Unique Fabricating, Inc.
Q1 2020 Earnings Call Transcript

Published: 25 Jun 2020

[Operator:]

Greetings, and welcome to the Unique Fabricating First Quarter 2020 Earnings Call. Currently, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rob Fink of FNK IR. Please go ahead, sir.

[Rob Fink:]

Thank you, operator. I'd like to welcome everyone to Unique Fabricating’s first quarter 2020 earnings conference call. Hosting the call today is Doug Cain, Unique Fabricating's President and Chief Executive Officer; and Brian Loftus, Unique’s CFO. 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 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 any future results, levels of activity, performance or achievement expressed or implied by statements on today's call. All such forward-looking statements are based on management's present expectations and are subject to certain risk factors, uncertainties that may cause actual results, 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 quarterly report on Form 10-K for the period ended March 31, 2020, which will be 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 morning'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 these non-GAAP financial measures are useful to investors in understanding and assessing the company's ongoing core operation and prospects for the future. Unless it is otherwise stated, it should be assumed that any financials discussed on 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 to Doug. Doug, the call is yours.

[Doug Cain:]

Thanks, Rob. Our first quarter results provide further evidence that we are 'Boldly Back on Track' as we improved our adjusted EBITDA or lower revenue due in large part to 1.4 million reduction in our SG&A costs. To be sure, this has been a difficult period of time as many of our customers shutdown due to the COVID-19 pandemic. Our progress in the first quarter preceded the full effect of the worst of the COVID-related challenges which will significantly impact our second quarter. The results reflect the positive changes we made to the business which have positioned us to better weather the short-term disruption we are facing and should benefit us significantly when this pandemic is behind us. I am optimistic as we move forward. In fact, now almost nine months in my 10-year at Unique Fabricating and despite the unprecedented challenges of the last 100 days, I am more convinced of and passionate about the bright outlook for Unique Fabricating over the next years as we continue to fulfill our 'Boldly Back on Track' vision. As a result of the foundation laid and due to our creative and passionate organizational response to the recent challenges, we continue our forward momentum with a focused sense of urgency to execute the cultural, organizational and operational changes necessary to achieve sustainably the ambitious targets for EBITDA improvement, debt reduction and sales growth that we collaboratively set. We continue to have strong support from the Board, the bank syndicate, the leadership team and other stakeholders from the actions undertaken and the direction set forth. Let me speak more about the specific COVID-19 effects on the company and our corresponding actions. Due to the ongoing COVID-19 outbreak with its uncertain near, mid and longer-term impacts on the company, our customers, our suppliers, and the industries we serve, we executed a comprehensive set of actions to prudently manage our resources while keeping our customers supplied with the products they continue to require. We are following the guidelines concerning creating a safe work environment provided by the various governmental entities in the jurisdictions where we operate and are taking additional measures to protect our employees. Local government or union representatives had visited several of our facilities to see our protocols. We have passed all such reviews to date. In line with the increasing demand we are now seeing from our customers, we are adding back resources prudently with the target to wrap up production more efficiently and productively than we operated before COVID-19. We have continued our discretionary spending rationalization, reduction or elimination. Based on our analysis and our experience to date, we anticipate no supply chain issues impacting our ability to meet the increasing customer releases and have executed plans to ensure minimum extra costs are incurred during this period of demand volatility. As a result of our prior efforts to grow our truck and SUV, CUV share, we expect to see positive impacts from the OEMs focus on producing these vehicles. We also expect to see benefits from the increasing activity in the housing, construction and home improvement markets. Due to the inherent uncertainty and the unprecedented