Q2 2022 Unique Fabricating Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to your unique fabricating second quarter 2022 earnings call.
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Thank you operator, I'd like to welcome everyone to unique fabricating second quarter 2022 earnings conference call hosting the call are 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 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 that are subject to certain risk factors and uncertainties that may cause actual results outcome 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.
Our Form 10-K Form 10-Q that are filed with the SEC pursuant to rule 424 beat 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.
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 on 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 of 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 noncash goodwill impairment charge of $12 2 million.
Second we recognized a three point O million benefit related to the employee retention credit.
Third we experienced equipment and labor related operating issues at our Lafayette, Georgia facility.
We resolved as at the end of the second quarter, but that did result in a higher operating cost 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 cost to below the 5.1 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 that our supply chain.
The complexities of effectively flexing calls 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.
Cereal and packaging through the first five weeks of Q3.
Our comprehensive cost recovery activities initiated during Q2 of 2021.
Delivered positive results to date, but 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 of 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're passing along more more significant price increases.
At a 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 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 N V H.
Noise vibration and harshness products for three high volume applications with strategic tier one 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 1.1 million units on hand, each of the last nine months.
<unk> to more than 3.1 million each month throughout 2019 and.
$3 4 million units March the first 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 Saar did increase to approximately 14.1 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 'twenty 'twenty production.
The combined production from 'twenty 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 America production outlook for 2023.
With $16 4 million units at 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 a third party forecast for $7 6 million units to be produced in the second half 2022.
We are reducing our range for second half 2022, net sales to between 71 and $75 million from.
From the prior guidance of between 75 and 79 million.
Based upon this revenue level, we would expect an operating EBITDA level of between three point Omega $3 5 million.
For the full year, we're now forecasting our net sales range of between $141 million to $145 million.
With overall supply chain issues continuing to improve through 2023.
Increased C O are enabled by longer term bank agreement.
And the forecasted production levels of 16.44 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 that 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 mid term forecast as well as increased quoting activity in consumer goods and appliance markets as onshoring activities from China, specifically gained traction.
During Q2, we received a 1.8 million expected from the IRS for tax loss carry backs.
We still have <unk> 3 million remaining to be collected from the initial employee retention credit E. R. C program.
As well as the additional 3.1 million related to the E. R. C 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 left the cloud, but it's been impeding our efforts to win the additional C O on 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.
Doug.
Good afternoon, everyone turning to the second quarter results.
Net sales for the second quarter of 2022 increased $4 1 million or 13, 4% to $35 million as compared to 39.
Second quarter of 2021.
The increase in net sales as compared to the same period in 2021 is primarily due to higher demand for our products because of higher North American light vehicle production.
And the impact of our cost recovery efforts, where we pass a portion of our input cost increases to our customers through pricing.
Of the 35 million net sales for the second quarter customers in the transportation market accounted for approximately 89%.
Scientists at approximately 9% with the remaining 2% primarily attributable to our consumer off road market.
Gross profit for the second quarter.
$5 2 million or 15% of net sales compared to $4 6 million or 14, 9% of net sales for the same period last year.
The increase in both gross profit and gross profit as a percentage of net sales reflects the impact of the employee retention credits recognized in the second quarter of 2022.
Higher sales volumes and our cost recovery efforts, which offset the operational efficiencies in our Georgia facility, Doug mentioned it earlier.
Higher manufacturing costs, including material and labor as compared to the same period a year ago.
Both cost of sales and selling general and administrative expenses were impacted by the $3 million ERC benefit recognized in the second quarter of 2022.
Approximately $2 5 million of the benefit was recognized as a reduction of cost of sales.
And <unk> 5 million was recognized as a reduction of selling general and administrative expenses.
Last year during the second quarter of 2021, we recognized a 3 million ERC benefit as a reduction of cost of sales.
Selling general and administrative expenses for the second quarter of 2022, we're down to $4 2 million compared to $6 1 million for the second quarter of 2021.
The decrease in SG&A was primarily attributable to.
Lower salary expenses as a result of our 2020 one cost reduction activities.
The 25 million benefit from the ERC program previously mentioned.
And lower amortization expense as certain intangible assets became fully amortized since the second quarter 2021.
Operating loss in the second quarter of 2022 was $11 2 million compared to an operating loss of $1 5 million for the same period last year.
The increase in the operating loss is driven by the $12 2 million noncash goodwill impairment charge in the second quarter of 2022.
