Jason Industries, Inc. (JASN) CEO Brian Kobylinski on Q3 2018 Results - Earnings Call Transcript

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About: Jason Industries, Inc. (JASN)
by: SA Transcripts

Jason Industries, Inc. (NASDAQ:JASN) Q3 2018 Earnings Conference Call October 30, 2018 10:00 AM ET

Executives

Rachel Zabkowicz - Vice President, Investors Relations

Brian Kobylinski - Chief Executive Officer and Chairman

Chad Paris - Senior Vice President and Chief Financial Officer

Analysts

Ephraim Fields - Echo Lake

Operator

Greetings and welcome to Jason Industries' Third Quarter 2018 Earnings Conference Call. [Operator Instructions]

As a reminder, this conference is being recorded. I'd now like to turn the conference over to Rachel Zabkowicz. Thank you. Please go ahead.

Rachel Zabkowicz

Good morning. And thank you for joining us today for the Jason Industries third quarter 2018 conference call to discuss our earnings results. If you have not received the slide presentation for today's call, you can access it on our Investor Relations website at investors.jasoninc.com and following the link to our events and presentation 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 statement due to several important factors described in the company's latest SEC filing. The company assumes no obligation to update any forward-looking statements made during this call.

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

Brian Kobylinski

Thanks Rachel. And thanks to rest of you for joining us this morning. I'll begin on Slide 3. Overall, Q3 was a quarter in which we focused on executing initiatives already underway and our results in the aggregate were as expected. Today's call will be a brief update as our outlook is not changed and we are not announcing any new initiatives.

We delivered another quarter to our expectations, expanded year-over-year EBITDA margin and sequentially reduced our net debt leverage to 5.1x. We reaffirmed our guidance for 2018. Our Seating business was a bright spot and it helped to balance revenue moderation due to phasing in finishing and component. Acoustics picked by new truck platform and operations continue to improve across the board, not helping with our customer relationships and growth positioning, but offsetting the impact of input cost inflation. Simply stated, our team is working our plan, remaining nimble in executive.

I'll turn the call over to Chad to provide details relating to our results and then come back to wrap up by focusing on our improvement efforts.

Chad Paris

Thanks Koby, and good morning, everyone. I'll start with the review of the third quarter results and then provide an update on the balance sheet. Starting on Slide 4, net sales of $145.3 million, or 6.5% lower than prior year with organic sales declining 4.3%. Divestures and non-core exits had a negative impact of 1.7% including the sale of Acoustics Europe completed in August 2017, as well as the sales of non-core smart meter product line in the component segment that will be exited by the end of the year.

Foreign currency negatively impacted sales by 0.5% primarily due to a weaker euro as compared to the third quarter of last year. Operating income was $2.9 million was a $1.8 million or 100 basis points decrease versus 2017, was impacted lower sales and higher freight material cost. Adjusted EBITDA decreased $900,000 or $300,000 excluding the impact of the Acoustics Europe divesture. Adjusted EBITDA margin expanded 10 basis points for Jason, with adjusted EBITDA growth and margin expansion in seating and finishing.

The overall improvement was driven by pricing initiative, operational efficiencies and continuous improvement project, pacing of incentive compensation as compared to the prior year and savings related to our Acoustics facility consolidation. This was partially offset by inflation headwinds on both materials and freight in line with our expectations for the quarter.

Sales results by segment are shown on Slide 5. Our organic sales declined of 4.3% was slightly better than our expectation for the quarter with mix results by segment. In Finishing, reported sales of $51 million were essentially flat to prior year, with organic sales growth of 1.2% and healthy US industrial end market, partially offset by moderating industrial markets in Europe. The impact of a weaker euro resulted in a negative 1.3% impact on sales.

Component sales of $21.4 million increased $1.5 million or 7.3%. Organic sales declined 9.4% on lower volumes in rail products and expanded metal product line. And were negatively impacted by the transformation within the business as we exit non-core product line. We expect lower organic sales to continue in the fourth quarter as we refocus our commercial pipeline on the core to support the return of growth in 2019.

Sales related to non-core smart meter products grew 16.7% on higher pricing as our customer accelerated orders in preparation for exit of the business, which now expect in the fourth quarter. Seating sales of $34.6 million increased $1.6 million, or 5% organic growth driven by strong demand in construction, agriculture and material handling market, along with new platform. This volume growth more than offset moderate declines in motorcycle.

Finally, Acoustics sales of $38.3 million decreased 25.6% which was a 14.1% organic sales decline excluding the divesture of Acoustics Europe. The decrease was slightly better than our expectations for the quarter, partially due to an increase in volume on SUV and truck platforms that we participate on. Organic sales were also impacted by platforms approaching end of life and by lower volumes on cars which is a higher proportion of our total volumes as compared to light trucks and SUV.

