Q3 2022 Unique Fabricating Inc Earnings Call
At this time, all participants have been placed on a listen only mode.
So it will be open for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Rob Fink of F N K IR Sir.
Or is yours.
Thank you Edward operator Youre.
Welcome everyone fabricating third quarter earnings conference call.
Hosting the call today are Doug Cain unique fabricating as president and Chief Executive Officer, and 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 1095 that are subject to risks and uncertainties.
Forward looking statements relate to future events or the future financial performance and involve known and unknown risks uncertainties and other factors that may cause the company's actual results levels of activity or 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 expectation and are subject to certain risk factors uncertainties that may cause actual results to outcomes and performance to differ materially from those expressed by such statements.
These risks and uncertainties include but are not limited to those discussed in the company's annual report on Form 10-K, and quarterly reports on Form 10-Q that are filed with the SEC pursuant to rule 424, B and in particular the section titled risk factors.
All statements on this call, including those in this afternoon press release are made as of today and unique fabricating does not intend to update this information unless required by law.
In addition, certain non-GAAP financial measures will be discussed during the call. These non-GAAP measures are used by management to make strategic decisions forecast future results and evaluate the 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 operation.
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 all that said I'd now like to turn the call over to Doug Doug The call is yours.
Thank you, Rob and good afternoon, everyone.
Unique fabricating Bryan and I appreciate your investment of time for today's update and the company's outlook overall operations and financial results.
In these extraordinary times I continue to be immensely proud of the resilient efforts commitment creativity and sense of urgency of all our associates in each of our seven locations throughout North America.
We remain focused on providing excellent service to our customers and are confident that we have taken the necessary steps to drive improved performance as volumes eventually increase.
During October we completed an investor led $4 8 million financing to provide additional liquidity.
We execute our comprehensive refinancing project.
As the next step in our refinancing the business to enable the execution of our growth plans, we executed an amendment to our credit agreement that ends our forbearance condition and evidence is the continuing collaborative work with our bank Syndicate B Riley and other stakeholders.
Our third quarter results reflect the impacts of four significant items.
First.
We recorded a noncash goodwill impairment charge of $4 8 million.
This eliminates goodwill from our balance sheet.
Second we experienced lower sales as overall demand from our customers was less than expected.
Specific OEM plant closures and shift reductions as well as inventory balancing from our tier customers had an outsized effect on our business.
In addition, our lower than planned.
Over the last months impacted by the commercial headwinds has had a negative cumulative effect on our net sales.
Third we booked <unk> $4 million in carryover operating costs from the second quarter that were not reflective of our third quarter operating improvements.
These were primarily related to the previously noted Lafayette operating issues and we do not expect to have a recurrence and our results going forward.
Fourth while fully effective as of the end of the third quarter, our cost recovery activities in Q3 were <unk> $3 million less than previously expected.
While overall market and supply chain challenges continue we are well positioned to realize the benefits as customer demand rises.
Despite the ongoing costs related to the comprehensive refinancing activities, we saw a reduction in our SG&A cost to $4 4 million in the quarter.
The complexities of effectively flexing costs to the short notice customer changes to release schedules continue to have a negative impact on our Q3 operational performance.
However, we do begin to see the benefit of ongoing lean initiatives, including an inventory reduction of $1 2 million or 9% since the end of 2021.
Sure.
While we have seen and do expect to see continued challenges through Q4 and into the first half of 2023 from the chip shortage and other factors outlined previously.
We also see improvements in raw material logistics, and labor availability as well as a flattening of the raw material and packaging cost curve for Q4 and into 2023.
As evidence of our continuous improvement activities. We have received positive feedback from recent customer site audits of our locations.
These assessments made by customers, including value Bosch and male arent important precursor to new business Awards.
Year to date, we secured approximately $79 million.
Despite the previously noted commercial headwinds.
We strongly believe that exiting the forbearance condition and then completing the refinancing activities we will have.
Prove our commercial positioning to win new business.
From an open capacity and overall capability perspective, we are ready to supply. These higher volumes that we believe will begin in the first quarter of 2023.
Included in the COI unique.
Unique recently won a takeover project representing a December 2022 launch utilizing our twin shape foam technology for an HV AC duct on the new ready and truck.
This is the second active program for our twin shape docs, which are a lighter weight more thermally efficient alternative to traditional plastic are ducks.
Our first program was for pack, our trucks for which we recently received a quality award from our customer and Tivo.
Light duty new vehicle inventory increased to just over 100 million units at the end of October .
While this is the first time to exceed $1.8 million since may of 2021, it is lower than the $3 million each month throughout 2019, and $3 4 million on March one 2020.
Resulting primarily from the low inventories U S light vehicle sales continued to be less than previously forecast.
