Q3 2020 Unique Fabricating Inc Earnings Call
On the line your conference will begin momentarily. Thank you.
[music].
Good day, ladies and gentlemen, welcome to your unique SAP.
<unk> third quarter 2020 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 then zero at.
At this time it is my pleasure.
Your turn the floor over to your host Rob Fink ethane Kaye Investor Relations, Sir the floor is yours.
Thank you operator, I would like to welcome everyone you meet fabricating third quarter earnings Conference call.
During the call today, Doug Jane unique fabricating, President and Chief Executive Officer and Brian.
Good luck this 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 find in the private Securities Litigation Reform Act 1995 that are subject to risks and uncertainties.
Forward looking statements.
Thats relate to future events or to future financial performance and involve known and unknown risks are you Sir.
These and other factors that may cause the company's actuarial levels of activity performance or achievements to be materially different from any future results levels of activity performance or achieved expressed or implied statement.
Made on today's call.
All such forward looking statements are based on management's present expectations and are subject to certain risk factors uncertainties that may cause actual results or outcomes and performance differ materially from those expressed by such statements.
These risks and uncertainties include but are not limited to those discussed.
The company's quarterly report form 10-K for the period ended September Thirtyth, 2020, which will be filed with the FCC pursuant to rule, we're working for B and in particular, the section entitled risk factors.
All statements on this call, including those in this mornings press release.
Useful to investors understanding and assessment of 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.
All right Bill reconciliations of non-GAAP to GAAP are included in the press release that was issued earlier today.
That said I'd like to turn the call over to Doug Doug The Call's yours.
Thank you Rob.
And good morning, everyone.
During the third quarter, we saw a continuation of the recovering customer demand as our net sales of 35.6 million were up.
Approximately 96.
Percent of our pre COVID-19 expectations.
The latest independent North America automotive production forecast for the fourth quarter of 2020 show a 6% decrease from the third quarter.
With the impact of reduced OEM production over the Thanksgiving and Christmas holidays.
Well this indicates North America fourth quarter light vehicle volume production to be approximately 3.8 million units up from the prior 3.5 million units were 94% of the original 2020 forecast.
The 2020 production outlook is now for approximately 12.8 million units.
But from the last version of 12.4 million units.
Versus the 16.5 million forecasted to start the year.
As we also see continued strength in our appliance business, reflecting positive homebuilding and home improvement activity.
We expect slightly lower overall fourth quarter sales than this.
Core.
October net sales 13.4 million in November customer orders to support this outlook.
With the higher net sales volumes in the second quarter, our third quarter results show, improving gross profit and net income of 1 million.
We were effectively.
Well to maintain overall operational and asked you get a cost discipline, despite cost associated with maintaining a coded safe working environment.
At a higher operating costs to ensure sufficient production with the challenging workforce environment.
During the third quarter of 2020, we did not incur.
Or any restructuring or severance charges.
We sold O. point 1 million in nude and 95 face mask in the third quarter and expect these sales to be <unk> point sevenmillion in the fourth quarter as we conclude our initial or.
Due to the continued inherent uncertainty of the unprecedented.
Got it and evolving COVID-19 situation with the increasing reporting on infections, which can cause customer or supplier production disruptions. We feel that we are unable to determine the full impact of the COVID-19 situation on our future operations.
As necessary, we will adjust our production schedules.
Sales to adhere to governmental requirements and aligned with our customer demands.
To date, we have taken the necessary steps to generate profit results amidst the challenging environment.
For 2021 third party forecasts show, a 16% increase in North America lightly.
Vehicle production to 15.0 million units from 2020 used 12.9 million.
The 15.0 million units for 2021 do represent a 3.5% decrease from the second half of 2020 annualized run rate.
For 2022, the forecasts show a 6.6.
Percent increase from 2021 to 16 million units.
Our ability to deliver positive operating profit and net income on these improving but still lower volumes than previously planned confirms that our actions taken over the last year positioned us very well for us.
Sales going forward.
We were able to effectively increased production during the third quarter. Despite the multiple challenges associated with the continuing COVID-19 impacts on our business.
Based upon the dedicated work with the unique fabricating team over the last 13 months, we have moved beyond our initial boldly.
