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spk01: 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.
spk04: 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.
spk02: 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.
spk06: Turning to the third quarter results. Net sales for the third quarter of 2021 decreased to $29.9 million. compared to $35.6 million in the third quarter of 2020. The decrease in net sales as compared to the same period in 2020 is primarily due to decreased demand for our products as some automotive original equipment manufacturers canceled or reduced planned production due to semiconductor and other supply shortages. Of the 29.9 million net sales for the third quarter, customers in the transportation market accounted for approximately 88%, appliance at approximately 10%, with the remaining 2% primarily attributable to our consumer off-road market. Gross profit for the third quarter was 3.3 million, or 10.9% of net sales, compared to 8.2 million or 23.1% of net sales for the same period last year. The decrease in both gross profit and gross profit as a percentage of net sales reflects the higher material, freight, and labor costs, the inefficiencies of our current operating environment, and the impact of lower operating leverage because of lower sales volumes. Material costs as a percentage of net sales increased approximately 320 basis points compared to the same period last year, caused by the well-documented significant raw material and logistic cost increases resulting from the various COVID and weather related issues throughout our supply base, as well as significant demand competition for our raw materials from other industries. During the third quarter of 2021, direct labor as a percentage of net sales was negatively impacted by operating inefficiencies resulting from customer launch delays, release cancellations, and reductions due to the previously discussed supply shortages as well as the increasing labor rates to secure sufficient labor to meet demand. As I mentioned during our second quarter call, many customer release cancellations are occurring with minimal notice, which limits our ability to flex our labor capacity. Also, negatively impacting our direct labor costs was the impact of increasing staff levels to support new program launches, which ultimately were delayed as a result of the supply shortages previously mentioned. Unfortunately, Our customers made the decision to delay those launches after we had increased our staffing levels and began training the workforce to support start of production on those launches. Manufacturing overhead was negatively impacted by increased outbound logistical costs, including freight, packaging materials, and shipping supplies, as well as higher energy and people costs, including salaries and benefits, as compared to the third quarter of 2020. Selling, general, and administrative expenses for the third quarter of 2021 were down to $5.7 million compared to $6.4 million for the third quarter of 2020. The decrease in SG&A was the result of certain intangible assets becoming fully amortized resulting in a half million dollar reduction of amortization expense as compared to the same period in 2020, in addition to lower people costs, including salaries and benefits, in an effort to control costs in light of the current operating conditions for automotive suppliers. Partially offsetting the lower amortization and employee costs were 0.4 million of higher legal and professional service fees related to our forbearance agreement with our bank group and our efforts to remediate the previously identified material weaknesses in our internal control over financial reporting. Despite the operating challenges we have faced the last six months, we have continued to prioritize our remediation efforts. While there remains more work to be done, including testing the operating effectiveness of the new or redesigned controls we have implemented as part of this process, we are cautiously optimistic that we will achieve our goal of remediation by year end. During the third quarter of 2021, we identified indicators of impairment that required us to complete an interim impairment analysis of our intangible assets including goodwill. As a result of our interim impairment analysis, we recorded a non-cash impairment of goodwill of $5.1 million during the third quarter of 21. The impairment is reflective of the near-term operating challenges faced by us and many other automotive suppliers, including rising material and labor costs and lower demand for our products as a result of the chip supply shortage previously discussed. Operating loss was $7.6 million for the third quarter of 2021 compared to operating income of $1.8 million for the same period last year. Excluding the $5.1 million goodwill impairment charge recorded in the third quarter of 2021, our operating loss would have been $2.5 million driven primarily by the lower sales volumes and lower gross profit because of rising input costs. Interest expense was $0.8 million for the third quarter of 2021 compared to $0.7 million for the third quarter last year. The year-over-year increase was primarily due to higher borrowings on a revolving line of credit in addition to higher interest rates because of our forbearance agreement. Net loss for the third quarter of 2021 was approximately 1.9 million or 19 cents per basic and diluted