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Edited Transcript of HZN earnings conference call or presentation 12-Nov-19 1:30pm GMT

Q3 2019 Horizon Global Corp Earnings Call

TROY Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Horizon Global Corp earnings conference call or presentation Tuesday, November 12, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James G. Pierson

Horizon Global Corporation - CFO

* John C. Kennedy

Horizon Global Corporation - Independent Chairman of the Board

* Terrence G. Gohl

Horizon Global Corporation - CEO, President & Director

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Conference Call Participants

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* Michael Joshua Nichols

B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group

* Jeffery A. Tryka

Lambert, Edwards & Associates, Inc. - Senior Consultant

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Presentation

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Operator [1]

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Good morning, and welcome to the Horizon Global Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jeff Tryka, Investor Relations. Please go ahead.

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Jeffery A. Tryka, Lambert, Edwards & Associates, Inc. - Senior Consultant [2]

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Thank you, operator. Good morning, and welcome to our Third Quarter 2019 Conference Call and Webcast.

On the call, today are John C. Kennedy, Chair of Horizon Global's Board of Directors; Terry Gohl, Horizon Global's Chief Executive Officer; and Jamie Pierson, Horizon Global's Chief Financial Officer.

Earlier this morning, we announced our third quarter 2019 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. 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.

Today's presentation also includes non-GAAP disclosures. These disclosures are reconciled to GAAP in the appendices to our quarterly press release and presentation, both of which are available on the Investor Relations section of our website at horizonglobal.com.

With all that being said, I would like to turn the call over to Horizon Global's Board Chair, John C. Kennedy. John?

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John C. Kennedy, Horizon Global Corporation - Independent Chairman of the Board [3]

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Thanks, Jeff. I'm happy to be able to join the call to formally introduce Terry Gohl, our new CEO, and provide some context of why we chose Terry to lead the Horizon team.

When the new Board was appointed in early 2019, we saw the bones of a great company, which had operational challenges in the Americas, unsuccessful efforts to fully integrate a large European acquisition, had a massive substantial amount of debt and repeatedly underperformed market expectations. We knew we needed to decrease that rapidly, and we felt the best way to do this was the sale of the Asia Pacific business.

Our management team worked tirelessly on this sale process and brought us an absolutely great result. During the sale process, the Board maintained strong oversight over management and the operations of the company. The sale of the APAC business significantly reduced our debt but we needed our continuing operations to perform to their full capability.

Many operational improvement initiatives were identified, but Horizon required strong data-driven operational leadership to execute these initiatives at a faster pace in order to get this business back to where it was just a few years ago. The Board identified Terry Gohl as a proven leader of -- capable of restoring profitability and creating a culture of operational excellence at Horizon Global. Terry served as a CEO in another significant and successful operational turnaround, and we are confident that he can do the same at Horizon Global.

Terry's passion for operational excellence and the speed in which he operates is exactly what we need. Terry has already dug in deep and is driving change. From traveling with him, I believe Terry's priorities are clear. He will work tirelessly to accelerate the turnaround of this business and, in turn, maximize long-term value for the benefit of our shareholders, employees and all of our stakeholders.

As Terry will tell you, all of the identified issues are fixable, and we are optimistic about our ability to show significant progress on these through 2020.

Terry, with that intro, welcome to Horizon. I will now turn the call over to you.

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Terrence G. Gohl, Horizon Global Corporation - CEO, President & Director [4]

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Good morning, everyone, and thanks, John, for that very kind introduction. I'm truly honored that the Board has entrusted me to lead Horizon Global and its 4,000 employees into the future. I would also like to express my sincere gratitude to the men and women of the company, to our customers and to our suppliers for the positive reception and support that I have received thus far. Thank you for that.

Even though I have only been here for about 50 days, the magnitude of opportunities available to this company has become clear. We control our own destiny relative to the majority of these opportunities, and while we've executed on some already, we are organizing and planning to fully implement them all.