Excluding the goodwill impairment charge, we would have had operating income of $1 million, which is reflective of the impact of the E. R. C benefit higher sales volumes and cost recovery efforts, which were partially offset by the higher manufacturing costs and operating efficiencies.
Plant facility.
Interest expense was <unk> 7 million for the second quarter of 2022 compared to <unk> 8 million for the second quarter last year.
Year over year decrease was primarily due to favorable mark to market adjustments on our interest rate swap.
Net loss for the second quarter of 2022 was approximately $10 7 million or 91 cents per basic and diluted share compared to a net loss of $2 5 million or <unk> 26 cents per basic and diluted share in the second quarter of 2021.
We had an income tax benefit of approximately $1 million in the second quarter of 2022 compared to an expense of <unk> 3 million in the second quarter 2021.
I'll now provide an update on our financial position and liquidity.
Total debt was $47 7 million as of June 32022, compared to $48 4 million as of December 31, 2021.
We ended the quarter with approximately one 6 million of cash and cash equivalents.
And $4 3 million of net availability on our revolving line of credit.
Doug will now provide closing remarks, Doug back to you.
Thank you Brian .
Our team remains focused on continuous improvement in all areas and realizing the benefits from enhancements now in place.
We are positive about the midterm and longer term outlook for demand in each of our markets as well as the position we maintain within those targeted markets.
With the operational challenges at our Lafayette, Georgia facility demonstrably behind US we are seeing the resulting improved operating profit from higher volumes and reduce cost in Q3.
We remain committed to our vision of delivering profitable growth.
And increasing shareholder value that follows for my brand of providing innovative optimized and sustainable solutions for our customers.
With that we will open the call for questions operator.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to signal for a question and we'll pause briefly to assemble the queue.
And we go to our first question from Matt Leonard Schleifer of Piglets Brothers. Please go ahead. Your line is open.
Hi, Doug I'm filling in for John So I just have a couple of questions.
Disregarding well put it this way do you see Ah shall we take the our projections for North American vehicle production at face value are you seeing anything else out there.
That might indicate that things are happening, a little faster or slower than than those numbers.
Thank you for the question and Oh jobs Okay.
That we said Hello, yeah sure he's fine.
Okay. Good that's it that's important.
I would say to you is yes the.
Volumes that occur after the IHS production forecast come out have tended to drift a little bit lower.
What are the points is that the IHS forecast had been fairly consistent for the last three months. We also do track something in which there is a chip shortage impact report.
And four and that's put out weekly for four weeks before the past week Theres really been no change whatsoever in the last week that number went up about 100000, and then indicating about a 1.2.
$2 million reduction 1.2 million unit production.
For 2022 from the original and that's still kind of puts you in that 14 five to 14 seven range.
Again, what eventually transpires is somewhat open and in the communications, we've made about our revenue and EBITDA in volumes or whatever.
Trying to buy those down slightly for impacting that but we have no.
Better information and if you listen to what the Oes, who say.
They are all saying that they're going to have higher production in the second half of the year, but we will we will see how that works.
Okay, great. Thanks for that also last call. You said that you were looking to expand your industrial business in light of current automotive market conditions could.
Could you talk a little bit about any progress that you've made an effort to expand the industrial business.
Yep. So I appreciate that again, we have it.
Yes.
With the comments that Ive made about the forbearance agreement and the impact that that's had on certain of our.
Transportation, Oh, we ability to win new business, we have I'll say refocused some of our efforts in those areas and we are tracking several substantial opportunities in both medical and other.
The consumer good side.
That will enable us to meet what is really our new target that we've got for this year of about $115 million of C. A lot. So we've identified had them focused and in fact I'm in the process of meeting with several of our large customers today are potentially larger customers to try it.
Work through whatever issues, maybe outstanding so that we can get that business booked as soon as is possible and we are again as I noted in the commentary saying.
Some additional quoting activity and the desire for customers to move business onshore.
For a lot of well documented reasons that are out there. So we're pretty encouraged by that as well as we are seeing growth with a G. E who is our largest appliance business. They continue bringing business to us as they are.
I'll say moving production from other suppliers, who maybe having other of their own challenges or they're trying to consolidate things because of our footprint that we have that's an advantage for us. So we're just trying to focus our efforts there.
As we continue working through the issues with a couple of our larger transportation Oes.
Okay, great. Thank you.
Again, ladies and gentlemen, if you do have a question or comment please signal by pressing star one and.