share compared to net income of 1 million or 10 cents per basic and diluted share in the third quarter of 2021. We had an income tax benefit of approximately 0.5 million in the third quarter of 2021 compared to income tax expense of 0.2 million in the third quarter of 2020. The income tax benefit is driven by our foreign subsidiaries as we have a valuation allowance position in the US tax jurisdiction. I will now provide an update on our financial position and liquidity. Net debt or total debt less cash and cash equivalent was 46.4 million as of September 30, 2021, inclusive of 1.1 million of cash and cash equivalents, compared to 49.6 million as of December 31, 2020, inclusive of 0.8 million of cash and cash equivalents. As previously announced, we received notice that the SBA had approved our application for full forgiveness of our PPP loan which resulted in a $6.1 million gain on debt extinguishment in the third quarter of 2021. We ended the quarter with approximately $1.1 million of cash and cash equivalents and $7.4 million of net availability on our revolving line of credit. As of September 30th, we were not in compliance with the minimum EBITDA covenant set forth by our forbearance agreement as amended. which constitutes a default. We have been working with our financial advisors and banking group to enter into an amendment and a waiver to cure the covenant default. However, there is no assurance that the bank group will waive the default or agree to an amendment to the current provisions set forth in the forbearance agreement. As of today, we are still able to borrow on our revolving line of credit. However, the bank group could exercise their rights as defined in the credit agreement at any time, which could include eliminating our ability to borrow on our revolving line of credit. Doug will now provide some closing remarks. Doug, back to you.
spk02: Thank you, Brian. In the near term, we continue to navigate low customer releases, demand volatility, industry-wide supply chain challenges, and the continued impact of COVID. We are confident that new business awards combined with strong in-customer demand and low inventory levels indicate greater revenue volumes for us after the recovery beginning in 2022. As the customer release situation improves and supply issues are resolved, we believe we are poised to generate improved results. We are longer term very positive and believe the transportation market is entering a multi-year growth cycle. For 2020 and 2021, North American light vehicle automotive production is forecast to be only approximately 13 million units each year. This follows a four-year average from 2016 to 2019 of approximately 17 million units. This production decline of 4 million units each in consecutive years has significantly depleted inventories and has resulted in substantial pent-up demand. Our team continues to operate more effectively, which should benefit operating results 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?
spk01: Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. If you wish to withdraw from the queue, please press star 2. We do ask that if you are listening via speakerphone to please pick up your handset for optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone now. Please hold a moment while we poll for questions. And our first question today is coming from Leonard Schleicher at Taglage Brothers. Your line is live. You may begin.
spk05: Hi, Doug. I'm calling in for John. How are you? Fantastic, Leonard.
spk02: Is John okay?
spk05: Yeah. No, he had another competing call, so I'm helping him out. So when you were presenting at the Taglage Conference this September, You said that while you didn't have a lot of confidence in the North American production forecast for the second half of 21 coming to fruition, you placed more confidence in the projections for 2022. So do you still have a healthy level of confidence for 2022's current North American production forecast?
spk02: I appreciate the question, and as you recognize, that's a somewhat difficult question question to answer with a percentage of confidence level. What I would tell you is that I have a high degree of confidence in what we expect to see in the second half of 2022, but I think that the first quarter of 2022 is certainly going to remain somewhat challenged. We hear communications from our customers, both Tier 1 and OEM, that they are marshaling their resources on chips and etc., to make sure that 2022 starts off more positively, but I remain somewhat skeptical of that. So as I said in the conference, it's kind of the farther out it goes, the more confidence we have. Counterintuitive for sure, but what I would say is second half, absolutely much stronger. Q1, likely to be somewhat better than what we're seeing in Q3 and Q4, and then Q2, somewhere in between those two. But by the time we get to the back half of 22 and into 23, we have a high degree of confidence in the forecast that we're seeing.
spk05: Okay, thank you for that.
spk01: Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 now. Our next question today is coming from George Mellis at MKH Management. Your line is live. You may begin.
spk03: Good afternoon, Doug and Brian. Quick question on the customer order intake. $27 million in the September quarter. How do you evaluate that? Was there a lot of activity? How was your win rate? And how do you think about that?
