Unique Fabricating, Inc.

Greetings and welcome to Unique Fabricating's fourth quarter 2020 earnings call. Currently, all participants are in a listen-only mode. A question and answer session will follow the phone presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rob Fink of FNKIR. Please go ahead.

Thank you, operator. I would like to welcome everyone to Unique Fabricating's fourth quarter and full year 2020 earnings conference call. Hosting the call is Doug Cain, Unique Fabricating's President and Chief Executive Officer, and Brian Loftus, Unique Fabricating's Chief Financial Officer. Before I turn the call over to Doug, I would like to remind everyone that matters discussed on this conference call will include forward-looking statements defined in the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. Forward-looking statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause the company's actual results, levels of activities, performance or achievements to be materially different from any future results, levels of activities, performance or achievements expressed, or implied statements made on today's call. All such forward-looking statements are based on management's present expectations and are subject to certain risk factors, uncertainties that may cause actual results, outcomes, performance to differ materially from those expressed by such statements. These risks and uncertainties include, but are not limited to, those discussed in the company's annual report on Form 10-K for the period ended December 31st, 2020, which was filed last week with the SEC pursuant to Rule 424B, and in particular, the section entitled Risk Factors. All statements on this call, including those in this afternoon's press release, are made as of today, and Unique Fabricating does not intend to update this information unless required by law. In addition, certain non-GAAP financial measures will be discussed during this call. These non-GAAP measures are used by management to make strategic decisions, forecast future results, and evaluate the company's current performance. Management believes the presentation of these non-GAAP financial measures are useful to investors in understanding and assessing the company's ongoing core operations and prospects for future. Unless it's otherwise stated, it should be assumed that any financials discussed on this call will be on a GAAP basis. Full reconciliations of non-GAAP to GAAP are included in the press release that was issued earlier today. With all that said, I'd now like to turn the call over to Doug. Doug, the call is yours.

Thank you, Rob. And good afternoon, everyone. Unique Fabricating, Brian, and I appreciate your investment of time this afternoon for an update regarding our outlook, overall operations, and financial results. As most of you are aware, we filed our fourth quarter and full year results approximately two weeks later than we normally would as a result of a restatement of our first three quarters of 2020. We corrected accounting errors that resulted from control failures related to turnover and a staff shortage, which required us to restate our financial results to the first, second, and third quarters of 2020. That process is now complete, and we have filed updated and corrected financial statements. We are glad to put this challenge behind us and to move forward with confidence in the reported financial results. The most significant errors were attributable to the first quarter of 2020 with nominal adjustments to the quarter-to-date statement of operations for the quarters ended June 30, 2020 and September 30, 2020. As a reminder, Brian, our CFO, joined Unique Fabricating in early April 2020 after the first quarter had been completed and he needed to rebuild the finance organization while working through the first quarter reporting period. This was also the time during the onset of the significant COVID impacts on our business and our activities to secure the PPP loan. We share this as an explanation, not as an excuse. We want to make it clear that today we have the team in place to ensure that issues like this do not reoccur. In fact, our new and capable team discovered the errors and worked tirelessly and diligently so that we could file our results on April 15. We are now back on track from a financial reporting perspective. In a few moments, Brian will discuss the details of the restatement. We have seen continuing commercial success over the last months in our targeted markets across all of our locations and processes. For full year 2020, we won 208 million of new customer order intake, or COI. Over the last 15 months, we have made significant improvements in the capability and capacity of the organization. Combining the continued commercial success, ongoing operational enhancements, including the implementation of the Plex ERP system in all U.S. locations, and the completion of our consolidation activities, We are positioned for a positive path forward despite the well-documented supply chain impacts affecting many industries and businesses at the present time. The latest independent North American automotive production forecast for 2021 shows approximately 15.6 million units. This is 21% above the 2020 full-year production of 12.9 million units. This forecast does include the current expected impact of reduced OEM production from the chip shortage and other supply chain challenges estimated now at approximately 800,000 units concentrated in Q1 and Q2 with an expected recovery of 400,000 units in the second half of 2021. Light duty new vehicle inventory levels remain well below historical norms down 25% from March of 2020. Fleet signals have also remained depressed at 28% below Q1 2020 levels, but with demand strengthening as travel increases. For 2022, the current outlook is for approximately 16.2 million units, or a 4% increase from 2021 full year. We continue to see strength in our appliance business, despite this market also being impacted by the chip and petroleum-based raw material shortages. Home building and home improvement trends are expected to remain positive throughout 2021 and well into 2022. We have also begun to see recent success with our initiatives in winning consumer and off-road business, including marine applications. For the first quarter, we're expecting revenue of approximately $34.5 million. We are achieving this level in spite of the supply chain headwinds I mentioned. Despite the impact of these supply chain challenges on our customers and suppliers, we expect sales to increase slightly in the second quarter from the first quarter levels, assuming conditions do not worsen, and for the second half to reflect sequential and year-over-year increases. These higher volumes represent both the market share gains we see from our COI wins and the expected higher overall North American production as our customers recover some of the lost first half 2021 production. The Q4 financial results reflect the pandemic impacts and other challenges, particularly in the supply chain and labor markets. Brian will now provide an overview of our fourth quarter and full year 2020 financial results.