Back on track initiatives.
Representing this progress we updated our corporate logo and Im now embraced our new company motto that unique fabricating produces innovative optimize sustainable solutions for our customers.
Building on our production of in 95 face mask, we continue.
Our next phase development activities to evaluate the longer term potential of these new products as part of our overall growth target for the medical and consumer markets to be more than 10% of our total sales by the end of 2023.
We continue winning new business in our targeted markets across all of our.
A locations and processes.
Over the last three months, we have seen a substantial increase in our customer order intake where COO.
To a total year to date of approximately 185 million.
Based upon the nature of and specific applications for our die cut.
Precision diakha in CNC processes, we often see the positive impact on net sales in less than a year from new program or business Award.
We continue to strengthen our capabilities to realize the identified commercial opportunities and to build on the already implemented sustainable operating.
Bill improvements.
Brian will now provide an overview of our third quarter financial results.
Thank you, Doug and good morning, everyone.
Net sales for the third quarter of 2020.
Decreased to 35.6 million down 7.8%.
Hi, Matt.
Were 3 million from the $38.5 million in the third quarter of last year.
The decrease in net sales was attributable to the end of certain customer programs.
Lost sales as a result of our previous facility closures.
De contented.
Components for two transportation customer platforms.
Only to $35.6 million in net sales for the third quarter customers in the transportation market accounted for approximately 89%.
Appliance at approximately 9%.
With the remaining 2% primarily attributable to the medical market.
Gross profit for the second quarter was $8.1 million or 22.7% of net sales.
Compared to $7.2 million or $18.6 million 18 point.
6% of net sales for the same period of 2019.
The 1.7 million dollar inventory valuation allowance charge taken in the third quarter of 2019 did not reoccur in 2020.
This benefit was partially offset by the loss of.
Contribution margin on the 3 million lower net sales in the third quarter of 2020 as compared to the same period last year.
And COVID-19 related costs.
Selling general and administrative expenses for the third quarter of 2020.
Were down 8.3 million.
Moving to $6.3 million compared to $6.5 million for the third quarter of 2019.
The decrease in SGN name results from several cost reductions, including management and commission expenses.
Which were partially offset by higher professional service.
These.
Including legal and information technology support.
Operating income was $1.8 million for the third quarter of 2020.
Compared to an operating loss of $8.4 million for the same period last year.
The increase is.
The result of the 1.7 million previously noted inventory charge taken in 2019.
The point 3 million reduction in SGN anyway.
And $1 million lower restructuring charges.
These improvements were partially offset by the impact of.
3 million decrease in net sales year over year, and the COVID-19 related costs.
Interest expense was point $7 million for the third quarter of 2020.
Compared to 1.2 million for the third quarter last year.
The year over year.
The decrease was primarily due to.
Lower expenses related to our interest rate swap.
And the composition of our debt compared to last year as the $6 million PPP loan has an interest rate of 1%.
Net income for the.
The third quarter of 2020 was approximately $1 million.
Or 10 cents per basic and diluted share.
Compared to a net loss of $1.3 million.
Or 13 cents per basic and diluted share in the third quarter of 2019.
Our increased profitability is the result of the 410 basis point improvement in gross margin.
In the lower SGN, a restructuring and interest expenses.
Which were partially offset by higher income tax expense.
I will now provide an update on our financial position.
And liquidity.
Net debt or total debt less cash and cash equivalents.
Decreased $2.1 million to $47.2 million as of September Thirtyth, 2020, inclusive of $2.3 million of cash and cash equivalents.
Compared to 40.
9.3 million as of September 29.
2019, inclusive of $1.5 million of cash and cash equivalents.
Included in net debt at September Thirtyth 2020 is the 6 million dollar PTP loan received in the second quarter of 2020.
Heading into year end net debt has increased to $5.4 million.
Inclusive of 1.7 million of cash and cash equivalents at December 29, 2019.
As we discussed during our second quarter earnings call, we fully utilized the proceeds of the pp.
P. loans during the third quarter.
We have begun the forgiveness application process and expect to be finished in November.
We still believe a substantial portion of the PPP loan will be forgiven. However, we have not completed the application process and there remain inherent uncertain.
Certainty.
