Q3 2021 Unique Fabricating Inc Earnings Call
Okay.
Greetings and welcome to unique fabricating third quarter 2021 earnings call. Currently all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference. After your host, Jeff Stanley's, which bank F. N K IR. Please go ahead.
Thank you Kate and I would like to walk about once your unique fabricating third quarter 2021 earnings conference call hosting the call is Doug Doug Cain unique fabricating as President and Chief Executive Officer, and Brian Loftus unique fabricating as 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 1095.
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 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 all such forward looking statements are based on management's present expectations that are subject to certain risk factors.
Certainties that may cause actual results or 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 for the period ended December 31, 2020, which was filed in April of this year with the SEC pursuant to rule 424 billion.
And in particular, the section titled Risk factors all statements on this call and including those in this afternoons 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 Companys 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.
<unk> of GAAP to non-GAAP are included in the press release that was issued earlier today with that 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 our update of the company's outlook overall operations and financial results.
Unique fabricating continues to navigate unprecedented and ongoing challenges for the markets we serve.
While providing our customers timely delivery of quality product.
And by winning new business.
As we began to emerge from the worst of the pandemic new challenges from shortages of raw materials and labor.
Plus the inefficient logistics created new obstacles for our customers and the entire automotive and appliance to supply chain.
This has led to a continuing market condition of increasing raw material labor and logistics cost with comprehensive operational inefficiencies, resulting in decreasing margins.
As volume projections and customer releases are constantly being revised.
<unk> forecasting and planning effectively are very difficult.
Through all of this unique fabricating has been able to maintain or strengthen customer and supplier relationships, while increasing organizational capability.
Albeit with results that are not what we had originally expected.
We are not satisfied with our financial performance and as these challenges abate. We are confident that we have taken the steps necessary to showing progress performance with higher volumes.
Our ability to maintain liquidity and to service our customers effectively while working closely with our supply base is creating both near term and longer term opportunities for us.
The impact of the continuing challenges on the supply base are leading to movements within the industry, including resourcing of business and supplier consolidation opportunities.
Several of our customers are approaching us about takeover work from their suppliers, who are unable or unwilling to navigate these challenging times.
I am encouraged with how our entire team has met these existential challenges head on.
Taking care of our customers every day and maintaining our position as a partner.
Collyn, whom our customers know they can rely on.
As a part of the effort to better position the company to be opportunistic we executed a private placement equity raise of approximately $4 million in September.
This demonstrates.
Strikes the ongoing strong support from our shareholders and board for the actions taken over the last two years to build a highly capable organization.
Well positioned to profitably benefit from the expected volume increases in all our markets in 2022 and beyond.
On the demand side through Q3, our transportation appliance market customers reduced releases well below any previous third party estimates.
Resulting in a recording 3% lower net sales in Q3 compared to Q2.
The primary causes or continued shortages of key materials, primarily chips and certain petroleum based products as well as labor and logistics challenges.
Compared to previous third party forecast and assay, it's been widely communicated the Detroit three auto manufacturers and their tier suppliers had been more dramatically impacted by these shortages in Q3.
Then in Q2, causing greater production reductions than the overall market.
The previously communicated third party estimates showed 18% higher North American light vehicle production in Q3 versus Q2.
During our previous earnings call. We stated that we have been skeptical of the magnitude of these forecasted increases.
But we had not anticipated actual north American production to decrease 6% from Q2.
With its corresponding negative impact on our Q3 met site.
We see continued strength for our offerings to the appliance industry and our outlook for this market is improving.
We recently began shipments for our latest consumer goods order intake wins and expect this market to grow for the company.
On the supply side, the labor availability challenges related to Covid and cost increases in our supply chain.
Adding labor logistics packaging and raw materials have persist with.
With costs in Q3, continuing to increase over Q2 levels.
These factors negatively affected our margins along with the continued impact of operational inefficiencies, resulting from the ongoing short or no notice customer order fluctuations.
Supplier issues with allocations forced mature et cetera.
Over the last months.
However, with limited specific exceptions, we have been able to secure necessary materials to meet our customer commitments for on time delivery with the result that our outbound expedite costs have dropped significantly since Q2.
We do expect to see continued challenges from the chip shortage and other factors outlined previously as.
