Jason Industries, Inc. (NASDAQ:JASN) Q3 2019 Earnings Conference Call November 8, 2019 10:00 AM ET
Rachel Zabkowicz - Vice President, Investor Relations
Brian Kobylinski - Chief Executive Officer
Chad Paris - Chief Financial Officer
Conference Call Participants
Good morning, and thank you for joining us today for the Jason Industries third 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 Investor 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'll begin this morning with our CEO and Chairman, Brian Kobylinski. Koby?
Thank you, Rachel, and thank you all for joining our third quarter earnings call. Our quarterly results were weaker than expected as European and Asian markets, lower general industrial production and softening end market demand at our OEM customers reduced revenues. The U.S. Purchasing Managers' Index, a measure of confidence, was down 8 points since March. Germany's PMI is operating at 42%, and key China end markets like automotive are down 20%. We will go through our results in a moment, but I want to start with what we are doing to counteract our market-driven sales declines and better position Jason.
As noted on Slide 4, we have taken steps to transform our portfolio, capture market share and reduce our cost structure. We refined Jason's business composition and improved our sales mix through the timely completion of our Janesville fiber solutions divestiture during quarter 3. This portfolio transformation reduces Jason's exposure to the cyclical automotive market from 35% of revenue to less than 10% and increases liquidity to $111 million.
Our teams are focused on capturing market share to mitigate current served market weakness.
Milsco secured a new turf care platform valued in excess of $1 million annually. Osborn signed 1 new strategic supplier agreement and expanded the scope of 3 current agreements with core industrial national account partners.
We have worked hard over the last 3 years to instill a base and a bias to control costs and simplify the business. Our skill sets in these areas were evident in the quarter as we completed facility consolidation projects on both the Engineered Components and Industrial segments. We also established and began executing 2020 cost reduction plans that will deliver $4.5 million of annualized savings.
Most importantly, Jason's operations continue to build off of what is now a strong base. Quality and service delivery, performance improvements are leading to further customer scorecard upgrades and supporting our team's growth-related commercial activity.
As communicated last quarter, Jason's Board of Directors engaged BMO Capital Markets to conduct a review of strategic alternatives. The process is underway, and the Company will only provide additional information when there is something to report. As such, we will not be conducting a question-and-answer session.
I want to emphasize one thing before handing the call over to Chad to discuss our results. Management is focused on running this business. We have seen meaningful pressure from the markets in the last two quarters, and we are taking the necessary steps to mitigate the impact, as Jason's customers and suppliers have acknowledged our continuous and sustained improvements, combined with enhanced products and solutions, drives real value. Running the business, it is where our focus has been, it is where our focus currently is, and it is where our focus will remain. Chad?
Thank you, Koby. Good morning, everyone. I'll start with an overview of the quarter, discuss results for both of our segments, and then provide an update on the balance sheet following the divestiture of Fiber Solutions. Please note that the results of Fiber Solutions are now reported as a discontinued operation for all periods presented. Discussion of Jason's consolidated results on today's call and in our earnings release and slides are for continuing operations, which are comprised of our Industrial and Engineered Components segment.
Starting on Slide 5. Net sales of $85.6 million were 20% lower than prior year. The noncore exit of the smart meter product line in the Engineered Components segment had a negative 5.4% impact on sales. And foreign currency negatively impacted sales by 1.4%, primarily due to a weaker euro as compared to the third quarter of last year. The Schaffner acquisition within Industrial had a positive 4.1% impact.
Organic sales declined 17.3% resulting primarily from weaker industrial markets in North America, Europe and Asia and significantly lowered demand from OEM customers and Engineered Components across most of our product lines. Overall, our businesses were impacted by a slowing global industrial manufacturing environment.
Operating loss of $27.5 million increased $29.6 million, primarily due to a $20.6 million noncash intangible asset impairment charge in Engineered Components and lower sales volume. Adjusted EBITDA was $3.1 million or 3.6% of net sales compared to $10.8 million or 10.1% of net sales in the prior year. Adjusted EBITDA was impacted by lower sales volumes and unfavorable product mix, which were partially offset by price recovery and cost reductions across the businesses that were actioned in response to the lower demand environment.
Turning to Slide 6. Industrial reported sales of $48.9 million, which were $2.1 million lower than prior year, with an organic sales decline of 10%, a positive 8.6% impact from the Schaffner acquisition and a negative 2.8% currency impact on sales.
