Unique Fabricating [UFAB] Conference call transcript for 2022 q3
2022-11-13 15:15:29
Fiscal: 2022 q3
Operator: Good day, ladies and gentlemen, and welcome to the Unique Fabricating third quarter 2022 earnings call. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Rob Fink, of FNK, IR. Sir, the floor is yours.
Rob Fink: Thank you, operator. I'd like to welcome everyone to Unique Fabricating third quarter earnings conference call. Hosting the call today are Doug Cain, Unique Fabricating's President and Chief Executive Officer; and Brian Loftus, Unique Fabricating's Chief Financial Officer. Before I turn the call over to Doug, Iâd 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, the levels of activities, the performance or achievement, 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, and are subject to certain risk factors and uncertainties that may cause actual results, 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 report 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 and including those in this afternoon's press release are made as of today, and Unique Fabricating does not intend to update this information unless required by law. In addition, certain non-GAAP financial measures will be discussed during this call. These non-GAAP measures are used by management to make strategic decisions, forecast future results, and evaluate the company's current performance. Management believes the presentation of this 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 all that said, Iâd now like to turn the call over to Doug. Doug, the call is yours.
Doug Cain: Thank you, Rob, and good afternoon, everyone. Unique Fabricating, Brian, and I, appreciate your investment of time for today's update of 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 $4.0 million financing to provide additional liquidity as 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 evidences 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 non-cash 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 COI over the last months, impacted by the commercial headwinds, has had a negative cumulative effect on our net sales. Third, we booked $0.4 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 in our results going forward. Fourth, while fully effective as of the end of the third quarter, our cost recovery activities in Q3 were $0.3 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 costs to $4.4 million in the quarter. The complexities of effectively flexing costs to the short notice customer changes to release schedules, continued 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. 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 Valio, Bosch, and Maley, are an important precursor to new business awards. Year-to-date, we've secured approximately $79 million in COI, despite the previously noted commercial headwinds. We strongly believe that exiting the forbearance condition, and then completing the refinancing activities, will improve 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 this COI, Unique recently won a takeover project, representing a December 2022 launch, utilizing our TwinShape foam technology for an HVAC duct on the new Rivian truck. This is the second active program for our TwinShape ducts, which are a lighter weight, more thermally efficient alternative to traditional plastic air ducts. Our first program was for PACCAR trucks, for which we recently received a quality award from our customer, Inteva. Light duty new vehicle inventory increased to just over 1.0 million units at the end of October. While this is the first time to exceed 1.0 million since May of 2021, it is lower than the 3.0 million each month throughout 2019, and 3.4 million on March 1, 2020. Resulting primarily from the low inventories, US 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 SAR, of 13.0 million units in Q3 2022, was close to the 13.3 million in Q2 of 2022. The independent North American automotive production 2022 forecast as of October 14, is 14.5 million units or 11.2% above both 2021 and 2020 production, and is 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 9.0 million units from the average of the last four pre-pandemic years. North American production outlook for 2023 has been reduced by 1.0 million units from our previous earnings call, or 6%, to 15.4 million units, with an average of approximately 16.3 million units from 2024 through 2027. As we have seen continued demand weakness from our customers in Q4, we discounted the third party forecast for 3.7 million units to be produced in Q4. This lower Q4 forecast than what was shared in our last call, has 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 31.0 million and 32.0 million. The reduction also reflects the impact of the commercial challenges that have hindered our securing the planned COI 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 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 for 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 COI 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 million and 162 million. This does reflect the cumulative effect from lower COI over the last 18 months that was previously mentioned. Based upon this revenue level, we would expect an operating EBITDA of between $9.0 million and $11.0 million. 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.
Brian Loftus: 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, 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 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. Gross profit for the third quarter was $3 million or 8.8% 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, reflects the impact of higher manufacturing costs, most significantly, material costs compared to the same period last year. Selling, general and administrative expenses for the third quarter of 2022 were down $1.3 million to $4.4 million, compared to $5.7 million for the third quarter of 2021. The decrease in SG&A was primarily the result of lower salary and healthcare expenses because of our 2021 cost reduction activities and lower amortization expense, as certain intangible assets became fully amortized since the third quarter of 2021. Operating loss in the third quarter of 2022 was$ 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 onetime $6.1 million gain on debt extinguishment related to our PPP loan forgiveness recognized in the third quarter of 2021. Interest expense was relatively flat compared to the same period last year, at approximately $0.8 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 $0.5 million 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 was approximately $10.6 million or $0.90 per basic and diluted share compared to a net loss of $1.9 million or $0.19 per basic and diluted share in the third quarter of 2021. Total debt was $47.7 million as of September 30, 2022, compared to $48.4 million as of December 31, 2021. We ended the quarter with approximately $0.5 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 7th. Doug will now provide closing remarks. Doug, back to you.
Doug Cain: 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 our commercial activities, most notably an increase in our COI. We are positive about the midterm and longer-term outlook for both demand and the competitive position we maintain in each of our targeted markets. While volumes remain 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 our brand of providing innovative, optimized, and sustainable solutions for our customers. With that, we will open the call for questions. Operator?
Operator: We have a question from Michael Taglich with Taglich Brothers. Please go ahead.
Michael Taglich: Hello. Congratulations on the refinancing.
Doug Cain: Thank you. We're very excited.
Michael Taglich: I am too. A question for you. Looking at the competitive landscape, now that your forbearance agreement is behind us, I mean, you had some decent language in your written remarks, if you will, but how many other suppliers out there are in forbearance and then no more business? And now that you're free of that, what do you - how much market share can you grab in the meantime?
