HZN (HZN) 2017-12-15 Earnings Call Transcript

Good morning, everyone, and thank you for participating on today's call to discuss Horizon Global's acquisition of the Brink Group. My name is Maria, and I'll be your operator. [Operator Instructions]. This call is being recorded at the request of Horizon Global. If anyone has any objection, you may disconnect at any time. I would now like to introduce Ms. Christi Cowdin, Director of Corporate Communication and Investor Relations for Horizon Global. Ms. Cowdin, you may proceed.

Thank you, Maria, and good morning, everyone. On the call today to discuss the company's acquisition of the Brink Group and answer your questions are Mark Zeffiro, our President and CEO of Horizon Global; and David Rice, our Chief Financial Officer. Earlier this morning, we announced that we have entered into a definitive agreement to purchase the Brink Group. The release is available on many news sites as well as on the Investor Relations section of our website at horizonglobal.com. If you'd like to turn to slide 2, I would like to remind you that the statements in today's presentations 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 statement. With all of that now been said, I would like to turn the call over to our President and Chief Executive Officer, Mark Zeffiro.

Thank you, Christie. Today is another significant milestone in Horizon Global's pursuit of our long-term strategic goals. This morning, we announced that we have entered into a definitive agreement to buy the Brink Group, a $150 million European designer and manufacturer of towbars, wiring kits and towing accessories, based in the Netherlands. On this call, we'll provide an overview of the transaction and share our thoughts on the opportunities and synergies we expect to realize from this combination. We'll also talk about how this transaction positions Horizon Global for future growth and moves us closer to achieving our long-term strategic goals. We believe that Horizon's acquisition of Brink will significantly benefit our customers and users, employees and stakeholders over the coming years. If you turn to Slide 3. Our vision, mission and values define how we operate as a business team. Our vision is to empower people to live, work and play. We have recently reshaped this vision and view our innovative product set as the pathway to realizing this vision. Global truck, CUV and SUV sales continue to increase as consumers look for ways to enhance the way they live, work and play. Whether towing tools or equipment for a wide variety of work applications, or whether it's ways to transport recreational equipment to lakes, compounds or the mountains, our products are an important portion of the consumer's lifestyle. Today's announcement is consistent with our vision and enhances our ability to meet the strategic objectives and performance goals. This transaction strengthens our position as a premier solution provider, product innovator and strategic partner in our industry. Please turn to Slide 4. So why the Brink Group, and why now? In addition to its strong portfolio of products, Brink complements our existing Global business in a number of ways that will significantly benefit our customers and end users. We expect this transaction to reinforce our Global leadership position in a consolidating industry. We view the Brink Group as a highly valuable business and brand, combining our 2 businesses provides a solid platform for growth. We have proven with Westfalia acquisition that we have the right processes and team to integrate a significantly sized business. We now have a well-established project management office in Europe and a dedicated scalable team, prepared to integrate the Brink Group, while not losing sight of our commitments to the synergies related to Westfalia. We are also impressed with the strong management team of the Brink Group. I personally spent time with them last week, and Paul Caruso, who heads up the Europe, Africa business, has also spent a great deal of time with members of Brink's management. We have learned that the Brink Group has a talented, engaged and motivated team that is excited about the opportunities that will exist following the completion of this transaction. Our combined resources should translate to significant benefits to our customers, as we leverage our Global product development pipeline and supply chain that better -- to provide better, more innovative and cost-effective products worldwide. This transaction will enable our company as a combined entity to better serve the needs of our core customers in the OEM, OES, aftermarket and retail, e-tail commerce channels. With our prior European acquisition, we created a market leading position in Europe, a position that was primarily focused on the OEM channel, with a smaller presence into OES and aftermarket channels. At this -- at the time, Horizon Global had very little business with OEMs. So combining with Westfalia was also highly complementary and provided immediate channel and customer access. Bringing together Horizon Global and the Brink Group solidifies our leadership position in Europe and importantly, gives us greater access to another important customer channel, OES. In the past, we've talked about OEs as 1 channel and combined OEM and OES. A significant portion of the Brink Group's business is with the OE accessories groups. Initially, the