Thank you, Doug. Good afternoon, everyone. Included in today's press release were tables that break down the changes to our quarterly financials for the quarters ended March 31st, June 30th, and September 30, 2020. As you can see, there were several adjustments to both our balance sheets and income statements with the most significant adjustments being directly attributable to the first quarter of 2020. While it was disappointing to find ourselves in the position of needing to restate the 2020 quarters, we are glad to have this behind us and I am extremely proud of how our team persevered. I encourage everyone to read item 9A in our 2020 Annual Report on Form 10-K for our disclosure related to the control failures that led to the errors not being identified and corrected in a timely manner. Turning to the fourth quarter and full year results. Net sales for the fourth quarter of 2020 decreased to 35 million, down 1.6% or 0.6 million from 35.6 million in the fourth quarter of last year. The decrease in net sales is attributable to the end of certain customer programs and lost sales as a result of our previous facility closures, which were partially offset by the N95 face mask project sales. Of the 35 million net sales for the fourth quarter, customers in the transportation market accounted for approximately 88% Appliance, approximately 9%, with the remaining 3% primarily attributable to the medical market. Gross profit for the fourth quarter was 5 million or 14.4% of net sales compared to 7.8 million or 22% of net sales from the same period in 2020. Impacting our gross margin in the fourth quarter were higher costs related to expedited freight labor premiums due to the tight labor market and an unfavorable physical inventory adjustment. Selling general and administrative expenses for the fourth quarter of 2020 were up $1.4 million to $6.9 million compared to $5.5 million for the fourth quarter of 2019. The increase in SG&A results from higher people costs as there were many open positions throughout the company in the fourth quarter of 2019 that have since been filled and 2019 had a favorable adjustment to certain employee benefit accruals which did not reoccur in 2020. Also contributing to the increase in SG&A in the fourth quarter of 2020 as compared to the same period in 2019 were higher professional service fees including legal, finance, tax, and information technology support. Operating loss was $1.9 million for the fourth quarter of 2020 compared to operating income of $1.4 million for the same period last year. The decrease of the operating income is the result of the lower gross profit and higher SG&A expenses partially offset by $0.9 million lower restructuring charges. Interest expense was 0.6 million for the fourth quarter of 2020 compared to 0.7 million for the fourth quarter last year. The year-over-year decrease was primarily due to lower expenses related to our interest rate swap and the composition of our debt compared to last year, as the $6 million PPP loan has an interest rate of 1%. Net loss for the fourth quarter of 2020 was approximately $82,000 or one cent per basic and diluted share compared to net income of 9,000 in the fourth quarter of 2019. We had an income tax benefit of approximately 2.3 million in the fourth quarter of 2020 compared to income tax expense of 0.6 million in the fourth quarter of 2019. The large income tax benefit is the result of net operating loss carryback rules related to the global and tangible low-tax income provision of the Tax Cuts and Jobs Act of 2017 and the Coronavirus Aid, Relief, and Economic Security Act. There were several factors which impacted our financial results during the fourth quarter which we do not expect to reoccur to the same magnitude in the first quarter of 2021. First, we expect our direct labor costs to reduce by approximately $0.7 million. This improvement is partially attributable to the completion of our N95 mask project. The N95 mask production process was labor intensive and required us to increase our staffing levels, which during the pandemic-induced tight labor market resulted in higher than anticipated labor costs. This impact is now behind us. Second, we expect our SG&A expenses to decrease by nearly 0.8 million, returning to a level more consistent with recent periods than the fourth quarter. While we have seen some of the excess operational costs experienced in Q4 recede, there are some direct and indirect pandemic-related costs that we expect to continue at a higher than normal rate in the first quarter. During the fourth quarter, we saw an uptick in supply chain disruptions. Throughout the pandemic, there have been supply chain challenges, but we saw a significant increase in the fourth quarter as compared to the third quarter. These supply chain disruptions resulted in higher inbound and outbound freight costs as we fought to minimize the impact on our customers. The supply chain disruptions have also resulted in operating inefficiencies and higher material costs when we purchased alternative material at a higher cost to