As we move through Q4 2021 and into the first half of 2022.
During the quarter, we remain focused on ensuring that our customer calls to increase recovery program was effectively implemented.
As we saw it to partially offset the well documented and continuing input cost increases that are impacting all segments of our economy.
This effort was in large part successful in mitigating a portion of these increased costs.
With our Q3 sales coming in at 26% below our original 2021 planning.
The significantly reduced production volumes and the resulting loss of contribution margin.
That continued to be negative impacts to our financial results along with the challenges of effectively flexing cost.
The changing release schedules.
With our customers' ongoing focus on managing their own supply chain issues and labor shortages. We continued to see an overall reduction in new business sourcing activity throughout all of our markets during Q3.
Despite this and our focus on the cost recovery activities. We have been awarded an additional $27 million in customer order intake or C O.
Since our last call for a total year to date of $93 million.
With 16 million of this get appliance and 6 million in consumer goods.
This compares to 161 million at the end of October 2020.
We have maintained our customer responsiveness to delayed and then accelerated timetables for potential New awards and platform launches.
In Q4, we are now seeing an increase in quoting activity.
Despite the current challenges in the macroeconomic environment, we remain confident in the longer term strength in each of our key markets through at least 2024.
And customer demand, including commercial fleet and rental car companies remains very high.
And inventory levels continued to be historically low.
And customer back orders continue in the appliance in customer goods markets we serve.
Okay.
Light duty new vehicle inventory has remained historically low with approximately <unk> 9 million units at the end of September.
Compared to $2 3 million units for September 2023.
$3 4 million units for September of 2019.
Resulting from the low inventories and reduced production volumes U S light vehicle sales continued to be lower than previously forecasted provide.
Providing additional pent up demand supporting a positive longer term outlook.
The seasonally adjusted annual sales rate or Saar dropped to approximately $12 million in September after averaging just over $17 million in the first half.
And approximately $13 million in August and.
In $2014 7 million in July.
The mid October independent North American automotive production forecast for 2021 dropped one 6 million units to $13 8 million full year or approximately 25% from the previously communicated mid July 2nd half volumes.
With first half at $6 8 million units. This now indicates an approximate 10% further drop in second half.
Over the already low first half.
This now places 2021 on par with the 2020 low production.
In our last earnings call, we had expressed substantial skepticism on the earlier forecast volumes.
But these additional reductions at approximately 21% for second half 2021 production are even greater than we had anticipated.
For 2022, the latest outlook was also decreased substantially by $1 8 million units or 10%.
The $15 2 million units.
This still does represent a 17% increase over the low 2021 full year volume.
And.
More importantly indicates a 27% increase in production from second half 2021 levels.
The 2000 2030 forecast now shows $17 3 million units or an additional 14% above 2022.
Continuing our cost review and reduction activities, we further streamline our salaried organization.
Resulting in an additional annualized savings of approximately <unk> 5 million.
Beginning in December 2021, and fully effective in Q1 of 2022.
This is in addition to the approximate $1 8 million of annualized benefit from the previously communicated salaried organization enhancements.
Focused on increasing capability and reducing costs.
We did incur approximately $1 1 million of severance costs in Q3, and expect to incur up to $1 3 million in additional severance in Q4 for these activities.
We believe that our comprehensive improvement activities implemented across all facets of the business. During the last months have positioned us well for sustained profitable growth as customer releases increase.
Our new program wins come into production.
The supply chain challenges are resolved over the next months and all of our markets.
During the quarter, we received confirmation of the SBA PPP $6 million loan forgiveness, and the related <unk> 1 million in interest expense, resulting in a Q3 gain that did improve our balance sheet and debt ratios.
This gain was partially offset by the $5 1 million noncash goodwill valuation adjustment.
We continue our collaborative work with our bank syndicate to develop a longer term framework.
To date, we continue to maintain sufficient liquidity for us to operate in these challenging times.
Brian will now provide an overview of our third quarter 2021 financial results.
Thank you, Doug and good afternoon, everyone.
Turning to the third quarter results.
Net sales for the third quarter of 2021 decreased to $29 9 million compared to $35 6 million in the third quarter of 2020.
The decrease in net sales as compared to the same period in 2020 is primarily due to decreased demand for our products as some automotive original equipment manufacturers.