Doug Cain: Okay, that's a good question that implies some knowledge that I may not fully have, like who may or may not be in forbearance, since again, where we sit, we're the only real public company that's in our space, as you know, and that's part of what has caused us some challenges over the last 18 months that again, we have now put behind us with the new amendment to the credit agreement then and the exiting of the forbearance. 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 have many tier two and tier three suppliers. So, there is distress, and the fact that we've now put this behind us are well on our way in the refinancing, the 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, and I have many of those, we have been told absolutely that exiting the forbearance agreement will put us in 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 they say that in the south, it's going to be Katy, bar the barn door. It's going to be a wide-open situation, and that's the reason that I made sure that I noted in our comments that we are from an organization, a capability and a capacity standpoint, ready and able to take on those additional volumes.
Michael Taglich: With the capacity you have, the muscle and the bone you've kept, okay, what's the earnings power of this company when you're operating, say at 90% capacity level?
Doug Cain: 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 have been doing a lot of detailed forecasting between $9 and $11 million EBITDA on the - I'll say the split number of around $158 million of sales next year. What we do see based upon our fixed cost structure in the control that we've 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 bottom line.
Michael Taglich: So, you could - at $200 million in revenues, you could knock on $30 million in EBITDA?
Doug Cain: If we were saying $10 million on 158, let's call it for next year.
Michael Taglich: You have 40. Okay.
Doug Cain: Yes. Then you're 40 more. So, let's call it 10 to 12 more. So, you're talking about a million, Yes.
Michael Taglich: 20s, somewhere in the 20s. all right. Great. I'll let someone else slide into the next slide.
Doug Cain: No, thank you for that.
Michael Taglich: Hey, keep up the good work.
Doug Cain: Yep. Thank you.
Operator: Thank you. Our next question is coming from Howard Halpern with Taglich Brothers. Please go ahead.
Howard Halpern: Hi, guys. I'm pinch hitting today for John. One of the questions is really regard to, I guess more the gross margin and what you - do you see the third quarter gross margin as the low point, and you're going to be able to improve on that as we go and see in subsequent quarters?
Doug Cain: 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 said, we're expecting volume in Q4 to be $31 million 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 mentioned in 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 5% 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, and then this exiting forbearance and having the amendment in place, these are the reasons these are - theyâre the linchpins of what we expect to see in Q1 forward next year, plus the overall market increase that we expect to see.
Howard Halpern: Okay. And based on your forecast that you provided for 2023, does the SG&A, I mean, it might marginally increase quarter-by-quarter next year, but not significantly from that 4.4 that you experienced this quarter?
Brian Loftus: Yes, what we're looking, we do have some commission expenses, and then we would have -believe hopefully potentially some salary 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 on what amounts to $20 million more in sales. So, again, you can see that operating leverage that's there.
Howard Halpern: And just one last one that based on what you've been - you've discussed so far is that with your operations that you've structured in place, how quickly can you take on a new project and get it up and running maybe compared to three or four years ago?
Doug Cain: So, again, a very good question. What I would say, that differs depending upon what the process is. So, as I mentioned this business that we have for the new TwinShape ducts that we picked up from the EV maker Rivian, on top of what we're already doing with PACCAR, we were awarded that business and we'll be in production in that in less than 60 days. And if you take our basic die-cut business, if we are awarded something, and potentially there's 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 in less than 30 days. So, this is not the long lead time stuff. Now, if we were to take a major program that we won for our reaction injection molding and having to put tooling in, then maybe at the outside, it's a nine-month maybe situation by the time you get to all the PPAP and the tooling put in place. But this is a very 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 also - back to your organization question, sorry for interrupting, so I want to make sure that I address it. We have made a lot of changes in the organization, in engineering and operational excellence. We've got an entire team focused on launch management. The awards that we've been getting and the quality audits that we're talking about, as I mentioned, they're 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. You can always 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 back. So, that's been a key focus of us and we've worked on other process improvements throughout in all of our systems to be able to do this.
Howard Halpern: And just one final one. I think you mentioned it in the press release, but you're really seeing a leveling off of your input costs, and that would be a tailwind for you going down the road if it maintained that?
Doug Cain: Yep, absolutely. So, again, as I said a couple of times, I have to be mindful of all the people on the call, right? So, we have - I'm sure we have suppliers, some customers, as well as investors on the call, but I 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, prices began to increase. When you are 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 the conversation is just like a rollercoaster, we believe we have crested the top of the hill and therefore the input cost. We've also raised our labor rates. We've seen higher cost in packaging. We've seen higher cost in logistics, diesel fuel and everything else, as well as raw materials. All of those have crested, okay? So, they're 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 is the same stickiness that there was in trying to raise prices and being behind the curve. When price costs go down, input costs go down, then you are very sticky on providing 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 that happens. And I've got a lot of experience in doing this, and I've seen this many, many times.
Howard Halpern: Okay, well keep up the good â¦
Doug Cain: So, yes, it is a tailwind.
Howard Halpern: Okay. Keep up the good work in navigating these rough waters.
Doug Cain: Thank you, sir. Tell John we said hello.
Howard Halpern: I will.
Operator: Thank you. As there are no more questions in queue, I will hand it back to Mr. Cain for any closing comments.
Doug Cain: Thank you very much. I appreciate everybody's continued interest. I very much appreciate the investor group that we have supporting us, the board of directors that we have supporting us, the management team who 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 and see the operational margin, operating margin improve as we expected. So, thank you for that. Thank you for your continued interest. Also, appreciate everybody taking the time on election night. I have to recognize that. So, there's a lot going on today. As always, we're available for follow-up questions as needed. And again, I look forward to talking with you all in a couple of months, and hopefully at that time, we'll 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.
Operator: Thank you, ladies and gentlemen, and this does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day, and we thank you for your participation.