ensure customer supply. Unfortunately, between COVID, the chip shortage, and the impact of the extreme weather pattern seen in the southern United States in February, We expect some of these disruptions and challenges to continue through the first half of 2021. Turning to the full year results. Net sales for the year decreased 21.2% to $120.2 million from $152.5 million last year. The decrease in net sales is primarily attributable to the COVID-19-induced shutdowns that began in the first quarter of 2020 and continued through the first two months of the second quarter. Also contributing to the sales decrease was the end of certain customer programs, lost sales as a result of our previous facility closures, and decontented components for two transportation customer platforms. Of the 120.2 million in net sales for the year, Customers in the transportation market accounted for approximately 88%, appliance at approximately 9%, with the remaining 3% primarily attributable to the medical market. Gross profit was 20.7 million or 17.2% of net sales compared to 31.5 million or 20.7% of net sales for the same period of 2019. SG&A expenses were down 4.7 percent to $25.5 million compared to $26.8 million in 2019. The decrease in SG&A results from several cost reductions, including management and commission expenses, which were partially offset by higher professional service fees, including finance, tax, legal, and information technology support. Operating loss was $6 million, compared to an operating loss of $4.8 million in 2019. Interest expense was $3.6 million compared to $4.3 million last year. The year-over-year decrease was primarily due to lower expenses related to our interest rate swap and the composition of our debt compared to last year, as again, the PPP loan has an interest rate of 1%. Net loss was 5.7 million or 58 cents per basic and diluted share compared to a net loss of 9.1 million or 93 cents per basic and diluted share last year. I will now provide an update on our financial position and liquidity. Net debt or total debt less cash and cash equivalents was 49.6 million as of December 31, 2020, inclusive of 0.8 million of cash and cash equivalents, compared to 46.8 million as of December 29, 2019, inclusive of 0.7 million of cash and cash equivalents. Included in the net debt as of December 31, 2020, is the $6 million PPP loan that we received in the second quarter of 2020. As for the PPP loan, we applied for full forgiveness of the loan during the fourth quarter of 2020, and we provided our lender and the SBA with supplemental data related to our forgiveness application in the first quarter of 2021. As of today, we have not received a decision from the SBA on our forgiveness application. Until we receive a decision, there remains inherent uncertainty about how much, if any, of the PPP loan will be forgiven. We ended the year with approximately $0.8 million of cash and cash equivalents and $5.7 million of net availability on our revolving line of credit. Based on the results of the six-month period ended December 31, 2020, which is the most recent measurement period for our financial covenants, we informed our lending group that we did not expect to be in compliance with our financial covenants when we delivered our audited financial statements to them and began the process of working towards an amendment of our credit agreement. As previously disclosed and included in our announcement today, we entered into a forbearance agreement with our lending group on April 9th, which allows the lending group and us to continue our discussions of an amendment. The forbearance agreement allows us to continue borrowing on our revolving line of credit during the forbearance period, which commenced on April 9, 2021 and runs through and including June 15, 2021. We believe we will be able to successfully negotiate an amendment with our lending group during the forbearance period. However, there can be no assurances and there inherently are risks associated with these types of negotiations. We appreciate the speed at which our lending group was able to get the forbearance agreement in place. And finally, as disclosed in our annual report on Form 10-K and included in our announcement Our 2020 audited financial statements contain an audit opinion from our independent registered accounting firm that includes an explanatory paragraph related to our ability to continue as a going concern. Our failure to be in compliance with our financial covenants is a default under the amended and restated credit agreement. And we do not have sufficient liquidity to repay the debt in full. which raises substantial doubt about our ability as a company to continue as a going concern. You will notice in our December 31, 2020 balance sheet that all debt, excluding a portion of the PPP loan, has been classified in current liabilities. Without an amendment and a waiver that cures the default, the substantial doubt about the company's ability to continue as a going concern will remain. Doug will now provide some closing remarks. Doug, back to you.