and evolving situation, including the production plans from our various customers, we are unable to determine the full impact of the COVID-19 situation on our future operations. However, we have developed our current plans in line with the latest third-party provided North America automotive production outlook for approximately 12.4 million units versus the 16.5 million forecast to start the year. This indicates North America second half light vehicle volume production to be approximately 7.2 million units or 90% of the original 2020 forecast. Regarding the first and second quarter of COVID-19 impact on the business, the dramatic reduction of automotive shipments in the second half of March reduced net sales by approximately 3.2 million. For April and May, respectively, we estimate net sales of 2 million and 2.8 million reflecting very little automotive revenue from any of our customers regardless of location. We did continue to shift to our regular appliance, consumer and medical customers during this time, albeit at a lower than planned rate. The result was an approximate 20 million or 80% shortfall of net sales in those two months despite more than 1 million of new PPE product sales for the healthcare and manufacturing sectors. We completely shut down our Mexico operations in April and May in accordance with government mandates and dramatically reduced our operations in all other locations in line with the demand drop. Our Mexican operations reopened on a reduced basis in June 2020. For June, we estimate net sales to be substantially higher than April and May, although much lower than net sales for June 2019 with forecast slightly above 9 million. This is driven by substantial increases in our net sales to transportation customers and to a lesser degree on our appliance business. For the second quarter, we currently expect net sales of approximately 14 million or 36% of net sales for the second quarter of 2019. With the latest North American third party service automotive production forecast for the second half of the year of approximately 90% of initial 2020 volumes hold, we will generate improved operating cash flow as a result of the actions taken to date. In summary, the COVID-19 impact on our second quarter will be significant but our cost reduction efforts, our quick pivot to new manufacturing of PPE and our ability to react quickly helped us navigate this challenging time. We’ve seen significant improvement already in June and we are confident that the second half will be better. We believe that the worst is behind us and that we are well positioned for success. Next, I will discuss our current and future key business activities and highlights. As of the end of March, we completed our Bryan, Ohio location closure with the final moves of production to our Lafayette, Georgia and Queretaro, Mexico facilities. As a result of these activities and some remaining costs of the Evansville, Indiana site closure, we recognized restructuring charges of 0.9 million during the first quarter of 2020 compared to 0.1 million in the corresponding period last year. In June, we completed the sale of our owned Evansville facility for a net 0.85 million and executed a sublease agreement for a portion of the Evansville facility leased through 2022. We have now completed all of our location restructuring activities with no expectation of further cash restructuring costs. We did identify an additional 0.9 million annual cost savings opportunity related to consolidating an external warehouse in Lafayette into our own facilities. This will have a 0.2 million positive impact in the second half of 2020. We retained significant overall additional capacity in our remaining 11 facilities to grow the business over the next five years. As our organizational simplification and realignment nears completion, we have already begun to see the benefits in enhanced collaboration and problem solving with a clear and common understanding of the need for urgency, accountability, responsiveness, creativity, clarity and best practice sharing in all that we do. This is perpetuating the renewed pride in our activities as part of the 'Boldly Back on Track' initiative. During the first half of 2020, we eliminated an additional 13 salaried positions and executed a reorganization and upgrade of our Mexico leadership team. From these activities we expect to incur 0.4 million in severance costs in the second quarter with the resulting 0.6 million annual cost savings. We continue our initiatives to bring on targeted key support in technical areas to enhance our capabilities to meet customer expectations and to provide the necessary foundation for our growth plans. With the continued development of our leadership team critical to our success, we are restarting