Unique Fabricating, Inc.

Greetings and welcome to Unique Fabricating's third quarter 2021 earnings call. Currently, all participants are in listen-only mode. A question and answer session will follow the formal 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, Jeff Stanliss with FNK IR. Please go ahead.

Thank you, Kate. And I'd like to welcome everyone to Unique Fabricating's third quarter 2021 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 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, level 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, and performances 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 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 are and 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 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 GAAP to non-GAAP are included in the press release that was issued earlier today. With that, I would like to turn the call over to Doug. Doug, the call is yours.

Thank you, Jeff, and good afternoon, everyone. Unique Fabricating, Brian, and I appreciate your investment of time for our update of the company's outlook, overall operations, and financial results. Unique Fabricating continues to navigate unprecedented and ongoing challenges for the markets we serve while providing our customers timely delivery of quality product and by winning new business. As we began to emerge from the worst of the pandemic, new challenges from shortages of raw materials and labor plus inefficient logistics created new obstacles for our customers and the entire automotive and appliance supply chains. This has led to a continuing market condition of increasing raw material, labor, and logistics costs with comprehensive operational inefficiencies resulting in decreasing margins. As volume projections and customer releases are constantly being revised, forecasting and planning effectively are very difficult. Through all of this, Unique Fabricating has been able to maintain or strengthen customer and supplier relationships while increasing organizational capability, albeit with results that are not what we had originally expected. We are not satisfied with our financial performance, and as these challenges abate, we are confident that we have taken the steps necessary to show improved performance with higher volumes. Our ability to maintain liquidity and to service our customers effectively while working closely with our supply base is creating both near term and longer term opportunities for us. The impact of the continuing challenges on the supply base are leading to movements within the industry, including resourcing of business and supplier consolidation opportunities. Several of our customers are approaching us about takeover work from their suppliers who are unable or unwilling to navigate these challenging times. I am encouraged with how our entire team has met these existential challenges head on, taking care of our customers every day and maintaining our position as a partner upon whom our customers know they can rely. As a part of the effort to better position the company to be opportunistic, we executed a private placement equity raise of approximately $4 million in September. This demonstrates the ongoing strong support from our shareholders and board for the actions taken over the last two years to build a highly capable organization, well positioned to profitably benefit from the expected volume increases in all our markets in 2022 and beyond. On the demand side through Q3, Our transportation and appliance market customers reduced releases well below any previous third-party estimates, resulting in our recording 3% lower net sales in Q3 compared to Q2. The primary causes are continued shortages of key materials, primarily chips and certain petroleum-based products, as well as labor and logistics challenges. Compared to previous third-party forecasts, And as has been widely communicated, the Detroit 3 auto manufacturers and their tier suppliers have been more dramatically impacted by these shortages in Q3 than in Q2, causing greater production reductions than the overall market. The previously communicated third-party estimates showed 18% higher North American light vehicle production in Q3 versus Q2. During our previous earnings call, we stated that we had been skeptical of the magnitude of these forecasted increases, but we had not anticipated actual North American production to decrease 6% from Q2, with its corresponding negative impact on our Q3 net sales. We see continued strength for our offerings to the appliance industry, and our outlook for this market is improving. We recently began shipments for our latest consumer goods order intake wins and expect this market to grow for the company. 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 costs in Q3 continuing to increase over Q2 levels. These factors negatively affected our margins, along with the continued impacts of operational inefficiencies resulting from the ongoing short or no-notice customer order fluctuations, plus supplier issues with allocations, force majeure, et cetera, over the last months. However, with limited specific exceptions, we have been able to secure necessary materials to meet our customer commitments for on-time delivery with the result that our outbound expedite costs have dropped significantly since Q2. We do expect to see continued challenges from the chip shortage and other factors outlined previously as we move through Q4 2021 and into the first half of 2022. During the quarter, we remained focused on ensuring that our customer cost increase recovery program was effectively implemented as we sought to partially offset the well-documented in continuing input cost increases that are impacting all segments of our economy. This effort was in large part successful in mitigating a portion of these increased costs. With our Q3 sales coming in at 26% below our original 2021 planning, the significantly reduced production volumes and the resulting loss of contribution margin have continued to be negative impacts to our financial results along with the challenges of effectively flexing costs to the changing release schedules. With our customers' ongoing focus on managing their own supply chain issues and labor shortages, we continue to see an overall reduction in new business sourcing activity throughout all our markets during Q3. Despite this and our focus on the cost recovery activities, We have been awarded an additional $27 million in customer order intake, or COI, since our last call for a total year-to-date of $93 million, with $16 million of this in appliance and $6 million in consumer goods. This compares to $161 million at the end of October 2020. We have maintained our customer responsiveness to delayed and then accelerated timetables for potential new awards and platform launches. In Q4, we are now seeing an increase in quoting activity. Despite the current challenges in the macroeconomic environment, we remain confident in the longer-term strength in each of our key markets through at least 2024. End customer demand, including commercial fleet and rental car companies, remains very high, and inventory levels continue to be historically low. End customer back orders continue in the appliance and customer goods markets we serve. Light duty new vehicle inventory has remained historically low with approximately 0.9 million units at the end of September compared to 2.3 million units for September 2020 and 3.4 million units for September of 2019. Resulting from the low inventories and reduced production volumes, U.S. light vehicle sales continued to be lower than previously forecasted, providing additional pent-up demand, supporting a positive longer-term outlook. The Seasonally Adjusted Annual Sales Rate, or SAR, dropped to approximately 12 million in September, after averaging just over 17 million in the first half and approximately 13 million in August. and 14.7 million in July. The mid-October independent North American automotive production forecast for 2021 dropped 1.6 million units to 13.0 million full year, or approximately 25% from the previously communicated mid-July second half volumes. With first half at 6.8 million units, this now indicates an approximate 10% further drop in second half over the already low first half. This now places 2021 on par with the 2020 low production. In our last earnings call, we had expressed substantial skepticism on the earlier forecast volumes, but these additional reductions at approximately 21% for second half 2021 production, or even greater than we had anticipated. For 2022, the latest outlook was also decreased substantially by 1.8 million units, or 10%, to 15.2 million units. This still does represent a 17% increase over the low 2021 full-year volume, and more importantly, indicates a 27% increase in production from second half 2021 levels. The 2023 forecast now shows 17.3 million units, or an additional 14% above 2022. Continuing our cost review and reduction activities, we further streamline our salaried organization, resulting in an additional annualized savings of approximately 0.5 million beginning in December 2021 and fully effective in Q1 of 2022. This is in addition to the approximate $1.0 million annualized benefit from the previously communicated salary to organization enhancements focused on increasing capability and reducing costs. We did incur approximately $0.1 million in severance costs in Q3 and expect to incur up to $0.3 million in additional severance in Q4 for these activities. 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 in all our markets. During the quarter, we received confirmation of the SBA PPP $6 million loan forgiveness and the related $0.1 million in interest expense, resulting in a Q3 gain that did improve our balance sheet and debt ratios. This gain was partially offset by the $5.1 million non-cash goodwill valuation adjustment. We continue our collaborative work with our bank syndicate to develop a longer-term framework. To date, we continue to maintain sufficient liquidity for us to operate in these challenging times. Brian will now provide an overview of our third quarter 2021 financial results. Thank you, Doug. Good afternoon, everyone.