Thank you, Brian. Over the last months, we have diligently worked to ensure a firm organizational, commercial, and operational foundation for the business going forward. Our COI performance over the last 15 months, indicating increasing market share in our core transportation and appliance markets, combined with the completion of the restructuring and organizational realignment activities, position us well for the near term and future. While this process has taken longer than we would have liked, we have finished these necessary tasks and have a clear line of sight towards the targets we have set for delivering sustainable, profitable growth and increasing shareholder value that follows from providing innovative, optimized, and sustainable solutions for our customers. With that, we will open the call for questions. Operator.

At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

Again, if anyone has any questions, you may press star 1.

And our first question comes from George Melas with MKH Management. Please proceed with your question.

Good afternoon, Doug and Brian. First quick question is, I didn't, Brian, I didn't understand when you said that SG&A would return to level consistent with prior period in the first quarter. And I think you gave a number, and I missed that. So maybe could you say that again?

Yeah. I believe the... Let me make sure I get the exact number.

I'm sorry.

Yep. SG&A came in at approximately $6.9 million for the fourth quarter of 2020. And we're expecting it to decrease in the first quarter approximately... eight hundred thousand dollars so it'll return roughly around that six point one million dollar mark which if you look at the uh first three quarters of 2020 would kind of be a more normalized level okay let me just look at that uh yeah okay very good great okay thank you for that uh jack the the the customer order intake was very strong for the year

The fourth quarter was a bit less than prior periods. Is there some seasonality to awards and how is your pipeline and how does the future look there?

George, good afternoon and thanks for the question. COI does have seasonality to it. There's kind of a cadence within the OEM so that Q1 and Q4 tend to be the lower season periods for that, awarding COI so that's natural and that's been true with the 14, 15 years I've been in this business. We have several opportunities that we are pursuing and are still very positive about our outlook going forward for COI and we'll be able to present our Q1 or through April results when we do our call within a few weeks.

Okay, very good. Just a few words on customer relations. I imagine that the COVID, everybody's sort of operational challenges regarding deliverability, and now with supply chain issues, how would you characterize your customer relationship at this point facing the challenges that you are facing?

If I said frequent communication, you would probably understand what I mean. That really has been the focus of almost the entire enterprise since early in Q4. It is noted that it has resulted in a lot of, we'll call it extra cost associated with this. We've maintained our customer relationships. It has cost us some money to do so, as Brian had mentioned very specifically. We have no lingering customer relationship issues related to supply, but this remains a challenge. More recently, as y'all have probably seen, and as we've noted a couple times, the issues around what happened in Texas in forest and shore activities around the petroleum-based products, which include some of our foam that we use in seeding applications and other things. What I would say is the customers are unrelenting. That would definitely be a fair statement. but they also have an understanding of the challenge that are there. They just want their product so that we don't cause them supply disruptions and we're working with them literally on a daily basis. And this is also true in appliance. Appliance has been about this also.

Okay, okay. Brian, you mentioned in the impact on the gross profit that there was an unfavorable physical inventory adjustment. Can you quantify that?

Yes, it was roughly $400,000. Okay.

Can you say what it was? Is it just some obsolete inventory that you had to write off?