Handled or reduced planned production due to semiconductor and other supply shortages.
Of the $29 9 million net sales for the third quarter customers in the transportation market accounted for approximately 88%.
Appliance at approximately 10% with the remaining 2% primarily attributable to our consumer off road market.
Gross profit for the third quarter.
$3 3 million or 10, 9% of net sales compared to $8 2 million or 23, 1% of net sales for the same period last year.
The.
Greece in both gross profit and gross profit as a percentage of net sales reflect the higher material freight and labor costs.
Inefficiencies of our current operating environment.
And the impact of lower operating leverage because of lower sales volumes.
Material costs as a percentage of net sales increased approximately 320 basis points compared to the same period last year caused by the well documented significant raw material and logistic cost increases, resulting from the various COVID-19 and weather related issue.
Use throughout our supply base as well as significant demand competition for our raw materials from other industries.
During the third quarter of 2021 direct labor as a percentage of net sales was negatively impacted by operating inefficiencies, resulting from customer launch delays relief cancellation and reductions due to the previously discussed supply shortages.
As well as the increasing labor rates to secure sufficient labor to meet demand.
As I mentioned during our second quarter call.
Many customer relief cancellations are occurring with minimal notice, which limits our ability to flex our labor capacity.
Also negatively impacting our direct labor costs.
Was the impact of the increase in staff levels to support New program launches, which ultimately were delayed as a result of the supply shortages previously mentioned.
Unfortunately, our customers made the decision to delay those launches. After we had increased our staffing levels and began training the workforce to support start of production on those launches.
Manufacturing overhead was negatively impacted by increased outbound logistical costs, including freight packaging materials, and shifting supply as well as higher energy and people costs, including salaries and benefits as compared to the third quarter.
2020.
Selling general and administrative expenses for the third quarter of 2021 were down to $5 7 million compared to $6 4 million for the third quarter of 2020.
The decrease in SG&A was the result of certain intangible assets, becoming fully amortized, resulting in a $5 million reduction of amortization expense as compared to the same period in 2020.
In addition to lower people costs, including salaries and benefits.
In an effort to control costs in light of the current operating conditions for automotive suppliers.
Partially offsetting the lower amortization and employee costs were.
$4 million of higher legal and professional service fees related to our forbearance agreement with our bank group and our efforts to remediate. The previously identified material weaknesses in our internal control over financial reporting.
Yeah.
Despite the operating challenges we have faced the last six months.
We have continued to prioritize our remediation efforts.
While there remains more work to be done including testing the operating effectiveness of the new or redesigned controls we have implemented as part of this process. We are cautiously optimistic that we will achieve our goal of remediation by year end.
During the third quarter of 2021.
Densify indicators of impairment that required us to complete an interim impairment analysis of our intangible assets, including goodwill.
As a result of our interim impairment analysis, we recorded a noncash impairment of goodwill.
$5 1 million during the third quarter of 'twenty one.
The impairment is reflective of the near term operating challenges faced by us and many other automotive suppliers, including rising material and labor costs and lower demand for our products as a result of the chip supply shortage previously discussed.
Operating loss was $7 6 million for the third quarter of 2020, one compared to operating income of $1 8 million for the same period last year.
Excluding the $5 1 million goodwill impairment charge recorded in the third quarter of 2001, our operating loss would have been $2 5 million driven primarily by the lower sales volumes and lower gross profit because of rising input costs.
Interest expense was <unk> 8 million for the third quarter of 2021 compared to <unk>.
<unk> 7 million for the third quarter last year.
The year over year increase was primarily due to higher borrowings on our revolving line of credit in addition to higher interest rates because of our forbearance agreement.
Net loss for the third quarter of 2021 was approximately $1 $9 million or <unk> 19 per basic and diluted share compared to net income of $1 million or <unk> 10 per basic and diluted share in the third quarter of 2021.
We had an income tax benefit of approximately <unk> 5 million in the third quarter of 2021 compared to income tax expense of <unk> 2 million in the third quarter of 2020.
The income tax benefit is driven by our foreign subsidiaries as we have a valuation allowance position in the U S tax jurisdiction.
I will now provide an update on our financial position and liquidity.
Net debt or total debt less cash and cash equivalents.
