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spk01: Greetings and welcome to Unique Fabricating's first quarter 2021 earnings call. Currently all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance throughout 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 FNK IR. Please go ahead.
spk03: Thank you, operator. I would like to welcome everyone to Unique Fabricating's first quarter 2021 earnings conference call. Hosting the call today are Doug Kane, Unique Fabricating's president and chief executive officer, and Brian Lopez, Unique Fabricating's chief financial officer. Before I turn the call over to Doug, I'd like to remind everyone that matters discussed on this conference call will include forward-looking statements as 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, performance, or achievements to be materially different from any results performance, or achievements expressed or implied on today's call. All such forward-looking statements are based on management's current expectations and are subject to certain risk factors, uncertainties that may cause actual results to differ materially from those expressed by such statements. For a discussion of such risks and uncertainties, please see the risk factor section as described in the unique fabricating annual report on Form 10-K and quarterly report on Form 10-Q that are both filed with the SEC. All statements on this call, and including those in this afternoon's press release, are made as of today. 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 their prospects for the future. Unless it is otherwise stated, it should be assumed that any financials discussed in this call will be on a GAAP basis. Full reconciliation of non-GAAP to GAAP are included in the press release that was issued this afternoon. With all that said, I'd now like to turn the call over to Doug. Doug, the call is yours.
spk04: Thank you, Rob, and good afternoon, everyone. Unique Fabricating, Brian, and I appreciate your investment of time for an update regarding our outlook, overall operations, and financial results. We continue to have success across all of our markets in winning new business, even as our customers' purchasing departments navigate challenges with supply chain issues, which have taken a priority over a more normal cadence of sourcing. For 2021 year to date, we have been awarded 45 million in new customer order intake or COI. Wins in our consumer goods market with Skeeter Boats owned by Yamaha and a major hot tub manufacturer validate our belief that substantial opportunity exists for us to grow our business in this market. We have seen continued increases in the cost of our supply chain, including labor, logistics, packaging, and raw material along with the impacts of operational inefficiencies caused by the extreme customer order fluctuations and supplier issues with allocations, force majeure, et cetera, over the last months. As a result, we have implemented a cost recovery program effective with shipments in Q2 across all of our markets and customers. This program will be reviewed periodically to determine what modifications we may make in light of the changing supply conditions. We believe that our comprehensive improvement activities across all facets of the business over the last months have positioned us well for sustained profitable growth as customer releases increase and our new program wins come into production over the next quarters across all of our markets. We do expect to see continued challenges from the chip shortage and other factors outlined previously as we move through the second quarter and into Q3. Even with the industry production struggles and very low inventory levels, US light vehicle sales have continued to exceed expectations, with March and April SAR, or Seasonally Adjusted Annual Rate, at 18.0 million and 18.5 million units, respectively. This is the first time since early 2000 with consecutive selling months at these levels. Fleet demand is also rising as travel increases. The latest independent North American automotive production forecast for 2021 shows approximately 15.0 million units, down 0.6 million from my last update, with Q2 especially hard hit. This forecast does include the current expected impact of reduced OEM production from the chip shortage and other supply chain challenges. There is an expected increase of 1.0 million units in the second half of 2021 to 8.0 million units above the first half expected 7.0 million units of production. Light duty new vehicle inventory remains at historically low levels. with today's supply at the end of April of approximately 33 days, down even further from March's low value. For 2022, the current outlook is for approximately 16.8 million units of production, or a 12% increase from the 2021 full year expectation. We continue to see longer term strength in our appliance business, despite this market also being negatively impacted near term by the chip and petroleum-based raw material shortages. Home building and home improvement trends are expected to remain very positive through the remainder of 2021 and through 2022. For the first quarter, we slightly exceeded our prior sales communication with revenue of approximately $34.8 million. We achieved this level of sales despite the continuing supply chain and customer release headwinds I mentioned. The Q1 results do reflect ongoing pandemic impacts, labor costs, and availability challenges, as well as other supply chain costs and availability issues, which we now expect to continue through the second quarter and into the third quarter. The most recent announcements and release schedules from our customers reflect even greater negative impacts on production from the chip shortage. In light of these headwinds, we expect Q2 sales to be lower than Q1. Based on the latest third-party forecast, we expect our second-half sales to exceed first-half run rates as the chip shortage condition lessens somewhat and the increasing pent-up demand drives OEM production schedules to recover as much lost volume as is possible. These same forecasts lead us to believe that our 2022 sales will be higher sequentially and year over year. These expected increasing sales represent both the market share gains we see from our COI wins and the expected higher overall North American production. Our collaborative work with the bank syndicate continues as we develop a revised agreement reflecting the current and expected market conditions. Brian will now provide an overview of our first quarter of 2021 financial results. Thank you, Doug.