I think it was probably kind of a combination of a number of factors. We certainly haven't been sitting still since we saw it, because we obviously didn't like the result. So we've been digging in through some bombs and things like that, just kind of making sure that we're not missing under-reporting scrap or material utilization. I mean, kind of evaluating those things. So I wouldn't say it was any one obvious driving force there, but it was a collection of items that we're kind of investigating and trying to tighten down so it doesn't repeat.

Okay, great. And regarding the higher cost on the cost of goods sold, is there a way you can sort of quantify freight, labor, and you already did on the inventory side because there was a meaningful increase in cost of sales on very similar revenue levels. So it would be interesting to get some sort of understanding of that.

Yes, I'm looking here real quick. The freight number that I believe, and Doug, correct me if you have a different number, I believe we're looking at probably around a half million to 600,000 on the free side.

Okay. Yeah, if I can step in a little bit again, this also would be part of the results of even the physical inventory as we were doing to make sure that we were supplying customers as required. And everybody on this call I know is aware of the cost, both commercial cost as well as financial cost, if you actually do end up shutting down one of the bigger tier ones or one of the OEMs, we creatively worked with the customers but we used a lot of material substitutions in Q4 and also we've been doing some of this in the Q1 because some of the raw material is on force majeure and is unavailable. This tends to drive up costs because we're not optimizing the material utilization. So that's an additional part of the cost being higher in Q4. We've been able to mitigate some of those things in Q1 back to those costs. As mentioned earlier, in COGS you had the direct labor number which was substantially higher and we've been able to see an approximate 0.7 million reduction in that as far as Q1 is concerned from Q2. And then like I said, it's a combination of inbound and outbound expedites because we were having to air freight some material in from China and from Europe and elsewhere to make sure that we got it here because of, again, the well-documented but very painful supply chain issues related to boats being stuck in port or being anchored outside of port, et cetera, et cetera. So it's a combination of the direct labor, which basically has been resolved in large measure, It's the raw material costs, the material costs, some of which are still going to hang over into Q1 as mentioned. And then it also has to do with these expedite freight in which we are working to lessen or have worked to lessen in Q1, but they have continued to an extent in Q1 also.

Okay, great. And maybe sort of looking into the second half of 2021 and maybe beyond, When you look at your bookings, at what gross margin do you expect the company to operate? And in a way, it's sort of given your bidding system, at what margin are you bidding the work?

That's a great question, a little complicated and maybe a little more forward-looking than what I would be comfortable in expressing at this point in time. What I would say is that we have been winning business at a margin that would work for us relative to a general material cost in the, we'll call it the 52 to 53% material cost range with a direct labor component that's somewhere in the 13 to 15% range. and then OPEX that's somewhere sitting around the 13 to 14% range, excluding some of these additional costs that we've been having to take into account. So we're not winning business at the expense of our margin, but we are gonna have margin pressure again, depending upon how long some of these supply chain issues last into the second half of 2021.

Okay. And then just maybe one last question. What confidence you have on your bidding given the uncertainty regarding labor costs to some extent, material costs as well, freight costs seems to be sort of fairly almost volatile. How are you able to understand to create some contingency in the pricing that the customer would have to pay some of these extra costs, or is just that not the pattern industry?

Unfortunately, the pattern in the industry is not to do that unless you've got a pure index that you can track relative to raw materials. So steel is one thing, aluminum, copper, these kind of things give you that opportunity. Without going into more than I feel comfortable saying at this point in time, relative to the extra cost that we have been seeing and are still seeing now, we do have an internal process ongoing and are reaching out to our customers in a cost sharing we'll say application for the cost that we're seeing today. Again, you will never find a customer telling you that they will do that. You will never find that in a contract that they will do that, but this ends up being a one-by-one negotiation with specificity. So I would tell you that we're doing that relative to what we're seeing today, and our forward look, we'll call it contracts, that we have out there, we're making sure that we have sufficient room in the raw material. I would also tell you that we did an internal review over the last 10 days giving an outlook relative to raw material prices and logistic costs that are there and we believe, but it's our belief at this point in time, that some of these costs are at historic highs and that as the supply chain opens up you'll see a Reverting back to the mean is the word I would use when it comes to certain of the raw materials that we use, whether that's going to happen in late Q3, whether it's going to happen in Q4, whether it's going to happen in the first quarter of 2022, I certainly can't say. But as part of our negotiations and discussions we're having with customers to recover current higher costs that are beyond our control. We are using that time to open these discussions about the future also, George.