Brink Group has a strong and complementary aftermarket business, an area of the business that has been in development mode with our Westfalia brand. The acquisition of Brink solidifies our aftermarket presence and broadens our geographic exposure in Europe. Brink has invested in the development of certain products that have -- that are further evolved than our similar products -- product offerings, and the acquisition provides us the ability to advance those products further across a larger and combined global customer base. Conversely, we have certain products that will fill white space needs in the Brink product portfolio. Brink also brings an e-commerce model that nicely complements our own e-commerce efforts. Brink provides a seamless experience for consumers by integrating the delivery of products with service providers and installers, making the purchasing and installation experience easier, faster and ultimately, more satisfying for customers and our consumers. This product is something -- excuse me, this model is something we hope to leverage with our other Horizon Global brands. This acquisition will also help us achieve our enterprise-wide margin target and drive our revenue over the $ 1 billion mark, a high-water level achievement and important milestone, but more important is the increased scale we will have as an organization that should lead to greater access, product breadth, service and an innovation to the benefit of our Global customers. Overall, the addition of Brink will expand all -- our ability to serve all of our OEMs, OES, aftermarket, retail and e-tail customer channels in the European market and beyond. If you'll turn to Slide 5, we can go over the details of the transaction. With this transaction, Horizon Global acquires the Brink Group for €169 million. We expect to finance the acquisition through new long-term debt and cash on hand. While the purchase will temporarily increase leverage above historic levels, we are confident that this level of debt is manageable, considering it is in -- within one half-turn of our leverage level at the end of Q1, 2017. We see a clear 3-year path to achieving our goal to being less than 2x levered. Our plan will be to utilize the incremental cash flow and synergies generated to reduce our leverage over the near term. The purchase price multiple is within our target range, and we expect a multiple of mid-9x adjusted EBITDA, taking into account differences between IFRS and U.S. GAAP. We expect Brink to be accretive to our operating profit margin in its first full year as part of Horizon Global. Based on the timing of regulatory approvals, it is important to note that we expect only a partial contribution from the Brink Group in 2018. We will address how this impacts Horizon Global's full-year 2018 guidance, as we get closer to the completion of the transaction. Turning to Slide 6. For those less familiar with the Brink Group, the company has a deep heritage, originally founded as a blacksmith shop by Wint Brink. Headquartered in the Netherlands, Brink is a leading provider of innovated -- innovative, safe and easy-to-use towing solutions for its customers. With more than 75 years of towing experience, Brink currency produces nearly 1 million towbars annually within an installed base of more than 25 million vehicles. Brink truly fits well with our vision of empowering people to live, work and play. In addition to the physical assets and financial benefits that Brink will bring to Horizon, I want to emphasize the human element. Brink has a talented team of approximately 700 people that are a significant factor in Brinks' growth and success of the company. I have already spoken to the management team, and we expect their talents to enhance our combined leadership team, providing added bench strength to drive Horizon Global's continued growth and achieve our long-term strategic goals. Brinks services the automotive OEM, OES and aftermarket channels with their suite of products. Brink also brings a leading global customer set and advanced manufacturing practices and product technology that we expect to benefit our existing product set and operational practices. The addition of Brink will also enhance our global service levels, benefiting our entire customer base. If you'd slip to -- flip to Slide 7. Let's talk a little bit about the product portfolio and some of the exciting things that Brink brings to the table. The portfolio includes many innovative, user-friendly products, including vehicle towing, bike racks, rooftop cargo solutions and compatible break sensors, which offer key advantages to the market. Brink is proud of its product styling, which offers hidden, sleek designs, noted as being the perfect fit for consumers. Brink has focused on ease-of-use and safety, and its product offer -- offering, broad -- its broad product offerings and -- is compatible with multiple vehicle models, both in Europe and in the U.S. Once the acquisition is complete, the integration of our 2 companies -- and the integration of our 2 companies is underway, we'll be focused on establishing a roadmap for channel-specific design, engineering and manufacturing centers of excellence throughout our global operations to better serve our customers and market channels. If you flip to Slide 8, you'll see more detail on the top line impact of the transaction and the overall balance