Q2 2020 Unique Fabricating Inc Earnings Call

Greetings and welcome to unique fabricating second quarter 2020, <unk> earnings call. Currently all participants are in listen only mode. A question and answers that should follow the presentation. If any what's required operator systems. During the conference. Please press star zero when your telephone Keypad. As reminder, this conference is being recorded.

Now, let's turn the conference Herbert you, Jeff Stanlis <unk> IR. Please go ahead.

Thank you Debbie I'd like to welcome everyone to unique fabricating second quarter 2020, <unk> earnings conference call hosting the call stocking unique fabricating President and Chief Executive Officer, Brian Loftus unique fabricating 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.

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. That's such forward looking statements are based on managements, <unk> present expectations and are subject to certain risk factors certainty and uncertainties that may cause the actual results or outcomes and performance to differ materially from those expressed by such statements. These risks and uncertainties and include but are not limited to those discussed in the companies.

The report on form 10-Q for the period ended June 30, 2020, which will be filed by the Securities <unk>. We think it's true Securities Exchange Commission Commission pursuant to rule for two for B and in particular, the section titled Risk factors. All statements made on this call and including those in this mornings 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 believe believes the <unk> presentation of these non-GAAP financial measures are useful to investors and understanding and assessing the company's ongoing world.

Patients and prospects for the future.

Unless it is otherwise stated it should we assume that any financials discussed in this call will be on a GAAP basis full reconciliation reconciliation of non-GAAP to GAAP are included in the press release that we issued earlier today would that would that said I would like to turn the call over to Doug Doug the called is yours.

Thank you, Jeff and good morning, everyone.

Despite the significant challenges presented by the Cobot 19 situation.

Our second quarter results with much stronger June net sales in April and May.

<unk> continued evidence that we remain boldly back on track.

In June we generated 10 million about 14.8 million quarterly cycles.

What's your loss net sales exceeding GE and we see a continued strengthening in our customer demand.

While we ramped up production from the very low April and May levels, we effectively able to maintain overall operational NSG United cost discipline.

And the second quarter, our SG at a cost, including an old point Threemillion severance charge were 6.3 million compared to 5.9 billion in the first for 7.4 million in the second quarter of 29 tape.

Despite the significant challenges over the last laws, our operational and commercial improvements will continue to move the business positively for.

We've rebuilt the earnings power that you need fabricating and that's the automotive industry rebalanced, we're well positioned for continued success.

Based upon the foundational work laid over the last 10 Bucks. The leadership team an entire organization are ready to deliver EBITDA improved net debt reduction in sales rose.

With the strong relationship we have with our bikes said if we.

We achieved successful agreements regarding our new loan amendment, providing sufficient liquidity and revised covenants.

Combined with our operational improvements the New Amendment provides a farm basis for the company to focus its efforts fully oh profitable growth going forward.

Regarding the cobot 19 impact on our business and our corresponding actions. We continue to follow the guidelines regarding a safe work environment provided by the various governmental entities into jurisdictions, where we operate.

And if taken additional measures to protect our employees.

Due to the inherent uncertainty of the unprecedented and evolving situation. They quitting the production plans of our various customers. We are unable to determine the full impact of the cocontracting situation on our future operations.

We maintain our current plans based upon the latest third party provided North America automotive production outlook.

For approximately 12.4 million units versus 16.5 million forecasted to start the year.

This indicates north America's second half light vehicle volume production to be approximately 7.2 million units or 90% of the original 2020 forecast.

Did you lot August releases, we have seen from our automotive customers do support this production outlook.

In line with this increasing demand we added back resources prudently.

As a result, we ramped up our plant production to operate more cost effectively than we did before cobot like team.

We continue our discretionary spending rationalization reduction.

Or elimination.

Regarding the Coca 19 impact on our second quarter business, the dramatic curtailment of automotive shipments in Q2 reduced net sales by approximately 24.1 million or 62% from Q2 29 team.

Despite more than 1.4 million new P E product sales for the health care and manufacturing sectors.

April and May respectively. So net sales of 2 million in 2.8 million watch you did see a higher than expected increased 10 billion.