spk02: As I communicated in the Q2 call and then earlier in the script, and I know I provided a lot of information, through Q3 we still saw a overall very reduced level of quoting activity out there again as our customers' supply chain management was far more focused on trying to resolve their issues related to demand. We have seen an uptick in quoting activity in Q4, and we've seen an uptick in this activity related to, I'll say, moving some sourcing around, as I mentioned in the call. So I would say that while in absolute numbers we would always be disappointed in the value of $27 million, in relative terms we were actually fairly positive about that and felt good about it, especially in light of the fact that we also spent a great deal of our time in the latter part of Q2 and Q3 going through the cost recovery activity and that took a lot of time and focus for the company and doing that is a very necessary aspect. So on balance, not ebullient by any means but certainly positive and we're seeing more positive occur over the last 45 days and expect to see this continue to accelerate. The thing I was more pleased about, and that's the reason I highlighted it in the call, George, sorry to interrupt you, is the fact that out of that customer order intake for the entire year, and we did actually end up with an outsized view of this in Q3 also, was the appliance at $16 million of the COI number, and I believe the consumer goods was about $7 million. So you ended up having a 17% of the order intake and a 7% or 8% of the order intake was in those two businesses that were trying to grow. And we know the transportation order intake will come. So it shows our focus on those two areas was having a positive impact.
spk03: Great. I'm glad you pointed that out again. And in terms of the relationship with your customers, And I don't know to what extent you can say that in comparison to your competitors, but how would you evaluate the relationship with your customers and how has sort of the last six months strained them or strengthened them in a way?
spk02: It's my very long history in a couple of three different industries with this. I'll say sometimes conflict and challenges, you can develop a stronger relationship. It would be not accurate if I said that all of what's going on over the last six months has not put a strain on supplier-customer relationships, not only with our suppliers to us, but also from us to our customers. So there has been greater strain, but what I would say is, and the reason I commented this way, is through that it is forced, I'll say, more in-depth discussions and more transparency. And that's always good. And we as a company have always been very forward, very forthright, and very responsive and transparent with our customers as to what's going on. And so therefore, that's the reason I made the comment that I think it's been strengthened. We've seen this in two ways. One, to date, We have no evidence and have no belief that despite our activities relative to cost recovery, et cetera, that we have lost any business that we currently have. And in fact, as I've commented, we have seen some resourcing activity come our way. And this to me is an indicator of the fact that the customer base remains with a high degree of confidence in our ability to deliver. And I would also say we were earlier in what we had to do relative to cost recovery. We've been mentioning this for a couple of quarters. Some of our competitors were delayed in this, and they're now coming in late and perhaps even more aggressively than we did. And therefore, that may be also part of what's contributing to the resourcing activity. And last, as I mentioned, we have been able to maintain continuing to ship quality product on time. creatively working with and collaboratively working with our customers when we had to do substitutions and other activities to make sure supply was continued. And again, that also develops, I'll say, a closer relationship with the customers.
spk03: Great. Thank you, Doug. Appreciate it.
spk01: Thank you. We have no further questions in the queue at this time. I would now like to turn the call back to management for any closing remarks.
spk02: Thank you very much. Again, Brian and I and the entire leadership team here at Unique Fabricating appreciate the continued interest in what we are doing and the continued support of what we're doing. It has without doubt been a challenging period of time. It's been a challenging two years. It's been a challenging last nine months. but we believe that the actions that we have taken in my commitment that I made to the board and to the investor group in each one of these calls is to continue to strengthen the organization, strengthen the capability, strengthen the customer and supplier relationships despite the external challenges so that we are extremely well positioned when this business does turn, and it will turn, And I provided several examples of that during the earnings of the script that I read from. So we are very confident that we have the organization and the relationships and the capability to see much improved results when it returns. And that ends up being the question is exactly when that return occurs. But having been without 8 million units of production over what had been the average in the preceding four years to 20, 20 and 2021, there is absolutely significant demand that's out there and we're well positioned to take advantage of it. Thank you all and we look forward to talking and sharing with you in our next call, plus are always available in the interim period as necessary. Thank you.
spk01: Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. We thank you for your participation.
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