Next we go to the line of George Melas with M. K H management. Please go ahead.
Thank you Hi, Brian .
Hey, George afternoon.
Good afternoon.
Some of the chute Lafayette is there a way you can sort of.
Give us some sense.
Windows issue has occurred and.
Thank you put roughly one $2 million additional cost there is there a way you can provide a little bit of a breakdown on that.
So relative to cost the cost is broken up into two specific.
There is one was higher expedite costs than we were normally seeing which was $1.8 million in the quarter.
And then a higher labor cost related to inefficiencies inefficiencies as I noted we were having.
Some significant machine issues, and then I'm just getting the scheduling in place for the labor because of the location, where let's say it is it's kind of a fall off the beaten path I would say its about 40 minutes south of Chattanooga in an hour and 45 minutes north of Atlanta, So about <unk> 4 million I would call. It was in the area of <unk>.
Excess labor or lack of a labor productivity and that came up with the $1.2 million that we had this was not something that we had any indication of saying based upon all the key performance indicators or metrics you use really through the end of March and even into the first part of April .
But for a variety of reasons, including some items that had us make a leadership change in in the play it management there.
Decisions that were made.
That were done with the best of intention that had unintended consequences such as not doing some required maintenance are not keeping some of the tools in place and as volume increased in that location and it's a location that.
Does all of our processes.
And in fact ships all over the country from there again, we've got to larger facilities. It got out of hand, very quickly that unfortunately can't happen. It does happen in the transportation market.
So we ended up doing a lot of expediting from there into Mexico.
And into other areas.
Areas out of Lafayette, and that's the reason for the very large 1.8 million impact on exercise what we done subsequent to that is again, we've made a management change we have reorganized.
Organized the plant scheduling we have brought in additional supervision. We've also brought in.
Both engineering and lean talent from our Mexico facilities, where we've got excellent operations and have a gentleman that I put in place. There are two years ago, who I've worked with for years at both of them at Bay a N at at Alcoa.
And utilizing that talent and utilizing some additional support that we got from all of our hills facility. We've eliminated the back orders basically eliminated the expedites.
And improved labor productivity, because we also made some investments that were required in some of the two like maintenance and some of the other machinery magnets. So as we're tracking in August today.
Really seeing no expedites and no excess labor costs that are there it's.
It's something we're disappointed in and we've also made some changes in our early warning systems to focus on a couple of other metrics to ensure that this does not happen again. We also did work collaboratively with certain of our OE customers and moved some of the production that actually made more sense.
Longer term that had been a source into let's say it some years back they actually moved into new Mexico, where we have.
Excess capacity excellent operations and is actually closer to the customer. So it's a win win for the customer and for us.
Great.
Thank you very much for the deal there and then on does he allow your 46 dealing wages.
It's a little bit.
The breakdown by.
Clients is transportation and maybe consumer.
But of course there is.
So the COI year to date in transportation is 36 million can apply if its a $3 million.
And in the medical and consumer it is $5 million and as I mentioned before we've got 16 identified.
Very focused C. A lot targets that if we apply the probability that by commercial teams who have given me.
We do have a revised target that we're aiming for a 115 million in total see a lot of this year, which would be another $69 million and the remainder of the year and that actually are split because there are a couple of larger medical opportunities that are there. It's basically split about 40%, 45% medical applies to consumer.
<unk> and the remaining in the transportation.
I have again, even today had discussions with two of our larger OE customers are about the situation as I mentioned and I did it intentionally in the.
There's the script and also in the quotation.
When we can have the forbearance agreement situation behind us this opens up the opportunity for us to I'll say go back to a more normal condition, because the customers want us to do the business, our footprints and our capability and our quality are they all need us to be in the supply chain, especially with some of the other challenges.
Others in our space are having and that's the reason we're working so diligently to get the Viking situation straightened out because they have.
There are opportunities there that we need to.
Palazzo over the next months.
Okay.
And you feel like you have it.
She lives for the year a Wednesday.
That's enough to me.
Yeah.
Or.
Through 'twenty three.
Exactly if you take 115 number that I provided you there and then we are targeting 100 number for 2023.
Again, all of that's predicated at all having the banking situation put together then that is.
That supports the foundation of the revenue numbers that I provided as guidance and we are confident that all of those things will occur and that's the reason I was confident enough to make that.
Statement about what we have in front of us.
Again for for Historic book before we ended up in Forbearance. We ended up we had $206 million of COI 2020.