Resulting in second quarter net sales of 14.8 billion, which are above the previously communicated 14.

Our Mexico operations restarted in June better now than they are full production as or all of our other facilities.

In summary, the covet cobot 19 impact on our second quarter was significant.

However, our cost reduction efforts, our pivot to new manufacturing of PDP and our ability to react quickly helped us navigate this challenging Todd.

We saw significant June volume improvement, which continued into July with 10.8 million net sales.

The June and July increase volumes and our ability to deliver positive operating income although has improved but still modest volumes reinforce our confidence that the worst is behind us and that our actions taken over the last 10 months have positioned us very well for success going forward.

Next I will discuss our current and future tea business activities at highlights.

We completed the sale of our previously owned Evansville facility for a net Oh, 0.8, 5 million and executed a sub lease agreement for a portion of the Evansville facility at least through 2022.

We took a non cash restructuring charge of 1.1 million for the building so.

Combined with the disposal of certain equipment as part of our continuing operational review, we incurred a total of O point 3 million in non cash restructuring expenses in the second core.

From the remaining organizational realignment and upgrades primarily in our Mexico operations, we incurred Oh point 3 million in severance cost of a second quarter with an expected Oh point Sixmillion annual cost savings.

We have now completed our location and organizational targeted restructuring activities with no expectation of further cash restructuring costs.

We completed our realignment of the commercial teams with our transportation appliance medical and consumer Slash off road market approach.

With the recent additions to our executive staff noted in our prior earnings calls, we now have a complete experienced leadership team and an organizational structure capable of executing the various activities for us to achieve our strategy.

When we get our operational and commercial targets.

We implemented our new CRM or customer relationship management tool to facilitate all aspects of our commercial activities.

We've already seen an improvement in the information available to our teams as we continue to develop our customer relationships and capitalize slow commercial opportunities.

In late July we updated our investor page linked to our new website as part of our ongoing efforts to improve the information provided to our stakeholders.

As a continuation of our activities to produce new PBT for the medical and manufacturing communities with 1.4 million in second quarter sales. We began production of in 95 face mask in gilat or over and hills facility.

Where youre evaluating the longer term potential to these new products as part of our overall growth target the medical markets to be 10% of our total sales of the med turf.

With approximately 94 million in custom order intake Horsey go up through the second week of August we continue our success in winning new business.

At our targeted markets, including a large recent award of a new two unique application.

They class a fire retardant reaction injection molded ingenico.

Based upon our ongoing commercial and operational improvement activities, we remain certain that we have opportunities to grow our share organically and each of the markets. We have chosen to serve.

Our new hires will enable us to further enhance our product and service offerings as well as to develop longer term strategic supplier relationships.

We are confident that the team additions and the completed organization realignment enable us to create and communicate our unique selling points in our existing as well as our new targeted markets.

[noise] unique fabricating remains boldly back on track it isn't a stronger position now to realize the identified commercial opportunities and to build on the sustainable operational improvements made to date.

Brian will now provide an overview of our second quarter financial results.

Thank you Doug good morning, everyone.

Net sales for the second quarter of 2020 decreased to 14.8 million down, 62% or 24.1 million from 38.9 million during the second quarter last year.

Our April and May 2020 sales totaled 4.8 million.

As our transportation customers facilities were idled due to the ongoing covert 19 pandemic.

Gee net sales were 10 million or 68% of our total net sales for the second quarter of 2020.

All the 14.8 million in net sales for the second quarter customers in the transportation market accounted for approximately 75%.

[noise] appliance at approximately 14%.

The remaining 11% primarily attributable to the medical market as we transition some of our manufacturing capacity to personal protection equipment.

Okay.

Gross profit for the second quarter was 1.7 million or 11.8% of net sales compared to 8.2 million or 21.1% of net sales for the same period of 2018.

The decrease in gross profit was due to the lost contribution margin on the 24.1 million lower sales.

Partially offset by reduced structural and other overhead costs.

Selling general and administrative expenses for the second quarter up 2020 were down 1.1 million to 6.3 million compared to 7.4 million for the second quarter 2019.