our comprehensive development program in the third quarter. This program incorporates approximately 70 associates across our U.S. and Canada locations. In April, we were pleased to have Brian Loftus join Unique Fabricating as our new CFO. Brian has extensive experience in manufacturing operations as well as SEC reporting and businesses of various sizes. His addition not only strengthens greatly the financial organization and leadership team but also allows me to focus more fully on the commercial, strategic and operational aspects of the company. At the end of June, we will be bringing on board Dave Zaidan [ph] in a new position, Director of Materials Engineering. In the first week of August, Adam Treloar [ph] will join the team as Director of Transportation Sales. Both positions will contribute greatly in leading our commercial activities in these very critical areas. With the return to revenue growth, a vital aspect of meeting our ambitious targets, we have refined the approach outlined previously focusing on market share gains in existing markets, new product and materials development and further expansions into the heavy truck, medical, all highway and consumer markets. We have a lot in the commercial organization with designated market leaders to spearhead these efforts in four targeted areas; transportation, appliance, medical and consumer/off-road. Our recently added senior sales manager in Mexico is proving beneficial to date, supporting our renewed focus on sales growth in Mexico. Despite the COVID-19 impacts over the last 14 weeks, we have actively supported our customers who have continued their product development, sourcing and supply chain optimization activities. This includes an increasing interest in sourcing more products in North America as a result of the new U.S. MCA and other trade concerns. Recently, we have been working with foreign customers looking to source business represented more than 2 million annually to Unique Fabricating based upon these evolving changes in the supply chain landscape. Our competitive advantages resulting from our geographical footprint, diverse manufacturing processes, materials flexibility and available capacity allows to effectively respond to these opportunities. We reconfirm that sufficient capacity exists in our manufacturing locations. For us to grow our revenue over the next year has been limited, targeted capital expenditures focused on increasing automation, improving material utilization, reducing scrap and enhancing technology for our increased value-added processes. With our ongoing commercial and operational improvement activities, we are certain that we have opportunities to grow our share organically in each of the markets we have chosen to serve. Our new hires will enable us to further enhance our product offerings as well as to develop longer-term strategic supplier relationships. We are confident that these additions and the further organizational refinement enable us to create and communicate our unique selling points in our existing as well as our new targeted markets. By the end of June, we will have implemented our new CRM or customer relationship management tool to facilitate all aspects of our commercial activities. This will improve our ability to manage the many opportunities we see and to improve further our customer relationships. In June, we re-launched our Web site which had been in much need of a refresh. Over time but with urgency, we will continue to update and augment those capabilities in user effectiveness as another step in improving our commercial presence as well as providing greater value to all of our stakeholders. In addition, we continue to pursue targeted technical collaborations with leading raw material suppliers to enhance our competitive position and to develop new product applications. Since the end of March and through comprehensive team efforts, we have been able to support the healthcare and manufacturing industries by supplying PPE to a range of customers. Combined with our existing medical business, these sales will total more than 1.5 million in the second quarter. We are still evaluating the longer-term potential for these new products as part of our overall growth target for the medical market to be more than 10% of our total sales in the midterm. We have been successful in winning new business in our targeted markets as evidenced by approximately 70 million in new customer order intake or COI in the first half of 2020 despite the overall market and customer challenges. With our strength in engineering, commercial, purchasing, human resources, manufacturing and program management capabilities combined with our new CRM tool and Web site, I am confident that we will achieve share growth in each of our chosen markets. We