Providing additional pent up demand.
Supporting our positive longer term outlook.
The seasonally adjusted annual sales rate or Saar of $13 8 million units in Q3, 2022 was close to the $13 3 million in Q2 of 2022.
The independent North American automotive production in 2022 forecast as of October 2014 is $14 5 million units or 11, 2% above 2021 and 2020 production.
And as 0.2 million units below what we shared in our last call.
The combined production from 2020 through 2022 forecasted volume indicates an approximate shortfall of more than $9 8 million units from the average of the last four pre pandemic yours.
North American production outlook for 2023 has been reduced by 1.1 million units from our previous earnings call were 6%.
$15 4 million units with an average of approximately $16 3 million units.
From 2024 through 2027.
As we are seeing continued demand weakness from our customers in Q4, we discounted the third party forecast for $3 7 million units to be produced in Q4.
Lower Q4 forecast and what we shared in our last call is a larger impact on those Oems and platforms, where our content is greatest.
As a result, we have reduced our forecast for Q4 to between 31 and.
$32 million.
The reduction also reflects the impact of the commercial challenges that have hindered our securing to play them.
Over the last 12 months.
For the full year, we're now forecasting net sales of approximately $136 million.
With the more recent well documented challenges in housing and with excess consumer and customer inventory of some consumer discretionary items.
We see a reduction in demand from our non transportation markets.
We do continue to see positive trends were improving supply chain conditions, both in the near term and longer term in our other markets.
We also see supply chain costs flattening with the expectation of specific modest decreases at the end of Q4 2022 and into 2023.
With overall supply chain issues continuing to improve through 2023 increased <unk>.
With the commercial challenges removed and forecasted North American light vehicle production levels of $15 4 million units. We are forecasting 2023 sales between 154 and $162 million.
This does reflect the cumulative effect from lower over the last 18 months that was previously mentioned.
Based upon this revenue level, we would expect an operating EBITDA of between $9 8 million and 11 point okay.
We have allocated additional resources to identify and implement operating margin improvement activities, including our lean topics.
By the end of 2023, we are targeting a 1% to 2% point run rate improvement in direct labor and material costs.
We will provide regular updates on the progress regarding these key initiatives as part of our quarterly reporting.
Brian will now provide an overview of our third quarter 2022 financial results.
Thank you Doug.
Good afternoon, everyone.
Turning to the third quarter results.
Net sales for the third quarter of 2022 increased $4 6 million or 15, 4% to $34 5 million as compared to $29 9 million in the third quarter of 2021.
The increase in net sales as compared to the same period last year, 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 passed a portion of our manufacturing cost increases to our customers through pricing.
Of the $34 5 million 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 our consumer off road market.
Okay.
Gross profit for the third quarter was <unk> 3 million or eight 8% of net sales.
Compared to $3 3 million.
Or 11% of net sales for the same period last year.
The decrease in both gross profit and gross profit as a percentage of net sales reflect the impact of higher manufacturing costs.
Significantly material costs compared to the same period last year.
Selling general and administrative expenses for the third quarter of 2022, we're down $1 3 million to $4 4 million compared to $5 7 million for the third quarter of 2021.
The decrease in SG&A was primarily a result of lower salary and healthcare expenses because of our 2021 cost reduction activities and lower amortization expense as certain intangible assets became fully amortized since the third quarter of 2021.
Operating loss in the third quarter of 2022 was $6 2 million compared to an operating loss of $7 6 million for the same period last year.
The decrease in operating loss was primarily driven by the reduced SG&A expenses discussed previously.
Other non operating income was down approximately $5 8 million compared to the third quarter of 2021 as a result of the one time $6 $1 million gain on debt extinguishment related to our PPP loan forgive.
This recognized in the third quarter of 2021.
Interest expense was relatively flat compared to the same period last year and approximately <unk> 8 million for the third quarter of 2022.
Income tax expense during the third quarter of 2022 was $3 7 million compared to a benefit of a half million dollars in the same period last year.
The increase in income tax expense as compared to last year is the result of establishing valuation allowances on our deferred tax assets in Canada and Mexico.
Net loss for the third quarter of 2022.
It was approximately $10 6 million or <unk> 90 per basic and diluted share compared to a net loss of $1 9 million or <unk> 19 per basic and diluted share in the third quarter of 2021.
Total debt was $47 7 million as of September 32022.
Compared to $48 4 million as of December 31, 2021.
We ended the quarter with approximately a $5 million of cash and cash equivalents.
And $1 3 million of net availability on our revolving line of credit.
The September 30, cash and net availability amounts do not include the impact of the additional liquidity that was provided by the debt offering completed on October seven.
