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Edited Transcript of JASN earnings conference call or presentation 12-Aug-19 2:00pm GMT

Q2 2019 Jason Industries Inc Earnings Call

Milwaukee Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Jason Industries Inc earnings conference call or presentation Monday, August 12, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian K. Kobylinski

Jason Industries, Inc. - Chairman, CEO & President

* Chad M. Paris

Jason Industries, Inc. - Senior VP & CFO

* Rachel Zabkowicz

Jason Industries, Inc. - VP of IR

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Presentation

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Operator [1]

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Greetings and welcome to the Jason Industries' Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rachel Zabkowicz, Vice President, Investor Relations. Thank you. You may begin.

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Rachel Zabkowicz, Jason Industries, Inc. - VP of IR [2]

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Good morning, and thank you for joining us today for the Jason Industries Second Quarter 2019 Conference Call to discuss our earnings results. If you've not received the slide presentation for today's call, you can access it on our Investor Relations website at investors.jasoninc.com and follow the link to our Events and Presentations page.

With me today is Brian Kobylinski, our Chief Executive Officer; and Chad Paris, our Chief Financial Officer. Before we begin this morning, please be advised that this call will involve forward-looking statements regarding the company and its businesses as noted on Slide 2 of today's presentation. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during this call.

We will begin this morning with our CEO and Chairman, Brian Kobylinski. Koby?

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Brian K. Kobylinski, Jason Industries, Inc. - Chairman, CEO & President [3]

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Thank you, Rachel. As I'm sure many of you have already gathered, this call is about more than quarterly earnings. We took 2 actions to positively alter Jason's future course. First, we signed a binding agreement to sell our Fiber Solutions segment, a move that will reduce Jason's exposure to the automotive market; and second, the company engaged BMO Capital Markets to explore strategic alternatives, including a potential sale of the company. These 2 actions augment the progress made over the past 2 years and directly address our served market cyclicality and balance sheet. They also represent the next stage in our journey as depicted on Slide 4.

Our 3-year maturation has been intentional. In fact, the 2017 and 2018 headlines building credibility and improving operations were printed on our last 2 annual reports. Establishing an execution-based culture and improving our foundation prepared us for the third step in our journey for 2019 and that is transforming the portfolio. We began work on our portfolio earlier by prioritizing resources and investments, and organically driving shifts to our product and customer mix. The bigger moves, acquisitions and divestitures began an earnest 2 years ago with the sale of the Fiber Solutions European business. The acquisition of Schaffner Manufacturing for our Osborn business early in the second quarter this year, and now the divestiture of the remaining North American piece of our Fiber Solutions segment.

Slide 5 outlines our Fiber Solutions divestiture. Janesville is a high-quality business and we managed to receive a good value for it. The sale better balances Jason's sales mix by reducing our reliance on the automotive market and refines our focus to our core Industrial and Engineered Components businesses. It also will increase our liquidity. Janesville lands in a new home, one in which it will be able to reach its true potential by increasing its customer relevance and becoming part of a larger automotive interior business. On behalf of the remaining Jason employees and Board of Directors, I want to thank Srivas Prasad, our Senior Vice President and Fiber Solutions segment leader and all of our Janesville colleagues for their hard work and dedication. The improvements they have made over the past 2 years exemplify what we're doing with all of our businesses. We remain proud of your accomplishments and wish you well.

Please turn to Slide 6 for our high-level second quarter results. Q2 was clearly below our expectations as revenue declines caused by served market volatility combined with elevated input costs to compress margins. Inventory deduction actions taken by many of our OEM customers, principally those in automotive, motorcycle, agriculture, turf care and rail generated greater declines for Jason than our customers themselves. And our most diverse business, Industrial, was impacted by weakening economic conditions in Europe and Asia. Market pressures hit us sooner than most. Despite these external headwinds, we remain focused on that which we can control, integrating our new Schaffner acquisition, reducing our cost structure and driving operational and commercial performance. Our safety, quality and delivery remain at peak levels and this sustained foundation is enabling our sales teams to win platforms and gain market share in select regions in vertical markets. The tone of our customer interactions remains positive due to the past 2-plus years of improvements and our track record of delivering on our commitments.

I'll come back on the line to cover these areas in more detail after Chad reviews our financials and covers the implications of our Fiber Solutions divestiture. Chad?

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Chad M. Paris, Jason Industries, Inc. - Senior VP & CFO [4]

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Thank you, Koby. Good morning, everyone. I'll start with an overview of the quarter, discuss results for each of our segments and then provide an update on the balance sheet in our Fiber Solutions divestiture. Starting on Slide 7. Net sales of $138.3 million were 17.9% lower than prior year with organic sales declining 15%. The noncore exit of the smart meter product line in the Engineered Components segment had a negative 4.8% impact on sales, while the Schaffner acquisition within Industrial had a positive 3.2% impact. Foreign currency negatively impacted sales by 1.3%, primarily due to a weaker euro as compared to the second quarter of last year. Organic sales were lower than our expectations. And the key drivers were a continued weakening demand environment for Industrial, particularly in Europe and Asia and lower overall OEM customer volumes in Engineered Components across most of our product lines.