continue to develop and execute our detailed comprehensive performance improvement plans for each of our locations and functional areas that will generate positive margin impact over the next quarters as we increase production volumes while improving our balance sheet management and generating new business opportunities. To date, Unique Fabricating is 'Boldly Back on Track' and in a strong position to take advantage of a wide range of commercial and operational improvement opportunities that will present themselves over the next months. I will now provide an overview of our first quarter financial results. As you see from our performance, the cost reduction, organizational efficiency and productivity improvement activities are having a meaningful impact on our business. Net loss for the first quarter of 2020 was 1.1 million, including 0.9 million in restructuring expenses or 0.12 per basic and diluted share compared to a net loss of 0.2 million including 0.1 million in restructuring expenses or 0.2 per basic and diluted share in the first quarter of 2019. The increase in net loss was primarily due to the impact of lost contribution margin on the 4.5 million lower sales, the 0.8 million higher restructuring charges and the 0.6 million higher interest expense from the interest rate swap offsetting the impacts and the performance improvement, cost reduction and organizational alignment activities. Total debt reduced by 7.9 million to 46.4 million as of March 30, 2020 compared to 54.3 million as of March 31, 2019 as the company utilized an increase in operating cash generated from earnings and decreased use of working capital. Net sales for the quarter ended March 31, 2020 decreased to 35 million, down 11.4% or 4.5 million from 39.5 million during the first quarter of last year. The 4.5 million net sales decrease included the 3.2 million net sales loss resulting from COVID-19 impact on the automotive business in the second half of March. The remaining 1.3 million lower sales was the result of a combination of factors, including the appliance business lost from our Evansville, Indiana plant closure. Of the 35 million net sales for the first quarter, transportation represented approximately 92% of the total with appliance at approximately 8%. Gross profit for the first quarter of 2020 was 7.1 million or 20.3% of net sales compared to 8.3 million or 21% of net sales for the corresponding period last year. The decrease in gross profit was due to lost contribution margin on the 4.5 million lower sales, partially offset by reduced structural and other overhead costs. Selling, general and administrative expenses were 5.9 million or 16.8% of net sales for the first quarter of 2020 compared to 7.3 million or 18.4% of net sales for the first quarter of 2019. The decreased SG&A results from several cost reductions, including management headcount, commissions and professional services in addition to the savings from plant closures. Operating income, inclusive of 0.9 million restructuring expenses and with the impact of the 4.5 million decline in sales, was 0.3 million for the first quarter of 2020 compared to 0.9 million for the corresponding period last year which included 0.1 million restructuring expenses. The various performance improvement activities outlined previously offset the lost contribution margin from the lower sales. Interest expense was 1.7 million for the first quarter of 2020 compared to 1.1 million for the first quarter last year. The year-over-year increase was primarily due to the impact of the interest rate swap which offsets the positive from the reduced total debt levels. Despite the 4.5 million lower sales, adjusted EBITDA for the first quarter of 2020 was 3.2 million compared to 3 million in the first quarter of 2019. This increase is the result of the ongoing realization of the performance improvement activities underway for the last several months. As one consequence on the unprecedented impact of the COVID-19 pandemic, we have been unable to meet several of you as originally planned in various since canceled investor conferences. It is our intent to meet with many of you virtually or if possible face-to-face over the next six months as circumstances allow. In the face of the significant challenges over the last three months, the Unique team has creatively and passionately engaged in moving our business forward. We come out of this crisis as an organization even better positioned and more capable to maximize profitable growth and create significant shareholder value. Our team recognizes that we continue to have a unique opportunity to create something of which we can be proud. We all can state that Unique Fabricating remains 'Boldly Back on Track'. With that, we will open the call for questions. Operator?

