Horizon Global Corporation

Thank you, operator. Good morning, and welcome to Horizon Global’s third quarter 2020 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 third quarter 2020 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 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’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 would like to turn the call over to Horizon Global’s Chief Executive Officer, Terry Gohl. Terry?

Thank you, Jeff, and welcome to all of you who have joined our earnings call this morning. Today on behalf of the complete Horizon Global team, I proudly present our third quarter 2020 results.

Out team today can be summed up in a single word "momentum". Momentum, it’s palpable throughout this company.

We have regained it, we have it and we are going to continue to grow on it. We’ve come a long way in a short amount of time, but with the tailwinds of the improvements achieve, coupled with growing market awareness of the company’s transformation, we will build on the momentum gained to achieve the long-term objectives we have set for this company.

Today’s call represents the fifth of my tenure here at Horizon Global, the first being shortly after I joined the company in September of last year. First full year end and what a year it has been.

A year not only filled with the successful implementation of significant operational and administrative improvements, but a year in which we were all hit with unprecedented challenges thrust upon us by the COVID-19 pandemic. A lot to take in and a lot to manage through.

For us the message during this time was to stay the course, to be aggressive but steady, to never waver from the tasks at hand, the task of continuing to implement the recovery plan developed by the company roughly one year ago, all while ensuring that we were doing everything possible to protect the health and well-being of our great employees. Many of our employees called into this, this morning as they do each quarter.

To each of you and to all the employees of the company, let me say thank you. Thank you for your professionalism.

Thank you for your commitment that you display each and every day. I want to acknowledge that the incredible results reflected in today’s update are directly tied to how each of you applied your individual talents to continuously improve this company.

Great job. The same recognition and gratitude goes out to our supply community and to our customers across the world.

It has been through your unwavering support that we’ve been able to capitalize on our internal improvements to realize the increased sales and performance metrics which we will present today. In sports, the term "sudden change" is used to prepare a team to face unexpected challenges that could happen at any time.

Good teams plan for it and great teams are unfazed by sudden changes as they occur. We’ve had plenty this year.

Our team of employees has demonstrated throughout 2020 that we are a great team, that we do step up, that we don’t shy away from challenges, and we stay the course to deliver on our commitments to our customers, suppliers and to drive improved value to our shareholders. We went from strong volumes early in the year to mandated shutdowns across Europe and pandemic restrictions through the second quarter to dramatic increases in demand in the third quarter.

Rapid and sudden changes for sure, changes and challenges that were met by an unfazed team, all of you, great job and many thanks. Exiting the second quarter we reset our third quarter objectives to reflect the changing market conditions we were experiencing and that they were projecting.

First, to do our absolute best to protect our employees’ health and safety relative to the COVID-19 pandemic and to continue providing opportunities to support them during this trying time as it should go without saying, our employees are our most important asset. Second, to leverage the operational improvements we implemented to increase customer satisfaction and to generate increased sales, backlog, and most importantly, profitability.

Breaking through the shutdown period in July, we knew that the third quarter was our time to convert. The much referred to deep economic recovery was true for Horizon and the impact of those sales needed to be converted into profitability and positive cash flow performance.

And third, to continue to execute the transformational improvement plans we had in place. Our market remains strong and you will see our order book remains close to all-time highs as we exited the third quarter and even through today.

We have a great deal to present, so let’s get into it. Turning to page 5.

You will recognize that the Slide is what we presented in our fourth quarter 2019 earnings deck, our top level action plan. At that time, we clearly stated our targeted objectives of returning the company to double-digit margins through a series of actions defined in our roadmap.

In each of our prior quarterly earnings decks we kept you up to date on the progress made on specific initiatives and some of the performance metric improvements that resulted from the actions as they were implemented. Referencing the chart, we have stayed on track as evidenced by the completed items marked with checkmarks.

Great focus and achievements made by this team. While this reflects only the high level broad objectives, please accept as you have seen in previous earnings decks there are many actions that support the achievement of these objectives.

We said big objectives were big improvements all intended to lead to the operational and financial recovery of the business to double-digit margins. This remains our goal.

Bottom-line message here, the team executed to this plan. We are beginning to see the financial benefit of our hard work during this initial phase of our turnaround.