Adjusted EBITDA results by segments are shown on Slide 6. Adjusted EBITDA margin expanded in two of the four segments with overall Jason adjusted EBITDA margin expanding 10 basis points to 10.5%. In Finishing, adjusted EBITDA of $7.6 million, or 14.9% of net sales increased $100,000 or 20 basis points. The results were driven by strategic pricing initiatives partially offset by material and freight inflation and additional investments in selling resources.

Components adjusted EBITDA of $2.6 million or 12% of net sales increased to $100,000 with margins 30 basis points lower. Adjusted EBITDA was positively impacted by pricing actions and lower headcount as we worked to right-size the business with the planned exit of our non-core smart meter product. Steel inflation negatively impacted adjusted EBITDA margins as timing of pricing actions followed increases in input cost. Seating adjusted EBITDA of $3.6 million or 10.4% of net sales increased to $1 million or 240 basis points. The improvement was driven by higher sales volumes, pricing actions to offset material inflation, continuous improvement saving and production efficiencies. Koby will further discuss the progress made with seating.

Acoustics adjusted EBITDA of $4.5 million or 11.7% of net sales decreased $2.2 million with margins 120 basis points lower on price decreases and material inflation. These declines were partially mitigated by continuous improvement projects and manufacturing efficiencies, as well as savings related to the acoustics Richmond, Indiana plant consolidation. The consolidation was completed in the third quarter on time and on budget.

Finally, corporate expenses of $3 million decreased to $100,000. As discussed in these segment results, our businesses have seen material inflation and higher freight costs, which have averaged approximately 7% to 10% which continues to be in line with what we've shared previously. On our last two quarterly calls, we have provided details on how we manage and mitigate these cost pressures and the impact of tariffs including pricing actions supply, chain re-sourcing and continuous improvement initiatives to reduce material and freight usage.

The third-quarter message on material inflation, tariffs and freight cost is unchanged and we continue to manage these factors within our guidance. Jason's financial position at the end of the quarter is shown on Slide 7. Total liquidity was $91.2 million with $51.4 million of cash and cash equivalents and $39.8 million of available capacity on revolving lines of credit. Net debt for adjusted EBITDA improved to 5.1x, a tenth of a turn improvement from the second quarter and compared with 5.5x at the end of 2017.

Year-to-date, we've made net debt repayments of $6.8 million. Operating cash flow for the quarter was $8.9 million with free cash flow of $6.2 million in line with our expectation, The year-to-date decrease in free cash flow is driven by timing of working capital requirement, a higher incentive compensation payment for 2017 results and costs for the supplier force majeure event in the seating segment that we expect to recover through insurance in the fourth quarter which is included in cash restructuring.

We continue to expect $13 million to $17 million of free cash flow for the year. Our 2018 guidance is shown on Slide 8. With one quarter remaining, we are in line with where we wanted to be and we re-affirm our guidance for the year.

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

Brian Kobylinski

Thanks Chad. Our standard summary of cost reduction efforts is on Slide 9. Two updates; First, Jamesville Acoustics Richmond and the Battle Creek consolidation has gone smoothly thanks to increased planning, a lesson learned from other inefficient project experience, attention to detail and strong frontline leadership. I had a chance to see the fruits of our labor during the business of Battle Creek a couple of weeks ago. Material flow and labor of our overall location is more efficient, preventive maintenance and equipment upgrades like Poka-Yoke or foolproof manufacturing have been implemented.

We more than moved an already good operation; we improved it. Sitting down with our senior leaders and senior leaders of our top automotive OEM customers, arguably our most demanding customers, and hearing that we have acquitted ourselves well by executing a clean project is encouraging and marks a shift in their confidence over the past two years. Not only are we providing quality product on time, but we are able to execute structural operational changes with zero impact on any of our customer scorecards.

Second, our Milsco UK consolidation is reaching its midpoint and employs the same refined facility consolidation process just mentioned. We are confident in our ability to complete this project with precision and we will have more cash proceeds from the real estate sale than originally believed.

Fortunately, we have a valuable piece of property in an area with strong demand. We now anticipate net cash proceeds of $3.3 million, $1.5 million more than estimated at the beginning of the project. These proceeds are incremental to our free cash flow guidance and this cash will be deployed to reduce net leverage or fund further projects to grow and improve our company.