spk02: Good afternoon, everyone. Turning to the first quarter's results. Net sales for the first quarter of 2021 increased to $34.8 million compared to $34.7 million in the first quarter of 2020. Net sales were only down slightly from 35 million of net sales in the fourth quarter of 2020, despite the supply chain disruptions Doug described, and the 0.7 million of net sales from our N95 face mask project in the fourth quarter of 2020, which did not reoccur in the first quarter as we had completed the project. Of the 34.8 million net sales for the first quarter, Customers in the transportation market accounted for approximately 90%, appliance at approximately 9%, with the remaining 1% primarily attributable to the medical market. Gross profit for the first quarter was $5.9 million, or 16.8% of net sales, compared to $5.6 million, or 16.1% of net sales for the same period last year. The first quarter of 2021 represented a sequential improvement both in terms of gross profit and gross margin versus the fourth quarter of 2020 reflecting improved labor productivity in part due to the completion of our N95 face mask project. Selling general and administrative expenses for the first quarter of 2021 were down slightly to $5.8 million compared to $5.9 million for the first quarter of 2020. As previously communicated, SG&A in the first quarter improved as compared to the fourth quarter of 2020. Operating income was $48,000 for the first quarter of 2021 compared to an operating loss of $1.2 million for the same period last year. The significant improvement was primarily due to $.9 million lower restructuring expenses and $.3 million higher gross profit. Interest expense was $.7 million for the first quarter of 2021 compared to $1.7 million for the first quarter last year. The year-over-year decrease was primarily due to lower expenses related to our interest rate swap as LIBOR futures dropped significantly in the first quarter of 2020 with the onset of the COVID-19 pandemic. Net loss for the first quarter of 2021 was approximately $1.1 million, or 11 cents per basic and diluted share, compared to a net loss of $2.3 million, or 24 cents per basic and diluted share, in the first quarter of 2020. We had income tax expense of approximately 0.4 million in the first quarter of 2021 compared to an income tax benefit of 0.6 million in the first quarter of 2020. Our effective tax rate in the first quarter of 2021 appears high and is the result of the U.S. tax jurisdiction being in a valuation allowance position, which means there is no benefit on U.S. net operating losses. The results show that a significant portion of the excess operational costs experienced in Q4 have declined, but as expected, some direct and indirect pandemic-related costs continued at higher than normal rates into the first quarter. As Doug mentioned, we expect some of these higher costs to continue through the second quarter and into the third quarter. I will now provide an update on our financial position and liquidity. Net debt or total debt less cash and cash equivalents was $52 million at March 31, 2021, inclusive of $2.7 million of cash and cash equivalents, compared to $45.3 million as of March 31, 2020, inclusive of $1.1 million of cash and cash equivalents. Included in net debt as of March 31, 2021 is the $6 million Paycheck Protection Program loan received in the second quarter of 2020. We have applied for full forgiveness and are awaiting a decision from the SBA. Until we receive a decision, there remains inherent uncertainty about how much, if any, of the PPP loan will be forgiven. We ended the quarter with approximately $2.7 million of cash and cash equivalents and $2.9 million of net availability on our revolving line of credit. As Doug mentioned, we have continued to work collaboratively with the bank syndicates to develop a revised agreement reflecting the current and expected market conditions. Doug will now provide some closing remarks. Doug, back to you.
spk04: Thank you, Brian. In the short term, we are navigating industry-wide supply chain challenges and the continued impact of COVID. Longer term, we are seeing signs of improving market conditions and of growing pent-up demand. Based upon the continued reduction in customer releases primarily related to the chip shortages, we are anticipating the second quarter to be worse than the first quarter. Based on the forecast and market demand, we believe we are nearing the low water mark and we remain optimistic that we will see meaningful improvements in the second half of 2021 and into 2022. As the release situation improves, we believe we are poised to generate improved returns. We are taking market share as evidenced by our COI rates and by our growing presence in markets outside the transportation sector. Simultaneously, our team is operating more efficiently and effectively, which should benefit the bottom line as markets rebound. We retain a clear view of the targets we have set for delivering sustainable, profitable growth and increasing shareholder value that follow us from providing innovative, optimized and sustainable solutions for our customers. With that, we will open the call for questions. Operator.
spk01: Thank you. The floor is now open for questions. If you do have a question, please press star then 1 on your telephone keypad to join the queue. If you're using a speakerphone, please pick up your handset to provide the best sound quality. Again, ladies and gentlemen, if you do have a question or comment, please press star then 1 on your telephone keypad at this time. And we go to John Nobile with Cowich Brothers. Please go ahead.
spk05: Hi. Good afternoon, Doug, Brian. Thanks for taking this call. I just wanted to make sure because, I mean, the first quarter, 90% of your revenue was generated from the automotive production market. Did you make mention, Doug, that the forecast for production is a 12% increase in 2021 over 2020? Is that correct?
spk04: No, no. I believe what I commented earlier was the 2022 numbers being 12% over what the 2021 full-year expectation. Oh, I'm sorry. 2022 is 12% over 2021.
spk05: Okay. Yeah.
spk04: I'm sorry, John. Go ahead.
