Unique Fabricating, Inc.

Greetings, and welcome to Unique Fabricating's second 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 assistance during the conference, please press star zero on your telephone keypad to reach a live operator. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rob Fink of FNKIR. Sir, go ahead.

Thank you, operator. I'd like to welcome everyone to Unique Fabricating's second quarter 2021 earnings conference call. Hosting the call today is Doug Kane, 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, level of activities, performance, or achievements to be materially different from any future results, levels of activities, performance, or achievements expressed or implied by statements made on today's call. All forward-looking statements are based on management's present expectation and are subject to certain risk factors and uncertainties that may cause actual results, outcomes, and 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 31, 2020, which was filed in April of this year with the SEC pursuant to Rule 424B, and in particular, the section titled Risk Factors. All statements on this call, 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 the 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 that 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 reconciliations of non-GAAP to GAAP included in the press release that was issued earlier today. With 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 in our update of the company's outlook, overall operations, and financial results. The structural changes we made to reduce costs and improve operational efficiency are enabling us to navigate significant industry-wide external challenges. These challenges, which I've spoken about in prior quarters, persisted through the second quarter and have, to a large degree, continued thus far in the third quarter. On the demand side, our transportation and appliance market customers reduced releases through the quarter well below any previous third-party estimates, resulting in our recording approximately 11% lower sales in Q2 than in Q1. The primary causes are continued shortages of key materials, primarily chips, and certain petroleum-based products. As has been widely communicated, the Detroit 3 auto manufacturers and their tier suppliers have been more dramatically impacted in Q2 and the first half of Q3 by these shortages, causing greater production reductions than the overall market compared to previous third-party forecasts. While third-party estimates currently show 18% higher North America light vehicle production in Q3 versus Q2, we do not have confidence that this increase will occur considering our July sales and the customer releases we see for the remainder of Q3. On the supply side, the labor availability challenges related to COVID and cost increases in our supply chain including labor, logistics, packaging, and raw material have persisted with cost increasing over Q1 levels. These factors have negatively affected our margins along with the continued impacts of operational inefficiencies resulting from the ongoing customer order fluctuations and supplier issues with allocations, force majeure, etc. over the last months. We do expect to see continued challenges from the chip shortage and other factors outlined previously as we move through the second half of 2021. As noted in our previous call, we have been focused on ensuring that our customer cost increase recovery program is effectively implemented as we sought to partially offset the well-documented raw material, labor, packaging and logistics cost increases that are impacting all segments of our economy. This effort has been largely successful, mitigating a meaningful portion of these increased costs. This program will be reviewed periodically to determine what modifications we may make considering the changing supply conditions. The financial results in the quarter in year-to-date periods reflect the ongoing pandemic impacts, including chip shortages and other raw material allocations affecting revenue and the continuing higher raw material and labor costs, as well as labor availability challenges. These above factors were partially offset by our cost recovery activities. With our customers currently focused on managing the supply chain issues and labor shortages, we have noted a reduction overall in new business sourcing throughout all our markets. Despite this and our focus on the cost recovery activities, we have been awarded $66 million in customer order intake, or COI, year to date. This compares to $70 million at the end of June last year and $94 million mid-August of 2020. During Q3, customer sourcing overall will likely remain below historic levels. We have ensured that we have maintained our customer responsiveness to delayed and then accelerated timetables for potential new awards and platform launches. Despite the current challenges of the macroeconomic environment, we remain confident in the longer-term strength in each of our key markets into 2023. In-customer demand, including commercial fleet and rental car companies, remains very high, and inventory levels continue at historic lows. Life duty new vehicle inventory continued to drop with the day's supply at the end of July of 1.0 million units, reduced 0.5 million from June's 1.5 million units. For comparison, June 2020 inventory stood at 2.8 million while June of 2019 was at 3.5 million units in inventory. June and July U.S. light vehicle sales showed the first negative impacts of the very low inventory levels, with the seasonally adjusted annual sales rate, or SAR, dropping to 15.4 million in 14.7 million units, respectively, after averaging just over 17 million in the first half. The mid-July independent North America automotive production forecast for 2021 shows approximately 14.6 million units, down 0.4 million from my last update, with Q2 and Q3 each down 0.2 million units. With first half at 6.8 million units, down 0.2 million units from my last call, there is a forecasted increase of 1 million units in the second half of 2021 to 7.8 million units. As the recent months have shown reductions within a quarter from the prior third-party forecast, we are managing our business near term, assuming a 15% plus reduction from these third-party forecasts. For 2022, the current outlook has been increased 0.2 million units to approximately 17.0 million units, produced or a 16% increase from the current 2021 full year. Over the last weeks, we executed a series of salaried organization enhancements focused on increasing capability and reducing cost. We will realize an annualized benefit from these actions of approximately $1.0 million beginning the second half of Q3 with full realization beginning in October. We believe that our comprehensive improvement activities implemented across all facets of the business during the last months have positioned us well for sustained profitable growth as customer releases increase, our new program wins come into production, and the supply chain challenges are resolved over the next months across all our markets. As noted in our press release this week, we did receive confirmation of the SBA PPP 6.0 million loan forgiveness and the related 0.1 million in interest expense. Based upon the timing of the actual forgiveness documentation, this will be recorded as a Q3 gain event for financial statement purposes and will strengthen our balance sheet and improve our debt ratios. We are working productively with our bank syndicate to develop a longer-term framework to enable a new agreement prior to year end. To date, we continue to maintain sufficient liquidity for us to operate in these challenging times. Brian will now provide an overview of our second quarter 2021 financial results.