For more of what our team is doing to improve our seating business, please move to Slide 10. Milsco is a business with a rich history and unique capabilities to rapidly move from design to prototype. We are beginning to show signs of how good we can be and many of the Jason themes we've covered in the past are evident in Milsco's turnaround. We categorized these themes in three buckets. Bucket one is operational improvement and simplification. We have gone more than a year since the lost-time safety incident indicating improved discipline and better working conditions for our employees.

We are on track to consolidate both the afore-mentioned UK operations as well as an off-site warehouse in Berlin, Wisconsin in an effort to simplify our footprint, reduce fixed costs and generate cash.

We improved our product quality for our customers and reduced our defective parts per million or ppm by more than 35% year-over-year, and our customers have taken notice, most recently with the gold supplier quality award from Caterpillar for our India's seating operations. Bucket two relates to targeted growth initiatives and shifting our sales mix. We are following our recently announced wins for the Bad Boy Renegade Zero Turn Radius Mower and Textron Havoc all-terrain vehicle by leveraging our rapid design to prototype capabilities and progressing toward a supply and partnership agreement to secure an early mover position in the exciting electric Turf Care space.

We made the strategic decision in 2016 to focus on further penetration of the attractive heavy equipment market, essentially construction, agriculture and material handling equipment. This move and a bunch of hard work resulted in winning seven Mahindra tractor platforms last year, our largest share capture in a decade and a strong pipeline of future growth opportunities.

Most important, this decision proactively shifted our mix; heavy equipment has grown from 25% of our seating revenue in 2015 to 35% today while the power sports and heavy motorcycle percentage of revenue exposure has been reduced from 37% to less than 30% in the same timeframe. The motorcycle market is core to Milsco and we will continue to anticipate and support our customer needs; but it was imperative for us to better balance our sources of revenue to minimize cyclicality.

Our third and most important bucket relates to talent upgrades and execution. We refreshed our Milsco organization by providing opportunities to some of our more talented veterans in the areas of sales, marketing and engineering while bolstering operations and finance with folks from other Jason businesses and external upgrades. Milsco is a good business becoming better and on the journey to becoming great; definitely an example of what we are trying to work for across Jason.

Moving to Slide 11, I want to both acknowledge and thank our reinvigorated Jason organization. Over the last couple of years, we've consciously expanded the capabilities of our team through a balance of two approaches. First, we recognize resident talents and provide new opportunities to personally grow while greater impacting our business. Second, we supplement this internal development with new and upgraded additions to our roster possessing expertise ranging from back-office functions like HR, finance and IT to operational areas like supply-chain and manufacturing to growth drivers like sales and marketing. The result is a team that has enabled us to improve our service delivery and quality for customers, consolidate facilities and simplify our footprint, navigate unforeseen supply issues, mitigate cost increases and win new business.

Our level of activity has increased as has our level of engagement and it's this team's capability to remain nimble and yet focus on what's truly important that gives us the confidence that we will continue our path of improvement.

In conclusion on Slide 12, we are in the homestretch of 2018 and we remain focused on execution and completing our many initiatives. Our ongoing improvement in operations has yielded margin expansion in this helping offset inflationary cost pressures. And has strengthened our customer relationships, facilitating future growth. We remain focused on delivering to our 2018 guidance and positioning Jason for the next phase of our journey in 2018.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from line of Matt Koranda with Roth Capital.

Unidentified Analyst

Hey, good morning. This is Mike on Matt. So, first off, I was wondering in finishing, what's sort of driving the flattish growth year-over-year and how should we be factoring in FX headwinds going forward? And then also could you maybe talk a little bit about the pricing environment? And if we should expect that to continue driving margin expansion?

Brian Kobylinski

Probably two or three things really go into the flattish growth that you see in the quarter. The first is a little bit of phasing as we mentioned early on. Last quarter we had what we consider to be a little bit more favorable growth rate year-over-year. So a little bit of a transition between the quarters. I say the second thing is continued proactive nature of addressing the customer mix. We've got certain aspects that are higher in profit like our load runners business, our white-faced rollers that we're growing double digits or more.

And there are other areas that may be more margins neutral to negative that we're moving away from. I'd say the third aspect when you think regionally, Europe is moderating and so as part of our business roughly two-thirds of our exposures in Europe. And so we need to keep driving to offset that. Those are really the three main elements.

Chad Paris

Yes. I'll take the currency piece of the question. So relative to the guidance, see the biggest driver of currency and for Jason and for the finishing business, it's really the Euro. Our guidance had the Euro right around 1.15. So we're starting to see that headwind in year-over-year in the fourth quarter. I think we're comping up against the Euro that averaged about 1.18. So those are the underlying assumptions and what will we see.

