Unique Fabricating, Inc.

Good day, ladies and gentlemen, and welcome to the unique fabricating fourth quarter and full year 2021 earnings call and webcast. At this time, all participants have been placed on a listen only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Rob Fink, managing partner of FNKIR. Sir, the floor is yours.

Thank you, operator. I would like to welcome everyone to unique fabricating fourth quarter and full year 2021 earnings conference call. Hosting the call today are 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'd like to remind everyone that matters discussed on this conference call will include forward-looking statements as defined in the private securities litigation format of 1995 that are subject to risks and uncertainties. Forward-looking statements relate to future events or to future financial performance and of unknown and unknown risks, uncertainties, and other factors that may cause the company's actual results, 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 expectations and are subject to certain risk factors, uncertainties that may cause the actual results, outcomes, and performance to differ materially from those expressed by such statement. These risks and uncertainties include but are not limited to those discussed in the company's annual report on Form 10-K and the quarterly reports on Form 10-Q that are filed 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 up 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 their prospects for the future. Unless it is otherwise stated, it should be assumed that any financials discussed in this call be on a GAAP basis. Full reconciliations of non-GAAP to GAAP are included in the press release that was issued after the close today. With all that said, I'd now like to turn the call over to Doug Kane. Doug, the call is yours.

Thank you, Rob, 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. The management team and all our associates continue to work diligently and tirelessly through the industry-wide issues impacting each of our markets. While the company's financial results are not what we would like, we have been navigating these challenges aggressively and with a comprehensive approach. With our actions completed to date, and ongoing initiatives, we are one of the stronger and more capable suppliers in our competitive space and well positioned to realize the benefits as the supply chain issues continue to normalize and volumes increase. Throughout this period, we have been committed to maintaining excellent customer service, providing timely delivery of quality products, earning additional customer certifications, including the prestigious Ford Q1, and winning new business in each of the markets we serve. As highlighted in the last call, the continuing challenges for the supply base are leading to resourcing and new business opportunities for Unique. Like many suppliers who have already communicated results, our Q4 operations were negatively impacted by the ongoing shortages of raw materials and labor challenging all levels of the supply chain, reducing production, and leading to Q4 revenue of $30.1 million, or slightly above the Q3 level of $29.9 million. With the resulting loss of contribution margin, the low levels of demand significantly reduced production volumes and continued to negatively impact our financial results, along with the complexities of effectively flexing costs to the changing release schedules. 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, persisted through Q4, with some costs continuing to increase above Q3 levels. Over the last months, 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. While we have seen and do expect to see continued challenges through the first half of 2022 from the chip shortage and other factors outlined previously, we are experiencing improving supply chain availability and higher customer demand volumes with somewhat less short-term fluctuations. We do continue to see increasing costs that have been exacerbated by the persistent higher inflation throughout the supply chain. I remain very proud of how our entire team has met these existential challenges head on. We continue to respond effectively with the focus on taking care of customers. We are strengthening our position as a partner upon whom our customers know they can rely on. As we continue to augment our capability and to focus on customer satisfaction, These conditions create opportunities for unique. We remain confident that we have taken the necessary steps to drive improved performance as volumes increase. As previously highlighted, we have sustained our comprehensive cost recovery activities initiated during Q2 of 2021. We have now pivoted to a more targeted approach focused on specific programs most negatively impacted by higher logistics and specific raw material costs, which have continued to increase. On an annualized basis, and when fully realized by the end of Q2, these additional activities will have an approximate 2.0 million annualized improvement in operating margin, thereby partially offsetting the higher inflationary costs we continue to see. For certain smaller customers, we implemented a more significant price increase and higher minimum water quantities. These actions improve the efficiency and productivity of our plants by reducing complexity with minimal revenue impact. We completed our salaried and commissioned cost reduction and capability increase initiative with a net annualized savings of approximately $1.8 million, fully effective in March of 2022. These savings are and will be primarily reflected in reductions of our SG&A costs. We have continued our tactical investments in laser cutting and robotics to improve our operating margins in a sustainable manner through reducing labor costs and improving material