Horizon Global Corporation Common Shares

Good morning, everyone, and welcome to Horizon Global's fourth quarter full year 2021 conference call. My name is Jamie, and I'll be your operator for today's conference. All participants are currently in a listen-only mode until we reach the question and answer session of the conference call. This call is being recorded at the request of Horizon Global. If anyone has any objections, you may disconnect at any time. At this time, I'd like to introduce Mr. Jeff Troika with Lambert IR, Horizon Global's investor relations firm. Mr. Troika, you may proceed.

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 in the investor relations section of our website at horizonglobal.com. Turning to slide two, 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 three, 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 10Q, 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 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 will 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 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 they were 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 five. 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 a period of approximately $25 million being pushed to 2022. Inventory growth of 43 million driven by PPV impact of 28 million, and inventory impacted by components delayed, which impacted the ability to convert associated inventory to finished goods and applied against our booked orders. Europe-Africa performance was driven by global semiconductor shortages and the associated impact on OEM production levels. This impact was not only seen in the overall sales impact of roughly 17.2 million lower sales, but the timing of the changes in releases negatively impacted our 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 a 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 six. 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 to 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 a 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 cost and semiconductor impact on volumes experienced in the second half of the year. Turning to page seven, 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 and 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 eight. 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 to 2022. Moving to page nine. 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. Deal prices in America 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 costs throughout 2021. Q4 2021 overall freight costs increased 209% over Q4 2020. This is driven primarily by increases in base container rates experienced in the second half of the year. While cost per container rates are projected to soften 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 costs 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 freight 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 uncontrolled 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 towards 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 on primarily steel and grade 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 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 in the status of our actions as we continue into 2022. Dennis?