Operating loss of $3.6 million increased $10.4 million, primarily due to lower volumes. Selling and administrative expenses were $2.5 million lower in the quarter, partially offsetting the impact of lower volumes and transaction and integration costs of $1.3 million.

Adjusted EBITDA was $11 million or 7.9% of net sales compared to $21.4 million or 12.7% of net sales in the prior year.

Adjusted EBITDA was impacted by lower sales volumes and material inflation, which were partially offset by price recovery, operational efficiencies from our continuous improvement projects, and savings from the Fiber Solutions Richmond, Indiana plant consolidation.

Turning to Slide 8. Industrial reported sales of $55 million, which were $500,000 lower than prior year with an organic sales decline of 6.7% and a positive 9.6% impact from the Schaffner manufacturing acquisition, which was completed at the beginning of the second quarter. The impact of a weaker euro resulted in a negative 3.7% currency impact on sales.

Europe sales volumes showed continued weakness in the quarter across our product lines as compared with the second quarter of 2018 with an organic sales decline of approximately 11%. In particular, Germany sales were negatively impacted by significantly lower export sales to China. North American organic sales were approximately negative 1%. And while this market remained stronger than Europe, we saw a destocking of channel inventory and a weakening demand environment both compared with last year and the first quarter of this year. Adjusted EBITDA of $5.9 million or 10.8% of net sales decreased from $8.4 million or 15.2% of net sales in the prior year. The decline was driven by lower sales volumes, material inflation and higher freight costs, which were partially offset by pricing actions. Adjusted EBITDA margins were negatively impacted by 130 basis points, resulting from lower income from our unconsolidated Asian joint venture, which has operations in China and Taiwan.

On Slide 9, Engineered Components reported sales of $49.7 million, a decrease of $19.9 million, including a negative 11.5% impact from the exit of noncore smart meter product lines at the end of 2018.

Organic sales declined 17% on lower overall production volumes from OEM customers. Flooding across the U.S. and an overall wet spring resulted in a much softer agricultural and turf care season than we expected. During the quarter, residential riding mower unit shipments from OEMs were down approximately 10%. Volumes for seating products continued to be impacted as our customers are managing channel inventory in light of lower-end market demand. The rail, filter and safety grating markets also saw weaker demand in addition to continued heightened competitive pressure. Adjusted EBITDA was $3.6 million or 7.1% of net sales compared to $10.4 million or 15% of net sales in the prior year. Adjusted EBITDA margins were impacted by lower volumes and material inflation, partially offset by pricing actions and continuous improvement project savings.

Finally, on Slide 10, Fiber Solutions sales of $33.6 million decreased 22% or $9.8 million. The decrease was driven primarily by end-of-life vehicle platforms that ended in the third quarter of 2018 and lower OEM vehicle production as compared to last year. North American light vehicle production declined 2.2% overall in the second quarter. Adjusted EBITDA was $4.3 million or 12.7% of net sales compared to $6 million or 13.9% of net sales in the prior year. Adjusted EBITDA was impacted by lower volumes and contractual price decreases, partially offset by continuous improvement projects and savings from the Richmond, Indiana facility consolidation.

Jason's financial position at the end of the quarter is shown on Slide 11. Our total liquidity at the end of the quarter was $50.5 million comprised of $27.9 million of cash and cash equivalents and $22.6 million of available capacity on revolving lines of credit.

During the quarter, $10.5 million of cash was used to fund the Schaffner Manufacturing acquisition. We also extended our revolving credit facility during the quarter, which is now scheduled to mature in December 2020. Net debt to adjusted EBITDA increased to 7.0x compared to 5.7x in the first quarter, driven primarily by lower LTM adjusted EBITDA resulting from the lower volumes. While we expected our leverage to peak in the second quarter, the shortfall in adjusted EBITDA versus expectations resulted in higher than anticipated net leverage. Operating cash flow for the quarter was negative $1.6 million, with free cash flow of negative $4.5 million. The year-on-year decline of $8.5 million primarily resulted from lower adjusted EBITDA on lower sales, partially offset by lower cash taxes.

Cash restructuring costs included approximately $400,000 of transaction costs related to the Schaffner acquisition in the Fiber Solutions divestiture.

Slide 12 summarizes the key terms of the Fiber Solutions sale. The overall purchase price is $85 million of cash consideration. This includes $5 million of consideration that it's contingent on the achievement of certain commercial performance conditions related to pending platform awards between now and the fourth quarter. At $85 million, the transaction was valued at 5.0x LTM adjusted EBITDA. While the sales of the taxable transaction, we will be able to mitigate taxable gain through the utilization of our U.S. net operating loss carryforwards, certain tax credits and interest expense deductions that were otherwise limited by U.S. tax reform. Overall, we expect to pay approximately $4 million to $5 million in cash tax on the sale. Net of taxes and transaction costs, we expect net proceeds of approximately $71 million to $77 million with the range primarily dependent on the outcome of the contingent consideration. We expect to utilize cash proceeds to reinvest in the businesses or reduce debt.

Now I'll turn the call back to Koby to provide an update on the businesses.