Was $46 4 million as of September 32021, inclusive of $1 1 million of cash and cash equivalents compared to $49 6 million as of December 31, 2020, inclusive of $8 million of cash and cash equivalents.
As previously announced we received notice that the FDA had approved our application for full forgiveness of our PPP loan.
Which resulted in a $6 $1 million gain on debt extinguishment in the third quarter of 2021.
We ended the quarter with approximately $1 1 million of cash and cash equivalents.
Seven 4 million of net availability on our revolving line of credit.
As of September 30, we were.
Were not in compliance with the minimum EBITDA covenants set forth by our forbearance agreement as amended which constitute a default.
We have been working with our financial advisors and banking group to enter into an amendment and waiver to cure. The covenant default. However, there is no assurance that the bank group will waive the default or agreed to an amendment to the current provisions set forth in the forbearance agreement.
As of today, we are still able to borrow on our revolving line of credit. However, the bank group could exercise their rate as defined in the credit agreement at any time.
<unk> could include eliminating our ability to borrow on our revolving line of credit.
Doug will now provide some closing remarks, Doug back to you.
Thank you Brian.
In the near term, we continue to navigate low customer releases demand volatility.
Industry wide supply chain challenges and the continued impact of Covid.
We are confident that new business awards combined with strong end customer demand and low inventory levels indicate greater revenue volumes for us after the recovery beginning in 2022.
As the customer relief situation improves and supply issues are resolved. We believe we are poised to generate improved results.
We are longer term very positive and believe the transportation market is entering a multiyear growth cycle.
For 2020 in 2021, North American light vehicle automotive production is forecasted to be only approximately 13 million units each year.
This follows a four year average from 2016 to 2019 of approximately 17 million units.
This production decline of 4 million units each in consecutive years has significantly depleted inventories and has resulted in substantial pent up demand.
Our team continues to operate more effectively which should benefit operating results as release volumes rebound or in our markets.
We remain committed to our vision of delivering sustainable profitable growth and increasing shareholder value.
That follows from a brand of providing innovative optimized and sustainable solutions for our customers.
With that we will open the call for questions operator.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, if you wish to withdraw from the queue. Please press star two.
We do ask that if you are listening by a speakerphone. Please pick up your handset for optimum sound quality. Once again, if you have any questions or comments. Please press star one on your phone now please hold moment, while we poll for questions.
And our first question today is coming from Leonard Schleicher at Tag with Brothers. Your line is live you may begin.
Hi, Doug I'm, calling in for John how are you.
Fantastic Leonard as John Okay. Yeah, No. Yeah, you had another a competing calls so I'm, helping you out so when you were.
Renting at the <unk> conference in September.
You said that you didn't have a lot of confidence in the North American production forecast for the second half of 'twenty one.
Coming to fruition.
More confidence in the projections for 2022, so do you still have a healthy level of confidence for 2020 twos cards.
North American.
Production forecast.
I appreciate the question then pass you recognize that's somewhat difficult.
Question to answer with the percentage of confidence level, what I would tell you.
Is that I have a high degree of confidence in what we expect to see in the second half of 2022.
But I think that the first quarter of 2022 is certainly going to remain somewhat challenged we hear communications from our customers both tier one and OEM.
Marshaling, our resources on chips, and et cetera to make sure that 2022 starts off more positively.
But I'll remain somewhat.
Skeptical of that so as I said in the conference it's kind of the farther out it goes the more confidence we have.
Counterintuitive for sure, but what I would say is second half absolutely much stronger Q1 likely to be somewhat better than what we're seeing in Q3 and Q4.
And then Q2 somewhere in between those two but by the time, we get to the back half of 'twenty two into 'twenty three we have a high degree of confidence.
And the forecast that we're seeing.
Okay. Thank you for that okay.
Yeah.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one now.
Our next question today is coming from George Melas at MK H management. Your line is live you may begin.
Thank you.
Doug.
Ryan.
Quick question on the customer order intake.
$27 million in the September quarter, how do you evaluate that.
Was there a lot of activity.
With your win rate.
And how do you think about that.
As I communicated in the Q2 call and then earlier in the script and I know <unk> provided a lot of information through Q3, we still saw overall.
Overall very reduced level of quoting activity.