Early actions are yielding results. We have had an aggressive schedule over the past 7 weeks, as we've dug into all aspects of our business. We've conducted on-site reviews at our North American manufacturing sites and most of our operations in Europe. Improvement plans have been identified for each site, and work has begun.

Let's walk through several points highlighting the state and direction of the business. The critical goal of bringing debt down and providing the runway to promote further progress in North America and Europe has been accomplished with the sale of our Asia Pacific business segment and subsequent amendments to our debt covenants. The focus now is squarely on improving our operations, generating cash flow and improving the overall performance of our business.

Europe is seeing improvements as our new leader for that business is making good progress. Cost improvement, while increasing capacity and balancing production demand across our operations, are the keys to allowing us to capture the growth opportunities we see for the region.

North America performance remains disappointing. While certain elements of the strategy are in place and others were in progress, our fresh eye's assessments have identified many more areas for improvement. Some of these examples are as follows. Pricing actions have been implemented. However, weather, the timing of the slow season for RVs and marine, recent customer inventory reduction initiatives, and our internal performance deficiencies impacting inventory availability have impacted our ability to fully recognize the benefit of the pricing adjustments we've secured.

Reynosa Metal operations assessment improvement work started almost immediately upon my start date. We reviewed the plants and plans on day 3, and since that date, Reynosa's operations management has been upgraded, and operational excellence method has been deployed, our throughput has increased across our core manufacturing cells, past-due orders have been driven down significantly and capacity has increased through lean principles and equipment refurbishment. We have also initiated reversing outsourcing actions with the target of completing the in-sourcing by the end of this year. A comprehensive continuous improvement roadmap plan has been developed for the location, and it will be implemented throughout the upcoming year.

Distribution center performance relative to shipping effectiveness, while improving, continues to present opportunities for continuous improvement. With the belief that the issues driving fees and penalties are now defined, and we will aggressively address these through root cause identification and permanent corrective action deployment.

With respect to supply chain management, we have identified opportunities for improvement in our overall purchasing strategy as well as execution. While the complete continuous improvement, PPV roadmap remains fluid, the base plan is being executed and is generating results. Maximizing our effectiveness in this area is a prime importance to the company and is being addressed accordingly.

We did not have stock of certain items that left orders on the table and openings for our competitors. We lost sales due to our inability to sustain the right inventory of the right products, at the right time, in the right locations.

Reynosa operational performance improvements and revised demand and inventory planning processes are taking shape and will result in improved performance. Favorable responses from those customers I met at last week SEMA show reinforced to us that our initial actions are being recognized and appreciated.

We have an inefficient logistics model with too many touch points, resulting in inefficient routes and waste. We are working to optimize our transportation network and the freight modes currently deployed to support it. Operational improvements will also factor into our freight performance going forward. The team has been working hard, and we are beginning to lock in improvements as a result of favorable contract negotiations and operational improvement actions.

Relative to our business practices and procedures, we have identified that, in some cases, what we have in place is inefficient, ineffective or both. Standardization and improvement initiatives have begun in this area, which will lead to a leaner, yet significantly more effective organization and cost structure.

We are examining our SG&A costs and functions on a detailed level to ensure we are efficient, effective and structured properly to improve our performance and competitiveness. We have taken actions, and we'll continue to do so as we move forward.

We view our products and the one-stop-shop capability that we provide to our customers as presenting considerable value. Many of our customers share this view with us. Our relationships with customers need to be mutually beneficial, and in some cases, we believe that our value proposition is not properly valued or recognized. We do not say this lightly as we are focused on growing our top line and expanding our market share, but absent a fair return for the value we provide, the road back to profitability would prove to be increasingly more difficult.

We will continuously review our products and service to assure alignment with our objectives of improving our top line, but not at the expense of our bottom line performance.

With that, I'll turn it over to Jamie for his comments, and come back around at the end for some parting comments.