Turning to Slide 6. How did we perform in the third quarter?

As we look at the margin performance during the period you will see a dramatic year-over-year improvement, as our actions, some of those depicted on the prior page have taken hold. Net income shifted to a positive position for the quarter at $1.6 million, reflecting a $39.1 million turnaround in performance from Q3 2019.

This marks a transition point for this metric moving us into the black for the first time since 2017. Operating profit for the company jumped to $8.6 million for the quarter, reflecting a $21.3 million year-over-year improvement.

This reflects a 1140 basis point improvement in this metric. This improvement was driven in part by significant operational improvements throughout the business as fundamental operational excellence measures continued to be implemented by the team.

Adjusted EBITDA for the quarter was $16.1 million representing a $19.1 million improvement over prior year Q3 year-to-date measure. Adjusted EBITDA margin for the quarter increased to 8%, representing a 970 basis point improvement over prior year and an 800 basis point improvement over Q2 2020.

August adjusted EBITDA performance at 11.4% of sales highlights the company’s ability to convert on volume to double-digit adjusted EBITDA level margins. From a year-to-date perspective, we have generated $19.1 million in adjusted EBITDA representing a $10.9 million year-over-year improvement, in spite of our sales being down $62.8 million due in large part to the impact of the COVID-19 pandemic on our global operations in late quarter one and throughout quarter two.

We recall that we were down over a $100 million in targeted net sales during that time, yet we still performed at a positive adjusted EBITDA level in spite of it. Through the first three quarters of 2020 we generated positive $24.2 million of cash through operations.

This reflected a massive $90 million improvement from the prior year, yes a $90 million improvement. As a highlight $19.3 million of the $24.2 million cash from operations was generated in the third quarter alone.

Again, representing strengthening momentum. A major driver of this performance was our continued focus on effective trade working capital and inventory efficiency management.

These coupled with our improved profits reflected solid performance even with the heightened demands of supporting escalated sales throughout the third quarter. In Q3 net sales increased 13.3% or $23.7 million over the prior year, with the Americas leading the way as evidenced by the 23.8% sales increase seen year-over-year for the region.

We recognized a $45.1 million improvement in working capital compared to Q3 2019 marked by significant improvements in both inventories and accounts receivable. Overall, we improved our cash and availability to $78 million at the quarter end Q3.

This represents a $17.1 million year-over-year improvement and a $32.5 million or 71% improvement from our second quarter 2020 results. Again, this achievement was during a period of serious growth in sales which traditionally negatively impacts working capital.

I trust you would agree that the team performed extremely well during this quarter. Moving to operational highlights, please turn to Page 7.

As you recall in the Q2 earnings deck we highlighted specific actions that were completed relative to continuous improvements implemented across the operation at the administrative levels. Continuing with that theme, let’s take a look at some of the metrics impacted by those improvements seen on this and the following slide.

One of those highlights is centered around the improvements implemented at a Reynosa, Mexico Metals facility relative to hitches. The throughput improvements implemented placed us in favorable position with our customers, allowing us to better address and increase market demand and grow unit sales products at lower costs.

In the left bar chart, you can see the monthly comparative units sold compared to 2019. This is total hitches sold year-to-date for the Americas region including both OEM and aftermarket segments.

The green bars, these represent positive performance months compared to 2019. With the exception of the OEM, COVID-19 related shutdown period of March through May, we are significantly outperforming 2019.

Year-to-date we are up over 10% even with the impact of COVID-19 pandemic and trending to a significantly higher levels beyond 2019 as we progress through the third quarter. The third quarter unit sales are up 34% and October’s preliminary view of unit sales being 64% better than the prior year.

As you know, our business distribution in North America is heavily weighted to the aftermarket sales channel. You can see this with the chart on the right highlighting the aftermarket hitch in unit sales comparison to prior-year.

This is a subset of the chart on the left. First, focusing on the red bar seen from March through April you can see that while the impact of COVID-19 pandemic, while significant, it was less severe and for a lower duration of time than the overall segment performance.

Our units sold into the aftermarket sales channels were up 45% for the third quarter over prior year. This better than prior year performance continued to progress to even more impressive 93% improvement over the prior year with October’s preliminary sales results.

