued supply chain constraints, we experienced rapid customer disruptions relative to the Russia-Ukraine war. While we saw peak levels of customer assembly plant disruption during March, many of our Europe-based customers are back online and there is a positive outlook for global OE production for the remainder of 2022. As mentioned previously, IHS projects full year 2022 North American production volumes to increase 13% over 2021.

Secondly, we believe we are seeing a shift back to seasonal ordering patterns for our non-OE business. While we expect favorable impact during the selling season, historically during Quarter 2 and Quarter 3 and weighted toward our higher-margin non-OE business. This shift negatively impacted our performance in Q1. Third, our response to spikes in steel, freight, and other input costs is critical to the viability of our business.

We have been through this at length during this call, but it's worth repeating. We have fully implemented pricing recovery actions with our non-OEM customers. And we have either implemented or remain in active discussions with our OEM customers. We expect the benefit of our pricing actions to be fully recognized during 2022.

This recovery, together with expected softening in steel and average freight cost inflation should positively impact performance in 2022. And finally, I'd like to restate that we are not pleased with our results in Q1 2022 and we are determined to do a better job in addressing the very dynamic and ever-changing markets that we serve around the globe. We are now positioned with the highest flexible manufacturing capacities generated through lean initiatives that we've had since 2019. And with our quality performance being better than has ever been, we still have holes to fill in the processes that contributed to our first quarter results.

First, material supply constraints. Throughout the quarter, we experienced constraints on key components with limited execution on orders. While we had initiated countermeasures strategic sourcing actions, we are expanding and accelerating these initiatives. Second, forward forecasting to better predict major shifts in market dynamics.

We have implemented new organizational processes and procedures to draw in a broader set of industry indicators to improve forecast accuracy. Further work will be done relative to these processes and will be included in the upgraded capabilities, which will be gained with our ERP and 3PL introductions in Q3 this year. Third, we are addressing operational planning to align sales and inventory levels to efficiently monetize working capital throughout the remainder of the year. And lastly, we have and will continue to supplement our team with highly capable industry leaders.

We continue to be successful with this objective as seen with the recent appointments of our new president, [Inaudible] and financial leader to run in-house for our Europe Africa operations segment. While there are still some factors that remain outside of our control at present, leading indicators relative to product demand remains strong for the remainder of 2022. We look forward to speaking with you again when we report our Q2 2022 earnings. Thank you for your attention.

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

Questions & Answers:

Operator

It looks like we do not have any questions for the question-and-answer session. So this concludes our question-and-answer session. I would like to turn the conference back over to Terry Gohl for closing remarks. Please go ahead.

Terry Gohl -- Chief Executive Officer

Yes. In summary, again, tough quarter. We're going to do better. We've got good outlook in terms of the forward view of the business for the remainder of the year.

But I'd like to thank you all for joining the call today. and we look forward to our next call as we discuss our second quarter results. Thank you very much.

Operator

[Operator signoff]

Duration: 25 minutes

Call participants:

Jeff Tryka -- Investor Relations

Terry Gohl -- Chief Executive Officer

Dennis Richardville -- Chief Financial Officer

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