[Operator:]

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions]. Our first question comes from John Nobile with Taglich Brothers. Please proceed with your questions.

[John Nobile:]

Hi. Good morning, Doug and Brian. Thanks for taking my questions this morning. I first wanted to get into the significant cut in SG&A expenses. It was brought down to 5.9 million in that first quarter. Just curious if this is a level that we should expect going forward or obviously with the second quarter I think you said that there were even some further cuts. So I’m trying to get a handle on what to expect for SG&A going forward.

[Doug Cain:]

As usual, you always ask good questions. What I would say is that the total decrease will not be quite as much going forward. Partially year-over-year you’re going to have some of the cost reduction activities that were already begun last year from a comparative basis. The second thing is as you noted and one of the key focuses that I’ve had since I got here and as we’ve discussed in these calls is that the organization needed to have upgrades in certain positions. And so with that being said, a couple of the ones that we’ve announced this time and the new Director of HR and the new Director of Purchasing that we didn’t have, you would not expect to see that level of cost savings going forward. It will still be substantial. It just won’t be that level.

[John Nobile:]

Okay. And you mentioned the interest rate swap. It had an adverse impact on the first quarter interest expense. I was wondering if you can actually quantify what that impact was and do you believe that it’s going to impact the coming quarters?

[Doug Cain:]

So this is one of those things that as I joined and as you all know I happen to be a CPA myself and looked into this that the decision was made by the company to not utilize hedge accounting a couple of years ago when this was put into place. Normally the company would use hedge accounting and these will be seen as adjustments to retain earnings and will not be flowing through the operating costs. Unfortunately, that decision was made to not do it that way. And what this represents is the future view to what the lower interest rates now versus the fixed interest rate that we had built in to the loan agreements has an impact. So it’s got an outsized view now because it’s really looking for a future period. No one knows what interest rates are going to do. If interest rates fall further, which I guess could mean going negative, you would end up having a potential further impact from this. That’s about what I can tell you. It is non-cash at this point in time keeping that in mind, there would eventually be a settlement period. But it’s a non-cash item that hopefully won’t continue to be impacting us. But I can’t have assurance to that with --

[John Nobile:]

Obviously. I’m assuming like if interest rates stay where they are obviously. I’m trying to get through the actual impact that – having the net effects of the rate swap back last year. What did that impact in the second – excuse me, the first quarter if you can actually quantify that number?

[Doug Cain:]

I’m sorry, 0.6 million in the first quarter.

[John Nobile:]

Okay, 0.6 million.

[Doug Cain:]

That really was the entire representation of the higher interest expense because as we indicated we reduced. As you all know that was also part of the things that was a key focus. When I got here, it was reducing debt levels. And it is [indiscernible] I have to admit that you reduced debt levels, but have your interest expense end up being higher. So I guess same would be if interest rates don’t change, then you would not have this adjustment in the next quarter.

[John Nobile:]

Right, okay. Just wanted to make sure. By the way, thank you for the guidance to put out there what you expect for the second quarter, because I don’t think anybody was expecting any great number of sales obviously in the second quarter. So thank you for putting that out there. It’s obvious that this quarter is not going to look that great. But going forward is what I really wanted to get a handle on. And actually speaking of that, I was hoping that you’d be able to provide a status on automotive programs that were launched last June. I think it was about $10 million on an annual basis. So a year ago you had those programs launched and I will assume that for a good portion of Q1, definitely Q2 they were on hold. But I was curious if there might be actual some pent-up demand in regard to that program once the auto production level start to get back to normal rates?

[Doug Cain:]

Yes, so I appreciate that question. And as I have tried to share in the best way that I can recognizing the restrictions that I have in certain of our communications regarding those aspects, I will say that all the program launches have worked out okay at this point in time. There are no delays. There were no delays in the first quarter and no program launch activity either delay or pull ahead had any impact on our first quarter or the second quarter numbers that I have provided you. What I can tell you is that looking at what 2020 was going to be, we certainly had built in rolling off certain programs that naturally occur and then bringing on launch programs that were there. But what is factually true from the OEM perspective which then obviously flows through to the tiers is that they have delayed some launches. So that would have some negative impact on what we were looking at for the programs that we rolled. However, correspondingly they have extended certain programs because they were not killing them because they’re not have the substitute program coming on play. And there are some programs where we had planned that we would be taking off as the program ended. So for me, I don’t look at either one of those as having a meaningful impact to us as we go forward. What I would tell us is that the OEMs are continuing and they did during this I’ll call it quiet period for production. They did not reduce the activity that they had on engineering and then the demands and requests on this company and others to continue the product development activities, the launch activities, the quality activities, the quoting activities. And as you heard and I really wanted to emphasize this in the prepared remarks and even now, my complete intent was we needed to survive which was essential but we needed to make sure that we were positioned to be able to take advantage of what was going to be happening going forward. And I would just say that we’re in a very good position to be able to take advantage of any opportunities that present themselves either due to other external factors to us or now continuing to develop product and new applications for materials, and even as I mentioned the medical activities that we’ve been underway.