Brian Kobylinski

We were-- I mean we remain bullish about this business. It's still the one that has the most amount of opportunity for us to grow. We may run into a little bit of these bumps but it doesn't take --doesn't shake any of our confidence about what we're going to do with it.

Unidentified Analyst

Okay, great, thanks that's helpful. And then in components, can you talk about the rail end market and what's driving the lower volumes there? And also maybe what does this imply for margins in the fourth quarter?

Brian Kobylinski

So I'll take the first piece which is really about the markets themselves. I mean the markets are solid. There's no doubt about it. We had a very good first half. We had - when you think about what happened in quarter, it's really a combination of a few different events. Number one, there was a bit of pull forward if you recall we've been pretty vocal about transformation to this business both in the form of operations and what we're trying to do with the customer mix. So I think some of our customers pulled some business forward into the first couple of quarters of the year.

We did lose a small amount of share in the short term as these customers were setting up an alternate path to supply. And those couple of things kind of went together on it. We have improved these operations. Our fill rates continue to go up. Our engagement with the customer has not been higher. And I'm personally involved in some of these communications. So as we look to 2019, we feel good just in the short term we expect a little bit of a lag here in the next quarter or so. Chad do you want to hit anything out margin expectation? We typically don't get into that by business for the future quarter.

Chad Paris

Yes. I mean I would just say this business its biggest material input is steel, certainly there's been a fair amount headwind and pressure on margins related to steel. We've done and I would say the okay job of offsetting that probably not executing as efficiently as we'd like to. And the good news is we have flexibility with the customer contracts and arrangements to pass that through ,but you get a bit of a timing issue in terms of the, when the pricing increases on the cost side come in versus when they're effective on the revenue side. So we're working to continue to put pricing in. And I think the key is we've got to be nimble and efficient about it and you will probably feel a little bit of pressure on margins in the fourth quarter. And in general, we want this to be in the mid-teens and that's where we're targeting to be as we go into 2019.

Brian Kobylinski

We're strategically positioned with the operations that we have. When you think about our customer base and what they're looking toward for 2019, the fact that they have a couple of sources of manufacturer, the positioning of our Liberty Ville and our SLP Mexico facilities are great. And as I said, our frequency and intensity of customer communications has been very, very strong.

Unidentified Analyst

Okay, great. And then in seating, can you give a sense of what growth was like in construction, ag and material handling? And also maybe how much did motorcycle drag on material results?

Brian Kobylinski

Yes. I'll start, when you think about what we classify heavy equipment to three that you mentioned. I mean these are double digit type growth rates, pretty healthy, not only do we have markets that are doing well in this area, but we do --we are picking up share and I think the combination of the two are more than offsetting what we see is quite honestly just the secular decline of motorcycles. Turf Care, well solid, certainly not at that heavy equipment range. So you're looking at well over double-digit growth rates for the heavy equipment mid to high single digit declines in motorcycle and kind of a flattish to small growth in Turf Care.

Unidentified Analyst

Okay and then lastly if I can just squeeze one more in here. Are you able to quantify how much of a headwind break was and maybe which segments it's weighing on the most?

Brian Kobylinski

Yes. We can. It's - if you think about a year-to-date, it's seven figure type number that we're dealing with here a $1 million to $1.5 million. It's real, it's coming in.

Chad Paris

Yes. I mean so on freight I think the business where we see it the most is in the finishing business, where it's on the outbound side but we see it in all of our businesses on the inbound side in a little bit in interplant freight within one of the businesses. In the quarter $0.5 million or so and then the way we're addressing that really is particularly in the finishing business passing that through in the form of great surcharges and a general product cost increases to customers. But on average I'd say it's about a 10% impact year-over-year in the actual increase in the freight rate.

Operator

Our next question is coming from the line of Ephraim Fields with Echo Lake Capital.

Ephraim Fields

Hi, guys. And congratulations to the entire team on a great quarter. I'm looking at your free cash flow guidance of $13 million to $17 million for this year. Could you tell me what that number would be if you excluded any in cash restructuring charges?

Chad Paris

Sure, thanks Ephraim. So we would be at the high end of the range at about $21 million, so it is about $4 million of cash restructuring in the number for the year. And then Koby mentions we've got some non-operational asset sales or asset monetization that we are doing. And that we don't account that in free cash flow because it's not going to happen every year, but that's another $3.5 million.

Ephraim Fields

That's the UK facility?

Chad Paris

That's right.

Brian Kobylinski

Essentially, yes.

Operator

Thank you. This concludes our question-and-answer session. I'd like to turn the floor back over to Rachel Zabkowicz for closing comments.

Rachel Zabkowicz

Thank you. 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. Have a great day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.