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Brian K. Kobylinski, Jason Industries, Inc. - Chairman, CEO & President [5]

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Thanks, Chad. I'd like to begin with our operations and footprints on Slide 13. We continue our lean transformation and have progressed from rudimentary elements pertaining to housekeeping and digital management to true flow and automation. We see each of our sites regularly and all locations participate in quarterly lean reviews, a process that has been in place for over 1 year. The elevated performances clearly had a positive impact on our customers and is visible on scorecards. The illustration on the right depicts the impact our teams have had on simplifying our footprint. We've eliminated 11 locations in the past 2.5 years, and that does not include the offsite warehouses and the pending Janesville sale. In fact, our Osborn team has already integrated the former Schaffner Jackson Mississippi location into our sites. Think about that for a minute. We announced the Schaffner acquisition during April, and we already simplified the footprint. There is more to do here and we believe we are only in the top of the fourth innings. We will leverage this skill set to help scale our cost structure to the new reality of a simplified Jason.

The first of our remaining 2 segments, Industrial, is covered on Slide 14. We are beginning to see some real positive returns from our North American sales and marketing investments as our year-to-date power brush growth exceeds our competitors by more than 300 basis points according to American Brush Makers Association data. Our field sales force is leveraging a multipronged marketing plan that consists of numerous elements. New products like our tough brush, a range of industrial brushes that offer 20% more life and up to 60% more efficiency. Promotions and advertising, like our NHRA racing participation in European seasonal campaigns. Unmatched delivery performance through our core in 24 program. These are activities help increase our field sales folks confidence and success rates. Select vertical lines of businesses like a roller technology are winning in every region and our sales and service value proposition continues to support double-digit sales growth in this category. We are not immune to the weak Europe and Asia market conditions and are addressing our cost structure, reducing our employee base in these regions by high single digits and redeploying remaining resources for better focus to flex with economic trends.

Slide 15 is where the Osborn vision gets really exciting. The business is scalable, and we created a robust funnel of target companies focused near our core that extends our offering, capabilities and reach. Schaffner was generated through this process, and we hit the ground running from day 1 integrating the business. Our team took the approach that Schaffner is Osborn and in one short quarter, recast the organizational structure, lift the customer base, bundled spend and consolidated the Jackson, Mississippi facility. Much like our approach to footprint simplification, we have the targets and management capacity to execute 2 to 3 similar tuck-ins per year. The Engineered Components segment noted on Slide 16 maintains longstanding customers with relationships on these OEM manufacturers. The overall state of our Engineered Components segment is stronger. The progress we've made with our operational performance directly impacts our supplier scorecards and has resulted in multistep positive moves in our categorization and platinum awards for recognition. This transformation changes the dynamic and tone of our customer dialogue, shifting the focus to our industry-leading design capability, a service that is increasingly relied upon by our customers to solve problems and differentiate their end product. It also results in platform wins like the 4 turf care models we recently secured. Our organic growth activity remains healthy and our customer and commercial funnel is 3x that of past versions. Each of our businesses is tasked to create 1 special growth initiative beyond normal course. Think of these as growth incubators or projects that get special funding and attention and are aimed at additive sales beyond our day-to-day activity. The Janesville packaging initiative and Osborn's roller technology are 2 examples. Well, Milsco's initiative or incubator is the industrial agriculture and turf care aftermarket. Our team put together a plan to provide the standard line of Milsco branded product that end users can access via alternative channels. We are at the early stages of this initiatives and already our returns are encouraging as our aftermarket revenue's up 50% year-to-date. We have more to do, particularly in our uncertain economic environment and we haven't lost our discipline. We completed the Metalex, Libertyville distribution consolidation and continue to prune our cost structure. We will communicate our next wave of activity on subsequent quarterly calls.

I'll wrap up our prepared comments on Slide 17. We are building new plants to reduce costs, while protecting the gains made in safety, quality and delivery. We continue our commercial push to leadership positions in the market and are earning our business both from current and new customers. We're also entering a new and exciting phase of transformation, reducing our cyclicality and reliance upon the automotive market and focusing on our core Industrial and Engineered Components segments. We have fixed our operations and repaired and built stronger customer relations. Our remaining businesses are good businesses with a balance sheet challenge and as such we are attacking our capital structure head-on by exploring strategic alternatives, including a potential sale of the company. In light of this announcement, we will not be taking questions on today's calls. As we work with our Board of Directors and advisers to consider strategic alternatives and given the potential change in our business mix, we are suspending guidance for the year, will not be updating it as the year progresses. However, we will continue to provide the requisite quarterly updates on our performance.

Like the rest of our team, I joined Jason 3 years ago for the opportunity. The opportunity to learn, grow and be a part of something special, and Jason continues to provide all of that and more. We put together a team that has not only executed, but proven to be resilient. And when you enjoy the people you work with and like what you do, there is no limit to what can be accomplished. We look forward to continuing our journey.

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Rachel Zabkowicz, Jason Industries, Inc. - VP of IR [6]

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This concludes our call this morning. Thank you for your interest in our company. And we look forward to updating you on our future progress when we report again. Operator?

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Operator [7]

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Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.