We ended the third quarter with 2.3 million of cash and cash equivalents.
And 8.5 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 discretion.
Generic spend in capital expenditures. So we can generate strong cash flows to reduce our debt levels.
Doug will now provide some closing remarks, Doug back to you.
Thank you Brian.
Over the last month, we had the opportunity to meet remotely with several of you and will.
Tony this activity over the next quarters, including eventual in person meetings and conferences as circumstances allow.
Through the significant challenges we have faced in the multiple improvement initiatives, we have executed over the last year. The unique team has continued our focus on commercial and operating performance.
We have established a strong foundation to meet our ambitious targets and stakeholder expectations for profitable growth as we deliver significant shareholder value.
Are now complete leadership team and all of our employees are energized by the clear opportunities to provide innovative optimize cyst.
Animal solutions to our customers.
With that we will open the call for questions.
Operator.
Thank you the floor is now open for questions. If you do have a question. Please press Star then one on your telephone keypad to join the queue. If you are using a speakerphone. Please pick up your handset to provide the best.
Sound quality again, ladies and gentlemen, if you do have a question or comment. Please press Star then one on your telephone keypad at this time and we take our first question from John No deal with Taglich Brothers. Please proceed.
Hi, Good morning, Brian and Doug and thanks for taking my questions.
I was hoping you could talk a little about your medical products, Oh, and specifically what they contributed to your third quarter and your prospects for this market going forward.
So end of the third quarter I believe Brian had mentioned that the sales were about.
Moving to 3% of our third quarter sales.
Those numbers will be a little bit higher in the fourth quarter with the kind of the full position. The sales that we have for our in 95 face mask that will conclude that initial order that we had had the original press.
Press release about and were.
Or in the process of working with that customer and with a couple of other customers of what I would call out phase two.
In 95 face mask product, we've got three alternatives, but at this time don't have anything that is finalized or that is through 10.
Testing at this point in time and that's the reason.
Highlighting the fact that that ended that border going forward again, we have multiple opportunities there as well as other.
Of similar products that we currently make a phone products et cetera, and there are a lot of things I will say that are open and we our positive that we will.
I'll be winning new business, but I have nothing to point to at this time.
Okay well. Thank you for that then Oh your business more or less it runs in tandem with North American auto production, but I was hoping you could speak a little about the current outlook for your appliance business.
Okay.
Thank you for that question also John [laughter] as I had mentioned a unbelievable in previous earnings releases.
For a variety of reasons the appliance business had been a de emphasized prior to my arrival in.
And this is part of what had resulted in the closing of a couple of the plants.
Smith play at the Murfreesboro plant the.
Evansville plants in this caused us to have some lost business. It had not yet been replaced when I reviewed the business case for our appliance business review the capacities that we had and the talent that.
That we had in house it was clear to me that this needed.
And to be reversed and therefore, we put a full court press on winning new business and appliance and we've been very successful in doing so and we'll see a ramp up in that business.
In the 2021. So there is no reason that we shouldn't have the business where geographically position.
Well to do so and in fact are what are the key initiatives that we have commercially going forward as you remember a separated our businesses up with Threeq.
Three commercial heads Juana on appliance.
He is how do we oh penetrate the Mexico market for appliances today, we don't do any business there.
And there are tremendous amount of products that are produced there. We do have two locations in Mexico and this is going to be a focus for us going forward.
Okay, and I think your remarks, it said that the third quarter was about 9%.
Of total business.
And they'll be in that.
Automotive forecast.
For next year.
Aren't yet.
Was it supposed to be a little higher or lower than total for this year I would imagine a little higher and auto loan production being up for covered the impact this year, but could you talk about I like the appliance business.
As far as a percentage of total sales next year do you anticipate it to be higher than 9% say that you had in the third quarter.
You have I would view that it would be closer to 10 or slightly above 10% right now we're working on those figures.
Figures currently any.
And had done so as part of our.
Strategy process that we recently concluded.
We will see an increase in our transportation businesses. The reason that you won't see the appliance being higher in absolute dollars. The appliance business will be higher next year, but based upon the custom order intake that we have seen and I wanted to highlight again the comment that I made.