Thank you, Doug. Good afternoon, everyone. Turning to the second quarter results. Net sales for the second quarter of 2021 increased to 30.9 million compared to 15 million in the second quarter of 2020. Excuse me. The increase in net sales as compared to the same period in 2020 is primarily due to the COVID-19 induced production shutdowns at many of our transportation customers in the second quarter of 2020. Our net sales in the second quarter of 2021 were less than anticipated and that of quarters not impacted by pandemic-induced shutdowns because of decreased demand for our products, as some automotive original equipment manufacturers have canceled or reduced planned production due to semiconductor and other supply shortages. Of the 30.9 million net sales for the second quarter, Customers in the transportation market accounted for approximately 89%, appliance at approximately 10%, with the remaining 1% primarily attributable to the medical market. Gross profit for the second quarter was $4.6 million, or 14.9% of net sales, compared to 1.8 million or 12.3% of net sales for the same period last year. The increase in both gross profit and gross profit as a percentage of net sales reflects the higher sales volumes, which resulted in operating leverage, which drove a 450 basis point improvement of overhead as a percentage of net sales. Additionally, during the second quarter of 2020, we continued to provide health care and other benefits to our employees that were laid off or furloughed without employee contributions. Material cost as a percent of net sales increased more than 500 basis points compared to the same period last year. This increase is the result of increased raw material and freight costs. Material costs have increased significantly due to supply shortages resulting from the impact of the February 2021 extreme weather pattern in Texas had on petroleum-based materials and high demand from the home improvement and home construction industries for non-petroleum-based materials. During the second quarter of 2021, Direct labor as a percentage of net sales was negatively impacted by operating inefficiencies resulting from customer release cancellations and reductions due to the previously discussed supply shortages. Many customer release cancellations are occurring with minimal notice, which limits our ability to flex our labor capacity. Furthermore, The tight labor market has significantly impacted our ability to flex our labor levels because we may not be able to quickly increase them to meet demand when automotive production volumes recover. Selling general and administrative expenses for the second quarter of 2021 were down to $6.1 million compared to $6.3 million for the second quarter of 2020. The decrease in SG&A was the result of certain intangible assets becoming fully amortized, resulting in a $.5 million reduction of amortization expense as compared to the same period in 2020, partially offset by $.3 million of costs related to entering into our forbearance agreement with our lending group in April of 2021, and amending the forbearance agreement in June of 2021. Operating loss was 1.5 million for the second quarter of 2021 compared to an operating loss of 4.8 million for the same period last year. In addition to the higher sales volume, higher gross profit and lower SG&A, we also had lower restructuring expenses of 0.3 million compared to the same period last year contributing to the improvement in our operating loss. Interest expense was 0.8 million for the second quarter of 2021 compared to 0.6 million for the second quarter of last year. The year-over-year increase was primarily due to higher borrowing on our revolving line of credit. Net loss for the second quarter of 2021 was approximately 2.5 million or 26 cents per basic and diluted share compared to a net loss of 4.3 million or 44 cents per basic and diluted share in the second quarter of 2020. We had income tax expense of approximately 0.3 million in the second quarter of 2021 compared to an income tax benefit of 1.1 million in the second quarter of 2020. As mentioned on our last earnings call, Our effective tax rate in 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. I will now provide an update on our financial position and liquidity. Net debt or total debt less cash and cash equivalents was $53.6 million as of June 30, 2021, inclusive of $0.9 million of cash and cash equivalents, compared to $46.4 million as of June 30, 2020, inclusive of $4.1 million of cash and cash equivalents. As we announced a few days ago, we received notice from our lender that the Small Business Administration had approved our application for full forgiveness of the PPP loan. We expect to recognize a $6.1 million gain related to the forgiveness of the principal and accrued interest in the third quarter of 2021. We ended the quarter with approximately .9 million of cash and cash equivalents and 6.7 million of net availability on our revolving line of credit. As Doug mentioned, we have continued to work collaboratively with the bank syndicate to develop a longer-term agreement, allowing us to weather the current market conditions while also positioning us to be prepared for the North American automotive production volume recovery. Doug will now provide some closing remarks. Doug, back to you.

Thank you, Brian. In the near term, we continue to navigate lower customer releases, demand volatility, industry-wide supply chain challenges, and the continued impact of COVID. Longer term, we are confident that new business awards combined with strong in-customer demand and low inventory levels indicate greater revenue volumes for us over the next quarters. As the customer release situation improves and supply issues are resolved, We believe we are poised to generate improved returns. Our team continues to operate more efficiently and effectively, which should benefit the bottom line as release volumes rebound in our markets. We remain committed to our vision of delivering sustainable, profitable growth and increasing shareholder value that follows from our brand of providing innovative, optimized, and sustainable solutions for our customers. With that, we will open the call for questions. Operator.

Thank you. The floor is now open for questions. If you do have a question, please press Star 1 on your telephone keypad to ask a live question. If your question has been answered, you can remove yourself from the queue by pressing 1. Again, ladies and gentlemen, it's Star 1 to ask a question. Please hold while we poll for questions. And at this time, there does not appear to be any questions. I would now like to turn the floor back over to Doug Cain for any closing remarks. Thank you.

Doug Cain Thank you, operator. Brian and I and the entire management team at Unique Fabricating, again, want to thank everyone for their investment of time this afternoon in the earnings call. And as always, if there are questions that occur or come to mind after this call, we will make ourselves available. to answer those questions, and again, look forward to our upcoming communications. Thank you very much.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.