we expect to achieve with the completion of this acquisition. From a global perspective, the Brink addition will bring more balance to our revenue mix by channel, enhancing the position of aftermarket and e-commerce, while strengthening our position in the OES channel. Our OEM channel will become a more balanced contributor to our overall company sales mix. This balance is important and is a key contributor or to our global positioning and consistency in future periods. Adding the Brink Group to our company enhances this balanced strategy. Additionally, the combination of Horizon Global and the Brink Group fills in white space in our product portfolio and customer set, so we will have a more balanced product and brand portfolio. In the European market, these shifts will be more meaningful as we see Horizon in Europe and Africa become less dependent on the OEM channel of business. Even more importantly, the balance improves our margin profile globally and locally. And the aftermarket businesses historically offer higher margins and favorable impact our -- and favorably impact of our overall mix of these channel becomes more important to the company. Turning to Slide 9. This slide demonstrates the combined company's relationships with industry-leading brand partners in every channel. Of particular note is the OES channel. While we're already doing business in this important channel, the addition of Brink brings access to many new customers and makes this typically higher margin business, a more significant portion within Horizon Global. You can see that in OEM and OES, we work with some of the biggest and well-known automotive names in the world. This slide demonstrates that, right out of the gate, we have the opportunity to cross-pollinate our products with -- between the OEM and OES channel, as there is relatively low overlap. In the aftermarket and retail, e-tail commerce channels, the combined company will have a roster of customers that are trusted household names around the world, who enable us to enhance how people live, work and play. Brink also brings access to new customers in the important aftermarket channel. Let's turn to Slide 10. We see notable synergy opportunities, as we consider the optimization of the Brink Group's business and production footprint as well as the impact of bringing them under the Horizon Global business system. Once the acquisition closes, we expect Europe, Africa PMO office to begin planning and implementing work streams to deliver synergy benefits to the combined business. The integration of the Brink Group will be folded into our ongoing European integration process. With our synergy achievement so far in 2017, we have quickly established Horizon Global's ability to effectively integrate acquisitions into our global operations, driving improvements in the business that benefit all stakeholders. We also anticipate commercial synergies, given the enhanced aftermarket opportunities we see in the combined businesses. From a financial perspective, we expect to generate total synergistic annual cost savings in the range of €10 million to €12 million by the third year following the completion of this transaction. These synergies will be driven by the efforts of the combined team, as we focus on improving efficiency and productivity through our original footprint. It is important to note that any achievement of these synergies in '18, will be influenced significantly by the timing of the close of the transaction. If you would flip to Slide 11. The addition of Brink Group into Horizon Global family will have a meaningful impact on our business and advancement of our strategic goals. We have already discussed how our growth in the OES and aftermarket channels will help improve the margin profile and profitability of Horizon Global. We'll also achieve our $1 billion revenue goal during our full year as a combined company. Our view on the horizon is steadfastly focused on the business beyond today. We believe that this acquisition will position us to serve our customers as solution providers, product innovators and creators of value. Employees of both Horizon Global and the Brink Group will have access to expanded career and development opportunities around the world and will be encouraged to continuously develop and share best practices to improve productivity across the global enterprise. Stakeholders will benefit through earnings accretion in the first full year of the combined company, along with accelerated gross margin improvement and new opportunities for revenue growth. None of this will be possible without the Horizon Global culture that embraces our global efforts as 1 team with 1 goal. We have established our vision to empower people to live, work and play, and our team is fully engaged to achieve that vision. I would like to thank all of the Horizon Global team members, who have put in countless hours, to help our company take this next step in achieving its long-term strategic goals. We're excited about the opportunities that lie ahead for the company and our members, our customers and our shareholders, as we anticipated, become -- welcoming the Brink Group to the Horizon Global family. I look forward to keeping you -- all of you updated on our progress in the months ahead. With that, I would like to open the lines for questions. Maria, could you open the line for questions, please?