spk05: I'm sorry. I just wanted to make sure that was correct because I'm seeing the press release that alludes to the fact that production has been reduced again in the second half and actually the first half. So I was hoping to get what the actual percentages of vehicle production, if you could provide that, you know, and what the overall outlook is for 2021 over 2020?
spk04: Sorry and I apologize for talking over you earlier. The best information that we have today and for all of the people following this market in this industry right now, it's changing on a daily basis, is for the first quarter production to have been about 3.6 to 3.7 million units. The original expectation had been for Q2 to be higher than Q1, but the latest information shows that number now to be closer to 33 in Q2 from the 3637 that was in Q1. And the expectation for the second half of the year to be about eight million units compared to the seven million in total for the first half of the year for a total of 15 million. Then if you take the 16.8 million expected now For 2022, that's where you get the 12%. Okay.
spk05: All right. So I just was – I mean, you gave actual volume numbers, but I was just trying to get a percentage of that. So basically, the second half of this year, you expect to exceed, obviously, the first half run rate that you have. Well, now the first quarter and second quarter is going to be a little bit lower, though. percentage-wise, how does that look to shape up, say, versus either the first half of this year or comparable to last year's second half, if we could put that into a percentage term?
spk04: So I think the best way to answer that question is that if you say that we are following the market production, you have a decrease in Q2 over Q1 of approximately 10%. for North American production. You then see an increase to basically a four million per quarter number for the second half, which is above the 3.3 that you're gonna see for Q2. So now you're talking about a 15% overall increase from the first half of 21 to the second half of 21.
spk05: Okay, and obviously I'm not gonna pin you exactly in line with the North American vehicle production rates because it's a great percentage, but it helps just to get an idea of where the overall market is heading. I appreciate that color on that. The programs that are currently driving revenue, I know it was relatively flat, but what was really the current programs that are responsible for the majority of your automotive revenue And looking forward, what programs do you see as really driving future growth at this point?
spk04: What I say is because of the products that we make and because we are not only a Tier 1 but also a Tier 2 and a Tier 3, we end up touching really a pretty ubiquitous group of programs and OEMs so that we're not concentrated on any particular platform. or any particular OEM, and that's kind of why the better barometer is, on the one hand, the overall production changes, not tied to a specific platform or OEM, but also, again, as we mentioned, and we are anxiously awaiting as a group, a management team, et cetera, for the benefits of the business that we have been winning that will have us having a higher than market increased production as we move forward in quarters.
spk05: Okay, thanks for that. And I just have one final question because previously you had a pretty robust outlook for the medical market sales and our program ended, which is why you really did believe, what was it, 1% of total sales in the first quarter was related to medical markets. So I just was looking to see what your outlook for this market might be, given that COVID conditions look to be easing. So, you know, I don't know if you have, you know, a number that you could say would contribute to total sales in 2021. Would it be a little bit better than, say, the 1%? I mean, you know, a couple of quarters ago, it looked like this was going to be 10% of sales. So what do you think it could possibly be in this year?
spk04: John, thanks for the question. So if I say a couple things, I believe, and if my memory serves me correctly, that we had said that a longer-term target was for our overall business to have 10% in medical. That was not a look to a near-term quarter by any means. The gestation period for winning medical business and going through all the testing and the protocols and then bringing that into production was is in some cases longer than what it is for transportation. And we already know that transportation in some cases can be a little bit of time. So we are still aggressively pursuing business. We have several opportunities that we're working. And we still believe strongly that this will be a significant benefit to the business going forward. I did highlight the other part of our grouping of transportation, appliance, medical, and then consumer goods. And on our consumer goods and all highway business, I've specifically noted two wins that we had that represent several million dollars of new customer order intake in business that we will actually be in production in the second half of this year. That business has a less lengthy time and a less involved approval process than what we've seen in medical and are actually very encouraged by what we're seeing in that part of the business. So that's the best way that I could answer that question. Our appliance business also has been strong, but as I noted in my comments, it doesn't get as much press, but it has been significantly restricted because of their inability to get chips. All ovens and refrigerators and freezers and these kind of things are all now more electronically inclined. And they've also been heavily impacted by the allocations and the force matures related to the petroleum-based products with the weather that was out of Texas. So we have several programs that we've won that should be launching now but are restricted because of our ability to secure raw material. This will change, and it will change, we believe, in half of the year. And so you'll see an increase in that share of our business also.
spk05: I really hope so because it's obviously more than just the automotive market at this point. So many markets are being affected by this chip shortage. Anyway, that's all I have. I thank you and I appreciate you taking my questions.
spk04: Hey, John, as always, thank you.
spk01: There are no further questions. We turn to Doug Kane for closing remarks.
spk04: So again, we appreciate everybody's investment in time this afternoon in the business. Again, management is unified and is very positive about the outlook that we have going forward despite the real challenges that are out there for not only us but many manufacturers in this space and as John mentioned in other markets. So we're positive about the future, appreciate the support, and look forward to having our next call in 90 days or less. Thank you.
spk01: Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.
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