More on this later. New order intake remained strong for hitches which is keeping our backlog at an impressive level.

I’ll return to that later in the slides. Turning to page 8.

Here we are highlighting the progress being made on another very important aspect of our business improvement plan. Through a combined product and commercial strategy, we targeted and achieved significant improvement in our sales value per unit sold in North America.

Through SKU optimization efforts and standard pack initiatives, we’ve been able to shift our sales dollars per unit metric significantly higher this year. Short of the impact of the COVID-19 pandemic, we have been positive to prior-year on this metric with June through October period reflecting a 42% improvement over the prior year.

This shifting of value of products sold has led to improved efficiency at our distribution centers and increased utilization at our manufacturing sites. Heightened availability of high-value products produced at our Mexico sites has been instrumental in this transition.

Turing to Page 9. The health and well-being of our employees is paramount to us here at Horizon Global.

Through a strong collaborative effort, we have implemented what we believe are aggressive and effective protocols throughout our operations to mitigate or minimize the impact of the COVID-19 pandemic on our employees. While ut we cannot control the virus, we have taken prudent steps to limit exposure and potential transmission within the walls of our operations.

Remote site work options and in some cases, mandates, have been put into place where possible. Robust PPE availability and utilization and work rules are in place and are being followed by all of our employees.

Contact tracing protocols are being followed with self-quarantine requirements in place to protect not only potentially impacted employees, but all of the employees they may be coming in contact with. We consistently promote personal responsibility and how that plays out for our employees outside of the workplace in their social settings.

Our results have been good so far. An example of this is shown on the charts below on this slide.

You can see the chronology of the virus and its impact on our employees at both of our Reynosa locations. The gray line represents cases confirmed through testing while the yellow line represents the total cases inclusive of confirmed infections, those with symptoms and those on leave due to contact tracing quarantine.

There has been a dramatic reduction seen since July in confirmed cases. We currently have sustained zero confirmed case levels for quite some time now at both of our facilities.

At the peak with 50 confirmed cases we never surpassed 3.3% infection rate at those facilities and that for only a short period of time. This was better than the general regional rates for the community.

We are seeing that comparison up to now for all of our locations globally, which is a testament to our employees. Overall, we have 11 confirmed cases throughout our global operations or roughly a 0.2% infection rate.

We have also taken steps to support our employees and their families during these challenging times. Our mental and emotional health services have been increased and communicated to every employee.

We have conducted and had tremendous participation on overall wellness seminars. In listening to our employees in the challenges they are facing with balancing work and home life with many children of our employees on remote learning restrictions, we initiated an online tutoring program.

Great participation and a great response. We are continuing to deploy innovative solutions in support of our employees.

Relative to the virus, we will continue to evolve with the knowledge of experts as to the best practices to be deployed throughout our operations. Moving to Slide 10.

In this slide you can see the progression of sales and adjusted EBITDA month over month for the year and also compared to the 2019 levels. Our net Q3 sales increased by 13.3% over the prior year as we recovered from the impact of the COVID-19 pandemic seen during the first half of 2020.

Embedded in the year-over-year comparison is the elimination of historical end of quarter sales post discounts as seen in 2019. We are not sacrificing bottom line performance for top line sales headlines.

Good numbers, good trends, relative to sales. Throughout the quarter, with sales being substantially up, we also maintain a very strong backlog driven by increased new order intake across our channels.

More to come on this in my closing comments later, but the momentum for the company continued to escalate through October. Relative to adjusted EBITDA performance as stated earlier, our performance improved $19.1 million or 970 basis points for the third quarter as compared to Q3 2019.

Further, emphasizing this momentum in September, 2020 the company’s adjusted EBITDA improved by $7.3 million or an impressive 1080 basis points over September 2019. Due to the strength of our September 2020 results, we realized positive trailing 12-month adjusted EBITDA performance being positive as of September 30, 2020.

This also drove positive net income for the third quarter, which again, is the first time we’ve been in the black on this metric since 2017. I will come back later for a look at October sales and some closing comments, but for now I’ll turn it over to Dennis for the financial section.

Dennis, take it away.

Thank you, Terry. Good morning everyone and thank you for joining us.