Okay, great. Thank you very much. Good luck.

Thank you, George. And our next question is from John Noble with Taggart Brothers. Please proceed with your question. Hello, John, you may speak. Hello, John Noble, are you there? Hello? Yes, hello, we can hear you now. Yep. And I apologize, but I hope I'm not asking questions that were brought up.

John, unfortunately, you are cutting out, so I have only heard about one out of every six or eight words.

Can you hear me now?

Yes.

Okay, I moved. Maybe it's the location here. First off, I'm going to cut off from the call, so I just, that was mentioned, I'm going to cut off. Hey, John, that was very garbled. I'm sure your communication was clear, but I could not understand it.

Let me know if you can hear me at this point here.

Is this better?

Yeah, John, it's hit or miss every time.

Oh, gee. I'm moving about. I apologize. Can you hear me clearly at this point? Yeah, that's the best so far. Okay, I'm staying right here. Okay, let me go over. I want to make sure that. What you had said previously, the first quarter we expected about $34.5 million in revenue. Is that correct?

Yes.

Okay. And I did catch there were lower labor costs in 2021.

Did you quantify that? Yes. We provided a number that was about an $0.7 million number. Okay. $0.7 million. That's a year?

Yeah.

That's looking at a quarter-over-quarter view.

Okay, so this is quarterly. I just wanted to make sure. And I did catch the SD&A expectation. I appreciate that. I could just ask you to talk about the reduction in the effect that it would have. But it's a decent percentage of close to 10%. I was hoping that you might be able to comment on your outlook for the appliance business in this current year.

Okay. That was the clearest thing you said so far, John, so I appreciate that very much. Again, like I said, we know technology is challenged, and I had mentioned to our investor relations guy before we started the call, if we were standing outside, which you may be doing right now, it's snowing here, which is kind of strange. So for the appliance, we're actually very, I would say, bullish on the appliance business, as I had commented several quarters ago and as we've communicated in different communications. After the acquisitions were made, the appliance business was, I'll say, de-emphasized is maybe the best word that I could say for it. This resulted in the Fort Smith closure, the Murfreesboro closure, the Evansville closure, And then business went away from us, but there was really no reason for us to allow that to do. So I put ahead of Appliance Market, Brian Click, completely focused on making sure that we grow that business. We've been able to recover some of that business that we basically lost due to lack of attention and care, as well as winning new applications. So again, we're very bullish, and in fact, There are a couple of programs that we should have started revenue in Q1 that we are not able to start because the raw material for that is still sitting on force majeure. So when that relieves itself, I cannot give you a timing for that, we will see an immediate uptick in our appliance business. So we're very bullish on it and expect to see a significant increase in what we see second half of the year, even from what we see in the first half.

But it's possible to see some of this business still showing up in the second quarter?

It is possible. Absolutely. But I would say for sure in the second half of this year. But this business, and then more to your comment again, with this focus that we've got, there are a couple of other opportunities that we have in this market, including something that at least I've learned since I've joined here, that there are some of our automotive big tier ones, et cetera, that end up actually having operations that support appliance and actually operate and support medical. And we're leveraging our supplier codes and our contacts there so that it's less difficult to make a point of entry into the market. So we see that as being a benefit both to appliance and to medical, including the fact that...

Did you believe the medical business will grow in 2021? I know it was really not for the full year, but on a quarterly basis in where we are now with COVID, do you anticipate this still growing from where you are?