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James G. Pierson, Horizon Global Corporation - CFO [5]

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

I trust that it goes without saying that everyone appreciates the fact that the third quarter of 2019 saw several transformational events, from selling APAC for over $200 million to paying down over $180 million in debt, to hiring a new CEO to lead the company into the next phase of its journey. These transformational events decide, I do not want to lose sight of or trivialize the fact that we are forecasting to save over $25 million in annual debt service and ended the quarter with over $60 million in liquidity, which is the highest level since early 2018.

And before jumping back into results, like I would usually do, I wanted to remind everyone that what we are about to review will be on our pro forma, i.e., excluding APAC basis. Said directly, APAC is treated as discontinued ops for all periods reported, and we will only focus on Americas and Europe-Africa results to date and going forward.

With that out of the way, let's get to it. For the third quarter of 2019, we reported consolidated net sales of $177.9 million, down $16.2 million from $194 million reported in 3Q '18. On a constant currency basis, removing $3.9 million of unfavorable currency translation impacts, net sales decreased $12.3 million or 6.3%.

After adjusting for this currency translation impact and removing the $3.1 million from 3Q '18 related to the company's 1Q '19 divestiture of its non-automotive business in Europe-Africa, core business net sales decreased by 4.7%. The decrease is primarily related to lower fill rates and active market volumes, partially offset by increased OE volumes in 3Q '19 compared to 3Q '18.

In terms of operating income or loss, we reported an operating loss of $12.8 million compared to an operating loss of $29.9 million in 3Q '18, which included a $26.6 million goodwill impairment charge. On an adjusted EBITDA basis, we reported a $3.1 million loss, which is $12.9 million lower than 3Q '18. The decline was primarily driven by lower sales volumes, as previously mentioned; the impact of sales mix on margins, in other words, lower sales in higher-margin products versus the comparable period in 2018; and continued cost pressure from tariffs and other operational costs on a year-over-year basis.

Moving from the consolidated results to the individual segments. Net sales in the Americas were $96.2 million, which is $19.3 million lower than 3Q '18, primarily due to lower shipping volumes in our non-OE channels. While OEM volumes were slightly up compared to 3Q '18, inversely, volumes were lower in the aftermarket, industrial and retail channels, which drove a decline of $11.6 million, $3.5 million and $3 million, respectively, or $18.1 million of the $19.2 million decrease.

The Americas segment reported an adjusted EBITDA of $550,000, which is $13.7 million lower than the $14.2 million reported in 3Q '18. This decline was mainly driven by a decrease in sales, the revenue mix and related margin impacts, which I previously discussed, all combined with the operating cost pressures and tariffs and other material manufacturing cost inefficiencies, partially offset by SG&A savings related to prior year's restructuring efforts that began to take hold late last year.

Moving on to Europe. Net sales in the Europe-Africa segment increased by $3.1 million to $81.6 million compared to 3Q '18 but continued to be hampered by an unfavorable currency translation. On a constant currency basis, net sales increased by $7 million or 8.9%. This increase is primarily related to a $6.5 million increase in OE-related sales based on higher year-over-year volumes, partially offset by a $3.1 million decrease related to the impact of the company's divestiture of the non-automotive business in 1Q '19.

Like the Americas segment, channel mix shift unfavorably impacted gross margin, but the reported results were favorably impacted by a $4.3 million benefit from the commercial settlement related to a potential product liability claim made by one of our OEM customers. However, it's important to note that there is no impact on adjusted EBITDA, as defined, as we excluded the expense when originally incurred, and we're excluding the benefit under the same premise.

Lower selling, general and administrative expense resulting from restructuring activities initiated during 2018, offset some of the headwinds we experienced in the quarter relative to the same quarter last year.

Europe-Africa reported an adjusted EBITDA of $740,000, an increase of $810,000 compared to a $70,000 loss in 3Q '18. This is attributable to higher sales volumes and decreased SG&A that I previously mentioned.