Please turn to Slide 11 for an update on our refinancing. As previously shared with you in our second quarter earnings call, we executed an amendment in July to refinance the outstanding balances of our first and second lien term loans into a combined term loan.

Replacement term loan comes with an extended maturity and is cost neutral. It provides the company with enhanced operational flexibility, it demonstrates lender confidence in the business to execute its strategic initiatives.

To echo Terry’s comments, we are very pleased with the third quarter results. The hard work of the team around the globe is starting to show and we expect it to continue as we focus on earnings growth as well as solidifying the balance sheet and working capital management.

I would like to thank everyone for their contributions and dedication. Please turn to Slide 12 for review of the company’s consolidated results for the third quarter of 2020.

As a reminder, all results will be on a continuing operations basis. As a result of the company’s sale of its APAC segment in the third quarter of 2019, APAC is classified as discontinued operations for all periods presented in Horizon Global’s financial statements.

Therefore, they are not included in the discussion of ongoing results. Consolidated third quarter net sales were $201.6 million, an increase of $23.7 million or 13.3% from the prior year comparable period.

The net sales increase was primarily attributable to $22.9 million of higher net sales in the Americas segment, but both operating segments showed sales increases over the prior year. Operating profit increased to $21.3 million in the prior year.

We reported favorable performance with an operating profit of $8.6 million compared to an operating loss of $12.7 million in the third quarter of 2019. Increased gross profit as a result of the increased sales and operating and manufacturing efficiencies, along with $6.3 million of SG&A savings, drove the favorability in the quarter.

We reported adjusted EBITDA of $16.1 million which is $19.1 million higher than the prior year. Higher adjusted EBITDA was primarily due to increase in gross profit and SG&A savings previously mentioned.

Consolidated adjusted EBITDA margin increased to 8% as compared to negative 1.7% for the prior year. Now let’s turn to Slide 13 to review the segment performance for the quarter.

Net sales in our Americas operating segment were $119.1 million, $22.9 million higher than the prior year. We showed strong demand in volume across virtually all of the Americas sales channels.

The net sales increase was primarily attributable to $10.9 million of combined higher net sales in the retail and e-commerce sales channels and $8.5 million of higher net sales in the aftermarket sales channel. Automotive OEM and OES net sales also collectively increased $4 million.

Net sales reflects a decrease of $1.5 million in sales, discounts, returns and allowances compared to prior year, despite the sales growth in the channels historically impacted by these discounts and allowances. We reported an operating profit of $13.2 million compared to an operating loss of $2.2 million from the prior year.

The increase in operating profit was primarily driven by higher gross profit in the quarter from the increased sales volumes and the realization of manufacturing efficiencies during the quarter. Adjusted EBITDA increased to $15.5 million in the quarter as compared to $550,000 for the prior year.

Adjusted EBITDA margin increased to 13% as compared to 0.6% from the prior year. Transitioning to our Europe, Africa operating segment.

Net sales increased to $82.5 million, up $860,000 or 1.1% compared to the prior year. The increase was primarily due to $4.5 million of higher net sales in the aftermarket sales channel, which was partially offset by $3.5 million of lower net sales in the automotive OEM and OES sales channels.

We reported an operating profit of $2.4 million compared to an operating profit of $1.7 million in the prior year. Increased operating margin was primarily attributable to a $1.4 million reduction in SG&A cost.

Adjusted EBITDA increased to $6.1 million for the quarter as compared to $730,000 from the prior year. Adjusted EBITDA margin increased to 7.3% as compared to 0.9% for the prior year.

Now, moving on to our working capital, liquidity and free cash flow position on Slide 14. Total trade working capital was $66.6 million in the third quarter of 2020, which represented a reduction of $23 million compared to the fourth quarter of 2019, and a reduction of $45.1 million compared to third quarter of 2019.

Specifically, receivables increased to $106.7 million, an increase of $13.2 million compared to the third quarter of 2019. Days sales, outstanding, was 49, an increase of one day as compared to the third quarter of 2019.

Inventories decreased to $107.1 million, down $34 million as compared to the third quarter of 2019. Inventory days on hand were 62 days, a decrease of 25 days as compared to the third quarter of 2019.

Accounts payable increased to $97.2 million, up $17.7 million as compared to the third quarter of 2019. Days payable on hand was 56 days, an increase to 7 days as compared to the third quarter of 2019.

