Unique Fabricating, Inc.

Please stand by. Good day, ladies and gentlemen, and welcome to your unique fabricating second quarter 2022 earnings call. All lines have been placed in a listen-only mode, and the floor will be open for your questions and comments following the presentation. As a reminder, today's call is being recorded. If you should require assistance throughout the conference, please press star zero. At this time, it is my pleasure to turn the floor over to your host, Jeff Stanliss. Sir, the floor is yours.

Thank you, Operator. I'd like to welcome everyone to Unique Fabricating's second 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 activities, 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 on Form 10-K and quarterly report on Form 10-Q that are filed with the SEC pursuant to Rule 424-B, 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 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-GAAP to GAAP are included in the press release that was issued earlier today. With that said, 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 today's update of the company's outlook, overall operations, and financial results. In these extraordinary times, I would like to express my appreciation for the efforts, commitment, creativity, and sense of urgency from all our associates in each of our seven locations throughout North America. We have remained focused on providing excellent service to our customers as we face head-on the continuing challenges from rapidly changing customer demand schedules and ongoing supply chain issues. We are resilient and remain confident that we have taken the necessary steps to drive improved performance as volumes increase. Our second quarter results reflect the impacts from three significant items. First, we recorded a non-cash goodwill impairment charge of $12.2 million. Second, we recognized a $3.0 million benefit related to the employee retention credit. We experienced equipment and labor-related operating issues in our Lafayette, Georgia facility that we resolved as of the end of the second quarter, but that did result in higher operating costs of $1.2 million in the quarter. 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 customer demand rises. Despite the ongoing costs related to our forbearance agreement with the bank syndicate, we have seen a reduction in our SG&A costs to below the $5.0 million quarterly level we previously communicated. In addition, our Q2 operational performance continued to be negatively impacted by the ongoing labor challenges and the continuing cost increases in raw material, energy, and packaging in our supply chain. The complexities of effectively flexing costs to the short notice changing release schedules also had a negative impact on plant efficiency and operating margins. While we have seen and do expect to see continued challenges through Q3 and into Q4 of 2022 from the chip shortage and other factors outlined previously, we also continue to see improvements in raw material, logistics, and labor availability as well as a flattening of the cost curve for raw material and packaging through the first five weeks of Q3. Our comprehensive cost recovery activities initiated during Q2 of 2021 have delivered positive results to date by offsetting some cost increases. We are 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. The latest phase will be fully realized in August with a cumulative more than 10 million annualized benefit, partially offsetting the higher inflationary costs we have seen. Simultaneously, our smaller customer rationalization project continues. During Q2, we exited approximately 30 smaller customer relationships. In addition, we 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. Year to date, we have secured approximately $46 million in COI despite the continued commercial headwinds created by our ongoing forbearance condition which restricts our ability to win new business from certain larger customers in our transportation market. We have recently been nominated to supply NVH, noise, vibration, and harshness products for three high-volume EV applications with strategic Tier 1 customers. Additionally, we have been approached by multiple customers seeking to onshore consumer products currently produced and shipped from China. Our process capabilities and significant raw material buying power are an advantage for the consumer goods and medical market customers. Light duty new vehicle inventory has continued at historically low levels with less than 1.0 million units on hand each of the last nine months compared to more than 3.0 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 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, did increase to approximately 14.0 million units in Q2 of 2022, representing the best quarterly sales performance since Q2 of 2021. The Independent North American Automotive Production 2022 forecast as of July 15th is 14.7 million units, or 12.7% above both 2021 and 2020 production. The combined production from 20 to 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 American production outlook for 2023 with 16.4 million units and an average of approximately 16.6 million units from 2024 through 2027. With the forbearance agreement cloud causing ongoing challenges to winning new business from certain transportation market customers and utilizing the third-party forecast for 7.6 million units, to be produced in the second half of 2022, we are reducing our range for second half 2022 net sales to between 71 and 75 million from the prior guidance of between 75 and 79 million. Based upon this revenue level, we would expect an operating EBITDA level of between 3.0 million and 3.5 million. For the full year, we're now forecasting a net sales range of between 141 to 145 million. With overall supply chain issues continuing to improve through 2023, increased COI enabled by a longer-term bank agreement, and the forecasted production levels of 16.4 million units, we are now forecasting sales for 2023 with a range between 169 and 175 million. Based upon this revenue level, we would expect an operating EBITDA level of between $11.5 million and $13.5 million. We continue to see similar positive trends for demand and improving supply chain conditions, both near term and longer term in our other markets. We also see supply chain costs flattening with the expectation of some decreases in the latter part of Q4 2022. We are experiencing an uptick in appliance production volumes, both near-term and in mid-term forecast, as well as increased quoting activity in consumer goods and appliance markets, as onshoring activities from China specifically gain traction. During Q2, we received the $1.8 million expected from the IRS for tax loss carrybacks. We still have $0.3 million remaining to be collected from the Initial Employee Retention Credit, ERC program, as well as the additional $3.0 million related to the ERC benefit recognized in Q2. We continue working with our bank syndicate and other stakeholders to develop a longer-term framework to enable the execution of our growth plans and lift the cloud that has been impeding our efforts to win the additional COI necessary to achieve our targets for revenue, both near and longer term. To date, we are maintaining sufficient liquidity for us to operate in these challenging times. Brian will now provide an overview of our second quarter 2022 financial results.