The decrease in S. DNA results Im several cost reductions, including management headcount commissions and professional services. In addition, she savings from plant closures, which were partially offset I point threemillion of salaried severance costs recognized in the second quarter 2020.

[laughter].

Operating loss was 4.8 million for the second quarter of 2020.

Compared to an operating loss of 6.7 million for the same period last year.

The decrease in operating loss was primarily due to the 6.8 million impairment of goodwill recognized in the second quarter of 2019th which did not recur in 2020. In addition to 1.1 million lower S. DNA and point 4 million lower restructuring expenses.

The loss contribution margin on the 24.1 million lower net sales in the second quarter up 2020, as compared to 2018 more than offset the lower impairments as ginny and restructuring expense.

Interest expense was point Sixmillion for the second quarter of 2020 compared to 1.3 million for the second quarter last year.

The year over year decrease was primarily due to the impact of the reduced total debt levels lower expenses related to our interest rate swap.

In the composition of our debt compared to last year. The P.P.T. loan has an interest rate of 1%.

Net loss for the second quarter of 2025.

4.3 million or 44 cents per basic and diluted share compared to 7.6 million or 78 cents per basic and diluted share in the second quarter of 2019.

The net losses, the result of impact the 24.1 million lower net sales, partially offset by the lower SG nine impairment restructuring and interest expenses.

I will now provide an update on the financial on our financial position and liquidity.

Net debt or total debt less cash and cash equivalents decreased 5.4 million to 45.8 million as of June Thirtyth 2020, inclusive of 4.7 million of cash and cash equivalents compared to 51.2 million as of June Thirtyth two.

Any 19 inclusive of 1.1 million of cash and cash equivalents.

Since year end no debt has he has decreased 1 million inclusive of <unk> point 7 million of cash and cash equivalents at December 29.

2018.

The increase in cash and cash equivalence is primarily due to the 6 million dollar loan we received in April as part of the small business administrations Paycheck protection program.

During the second quarter, we used $3.5 million of the PTP loan proceeds for allowed expenses as defined in the cares Act.

Which left 2.5 million in cash and cash equivalents at June Thirtyth.

By the end of July we had fully exhausted the proceeds.

We expect to apply for forgiveness no later than October and we believe a substantial portion if not all of the P.P.P. loan will be forgiven.

As we have not gone through the forgiveness application process or any audits related to forgiveness. There is an inherent uncertainty to what amount at the PPP loan.

Will ultimately be forgiven.

[noise] in addition to our earnings announcement. This morning, we also announced that we had successfully completed the eight that amendment to our credit agreement on August 7th.

The seventh amendment, which we completed in April waved, our financial covenant requirements for the second quarter as we anticipated the covert 19 pandemic will significantly impact our financial results.

I knew that the waiver provided by the seventh amendment did not addressed our ongoing covenant needs.

The eighth amendment resets, our financial covenants, beginning with the third quarter of 2020.

Which excludes the second quarter 2020 results from our future Covenant compliance calculations.

We ended the quarter with 4.7 million, a cash and cash equivalents and point 7 million of net availability on our revolving line of credit.

We believe we have sufficient liquidity to meet our obligations and we remain focused on controlling discretionary spend and capital expenditures. So we can generate strong cash flows to de leveraged at the company.

Doug will now provide some closing remarks, Doug back to you.

Thank you Brian.

It remains our intent to meet with many of you virtually or if possible in person over the next year.

Circumstances allow.

Third the significant challenges we have faced over the last months. The unique team has not just survived but in fact is continued to improve all aspects of our commercial and operating performance.

We have established the strong foundation to meet our ambitious targets and stakeholder expectations for profitable growth as we deliver significant shareholder value.

As we continue on our past realizing our boldly back on track vision.

Our now complete management team and our employees are excited about the opportunities.

And we have in front of us.

With that we will open the call for questions operator.

At this probably be conducting a question and answer session. If you look that's question. Please press star one on your telephone keypad, a confirmation to will indicate your line is and the question Q.

You mean for start to feel like to remove your question from acute.

For participants using speed equipment, and maybe Mr to pick a principal per person to start keep one moment. Please as we pull for questions.

Our first question comes a lot of John would Taglich brothers. Please proceed with your question.