Cash and availability or liquidity totaled $78 million for the third quarter of 2020, which was comprised of $38.2 million of availability under our credit facilities and cash on hand of $39.8 million. This reflects a $17.1 million improvement over the third quarter of 2019.

Free cash flow totaled $16.1 million at the end of the third quarter of 2020 which is $90.4 million higher than the prior year. Free cash flow for the three months ended September 30, 2020 was $16.7 million, which is a $22.2 million improvement from the comparable period in 2019.

The increase in free cash flow in both periods is significant and is driven by improved working capital management and overall strong financial results. Turning to capitalization on Slide 15.

Total gross debt increased $28.6 million from $239.2 million in the third quarter of 2019 to $267.8 million in the third quarter of 2020, primarily due to increased borrowings during the first and second quarter of 2020 to strengthen liquidity in response to the COVID-19 pandemic. Since the initial impact of the COVID-19 pandemic earlier this year, the company has continued to meet its liquidity needs to run the business and deliver on our operational improvement initiatives.

We remain focused on the balance sheet and liquidity during a period where we have seen an extension of the peak North Americas selling season along with continued working capital needs to meet the market demand that has outpaced the prior year. The company’s liquidity and working capital have improved and we can see that cash flow from operations are supporting the liquidity needs of the business.

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

Thanks Dennis, great job. Turning to Slide 16.

Momentum regained, that is exactly what the third quarter and now October 2020 represents. Based upon preliminary October results, Americas net sales continued to outpace 2019 monthly, quarterly, and year-to-date levels.

Sales from June 2020, the month that the early phase recovery from COVID began through October 2020, our net sales are up 29.7% over the same period in 2019. Again, heightening momentum, our preliminary net sales for October are up 54.5% versus October 2019 representing a great trend.

Europe and Africa’s net sales for June through October 2020 period are up 5.6% with preliminary October net sales really kicking in to generate a 24.8% improvement over the same period in 2019. OE net sales continued to remain strong in the region with take rates and general production rates for vehicles which we support being favorable.

Overall, the tagline represents strong statements and representation of our position. October global net sales are projected to be 39.5% better than 2019, strong, strong momentum.

Continuation of the strength in customer orders can be seen on Slide 17. This slide presents a clear depiction of both our year-over-year sales performance from a growth standpoint and the backlog level comparison month over month as compared to 2019.

Key takeaways, our sales have been up significantly since May. We have an even outpace that rate with the level of inbound order intake in the generated resulting backlog.

We ended October with $40.7 million in backlog in North America which represented an 82% increase to the same metrics seen in 2019. This in addition to our gross sales being up for the region close to 54% versus prior year October.

Our market remained strong and is not diminishing. Turning to Page 18.

In summary, it was impressive quarter for Horizon Global, thanks to the collective work of our team and the continued support we received from our customers and our suppliers. Indenting the content of what you've heard today into a simple single slide is challenging, but our summary is as follows.

Significant improvements to our financial performance being recognized, our focus on cash manage has paid off with massive improvements in operational cash flow and resulting liquidity. Profits have returned to respectability with more opportunities for improvement in the works.

Net sales have shifted to higher value per unit SKUs and backlog book business levels are higher than they have ever been. We are producing more product through a complete transformation and operational excellence methods deployed in our plants.

We are distributing more efficiently at higher levels and at lower costs at our central and regional distribution sites. Preliminary October net sales came in strong and backlog orders being at significantly higher levels than prior years.

The market remained strong and our customers continue to look to Horizon Global to deliver for them during these challenging times. Take note of the backlog orders in North America exiting October.

At $40.7 million, this backlog represents 146% of the actual full 2019 November gross sales in North America. We continue to execute our plan and remain committed to returning the company to its historical profitability levels and beyond.

This while significantly increasing cash flow generation leading to delivering our balance sheet. The momentum continues and we look forward to speaking with you again with our year-end results.

Thank you for your time today and the interest that you have in our company. I will now turn it over to the operator for questions.

Operator?

Thank you. And thank you all for joining this morning.

I appreciate your interest in the company and continued support, and we look forward to presenting our year-end performance and full-year performance in our next call. Thanks again.