utilization. In 2021, we secured $100 million in COI customer order intake during a very difficult year for our transportation market customers. who spent much of their time navigating through vehicle production shutdowns due to microchip shortages, raw material force measures, delayed launches, and industry-wide commodity price increases resulting in delayed sourcing activity. For reference, we won $206 million of COI during 2020. We continued our focus on market diversification with 16% of our 2021 wins in the appliance market 8% in the medical and consumer goods markets, and 76% in the transportation market, with our historic sales split being 88% transportation, 10% appliance, and 2% consumer and medical. With supplier struggles continuing, we have also been able to win incremental takeover business outside of the normal sourcing cycle. Key new business wins with consumer goods customers like Jacuzzi and Skeeter Boats set the basis for long-term growth in these markets. The higher quotation activity we mentioned on the last conference call has continued and we are improving our success rate on quoted and sourced opportunities. Year-to-date 2022, we have secured approximately 25 million COI with approximately 30% of this non-automotive. We have identified key targets to realize additional wins with medical device suppliers. In addition, we're exploring collaborations with adjacent suppliers for expanded product offerings in the areas of impact foams and formed optical films. The transportation market shift to electric vehicles presents incremental opportunities for Unique as EVs demand additional emphasis on NVH, noise vibration harshness, and BSR, buzz, squeak, rattle mitigation products, weight reduction, and climate control efficiency, all of which can be supported by parts we manufacture. Unique has been awarded parts on multiple new EVs, including Ford Mach-E, F-150 Lightning, Rivian R1S, Hummer EV, Cadillac Lyric, Lucid Air, VW ID.4, and all current Tesla models. We expect 5% of our total sales to be attributed to EVs in 2022. In 2023, we forecast that number to grow to 6%. Going forward, we believe that percentage will outpace the industry growth as Unique's manufacturing footprint is very favorable to the recently announced automotive OEM EV investments. Light duty new vehicle inventory has continued at historically low levels with approximately 1.0 million units on hand over the last five months compared to more than 3 million each month throughout 2019 and 3.4 million units March 1, 2020, pre-COVID. Resulting from the low inventories, U.S. light vehicle sales continued to be less 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 12.8 million units in Q4 2021 versus 16 million in Q4 of 2020. Based upon available sales data to date, the SAR for Q1 2022 is expected to exceed Q4. After holding steady over the prior months, the independent North American automotive forecast as of March 16th dropped 3% from February's forecast to 14.7 million units of production or approximately 13% above 2021. With approximately 13 million units produced, 2021 was on par with the low 2020 volumes. The combined production from 2020 through 2022 forecasted volumes indicates an approximate shortfall of more than 9 million units from the average of the last four pre-pandemic years. This prolonged production shortfall and the low inventory levels lead to a positive North America production outlook for 2023, with 16.7 million and an average of approximately 17.0 million units through 2027. Over the most recent quarters, with the supply shocks impacting production, we do note that these third-party production forecasts have been optimistic. However, the last few months' updates have proven to be more accurate and stable. We recognize that the impacts of the events unfolding in Ukraine as well as the Japan earthquake are having a substantial negative impact upon European and Asian production. As of now, these specific issues do not yet appear to be affecting North America production, except for contributing to the increasing raw material and logistics costs. Including the positive impact from our COI over the last two years and utilizing the third-party forecast for 14.7 million units produced in 2022, we see our first quarter of 2022 revenue to be within a range of 34 to 35 million. We are forecasting between 36 to 38 million for Q2 and between 75 and 79 million for the second half of 2022 for a full year forecast between 145 and 152 million. With overall supply chain issues continuing to improve through 2023, production levels normalizing to an average of approximately 17 million units and pent up in customer demand remaining. We're now forecasting a 2023 sales range between 169 and 179 million. While we tend to focus on the transportation market in our communications, we see similar positive trends for demand and improving supply chain conditions, both near term and longer term in our other markets where we also see higher supply chain costs. Over the last months, the entire management team has worked successfully to complete remediation work of the prior period's material weakness findings. As we also completed the appropriate filings related to income tax loss carrybacks and employee retention credits over the last months, we're expecting to combine $2.1 million from the United States government over the next few months with exact timing subject to the myriad challenges the IRS is currently facing, which have been causing delays. We continue our collaborative work with our bank syndicate as we develop a longer term framework to enable the execution of our growth plans. To date, we continue to maintain sufficient liquidity for us to operate in these challenging times. Brian will now provide an overview of our fourth quarter and full year 2021 financial results. Thank you, Doug.