While both Europe and the Americas contributed to the organic sales decline in the quarter, the regions were impacted by several key factors. In Europe, order rates were soft throughout the quarter to both industrial and automotive markets, while the construction market remained a bright spot. Our European operations continue to be impacted by weakness in Asian export sales, particularly to China.
The organic sales decline was significantly impacted by a Chinese customer, who took large stocking orders in the third quarter of 2018 that did not recur, combined with their lower consumption of consumable polishing products due to reduced China production level. These factors represented an approximately 3% headwind to organic sales growth for the segment.
In the Americas, weakness accelerated throughout the quarter with softening in welding, metal fabrication and automotive end markets. Distributors and end-user customers significantly slowed order rates to reduce inventories and adjust lower consumption levels.
Finally, we continue to implement 80/20 initiatives to exit unprofitable SKUs or customers, which we do not adjust from our organic sales results. This activity resulted in an approximate 1% headwind to organic sales in the quarter. Adjusted EBITDA of $5 million or 10.2% of net sales decreased from $7.6 million or 14.9% of net sales in the prior year. The EBITDA decline in margin compression were primarily driven by lower sales volumes and lower utilization of our manufacturing capacity, partially offset by pricing actions and headcount reduction. Adjusted EBITDA margins were negatively impacted by 90 basis points, resulting from lower income from our unconsolidated Asian joint venture, which has operations in China and Taiwan.
On Slide 7, Engineered Components reported sales of $36.8 million, a decrease of $19.2 million, including a negative 10.3% impact from the exit of noncore smart meter product lines at the end of 2018. Organic sales declined 24.1% on lower overall demand as OEM's seating customers reduced forecast and orders in the quarter across our served end markets, including construction, agriculture, turf care and material handling. The rail market saw weaker demand, in addition to heightened competitive pressure, along with lower overall general industrial demand, which impacted our filtration and safety grading products.
Adjusted EBITDA was $1.4 million or 3.9% of net sales compared to $6.2 million or 11% of net sales in the prior year. Adjusted EBITDA margins were impacted by lower volumes and unfavorable product mix, partially offset by pricing and cost reduction actions and lower steel prices.
A noncash intangible asset impairment charge of $20.6 million was recognized in the business in the Engineered Components due to sustained sales and profitability declines. This noncash charge is excluded from adjusted EBITDA.
Jason's financial position at the end of the quarter is shown on Slide 8. Our total liquidity was $110.6 million comprised of $92.7 million of cash and cash equivalents and $17.9 million of available capacity of revolving lines of credit. During the quarter, $71.6 million of net cash was received upon completion of the sale of Fiber Solutions. These proceeds were net of cash divested, liabilities assumed by the buyer and $3.4 million of transaction costs. We expect to use our corporate net operating loss carryforwards, certain interest expense limitation carryforwards and tax credits to substantially offset all of the taxable gain, and we do not expect to pay any significant U.S. cash taxes on the sale. Following this transaction, we expect to have insignificant net operating loss carryforwards to reduce future taxable earnings.
We intend to use the proceeds from the sale of Fiber Solutions for reinvestment in the businesses, including capital expenditures and potential acquisitions as well as other permitted investments under the terms of our U.S. credit facility. To the extent that we do not reinvest the proceeds, a mandatory prepayment of our first lien term loans will be required in the third quarter of 2020.
The net debt to adjusted EBITDA increased to 11 times compared to seven times in the second quarter, driven primarily by lower LTM adjusted EBITDA resulting from the lower sales volumes.
Operating cash flow for the quarter was negative $6.9 million with free cash flow of negative $9.3 million. Both operating and free cash flow were impacted by $3.4 million of transaction costs, primarily related to the Fiber Solutions divestiture, and $2.3 million of cash restructuring and integration costs related to cost reduction, facility consolidation and Schaffner integration activity. Lower working capital provided a $2.6 million benefit to operating and free cash flow on lower volume, and we expect to continue to reduce working capital in the fourth quarter.
Now I'll turn the call back to Koby to provide an update on the businesses.
Thanks, Chad. Please turn to Slide 9. As Chad covered in his prepared remarks, turf care and heavy industry customers reduced their building schedules in the last two quarters, some by as much as 25%, in efforts to manage inventory. Milsco's revenue decline in the past two quarters are solely the result of destocking activity, not share loss. In fact, we secured a net of 6 new significant platforms so far this year that will generate in excess of $6 million annually at full production volumes.