Yeah, again, it's very small. Again, the face mask production that we did was, I'll call it a one-off that we did for a major OEM here in Detroit that ended up being more of a – a social benefit program, unfortunately, because of the challenges that Brian met relative to the labor of doing it. But they did give us a name and did give us an understanding about what it takes to make medical product in a quasi clean room environment. That business takes a little bit longer to win from a gestation period. We've been able to expand with a couple of the customers we currently have in making product. We do have three or four opportunities that we are working on, but even some of these have been challenged because of being able to get the supply, because with the overall supply locked for our raw materials, we're not in a position to be able to win a piece of business and then take raw material from somebody else because it's on allocation or force majeure. So that's what I would say about medical. It's a longer gestation period than maybe I had hoped or thought. We do have some progress there. The reason I mentioned the consumer and all highway, we've actually won a couple of pieces of business just in the last weeks relative to providing, I'll say, material for fishing boats, et cetera. So we're also looking to expand our business here where I'll say the margin pressure is different than it is in the core transportation business, back to some of George's comments earlier.

Okay. And could you talk a little about the current focus of your R&D investment? I was hoping you could give some specifics in what you're looking at in that.

Wow, that was not a question that I anticipated, so I appreciate that. So without getting ahead of my skis a little bit, what I would say is that we put in place, back to some of the SG&A calls that Brian had mentioned before, in recognizing that the key thing for this business is to profitably grow the business, that we set up a development group that had not currently been here before that really is focused on next generation product. And because that's something that you mentioned as an interest, let us put something together potentially that we're gonna be getting together in just a few short weeks relative to Q1. and maybe I would prefer being able to speak a little bit better to that at that time, John, if that's okay with you.

There are several questions we have.

I'm just not in a position to really be able to articulate them very well right now.

We're losing you again. Oh, man, I moved. Hold on a second. Ken, is this okay here? That's better. I have a cost location in the house. Okay. I have the rising cost of sales over the past year. And specifically, what range do you see your gross margins at in 2021?

So I think what you asked is where do we see our gross margins for 2021? Yes. Yes.

I know rising crude oil prices definitely impact people at risk.

you I just wanted to what what in 2021 and so again I appreciate the question and fully understand the question similar to the answer that I provided George he had touched on this a few moments before let us also work on that as far as the q1 results and going into the q2 and we do our earnings release and we'll comment on that a little bit more that's a commitment from Brian and I to do that the reason I hesitate a little bit is because I We don't know yet when there's gonna be some relief on certain of these items, including the comment that I made about the price increase activity with some of our customers. We will not have perfect clarity in 30 days, plus, minus, but we will be in a better position to comment on that if you can allow me that time to do so. We recognize the importance of the question.

in the books anyway for Q1. If you have the handle, I would believe on what the margin, the growth margin might be in the first quarter at least. Okay.

You cut out there a little bit. Can you answer that?

Yes. Okay. Difficult call here. The first quarter is in the books. I had to kind of get my book. I'm curious as to what the first cross margins are. I'm sure you have a pretty good handle on it at this point.

If you would allow me to do this, and John, as we've talked a couple different times in other calls and whatever, I like to be as transparent and as clear and as precise as possible. In all honesty, we have been doing nothing but Brian, myself, his team, other people in the organization working around the clock for the last weeks and weeks to get ready to get all the pre-statements done, to get the 10K done, to get prepared for this call. Everything is in such a draft position for Q1 right now. In fact, there is no rest for the weary. We're in fact turning our full attention to doing that and I would be remiss if I were to comment much about that because we're just trying to triangulate all the additional costs that we have, some of which have rolled off. We're able to say that clearly, but raw material and some of the aspects about that, we just need a little bit more work on Q1, and I don't want to provide a number that would halt, or that would halt buying. I understand.

I'm sure it was a lot better ready for it. for April 15th, really three-quarters worth of statements. That's basically it. I just want to thank you again for the call.

John, thank you, and hopefully you're not hanging upside down from a tree somewhere.

Almost, almost. You won't believe how many moves I had to make to complete this call.

Thank you again. And our next question comes from George Melas with MKH Management.

Please proceed with your question.

Great. Thank you. Just a quick question on the ERP system. Seems like you've implemented it in all the U.S. locations, so now you're probably going to do that in Mexico. Can you talk a little bit about some of the benefits that you expect from FLEX in 2021 and beyond that?