Now, moving on from the segment results to the balance sheet. Working capital totaled $111.7 million at the end of 3Q '19, which represented an increase of $8.9 million as compared to Q4 '18, and an increase of $2.9 million compared to 3Q '18.

Since our July 2018 refinancing, which we caught up on passthrough payables, our working capital has remained relatively flat versus comparable periods. Specifically, accounts receivable decreased $13.1 million to $93.5 million from our prior year comparable period; days sales outstanding was 47 days, a decrease of 1 day from the prior period; the inventory increased by $2.4 million to $141.2 million from the prior comparable period; and days inventory outstanding was 103 days, an increase of 8 days from their prior year comparable period.

Turning to accounts payable. It decreased by $14.1 million to $79.4 million, and days payable outstanding decreased 5 days to 46 days when compared to the prior comparable period.

Turning to capitalization, leverage and liquidity. As a result of the APAC transaction and our recent liquidity management efforts, gross debt decreased by $173.6 million from $388.5 million at the end of the 3Q '18 to $214.9 million at the end of 3Q '19, which included a massive paydown on the first lien term loan, as in $162 million out of $187 million outstanding, also included a sizable reduction in ABL balance, offset by the addition of our second lien term loan placed in the first quarter of this year. All told, again, we decreased leverage by over $170 million on a year-over-year basis.

As for liquidity, at the end of 3Q '19, it totaled $60.9 million, which was comprised of $44.5 million of availability under our ABL facility and cash on hand of $16.4 million. This is our highest liquidity level since early 2018.

Now, I'll take a breath, let you guys tune back in and talk about a few items that I think are meaningful on a go-forward basis.

Since this is only my second earnings call with you and Horizon, and we're still finding our cadence, I generally like to share a few points of like every quarter to make certain that we hit the highs, and sometimes, even the low points so that we're all grounded in the here and now. So without further ado, Point one, the APAC deal was a standard triple for us. The ability to delever by over $180 million and part, another $35 million in additional liquidity on the balance sheet, even exceeded my expectations.

Two, no one, and I mean no one is pleased with our results, thus Terry's recent appointment and areas of focus.

Third, with our renewed commitment to our customers and associated service and fill rates, we are looking forward to the coming months and quarters as we win back their trust and their business.

And finally, 2020, no doubt, will be a busy one for us. But from my perspective, an exciting one, as we usher in a new era of process, efficiency, accountability and focus on customer service and, ultimately, getting the swagger back in our staff, getting off the roads in delivering a couple of body blows of our own.

In closing, and since this is our first earnings call together, I would also like to welcome Terry to the helm and look forward to working with him shoulder to shoulder as we return this once proud and profitable business back to the market leader that it once was. Having personally been involved in turning around large complex businesses such as this for the past 10 to 15 years, I don't want anyone thinking that the results will improve in a linear fashion. Sometimes, it's 3 yards in a cloud of dust. Some other times, it's an upward at a 90-degree angle and then, some even other times, it is 1 or 2 steps backwards before progressing again.

Regardless, the team is committed, there's new blood in the organization that just needs a little time to make the changes necessary to ride the battleship that is Horizon Global.

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

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Terrence G. Gohl, Horizon Global Corporation - CEO, President & Director [6]

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Thank you, Jamie. In closing, the company has been through a lot in the recent past. Acquisitions, liquidity crisis, leadership changes in management as well as to the Board, refinancing, and most recently, the successful sale of our APAC operations, all of this during 2018 and 2019.

We with this behind us, it is now time for us to completely focus our efforts on taking care of our customers with the highest levels of products, availability, operational effectiveness and effective channel management.

We are reemphasizing the promotion of our iconic brands and are aggressively driving operational improvements throughout the company to achieve our objective of returning Horizon Global to its position as a clear product and supplier of choice for all of our customers, current and new.

We have much to do, as you can see, but the entire team is committed to achieving our objectives, and we are grateful to our investors, customers and suppliers for your continued support.

