Unique Fabricating, Inc.

Good day, ladies and gentlemen, and welcome to Unique Fabricating First Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Stanley. Sir, the floor is yours.

Thank you, Operator. I would like to welcome everyone to Unique Fabricating's First Quarter 2022 Earnings Conference Call. Hosting the call 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 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, levels of activity, performance, or achievements to be materially different from those expressed or implied by today's call. All such forward-looking statements are based on management's present expectations 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 in Form 10-K, and quarterly reports on Form 10-Q that are filed with the SEC pursuant to Rule 424B, and in particular, the section titled Risk Factors. All statements on this call, 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 non-gap-to-gap are included in the press release that was issued earlier today. With that said, I would now 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. The management team and our associates continue to make improvements across all aspects of our business. Our first quarter results show improvement over the third and fourth quarter of 2021 and demonstrate the effectiveness of actions taken with further benefit to be seen in the quarters ahead. Based upon our completed and ongoing initiatives, including the cost recovery efforts, customer rationalization project, and market diversification activities, we are improving our relative position in the markets we serve and one of the stronger and more capable suppliers in our competitive space. While overall market and supply chain challenges continue, we are well positioned to realize the benefits as the supply chain issues continue to normalize and volumes increase. Our Q1 operational performance was negatively impacted by the ongoing labor challenges and the continuing increases in raw material and other costs across all aspects of the supply chain. With the positive top line impact of the cost recovery activities, Our 35.3 million net sales slightly exceeded our prior guidance and is the highest level since Q3 of 2020. As noted previously, this cost recovery partially offsets the actual cost increases we have seen and continue to see. The complexities of effectively flexing costs to the continuing short-term changing release schedules also had a negative impact on plant efficiency and operating margins. Labor availability challenges in certain locations and cost increases throughout the supply chain are continuing in Q2 and are consistent with the overall and persistent higher inflation throughout the economy. While we have seen and do expect to see continued challenges through Q2 and in the second 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 less short-term fluctuations. I am proud of how our entire team is meeting these comprehensive challenges with urgency and a strong commitment to finding solutions. We continue to respond effectively with the focus on taking care of customers and on augmenting our capability. As these conditions provide opportunities for Unique, we are confident that we have taken the necessary steps to drive improved performance as volumes increase. Our comprehensive cost recovery activities initiated during Q2 of 2021 have delivered positive results to date by offsetting some of the cost increases. We are now having success in our pivot to a more targeted cost recovery approach focused on specific programs most negatively impacted by logistics and continuing raw material cost increases. We expect these cost recovery activities to be fully realized by the end of the second quarter with more than a $2.5 million annualized benefit, partially offsetting the higher inflationary costs we continue to see. Simultaneously, our smaller customer rationalization project continues. During Q2, we expect to exit approximately 20 smaller customer relationships and are passing along more significant price increases and higher minimum order quantity requirements for other smaller customers. These actions improve the efficiency and productivity of our plants by reducing complexity with minimal revenue impact. Despite high ongoing costs related to our being in a forbearance condition with the bank syndicate, we have seen a reduction in our SG&A costs to the approximate $5 million level previously communicated. 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. The higher quotation activity we mentioned on the last conference call has continued. Year-to-date, we've secured approximately $31 million of COI, or customer order intake. We are continuing our focus on market diversification, with 12% of our 2022 wins in the appliance market and 18% in the medical and consumer goods markets, with 70% in the transportation market. We have identified key targets to realize additional wins with medical device suppliers. In addition, we recently achieved approval to produce reaction injection molded front of dash HVAC seals for a high volume light duty truck application, which will enable us to further expand applications within our automotive HVAC customers. We are continuing our collaboration efforts with adjacent suppliers for expanded product offerings in the areas of integrated impact foams, informed optical and decorative films. Light duty new vehicle inventory has continued at historically low levels with approximately one million units on hand each of the last seven months compared to more than three million each month throughout 2019 and 3.4 million units March the 1st of 2020. Resulting from the low inventories, U.S. light vehicle sales continue 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, did increase to approximately 14.0 million units in Q1 2022, representing the best quarterly sales performance since Q2 of 2021. The independent North American automotive forecast as of April the 19th remained flat at 14.7 million units for 2022 from March's or approximately 13% above 2021, which was equivalent to the 2020 production units. As stated previously, 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. The prolonged production shortfall and the low inventory levels lead to a positive North America production outlook for 2023 with 16.5 million units, down 0.2 million from March's forecast, and an average of approximately 16.8 million units from 2024 through 2027. We are not yet seeing any meaningful negative impacts for North American production from the events continuing to unfold in Ukraine and in China, except to contribute to the increasing raw material and logistics costs. Utilizing the third-party forecast, 14.7 million units to be produced in 2022, recognizing the Q1 increase from previous, the decrease for Q2, and a higher overall second half production value, we are slightly reducing our range for Q2 net sales to be between 35 and 37 million from the prior guidance of between 36 and 38 million for Q2. We are confirming our prior guidance of between $75 and $79 million for the second half of 2022 and confirming the full year forecast previously provided of between $145 and $152 million. With overall supply chain issues continuing to improve through 2023 and the forecasted production levels dropping approximately 1% from the previous expectation, we can also reconfirm our sales forecast for 2023 with a range between 169 and 179 million. 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. We are experiencing an uptick in appliance production volumes, both near-term and in mid-term forecasts, as well as increased quoting activity in consumer goods and appliance markets, as on-shoring activities from China, specifically gain traction. Within the next few months, and subject to the myriad challenges the IRS is currently facing, which have been causing substantial delays, we still expect to receive a combined $2.1 million from the United States government related to income tax loss carrybacks and employee retention credits. We continue our collaborative work with our bank syndicate as we develop a longer-term framework to enable the execution of our growth plan. To date, we are maintaining sufficient liquidity for us to operate in these challenging times. Brian will now provide an overview of our first quarter 2022 financial results.