Even in the midst of a COVID-19 occurring in 2021 being in a forbearance agreement and going all the way back to the first quarter of 2021, we had 100 million of C. L.
So there's no reason for us to believe that those numbers that I gave are not achievable and in fact.
Because of I'll say, our lack of getting some business over the last.
12 months are certainly something that can be exceeded.
Okay, and then just one final question on Cogs.
That's the key.
Most of it is a big chunk of your cost savings and that has increased.
Uh huh.
Or an absolute basis.
Is there any way you see that maybe coming down back to maybe.
50, 51% of your of your sales.
Or.
What was that like what do you think is kind of a permanent change in the model.
Okay.
And you you always asked of the good questions or the probing questions in that one I also appreciate so when I went back historically and if you made the different adjustments that were made and I'm really only going back to 2019 as I started in.
September the 30th of 2019.
Cost was about 52% in 2019, maybe 51 eight or something after we had made the adjustment.
That was required as part of the Q3 2019 results. So that's kind of the baseline rather than a 50 or 51, maybe some time earlier it was a little bit lower than that.
George So I don't want to Cott.
Comment that it wasn't but we're kind of looking at this 52 as being a baseline then if you take the inflation that we're looking at so again, when we talk about our cost recovery efforts in them now and we're going to talk about raw material. We're tracking with the latest stuff again that we will see fully beginning in August we saw some in Q2.
Little bit more and in July , but we'll fully see it in August we've got cost recovery as noted of over $10 million.
Based upon the run rates that we have today.
Unfortunately, the raw material and logistics costs, which include the fuel surcharges and everything else that are going on exceed $12 million.
So.
While we have done our best to recover as much as we can again recognizing that our customers don't really allow you to recover 100% because we don't have anything that's that's indexed theres a little bit that you give up there.
The second thing is that when you in flight, but your cost of sales your material cost in your revenue and say, Okay. You revenue was $10 million higher than your cost of 10 million higher this actually tends to inflate your material costs are at the levels that we're running right now about 2.5% to 3%.
So when we look at it that way or other cost reduction activities that we've done including material utilization.
Some other changes that we've made have offset.
In large measure that number so if everything were going to stay the same but we are tracking in our internal forecasting is using a little bit over a 53% material cost.
Okay, now I say that with the caveat being what I did mention in the script that we are seeing a bending that curve a little bit on the raw material. So.
Very few if any cost increases and we've seen a couple of nominal cost decreases today I don't know everybody on the call you know pays attention to what's going on with the inflation rates in the producer price index and all these different things that my my view. Our view is that we will see a further bending of this curve down and likely see some.
I cannot quantify it right now, but some cost reductions in Q4 of 'twenty two.
In 2023.
That saying more than I should recognizing that I've got customers and suppliers and other people on the call as sticky as it was and as difficult as it was for us to get cost increase so we have always been behind the curve.
But if you've got an inflationary environment and you're trying to raise prices with your customers you really can't get ahead of it if you're a supply basis continuing to gave you increases so we've kind of leveled out at the point in time, where we are now when the prices decrease it will be sticky for.
For us to give back any.
Prices for some period of time, even with raw material and hopefully some logistics cost falling so that we believe will be an opportunity for us into improve the material margin and then the second thing is we do now have installed in our plants, we have three lasers.
We've got installed we've got a couple of more that are in the planning to install these improve our material utilization a great deal.
And we're also looking at some other robotics investments either that we've made or that we're continuing to make to further improve not only our labor productivity, but our material utilization so our target would.
It would be to get back to a 52% number let's say even with some of the inflation.
But getting back to 50, I'm not sure that I would.
See that to be the case.
Okay great.
Okay. Thanks.
I was hoping you start thinking you.
Youre welcome.
We have no further questions, we turned to Doug Kane for closing remarks.
Once again I appreciate the investment of time for for all those who are dialed in.
To participate in our call again, we remain very positive and encouraged about the future. We appreciate the support from all of our stakeholders are each and every one of them, including all of our employees, who have worked diligently and dedicated and passionate life.
To work on all the improvements that we've got in some very trying circumstances, both in the macro and the micro environment and as always you know, Brian and I are here to answer any questions and we'll make ourselves available to speak to anybody on any other topics that are out there and look forward to talking with you in about three months.
Thank you.
This concludes today's teleconference. We thank you for your participation you may disconnect. Your lines at this time have a great day.
Okay.
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Uh huh.