Hi, Good morning dog and Brian Thanks for the Coleman and taking my questions are we appreciate it.

I'd like to know.

If you could comment on how your current auto related businesses looking.

Now that we're almost halfway into the third quarter I know you had mentioned total basis.

Well, it's a 10.8 in July but a couple of weeks extra here. If you could talk just specifically about the auto related business.

Okay. So again as we mentioned in here a few different times everything we say is with a certain amount of caution in reservation.

You as everybody else on this call is familiar with the inherent uncertainty that exists right now with the changing.

Outlook relative to closures et cetera, but yeah, we communicated that you lost sales we thought that was important.

At 10.8 million, which was above the 10 million in June.

Through August we're seeing similar trends.

And as I indicated in the overall outlook using the production third party provided production.

Yeah baseball, we see today this trend.

Can continue I guess, the best way that I would say.

Okay, I had a a feeling.

Augusto would be a better trend a a better numbers in the auto related business versus July I know you can provide the break on US we had total business, which talks about your plumbing business also but actually you know what same question I can ask is in regard to your appliance business.

How how's that shaping up now halfway through the quarter.

So again, thanks for the question and again I appreciate the understanding that we do have a somewhat diversified business it.

Absolutely is concentrated in transportation.

Working diligently to diversify that somewhat as we move forward as we've indicated.

Before what I've said in the earnings release itself.

Is that we also see very positive trends.

Macro and specific to our customers related to appliance whether that is supporting the a very strong housing market.

New housing and refurbishment. So a lot of business is being done there and adding anecdotally I can say that we have evidence of people I'm trying to get washer dryers refrigerators that are all back or so we see a strong outlook at least for our visibility over the next 60 days in there that part of the business too.

But it also remains subject to all the different things and this is clearly supported by the very low interest rate environment, there, we have which.

Also can change, but that business remains strong at this point in time as does the relatively strong as does the transportation business.

Okay. Thanks for that sounds encouraging.

And or are you still targeting about 10% of your total sales come from the medical market and in the mid term I think last call you alluded to the fact that mid term I think youre looking at like 18 to 24 month period here.

I'll be looking that's still 10% to come from that.

I would tell you that that is clearly the target that we have internally and we have restructured our commercial team.

To be able to.

Access and deliver that that certainly as more of white space than what we have in our transportation in our appliance business.

And I appreciate your noting the mid term commented that we're looking to be that we would say no later than the actual end of 2022, because it does take some time to get started in that it and that remains our target.

As I noted previously game, we are doing they face masks production of the in 95 that has started but it's started at the very end of July or were in production now and we are assessing.

The longer term efficacy of what that business can be and that would certainly provide a foundation.

In being able to deliver that 10% of the midterm.

Okay, and well actually it did answer a question I was going to ask about 6 million dollar P.P.P. loan.

There is a good chance I mean, we don't know for sure now, but most if not all of it will be forgive me I think you had made those comments earlier old Brian did Oh I was going to bring it up I have just one or one final question here.

I I noticed that your interest rate swaps expire a this september and the overall, it's it's kind of added substantially to get interest expense.

After they expire what interest rate should we expect a going forward from the September fear period.

Well.

Some of that obviously were partially depend on what the.

The LIBOR rate will be but it would be pricing within our credit spread that we currently have.

Okay. So basically whatever obviously, but you know the rate the base rate plus LIBOR. That's the rate. That's specific rate is when I should basically model out going on a thing in Q4 and arm.

Correct.

Okay, great. Thank you for taking my questions.

Once again, if you would like to ask questions. Please press star one on your telephone keypad. Once again, if you will notice question. Please press star one on your telephone keypad one of them season for questions.

It seems to be no further questions, that's an acute and I would like to turn the floor back over to Mr. King for any closing remarks.

On behalf of the unique fabricating management team and the board of directors and all of our employees you know one express our appreciation for your continued interest in our business. The investment of time today, and we look forward to again hopefully seeing some of you are talking with some of you over the next two weeks.

Budson for certain we'll see you again as we provide information regarding our third quarter results. Thank you very much.

This concludes todays teleconference. You may now disconnect your lines at this time. Thank you for your participation number one.

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