Doug will now provide closing remarks, Doug back to you.
Thank you Brian .
Our team is focused on continuous improvement in all areas and realizing the benefits from enhancements already in place as well as those in the implementation phase.
In addition, we are optimistic about completing the comprehensive refinancing that we expect to benefit all of our commercial activities, most notably an increase in our COO.
We are positive about the mid term and longer term outlook for both demand and the competitive position, we maintain in each of our targeted markets.
While volumes remained lower than expected in Q4, we do anticipate seeing improved operating profit from higher volumes and continued operational improvements in Q1 2023 forward.
We remain committed to our vision of delivering 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.
While posing your question you. Please pick up your handset if listening on speaker phone.
<unk> optimum same quality.
Please hold while we pull for questions.
Thank you.
We have a question from Michael <unk> with Taiwanese brothers. Please go ahead.
Hello, Congratulations on the refinancing.
Thank you we're very excited.
I am too.
A question for you.
Looking at.
The competitive landscape now that Youre, a forbearance agreement is behind us.
You had some decent language in your written remarks, if you will but.
How many other <unk>.
Suppliers out there are in forbearance, and then no more business and now that you are.
Free of that.
How much market share can you grab in the meantime.
Okay.
A good question that.
Implies knowledge that I may not fully have who may or may not be in forbearance since again sure.
We're the only.
Real public company, that's in our space.
You bet.
And that's part of what has caused us challenges over the last 18 months that again.
We have now put behind us with the New Amendment.
To the credit agreement and the exiting of a fourth alright.
So what I would tell you is anecdotally speaking and then from people in the know in the industry.
This space has been challenged as if many tier two and tier three suppliers.
So there is distress and the fact that we've now put this behind us or in <unk>.
Well on our way and the refinancing.
Complete comprehensive refinancing of the company this puts us in a much better competitive position than what we've been over the last 18 months in different conversations that I've had with our customers have many of those.
We have been told absolutely that exiting the forbearance agreement.
Put us at a much better position for winning COI that we have been.
Basically blocked from getting as we were in forbearance. So we are very optimistic about that.
As we go forward. So we'll see some benefit from that over the next 60 days 90 days and then when the comprehensive refinancing is complete.
Then as I say that in the south that's going to be Katy bar, the barn door, it's going to be a wide open situation and thats the reason that.
Make sure that I noted in our comments that we are from an organization capability and a capacity standpoint ready enable to take on those additional volumes.
Okay.
With the capacity you have.
Muscle and bone, you've you've kept okay.
What's the earnings power of this company.
When you're operating at a 90% capacity level.
If we were operating at 90% capacity, you would be talking to something closer to $200 million.
Range. So as we indicated in the call. We are targeting right now and <unk> been doing a lot of detailed forecasting between nine and $11 million EBITDA on the.
I'll say the split number of around $158 million of sales.
Next year.
We do see based upon our fixed cost structure and the control that we put in our SG&A that we noted also that we see between 30% and 35% contribution margin on upside revenue.
And that will take limited capex to be able to achieve so you can take for every $10 million of upside revenue you have you've got 3 million plus of operating margin that goes to the goes to the bottom line.
So you're good at $200 million in revenues, you could knock on $30 million in EBITDA.
If we were saying $10 million on 158.
Let's call it for next year at $40.
40, more so let's call it 10 to 12 more.
So youre talking about.
Yes.
So I'm wondering if <unk> okay.
All right great I'll, let I'll, let someone else slide into the next point.
Thank you for that.
Keep up the good work.
Yeah.
Thank you. Our next question is coming from Howard Halpern.
Topic brothers. Please go ahead.
Hi, guys I'm pinch hitting for John .
I wanted to question.
Really we're glad to I guess more of that.
Gross margin and what you do you see that third quarter gross margin is the low point.
Youre going to be able to improve on that as we go.
And subsequent quarters.
What I would tell you is the fourth quarter is going to remain challenged just because of volume.
As you can tell from what I've said, we're expecting volume in Q4 to be 31% to $32 million as opposed to the $34 5 million that we saw in Q3.
And you can see a negative impact similar to the positive impact on the upside we see about a 35% negative on contribution margin for every $1 million that falls. So while we have eliminated the two negative items that I've mentioned and points two and three.
In the remarks, we will expect to see a negative in Q4 that will tend to offset that that's the reason the volume is so important to US again, our operating expenses are only about five or 6% of that is variable. Therefore, we end up having this.
Very strong contribution margin on the upside that's the reason that the new business is so important the launches that have been delayed somewhat over the last year.
Then this exiting forbearance and having the amendment in place. These are the reasons. These are.
The linchpins of what we expect to see in <unk>.
Q1 forward next year, plus the overall market increase that we expect to see.