[John Nobile:]

Okay. And actually in regard to what you label as medical activities, the personal protective equipment which basically was launched for COVID-19, you put out a number of $1.5 million for the second quarter and obviously it just started in this quarter. So I’m just curious if there’s any other opportunities that you are currently looking at in support of the pandemic? In your prepared remarks, did you say you were looking to have this portion of business to be about 10% of total sales? Is that correct?

[Doug Cain:]

That is our midterm target. And don’t hold me to what midterm is, whether that’s 18 months or 24 months, whatever it may be, but that’s definitely our target not the long-term target but the midterm target. So that will be 10% of our total sales. So medical really in the second quarter had two components to it. One, we had been focused on this over the last month prior to COVID and we had increased our sales, call it our basic medical group but this is very small an amount. What did transpire and back to the creativity and the passion and really the organizational capability that we represented, we were presented with multiple opportunities to make face shields. We had made a public announcement about this and supplied face shields into manufacturing locations and also into healthcare situations in this quarter and that represents the predominant part of that number. It remains to be seen what that is going to be going forward. Why do I say that? Because, a, no one really knows what’s going to be happening and what the provisions are going to be going forward relative to a face shield and how that’s going to be used. This is different than a face mask. However, I can say without providing any numbers or anything else to it that we are very likely to begin manufacturing face masks in a rather large quantity beginning in July, the second half in ramping that up. It remains to be seen how large that opportunity is going to be, so I’m not going to indicate anything further. However, I will say that when we get a better feel and a better sense of what that is going to be and its longer term continuity, we would be making a more formal communication about what that opportunity is.

[John Nobile:]

All right. So bottom line is this isn’t just something to fill in the gap until automotive production levels go up, this is something you’re going to continue going forward. Obviously to put out a target of 10%, you see that this is going to be meaningful business say in another year and a half to two years.

[Doug Cain:]

Absolutely. And again, as you all are learning about how we run the business, it’s wonderful to put a target out on the whiteboard and say there’s the target, but you really have to have the structure and the clarity into the organization and then actually set the organization in this way. That’s the reason I mentioned this comment in the script that we have decided we’ve broken the business up into four categories and we’ll have a market leader or have a market leader in each one of these heads of markets rather than having a more diffused way that we were doing it before when this was not defined. And having done this before, this is why I am extremely confident in our ability to be able to execute this. The opportunity is huge. The medical market is enormous and we consider our diverse manufacturing capabilities and our multi-materials and our locations. We have every right to have 10% or more of our sales being inside of the medical business.

[John Nobile:]

All right, great. Thanks for taking my questions. I’ll get back in the queue. I’ll open it up for others. Thank you.

[Doug Cain:]

Thank you, John.

[Operator:]

Our next question comes from George Melas with MKH Management. Please proceed with your questions.

[George Melas:]

Yes. Good morning, guys. Just first – just a clarification on one of John’s question and your answer. On the SG&A, you’re down a lot year-over-year, you’re up $250,000 sequentially and I understand that number fluctuates a lot as you are sort of hiring first management roles. Can you try to give us just a number of what you expect SG&A to be in coming quarters?

[Doug Cain:]

I picked up almost all of that except for the very first part when you said something about sequentially. What was that so that I can make sure --?

[George Melas:]

What I meant is that SG&A was up sequentially – SG&A was down a lot year-over-year but it was up sequentially and I’m just trying to get more of a number of where you expect SG&A to be in the next coming quarters?

[Doug Cain:]

George, I would love to answer it and you know that I like to be extremely binary in my communication. I don’t know that I could give you that number today because there’s still several things that are in flux relative to the COVID situation, the impact in the second quarter, some additional costs that we’re incurring from that for a variety of different reasons. I would prefer to defer to that question, but what I will say is again kind of what I said to John is the fundamental structural cost reductions are real and they are continuing. We are adding and have added a few extra costs, some of which were in the first quarter for at least two-thirds the first quarter some of which will be being added in the second quarter. We’re looking at further performance improvement activities to reduce SG&A costs additionally and I would just prefer not to give you --

[George Melas:]

Okay. Let me just ask you a very simple question --

[Doug Cain:]

It’s a good question.