With that, I'd like to turn it back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Josh Nichols with B. Riley FBR.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [2]

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Terry, first of all, welcome to the Horizon team. Good to have you. I wanted to ask a little bit, if you could provide a little bit more information on the softness in the quarter regarding the Americas, given that, that segment has historically been like improving over the last several quarters after some rightsizing of operations like the KC distribution facility. What are some of the actual items that really caused the shortfall regarding inventory? And how long is that going to take to correct?

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Terrence G. Gohl, Horizon Global Corporation - CEO, President & Director [3]

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Well, Josh, again, when we -- you look at what you termed as softness as some of this was self-inflicted wounds, as I mentioned in my opening statement, we didn't have the right inventory at the right location. So we have gone to work pretty aggressively in our Mexico operations. We've improved our -- so far, we've improved our hitch production capacity by 60% in the last 7 weeks. So our throughput is up. That means we can feed more effectively going forward. We will continue those efforts, again, another 30% to add on top of that as we look going into, say, the first quarter of next year. So sizable increase in our throughput there as well as our heavy-duty products, fifth wheels, in particular, we're going to be doing the same thing there in Mexico as well.

So our message is, we're going to provide the products to the field. We've gotten very favorable responses from the independents that we met with at the SEMA show, saying, "just give me the products. We're searching for your products. If it's not available, we're forced to go other locations or other directions. We don't want to do that. So we'd like to stick with you." So our effort is to fix our operations to make sure that we're clean and have inventory available for solicitations by our customers. But big moves that we're making.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [4]

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And then could you talk a little bit more about what you're seeing; one, in the macro environment in Europe, Africa and also as far as the company's operating performance and expectations for how that could improve in the coming quarters?

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Terrence G. Gohl, Horizon Global Corporation - CEO, President & Director [5]

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Yes. As far as Europe, I mentioned that we've been to some, not all. I haven't been to the France location and if there's people on the phone from our France location, I apologize for that. We're going to right that before the end of the year. But what we have seen is we've seen operations that, while they have opportunities associated with them, our position is we have more volume growth opportunities to utilize the facilities. Driving operational efficiencies and creating that capacity is our focus. So we look to grow that business. We have opportunities to grow that business. To do so effectively and from a profitable position, we need to contain that within the operations that we currently have by driving more manufacturing efficiency into the current 4 walls of the operations that we have. Selective investment but mostly just leveraging what we currently have.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [6]

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And could you also talk a little bit about some of the trends that you've been seeing across the companies like OE, aftermarket and like retail verticals, broadly speaking?

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Terrence G. Gohl, Horizon Global Corporation - CEO, President & Director [7]

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Yes. Between -- if we -- you got to look at them differently in different regions, right? So we're about 70-30, say, aftermarket to OE in North America, and it's just reverse of that in Europe just by buying practices and OE practices associated with the products that we produce.

Have we capitalized on expanding our OE business in North America? No, we really haven't. I mean we're selective. We -- there's been selective success here in North America that we would like to expand upon. So there's opportunities for us, we believe, to address that market and grow that market in North America. The European business primarily consists of OE-based products. And the volumes associated with what we're talking about there as -- and half of these has been taken up by the OE business. So we really haven't -- we haven't -- really haven't pushed, and we haven't been in a significant growth mode up to this point on the aftermarket segment in Europe. That provides us opportunity. That provides pretty significant opportunity in Europe.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [8]

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And then last question for me. Given the shifts that are going on, I appreciate that you've only been on the job about like 6 weeks here, but how should we think -- start thinking about 4Q and 1Q as you kind of enter what is typically a seasonally slower period relative to like 3Q or on a year-over-year basis as you're working to implement all these changes?

