Unique Fabricating, Inc.

Good afternoon, ladies and gentlemen, and welcome to the unique fabricating third 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, Rob Fink of FNKIR. Sir, the floor is yours.

Thank you, operator. I'd like to welcome everyone to Unique Fabricating's third quarter 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 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, their levels of activities, their 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 certainties 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 reports 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, 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 the 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 is 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 are included in the press release that was issued earlier today. With all that said, I'd now like to turn the call over to Doug. Doug, the call is yours.

Thank you, Rob, 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 continue to be immensely proud of the resilient efforts, commitment, creativity, and sense of urgency of all our associates in each of our seven locations throughout North America. We remain focused on providing excellent service to our customers and are confident that we have taken the necessary steps to drive improved performance as volumes eventually increase. During October, we completed an investor-led 4.0 million financing to provide additional liquidity as we execute our comprehensive refinancing project. As the next step in our refinancing the business to enable the execution of our growth plans, we executed an amendment to our credit agreement that ends our forbearance condition and evidences the continuing collaborative work with our bank syndicate, B. Reilly, and other stakeholders. Our third quarter results reflect the impacts of four significant items. First, we recorded a non-cash goodwill impairment charge of $4.8 million. This eliminates goodwill from our balance sheet. Second, we experienced lower sales as overall demand from our customers was less than expected. Specific OEM plant closures and shift reductions, as well as inventory balancing from our tier customers, had an outsized effect on our business. In addition, our lower than planned COI over the last months, impacted by the commercial headwinds, has had a negative cumulative effect on our net sales. Third, we booked $0.4 million in carryover operating costs from the second quarter that were not reflective of our third quarter operating improvements. These were primarily related to the previously noted Lafayette operating issues, and we do not expect to have a recurrence in our results going forward. Fourth, while fully effective as of the end of the third quarter, our cost recovery activities in Q3 were $0.3 million less than previously expected. While overall market and supply chain challenges continue, we are well positioned to realize the benefits as customer demand rises. Despite the ongoing cost related to the comprehensive refinancing activities, we saw a reduction in our SG&A costs to $4.4 million in the quarter. The complexities of effectively flexing costs to the short notice customer changes to release schedules continue to have a negative impact on our Q3 operational performance. However, we do begin to see the benefit of ongoing lien initiatives, including an inventory reduction of 1.2 million or 9% since the end of 2021. While we have seen and do expect to see continued challenges through Q4 and into the first half of 2023 from the chip shortage and other factors outlined previously. We also see improvements in raw material, logistics, and labor availability, as well as a flattening of the raw material and packaging cost curve for Q4 and into 2023. As evidence of our continuous improvement activities, We have received positive feedback from recent customer site audits of our locations. These assessments, made by customers including Valeo, Bosch, and Mahle, are an important precursor to new business awards. Year to date, we've secured approximately $79 million in COI, despite the previously noted commercial headwinds. We strongly believe that exiting the forbearance condition and then completing the refinancing activities will improve our commercial positioning to win new business. From an open capacity and overall capability perspective, we are ready to supply these higher volumes that we believe will begin in the first quarter of 2023. Included in this COI, Unique recently won a takeover project representing a December 2022 launch utilizing our twin-shaped foam technology for an HVAC duct on the new Rivian truck. This is the second active program for our twin-shaped ducts, which are a lighter weight, more thermally efficient alternative to traditional plastic air ducts. Our first program was for PACCAR trucks, for which we recently received a quality award from our customer Intiva. Light duty new vehicle inventory increased to just over 1.0 million units at the end of October. While this is the first time to exceed 1.0 million since May of 2021, It is lower than the $3.0 million each month throughout 2019 and $3.4 million on March 1, 2020. Resulting primarily 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, of 13.0 million units in Q3 2022 was close to the 13.3 million in Q2 of 2022. The Independent North American Automotive Production 2022 forecast as of October 14th is 14.5 million units, or 11.2% above both 2021 and 2020 production, and is 0.2 million units below what we shared in our last call. The combined production from 2020 through 2022 forecasted volume indicates an approximate shortfall of more than 9.0 million units from the average of the last four pre-pandemic years. North American production outlook for 2023 has been reduced by 1.0 million units from our previous earnings call, or 6%. to 15.4 million units with an average of approximately 16.3 million units from 2024 through 2027. As we have seen continued demand weakness from our customers in Q4, we discounted the third-party forecast for 3.7 million units to be produced in Q4. This lower Q4 forecast than what was shared in our last call has a larger impact on those OEMs and platforms where our content is greatest. As a result, we have reduced our forecast for Q4 to between 31.0 and 32.0 million. The reduction also reflects the impact of the commercial challenges that have hindered our securing the planned COI over the last 12 months. For the full year, we're now forecasting net sales of approximately 136 million. With the more recent well-documented challenges in housing and with excess customer inventory of some consumer discretionary items, we see a reduction in demand from our non-transportation markets. We do continue to see positive trends for improving supply chain conditions both in the near term and longer term in our other markets. We also see supply chain costs flattening with the expectation of specific modest decreases at the end of Q4 2022 and into 2023. With overall supply chain issues continuing to improve through 2023, increased COI with the commercial challenges removed, and forecasted North American light vehicle production levels of 15.4 million units, we are forecasting 2023 sales between 154 and 162 million. This does reflect the cumulative effect from lower COI over the last 18 months that was previously mentioned. Based upon this revenue level, we would expect an operating EBITDA of between $9.0 million and $11.0 million. We have allocated additional resources to identify and implement operating margin improvement activities, including our lean topics. By the end of 2023, we are targeting a 1% to 2% point run rate improvement in direct labor and material costs. We will provide regular updates on the progress regarding these key initiatives as part of our quarterly report. Brian will now provide an overview of our third quarter 2022 financial results.