Okay and.
And based on based on your forecast that you provided for 2023.
The SG&A.
It might marginally increase quarter by quarter next year, but not significantly from that point forward that you experienced this quarter.
What we're looking we do have some commission expenses and then we would have.
<unk> hopefully potentially sub salaries bonuses that we would have next year also even adding those two factors in we're looking at about $4 7 million a quarter versus the $4 4 million that you see now.
Even up to $20 million more in sales. So again, you can see that operating leverage that's there.
And just one last one.
Based on what you've been.
You discussed so far.
With your operations that you structured in place.
Quickly can you take on a new.
New project and get it up and running maybe compared to three or four years ago.
Okay.
So again, a very good question, what I would say that differs depending upon what the processes.
As I mentioned this business that we have for the new twin shake Ducks that we picked up from the VEB may carribean on top of what we're already doing with <unk>, we were awarded that business and we'll be in production in that in less than 60 days.
If you take our basic die cut business.
If we are awarded something in potentially there is takeover business.
As Mike had asked about distress with some of our competitors in the marketplace. We are asked to take on some business. This can be done sometimes at less than 30 days.
So this is this is not the long lead time stuff now if we were to take a major program that we won for a reaction injection molding.
And having to put tooling in than maybe at the outside its a nine month, maybe situation by the time you get through all the <unk> and the tooling.
Put in place, but this is a very quick quick business to be able to bring on new business as opposed to some others in the automotive.
And what I would also tell you that what I would add back to your organization question sorry for interrupting.
Dressed it.
We have made a lot of changes in the organization and engineering and operational excellence.
The entire team focused on large managed but the awards that we've been getting and the quality audits that were talking about as I mentioned are all precursors to being able to win new business and we've been very successful there. So our customers appreciate it we have not.
Skirted those necessary investments to be able to ramp up quickly.
Can almost go back and listen to what I've been saying in each one of these calls over the last three years I have maintained commitment and the team has maintained commitment to have the capability and capacity to be able to scale. This thing when this does come.
Come back so that's been a key focus of us and we've worked on other process improvements throughout.
And all of our systems to be able to do this.
And just one final one I think you mentioned in the press release, but you're really seeing a leveling off.
Of your input cost.
And.
And that would be.
What are you going down the road if it maintain Matt.
Yes, absolutely so again.
As I said, a couple of thoughts I have to be mindful of all the people on the phone on the call rights that we have I'm sure we have some suppliers some customers as.
As well as investors on the call, but I'll.
<unk> always speak the truth and as transparent as I can be so for the period of time going all the way back to.
2021 early okay, as we mentioned <unk>.
<unk> began to increase when you're in an inflationary environment and you are a supplier as we are especially in the transportation business, where it's challenging to get the cost recoveries from customers you are always behind the curve. Okay. That's just a fact, we're always running behind.
So what I'm trying to communicate in a conversation is just like a roller coaster. We believe we have crested the top of the hill.
Therefore, the input cost. We've also raised our labor rates, we've seen higher cost and packaging, we've seen higher cost and logistics diesel fuel and everything else as well as raw materials all of those have crested.
So they are at the top a few have had a slight amount of decrease that we've seen and we expect to see this accelerating somewhat and the way that that becomes a tailwind as the same stickiness that there was and tried to raise prices and being behind the curve when price cost go down input costs go down then you are very sticky.
<unk> customer relief. So therefore, the same thing you gave up over the last 18 months you end up picking up.
Over the next period of time as that happens.
I've got a lot of experience doing this and I've seen this.
Many many times.
Okay perfect.
Yes, it is a tailwind.
Keep up the good work and navigating these rough waters.
Thank you Sir tell us tell John we said Hello.
Hello.
Thank you.
There are no more questions in queue I'll hand, it back to Mr. Kane for any closing comments.
Thank you very much I appreciate everybody's continued interest very much appreciate the Investor group that we have supporting US the board of directors that we have supporting us the management team.
Remains committed to our vision the bank syndicate, who supported us in getting this very important amendment put forth the $4 million in financing that we did and we are aggressively and expeditiously moving forward with the refinancing the comprehensive refinancing process that we've got and we believe that this will be the last.
Step required for us to then be able to see the vision.
See the operational <unk>.
Margin operating margin improve as we expected.
Thank you for that thank you for your continued interest.
I appreciate everybody taking the time on election night have to recognize that so theres a lot going on today as always we're available for follow up questions as needed and again I'll look forward to talking with you all.
Couple of months and hopefully at that time, we will have the refinancing completed.
And we'll be able to talk about that and brighter times ahead. So thank you very much and we're excited about where we are.
Sure.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.
Thank you.
Okay.