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James G. Pierson, Horizon Global Corporation - CFO [9]

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Josh, it's Jamie. Let me jump in there. Obviously, we don't give guidance, especially during times like we're going through now in terms of the restructuring that we've got going on. But what I would say is that from a macro environment, you say unemployment remains at about 50-year low, maybe 49-year low. The Consumer Summit Index remains an incredibly high number. But you compare and contrast that with RV sales that are down about 17% from that '18 level, which, I would say, is probably a good portfolio of products that we have with kind of the aftermarket and the retail sales, maybe even industrial being down. I think that answered part of that question. But we supplement that or kind of buttress the floor with a good offering of OE, OEM and OES products.

So in terms of 4Q, 1Q and the future, less concerned about the exogenous events that we cannot control, but really focused on the events that we can control, which is focusing on the customer, the fill rates thereof and then the operational excellence that Terry is driving.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [10]

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I guess, just -- and I know you don't provide any specific guidance, and I appreciate the timing of it. But any high-level commentary you can make about expectations, at least, from a cash flow perspective, given you may have some inventory build, but also some expenses associated with working through this restructuring here?

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James G. Pierson, Horizon Global Corporation - CFO [11]

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Well, I'll tell you from my perspective, having demonstrated a couple of years is, we have a renewed focus on free cash flow. So it's not just EBITDA, adjusted EBITDA thereof, is we are focusing hard. We have teams mobilized that are incredibly focused on what I call the primary working capital accounts: accounts receivable, inventories and accounts payable. I think you'll see us continue to manage accounts receivable fairly aggressively in the coming months, if not the most, I guess, near term. Inventory is going to take a little bit longer with 11,000 SKUs in arguably $140 million, plus or minus, in inventory around the globe. That's going to take a little bit longer to get in line with what we want to, not only from a fill rate basis, Josh, because we don't want to stock out of our A and B items with a very high velocity, but we need to make certain that we rationalize those C and D items that we don't move that often and use that inventory and use that cash to actually supply those customers at the, I guess, the north end of that range. So what I would tell you is, continuing to aggressively manage primary working capital with a myopic focus on free cash flow, even over adjusted EBITDA.

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Terrence G. Gohl, Horizon Global Corporation - CEO, President & Director [12]

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And then -- and Josh, I mean, you have in the statement, our DSO, DPO and DIO metrics. And you can pretty much ascertain where we're going to focus our attention on with that.

Jamie mentioned the 11,000 SKUs. And we have initiated, just 7 weeks ago, the analysis of our SKU performance. There was 11,000, will be -- at the end of the year will be about 9,000. And we'll further rationalize that as we go through 2020 to the forecast of 7,000. So we're addressing that complexity issue as well as we move forward.

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Operator [13]

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I would now like to turn the call back over to management for closing remarks.

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Terrence G. Gohl, Horizon Global Corporation - CEO, President & Director [14]

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Prior to closing, Jamie's got a clarification he'd like to put out there.

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James G. Pierson, Horizon Global Corporation - CFO [15]

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Yes. Thanks, Terry. Real quick on the gross debt piece, it -- actually, if you include the current portion so that you compare apples-to-apples in 3Q '18 to 3Q '19, 3Q '18 gross debt was $388.5 million, 3Q '19 was closer to $240 million. So the reduction in gross debt, on a year-over-year basis, is closer to $150 million when you include the current portion of that. You'll be able to see it in the press release when you look at the balance sheet. I just wanted to make sure that everyone was level set on the exact reduction in debt on a year-over-year basis.

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Terrence G. Gohl, Horizon Global Corporation - CEO, President & Director [16]

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And then with that, I would like to say thanks to everybody for joining today. As you can tell, we're very focused. We are organizing very aggressively to address the challenges that we have and the opportunities that we have. We've dug in pretty deep into the elements of deficiencies that we have within the company, and we'll continue to do so.

And we are acting -- we're acting wisely, but very aggressively to address these. Our fill rates and margins are our principal focus at the moment. And I think the statements that we've made reinforce that the actions that we're taking and that we're planning are really tailored towards addressing those issues that both support our customers but also our shareholders and investors.

So with that, thank you, and thanks for joining the call.

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Operator [17]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.