The two photos on this slide were taken at last month's Green Industry & Equipment Expo, the largest outdoor power equipment and turf care industry trade show, and they represent the step-change we have made in our Milsco business over the past few years. This is a big reason we are winning share. Our team is advancing the design and innovation experience for our OEM customers, and our seats do more to differentiate our customers' product portfolios and nearly any other aspect of their equipment. Creativity meets science in our Milwaukee headquarters as designers and engineers work together to create customer-specific solutions that incorporate individualized styling, high-performance materials, ergonomics and suspension systems.
We now generate 20% of our business from seating solutions introduced in the last three years and expect to grow this figure to 40% in the coming years. A senior executive from one of our turf care targets delivered the quote on the bottom of the slide during a visit to our booth, by far and away, the most innovative and highest-quality seats. Comments like these reinforce our strategy and stoke our passion to capture further market share.
Please turn to Slide 10. Osborn has a number of initiatives that will help offset challenging China and German market conditions. Our global industrial commercial team is targeting the heavy fabrication market with products and solutions that increase trade worker efficiency.
New products designed to reduce deburring speed while providing up to two times the useful life of competitive products are opening the doors to fabricators and maintenance technicians in shipyards, on pipelines and in tool curves. We have augmented this end user approach via the national account channel partnerships mentioned earlier in the call.
Our marketing team wrapped this initiative in an integrated marketing calendar to bring all elements together to attack what we see as a $30 million global opportunity for our core products. Another example of our value-added approach relates to our roller technology business. These products apply our 100-plus years of brush technology experience to larger rollers used to transport, clean and apply surface treatments to process industries like primary metals. Our current order book is up 10% year-over-year on the back of double digit growth in the last 2 years.
Slide 11 provides an update of our recent Schaffner acquisition. Execution of our integration plan has been strong. We operate as a single, combined organization and have leveraged our 80/20 expertise to simplify and harmonize the product offering under the Osborn brand. While our supply chain team has bundled spend and driven greater than $500,000 of annualized savings, our aligned commercial team has been in front of each of our top customers multiple times with great effect. Combined aggregate North American polishing revenue is up, and margins on new business awards are 500 basis points higher than in the past.
We completed the Jackson, Mississippi consolidation into our Richmond, Indiana facility at the beginning of the third quarter. The momentum gained by these accomplishments lead us to our announcement today that we are accelerating our activity to create one Osborn polishing business.
We will be consolidating the remaining 3 former Schaffner facilities into existing Osborn location. This will bring our total synergy value to roughly $3 million of cost savings annually, a little more than half of which will positively impact next year. This integration is being leveraged to build Jason's acquisition and integration competency, and we look forward to executing additional highly synergistic tuck-ins.
Please turn to Slide 12. Jason's Lean transformation has altered our physical sites, changed the way we work and dramatically improved our operational performance. We have increased our on-time delivery 1,200 basis points and cut our defect rate by 50%. Customer confidence is at a high watermark, and we are proud of the positive reinforcement provided via Platinum awards and during site visits.
Cost reductions are critical in the current environment, and we created a plan to further reduce our expenses by $4.5 million. We are consolidating an additional 4 sites during the next 9 months, inclusive of the Schaffner locations just mentioned. We are also realigning pockets of our European organization. This shared service approach will simplify and standardize processes across the region as well as yield savings.
Finally, we are investing in automation. Investments generate a payback in less than 2 years. Our 2020 cost reduction plans will generate approximately $2.7 million of savings in the coming year.
In closing, on Slide 13, we conducted our third annual global leadership team meeting earlier this week. 55 of our best and brightest team members gathered together for 2 days to learn, share accomplishments and establish a framework for our goals and objectives for 2020. The energy level engagement were high. And one portion resonated with all of us, and that was the profiles and leadership section. 12 of our folks presented individual topics ranging from removing risk to Lean activities, to cutting costs, to driving growth. The aggregate impact of their contributions equates to $75 million of revenue and $8 million of EBITDA.
Clearly, these projects are not incremental, but the value of the projects, the talent of the leaders and the passion to succeed inspire us. I'd like to take this opportunity to thank all of our employees for their continued effort and execution. And to our suppliers and customers, I know you have seen the numerous improvements we have made to our company and are experiencing the increased quality, delivery and value-added commercial support we now provide.
We thank you for the opportunity to continue to earn your business. And finally, to all of our constituents, we are transforming our portfolio, capturing market share, improving operational performance, reducing our cost structure and working to solidify the long-term capital structure of the Company. Until then, we remain focused on running this business.
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?
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
End of Q&A