Things specific parts of our business the docket precision docket et cetera that I alluded to earlier, we are able to win that business and then see a near term impact on revenue or net sales.
With some business, if you're having to make bigger investments et cetera, the lead.
Tom maybe 18 months or two years, but we often see an impact early and with.
An increase in our custom order intake of an additional 90 million.
What we previously announced to now being at 185 million.
And continue to win business, we will see an increase in our.
Transportation business also and just the way math works. If it is currently 80, 586% of the business, 87% today and it's growing it will take a little bit of time for the other parts of the business to have a meaningful increase in percent.
But they will definitely have a meaningful increase in absolute dollar.
Well, that's good to hear and thank you for that.
The other thing.
John If you don't mind, yes, because you had kind of a three part question. Initially it is going to answer in case someone else as that has the same question I appreciate that your first in.
Because I can answer some of those things so when I responded to you.
In the latest third party forecast, which is.
Blended average of the three major ones.
The run rate that they are expecting for 2021.
Okay is slightly lower than the run rate in the second half of 2020.
Okay, so that would.
Tend to have a negative bias.
Revenue.
We do not believe that we will see that at all because the new business that we have one.
And the programs that we're on.
But just as an overall picture that that's true and then what has to always state with the.
Inherent uncertainty.
In risk associated with Covidien, what may be going on over the next.
Periods of time.
Okay.
No understood I appreciate that then.
I have just one final question.
I'm going to U.S. DNA expenses, you've trimmed them significantly over the past year.
And.
Just curious if your current level, which I think it's been at this level for about two quarters in a row. If this is a level that we might expect going forward or might there be further cuts or actually increases as business picks up.
So the latter is the right answer again, one of the things that having been in this business.
Quite some time and having bought together a talented group of people to lead the business.
The worst thing that we can do is when this business and then failed to execute.
This is not something that we're going to allow to happen in.
And therefore part of our reorganization commercially the later.
And did this we are adding tactically, adding specifically, adding engineering capability, both plant and application engineering to ensure we have the appropriate launches for this new business. So they would tend to be a biased up for that along with a couple of.
Missions that we're adding because we had we had handed out quite a bit.
It will be in line and makes sense relative to the revenue growth that we will see.
These are not things that have already been done they are things that are planned to be done but.
I continue to hold the lever for all of those things just like with some of our capital investments that.
Jeff I should note just for clarity for everybody with the acquisitions that have been made previously in this sitting inside of the 10-Q, you will see a.
Dramatic decrease in the amortization of.
Other intangibles beginning in the second quarter of next year.
We had is flowing through SGN a.
So.
If I were to sales you shouldn't be too far off using the absolute number, but it's going to be replaced with.
Additional resources that are offsetting the decrease in the amortization of intangibles that are rolling off.
Alright, Thank you very much that's all laughing.
Thank you John.
Again, ladies and gentlemen, if you do have a question or comment. Please signal by pressing Star then one at this time next we go to the line of George Melas with MK H. management. Please go ahead.
Thank you.
Good morning, guys.
Good job on the quarter.
Doug can you elaborate a little bit on your customer order in.
Jake and one with your previous number that you had given I think I think you've given two numbers.
In June and in mid August and how does that come here and maybe can you talk about a few of the wins that you've had.
Since since mid August.
So the last time, we reported we reported 94 million.
And today, we're reporting 185 million.
That's a 91 million number.
And as I have stated before that the CEO of something that I used for years previously.
That is an indicator of where we see the future sales volume to be.
If we were in a different part of automotive or something else. It had a very long lead time.
You would be talking three to five years out potentially for that number but as I mentioned, a large portion of our business actually has a shorter lead time from.
Award.
To revenue perspective, so we'll be seeing some of this increase business in Q2 Q3 Q4.
Of 2021.
We again were focused on business that made sense for us relative to our geographic advantages in location.
Also the open capacities that we had its out of our.
Specific facilities we.
I've been able to win business in all Oems, including easy manufacturers I can state. We just got an award actually yesterday and that is not sitting inside of the numbers that I just presented a with the leading easy a producer to expand our business with them. We also got a very.
Large award for one of the Detroit three expanding our.
Content on their primary a light vehicle production truck, we focus again as we can you can imagine our issue. The production. So there is no specific customer.