[Operator Instructions]. At this time, we have no further questions. I would like to turn the call back over to Mr. Mark Zeffiro.

Thank you, Maria. This is an exciting next step towards us -- for achieving our strategic long-term goals. And what's particularly exciting about this is that we will be on track to deliver those long-term goals in that 3-year time period that we, otherwise, had originally laid out. I want to welcome the Brink family to this company. I tell you, it's tremendous, the resources that I was meet last week and, otherwise, look forward to them being part and parcel of our leadership team. And to everybody that worked on this deal, I can tell you, a tremendous amount of effort and tremendous outcome for us as a company. So with that, I look forward to -- on otherwise updating you on our progress, and the exciting efforts that we can see happen here for the combined set of companies. Thank you and have a great day.

Thank you, ladies and gentlemen. This does conclude today's call. You may now disconnect.

[Operator Instructions]. Our first question comes from the line of Matt Koranda of Roth Capital.

Just wanted to start out with trying to get to the implied EBITDA margin for Brink. My back of the envelope says something around a 15% margin. So one, is that right? And then 2, what makes their margin so much better than Horizons' currently? Maybe you could just talk about the white space that their products fill as an example of maybe why the margins are higher, inherently?

Sure. First of all, you're a little high on EBITDA margins. It's more like 13% to 14%, and what really we're kind of hedging on the multiple is making sure that we've got all of the U.S. GAAP measures nailed down. There was some nice diligence done on this. We learned from what we went through in Westfalia and made sure we had identified the -- sort of the easy and large IFRS to U.S. GAAP differences. So that's what will drive the multiple kind of the mid-low to mid-9s range, if that helps.

Now when you think about the customer set, Matt. If you think about this, one of the things that Brink has done very well is penetrate the OES market, which includes a lot of the Asian domicile, but obviously, manufacturing and assembling in Europe type customers. Those are customers that we're quite strong with everywhere else on the planet other than in Europe. So for us, this is a confluence of customer needs, and frankly, how we interact with those customers on the global scale. The other white space here is, quite honestly, the Brink Group has done a nice job in terms of the next evolution of the mechanical as well as electric retractable solution. Why that's particularly interesting is that their cost position is expected to be significantly better than ours. And we've obviously -- we've had that product now for a couple of years, but their newer version is -- should be more cost-effective longest term. And quite frankly, the white space in terms of the growth here is just like we're doing with the integration of technologies for global customers, whether it was our new customers that we hadn't done business in Asia in a decade because we didn't really have the right kind of solution for them, which is a big contributor to top line synergies in the case of Westfalia. Or in terms of our -- the relative linkage between existing aftermarket business, which we -- it's quite complementary in that respect, where we're strong, they're not, and with they're strong, we're not. So it's a tremendous linkage here between being able to integrate the good and better alternatives in terms of brand positioning in that aftermarket business. So this is going to accelerate the improvement of our aftermarket business.

Okay, that's helpful, guys. Can you just give us the adjustments you made to their EBITDA in more detail to, kind of, get to that 9x? I'm just curious if we could get some of the puts and takes and try to, kind of, get the build-up that you guys are working with?

Yes, there wasn't anything significant in terms of R&D or anything like that. So really it was related to positions -- senior positions that they had already combined. But we're still in numbers, we are clearly not going to fill the most senior position. There was an advisory board cost that we won't incur. There was that -- the treatment of a pension, where it was running through expense. We have recognized it as a liability on the books, so you adjust EBITDA for that expense component, things like that. Nothing unusual in any way.

Okay, got it. And then, when you guys say accretive, I think you said accretive in the first full year, so that implies in 2019? Is that the way to think about it that you're working through synergies as you acquire it next year, sort of running in Q2, and then you reach the run rate of synergies that allow it to be accretive within 2019?

Well, I would tell you, it's accretive in its first full year on a segment basis even without the synergies. It's a much more profitable business than the one that we bought. On a total company basis, the addition of incremental synergies will prove it accretive at that level as well, within that first 12 months.

So margin rate is better as a combined entity even with 1/2 year of implementation, but as you implement synergies on a global scale, that's where everything happens in terms of being able to -- if you'll have better overall margin rates on that full implementation.

Okay. And can we get to, maybe, drill down on synergies for a second. I mean, €10 million to €12 million at a full run rate, and I assume, you guys showed, kind of similar buckets to what you're executing on for Westfalia, but could you talk about, sort of, where you see the most opportunity? Are we talking sourcing and supply chain? Or is there going to be facility-related consolidation with this acquisition?

Obviously, it's also saying that we close a transaction talking about facility consolidation. Obviously, something that we're not going to go down that bunny hole. So let's talk about directionally, what has happened with Westfalia by relative comparison. It's the usual, typical, less heavy lifting things that you, from a staff and structure perspective, where we have duplicate resources that will obviously be the first up. And those are the things that you obviously lead with, as frankly, you want to have the team set as quickly as you can. Now let's also reflect in terms of where we're headed with the Europe and Africa business. Romania continues to ramp and ramp at a very impressive pace in terms of its ability to pick up aftermarket production. That obviously, provides us a low-cost country solution for that particular business, but also gives us overhead efficiencies potentially in our OES business, as we look at that as well. So what we wanted to do is, obviously, it was -- the time-phasing associated with these synergies is important. We've got the year 2 heavy lifting in terms of facilities in Westfalia, that we need to get set before we add more stress to that system and it receives yet more production from, obviously, the Brink Group. So I think the timing of these actions are -- makes a ton of sense. So first up, it's going to be duplicative staff, it's going to be duplicative supply chain infrastructure, whether it's DCs or storage locations and the like. And then ultimately, you're going to get the next wave of that in terms of product cost synergies as a result of redistributing the manufacturing footprint.