Out there again as our customers supply chain management was far more focused on trying to resolve their issues are related to demand.
We have seen an uptick in quoting activity in Q4.
And we've seen an uptick in this activity related to I'll say moving some sourcing around.
As I mentioned in the call. So I would say that while in absolute numbers we.
Would always be disappointed in the value of $27 million in relative terms, we were actually.
Fairly positive about that.
So good about especially in light of the fact that we also spent a great deal of our time in Q. The latter part of Q2 and Q3.
Going through.
The cost recovery activity.
And that took a lot of time.
And focus for the company in doing that is a very necessary aspects. So all ballots.
What have you learned by any means but certainly positive and we're seeing more positive.
Her over the last 45 days.
I expect to see this continued to accelerate.
The thing that was more the thing I was more.
Pleased about in this recent highlight if you recall George sorry to interrupt you is the fact that out of that customer order intake for the entire year.
And a lot of and we did actually end up with an outsized view of this in Q3 also was the appliance at $16 million.
Of the CLI number and I believe the.
Coke consumer goods was about $7 million. So you ended up having a 17% of the order intake and a seven or 8% of the order intake was in those two businesses that were trying to grow.
And we know the transportation order intake will come so it shows our focus on those two areas is having a positive impact.
Okay.
So that would again.
And in terms of the.
The relationship with you.
Customers.
And I don't know to what extent you can see that in comparison to your competitors, but how would you weigh about.
The relationship with your customers and how has sort of a loss.
Six months training them with strength in any way.
I guess, my very long history, and a couple of three different industries with this out of.
I'll say, sometimes conflict and challenges you can develop a stronger relationship.
It would be not.
Not accurate if I said that all of what's going on over the last six months is not put a strain on our supply our customer relationships not only with our suppliers to us.
But also from us to our customers. So there has been greater strain, but what I would say is and the reason I commented. This way is through that it is forced I'll say more in depth discussions and more transparency.
And that's always good.
And we as a company have always been very forward, very forthright and very responsive and transparent.
With our customers as to whats going off and so therefore, that's the reason I made the comment but I think it's been strengthened.
We've seen this in two ways one today.
To date, we have no evidence and have no belief that despite our activities relative to cost recovery et cetera that we have lost any business.
That we currently have and in fact as I commented, we have seen some resourcing activity come our way.
And this to me is an indicator of the fact that the supply the customer base.
Remains with a high degree of confidence in our ability to deliver.
And I would also say we were earlier than what we had to do relative to cost recovery. We've been mentioning this for a couple of quarters.
Some of our competitors were delayed and this and they are now coming in late.
And perhaps even more aggressively than we did and.
And therefore that may be also part of what's contributing to the two.
The resourcing activity and last as I mentioned, we have been able to maintain continuing shift quality product on time.
Creatively working with and collaboratively working with our customers.
Our substitution and other activities to make sure. The supply has continued and again that also develops I'll say a closer relationship with with the customers.
Great. Thank you Doug I appreciate it.
Yes.
Okay.
Thank you we have no further questions in the queue. At this time I would now like to turn the call back to management for any closing remarks.
Yes. Thank you very much again, Brian and I and the entire leadership team here at unique fabricating I appreciate the continued interest in.
And what we are doing and the continued support of what we're doing it is without doubt has been a challenging period of time, it's been a challenging two years, it's been a challenging last nine months.
But we believe that the actions that we've taken.
And my commitment that I made to the board and to the Investor Group and each one of these calls is to continue to strengthen the organization.
Strengthen the capability strength of the customer and supplier relationships. Despite the external challenges. So that we are extremely well positioned.
When this business does turn and it will turn and I provided several examples of that during the earnings.
The script that I read from so we are very confident that we have the organization and the relationships and the capability to see much improved results when it returns and that ends up being the question is exactly when that return occurs but having been without 8 million units of <unk>.
In auction over what had been the average in the preceding four years 'twenty.
<unk> in 2021, there is absolutely significant demand that's out there and we're well positioned to take advantage of it. Thank you all and we look forward to talking.
Sharing with you in our next call.
Plus are always available.
In the interim period if necessary. Thank you.
Thank you ladies and gentlemen. This does concludes today's event you may disconnect at this time and have a wonderful day, we thank you for your participation.