And no specific product set.
That is winning additional business. If we go back in time to the Q2 report.
We were very proud and we're leveraging this our commercial discussions today, so for winning our first reaction injection molded business with graphite.
That allows it to be fire retardant flame retardant for engine covers and.
And this is.
A significant piece of business that we won with a European OEM.
And we are leveraging that to increase our presence in that part of the business. So the answer would be we're winning across all Oems.
Across all platforms, we're obviously focused on on the issue.
Ladies and the light duty trucks and will focus on making sure that we use the advantage of our geography with.
With plants in Canada, Michigan.
Kentucky, Georgia and two in Mexico were two locations in Mexico.
To make sure that we're not too concentrated in.
In any one location or with any one customer.
Wow, Okay, I'm not sure what the follow up question that given to that.
Hey, this is fantastic news.
Well, maybe I'll just ask a follow up on that one.
Right.
How do you explain in a way the you know, it's really very substantial pickup in customer wins in customer orders.
Oh it as I mentioned in one of my first conversations that I had and they were my first earnings calls and maybe with some on.
It takes everything.
But it is never one specific thing, but when I got here. It was clear that we had products and processes that customers wanted.
But we were making it very difficult internally for our commercial organization to actually see.
C.
Okay.
And.
Therefore, realigned everything very early on in providing clear focus as to what we were going to be working on and then gave them parameters. So that they could make the decisions previously all decisions had route through one.
Both.
What and that becomes quite difficult in became a bottleneck. The second thing is it becomes literally a matter of saying we are going to win the business.
In previously there were some decisions made relative to.
Cost models that were.
Yes, correct.
And we went in and review.
Viewed the cost models and in essence, what we were doing is showing higher cost than we should have.
Which then made it difficult for us to be competitive it was business. We should have won one that we did.
Okay, and so those things along with encouraging and it's been a little bit more difficult with coded to have meetings with our key.
Customers, but we outlined a key set of customers both tier one and tier two for us to further develop a commercial relationship.
Relationship and I've been involved in many of those meetings are giving the customers the confidence that we're on the right track that things are moving forward, we are committed to them.
That where you have it also had a very good quality record going forward, which is essential to doing it and now we have credibility with the customers for this is why I mentioned to John's comment.
We absolutely have to make these investments now in people.
To ensure that we don't fumble because.
It's easy to lose momentum in this regard and we're not going to do that so those are the key things that I would say have happened again, adding Adam trela.
Who I've worked with for many many years at Libya, who is transportation.
Market expert and understand running high quality.
How this works and adding him to the leadership team. So that we then had greater focus and appliance medical consumer engineering, whereas before it was diffused. This is also clearly been a support to the to the people who are actually out winning the business.
Okay, great. Thanks for that and maybe just a quick question for Brian on on the debt you seem to be getting in in pretty good shape, you will leverage ratio ease the well well below the covenant requirement, how you see the leverage ratio going forward.
In 2021 right.
So as Doug mentioned, we're still working on putting together 2021 forecast in our numbers, but obviously, we feel really good about the quarter, we just completed.
I think we said on the last call on lets say it again.
We were no very good.
Is there any of the collaborative pre.
Process. We went through are we to the eighth amendment working with our partners at the in the Bank Syndicate.
And we felt that we had.
Arrived at no covenant levels that.
Were achievable and we thought we had line of sight.
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So I think you know what I'll leave it at is is we feel good about the covenant levels that are in need and then we think we're going to be able to achieve them.
No I, that's probably about all I can say right now, but we certainly are very happy with how the third quarter end.
Great Okay.
Thank you very much for them.
This concludes our question and answer session, we returned to Doug Kane for closing remarks.
So again I appreciate everybody investing the time today and in the the call again the world around Us certainly.
Remains somewhat chaotic.
And I just want you to understand that myself and the leadership team and all the employees here are fully committed dedicated and energized.
I'm confident frankly that we are on the right path and that we will continue to produced.
Good results going forward.
Subject to what might happen with the rising Kobin cases, but again, we appreciate your attention and now look forward to the next conversation in the earnings release and look forward to having some individual discussions as you. So desire I will make myself available.
Thank.
Thank you. This does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time have a great day.
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