The only thing I'll add is that much like Westfalia, they do not have -- Brink Group does not have a very well-developed sourcing strategy in low-cost countries. They were beginning to do it. They started doing it with a third party. So they really didn't receive all the benefits of that cost leverage that they could, if they went direct. So plugging them into our existing structure will be beneficial from a sourcing perspective as well.

That was one of the teams, the Brink teams, most excited points of the leverage they'll have associated with Horizon Global's European -- excuse me, Asian office and the resources, both engineering as well as supply chain wise that they can immediately tap into.

Okay, got it. I'll do one more, and then I'll jump back in queue guys. So looking at the aftermarket customers that you listed, I do see a couple that are consolidating in Europe. Could you, kind of, talk about how this also positions you for that, kind of, coming consolidation in the aftermarket in Europe as well? And is that a meaningful reason to do this? Or is that just kind of an adjacent benefit?

The first major benefit is the OES customers, and us being able to satisfy their needs on a global scale. So that's the first up. Aftermarket is another wonderful addition here, because where they're strong, most notably in France and Benelux, and that's base -- that's where Westfalia was, quite frankly, weak. We were obviously contemplating how we were going to bring Witter brand to the continent, and instead of doing that and with all -- the ensuing fight that comes with that, we've already got the ability now to integrate the product offerings on a local scale, which is really a good outcome for customers, but also good for us in terms of the additional distribution of Westfalia product, but also the Brink product in terms of other elements. As far as the consolidating aftermarket business, I would tell you that this is something that is an underserved portion of the European segment for us, and as such, the -- this integrated effort and broader product offering as a result of the integration of the 2 product portfolios, we should see real growth out of it.

Our next question comes from the line of David Lin of Wells Fargo Securities.

Just a couple of quick ones. On the mid-9x EBITDA, is that inclusive or exclusive of the synergies that you're looking for?

That's on a trailing LTN basis, so it doesn't include any synergies at all.

Got you. And then when you look at the synergies, wouldn't that imply that the Brink Group could get to about a 20% EBITDA margin? You're talking about €10 million to €12 million full run rate savings, if we just overlay that onto the estimated EBITDA numbers. I mean, you're looking -- going from like 13% to 14% EBITDA to close to like 20%. Is that the way to think about it?

What it'll do is it's going to add profitability to the insider segment; because this isn't just about 1 team giving all those synergies, be as -- it may be the best athlete is in the Brink Group, that we need to keep or the best structure in terms of distribution as part of the Brink Group, and we'll advance additional synergies above and beyond what we've already committed to in Westfalia as part and parcel of that. So it's hard to point solely and exclusively at the Brink Group, as you then start to manufacture things in different locations, David, or you end up doing, if you will, best athlete wins in this particular situation, whether it's a distribution facility or what have you.

Got you. And then what's the glide path of that EBITDA? I mean, are we thinking -- are you guys thinking like $3 million, $3 million, or how does that sort of break out through 2020?

It all depends on how quickly we get this closed. Because in the first year, we'll provide that guidance as we get closer to the transaction date towards closing, David. So that'll be obviously contemplated, as we started thinking about 2018 guidance. So we'll be very transparent about that. But right now, we know what the first full year, kind of, feel like, but we've got to get to know when we actually have the ball to actually start to run the plays. So to that end, we'll be very transparent, and you'll know exactly what our commitments are. I'd also like to just reflect, make sure everybody looks back to Q3 earnings release. We are talking about an incremental €9 million worth of synergies as well on top of whatever we generate for Brink in the European business, so that'll be '18, and '18 is the way we're -- where our rally call here for our Westfalia brethren.

Our next question comes from the line of Gerrick Johnson of BMO Capital Markets.

Just a few deal clarification questions. First of all, onetime integration charges, have you formulated what those might be? And what might be pulled out as a onetime item? So that's the one? And number 2, how much debt are you taking on? And what would the interest rate there be?

So we are looking at refinancing our existing term loan with a new term loan. The rate is going to be fairly similar, but by going for a new debt instrument completely, we get to take another look at baskets and amortization rates. So that's the plan on the term loan. It's a little bit more expensive, but we think we get a better result going through that process. And then with respect to the cost for synergies, we haven't time-phased those either. They're going to be probably 70% to 80% of the full run rate synergies that we'll incur in one-time costs over that 3-year span of time. Obviously, it's slightly front-loaded relative to when the synergies come into play. But we'll -- when we talk about guidance, we'll be prepared to give you more guidance around that number as well.