George, I think the biggest benefit is probably one of the simplest things, which is just having improved visibility into the financials and the operations on a day-to-day basis. The legacy ERP systems are very outdated. Sub-ledgers aren't connected to ledgers, which just generally it's set up and been configured in a manner that It is human dependent, the entire process. So one of the biggest benefits I think we're going to reap is just the ability to have that view and more granularity as well. The level of detail that's in the financials out of the new ERP system are drastically improved from what we would have out of our legacy systems. So that's probably going to be the biggest benefit to us, which is just better visibility, more timely visibility because, again, you're not dependent on all these month-end entries to actually transact things that most ERP systems just automatically do. So it's probably the simplest thing is the best thing probably right now that we're looking forward to.

And, George, I know Brian was speaking from a financial perspective, which is, again, part of the the pain that we've all suffered over the last months and months. But the other thing the system does is it provides real-time data to the plants, operating the plants, to the supply chain group, getting material in, et cetera, et cetera. It's just fundamental to running the business, and the legacy systems he was kind to calling them ERP systems were very manual and were very insufficient to be able to run a business with the complexity and the number of locations that we have. So, we are, again, planning to continue this implementation into the two Mexico locations, so it's Queretaro and Monterrey. And then we will be left with the one location in London, Canada, which is a small site doing a little bit over a million one a month on average that is kind of a self-contained group that's out there. But we have seen advantages already in Q1 from having the better data. to operate the business. And as you can imagine, data is the foundation to operate.

Great. And then just in terms of CapEx for next year, do you have a sense of what is your forecast and your plan and what are your priorities for CapEx?

When you say CapEx, I'm assuming that you mean, CapEx for next year, you mean for 2021? Exactly, yeah. So again, my initial view was that on average we should spend about 3% of our sales on CapEx. We are not a CapEx intensive business. And that CapEx would include everything from safety issues to IT infrastructure issues to automation, specific capacity where needed. Because of the other challenges that we've seen, I had dialed that number back for 2021 so that we're targeting a number closer to the three million kind of a number. There's one very specific capacity piece that we have, the large VW business, maybe I shouldn't have said the OEM, but the large business that we won for our Lafayette, Georgia operation, which was our first foray into making engine covers and using fire retardant material with our reaction injection molding process. That's the biggest single item that we've got for this year and that's kind of a specific capacity increase. We have several smaller targeted automation investments that we're making throughout the locations that are focused on relieving the direct labor challenges that we currently have today and will continue having, perhaps forever. And then also really focused on material utilization improvements. Some of the equipment that we had here was, I don't want to say antiquated, but let's say it was past generation, and it works, but it does not enable us to use, to increase our material utilization the way that we need to, especially in the face of rising material costs. So these are the two areas of focus for our CapEx, but we're looking at basically running a total maybe of three million for this year rather than the four and a half that I had potentially targeted before. There's nothing that we're not gonna do that we have to do, and then hopefully be able to free up some more capital and cash flow going into 2022 to do that. Our capacity is sufficient. to meet these increasing volumes in the second half of the year without doing any capacity increase of any meaningful nature other than this one for the specific reaction injection molding program with the engine cover.

Great. Thank you very much. You're welcome. And this looks like we're at the end of the question and answer session.

I'll now turn the call over to Doug Cain for any additional closing remarks.

Thank you, operator. So first and foremost, I want to thank everybody's time invested this afternoon and for your continued commitment to unique fabricating through what has been a challenging time on many levels, not just with COVID, but supply chain issues, commercial issues, et cetera. some of which were internal, as we've addressed and discussed here in this call, but also many that are external, some of which have been mitigated, some of which will continue to go forward, and we look forward to speaking with each one of you in what is going to be a very few short weeks as we present our Q1 results, and then we're going to be mindful of a couple of the questions that were asked. I think I understood all the questions so that we can be in a better position to address a couple of those as part of our earnings call that we have in a few weeks. So again, I appreciate everything. Stay safe and stay healthy and look forward to talking with you again soon.

And this concludes today's conference and you may disconnect your line at this time. Thank you for your participation.