[George Melas:]

5.9 in the quarter, do you expect it to go up in coming quarters?

[Doug Cain:]

Yes, I would expect the SG&A number to go up somewhat, not significantly but somewhat over the next quarters. Yes, that was what I was trying to indicate.

[George Melas:]

Okay, great. Let me ask you a question on interest expense. If we take out the 0.6 million for the swap impact, the interest expense is 1.1 million which annualizes to roughly 4.4 million or 4.5 million on $47 million in debt. I’m just trying to understand that number and why is it so high given that your interest expense seems to be – your interest rates I think is in the 6.75 if I remember right?

[Doug Cain:]

Yes, so I will say a couple of things. One, the 47 million is obviously at a point in time. If I were to give you the average between 12/31 and now and then try to factor in what that would be, that may end up floating the interest expense in your calculation to a number that’s closer to you. There are other fees that are associated with that. That’s what I can tell you at this point in time, but I can’t answer that further.

[George Melas:]

Okay.

[Doug Cain:]

But what I’d say is that’s something that we will look into also.

[George Melas:]

Okay. Can you talk about your relationship with your banks and any change you have in your covenants because let me just look at my numbers here, I think your leverage covenants are expected to go down to 3.25 in the June quarter and clearly of course that’s not a feasible number. So what have you renegotiated with the banks or are in the process of doing?

[Doug Cain:]

I appreciate the question. As you can imagine since all of this became evident, it’s going to be a problem really in the first part of March. End of February, this has been a critical part of our activities. What I can say as I did state in the earnings script itself, I view – I believe that we have an excellent relationship not only with our lead bank but also with the entire bank syndicate and it’s build upon a foundation of very open and transparent communication. Very early on I went to the bank syndicate and discussed with them the issues that I saw that were going to be occurring and per a previous public 8-K that was provided, we were able to come to an accommodation with the bank. Maybe that’s not the right legal term to use, but to an agreement, an amendment with the bank that was previously provided that gave us a, the ability to get the SBA PPP loan and they were extremely supportive in those activities and very much appreciate that. It also allowed us to take the sale of the Evansville facility that we have where we netted $850,000 and use that against our borrowing loan for liquidity improvement as opposed to going against our fixed asset loan which would have reduced debt but certainly would not have improved liquidity, and that was just tacked on at the end of that which is I think the end of 2022 and the end of 2023. They also allowed us to defer the principle payment that we will have due next week as of the end of the second quarter. That is approximately 0.7 million relative to all of the debt that we have. And then they also did waive a review, in essence, or waived the covenants for the second quarter of 2020. This was done in a very collaborative way. Again, for full transparency and relative to your question, there’s no question that with the second quarter sitting in the way that the covenants are set, one quarter doesn’t accomplish what needs to be accomplished. So we had these ongoing discussions with the bank and the syndicate. I don’t want to speak on their behalf. I cannot absolutely provide any guarantee, but myself and management are confident that we will not have an issue with this going forward because of the relationship that we’ve developed.

[George Melas:]

Okay. At this point, the covenants or the leverage ratios are still in place but you’re saying they’re not in place for June that you were working to modify them for the second half and beyond?

[Doug Cain:]

Yes. And despite going back in for June, it means that this gets you really all the way into the third quarter and I can assure you in the interim period now that there’s more – somewhat more, I shouldn’t say more clarity, somewhat more clarity, there’s now an understanding about what the business requirements are and what the entire landscape is and what the SBA PPP loan did and all the other activities that are out there and we will be working the syndicate on a cooperative basis over the next couple of months so that we have this put in place early. We did this and like I said we’re ahead of this from many other companies. Again, as witnessed by the 8-K that we put in place and it’s our intention that we will deal with this early so there’s not an overhang issue late into that third quarter.

[George Melas:]

Okay, great. I have a very simple question on the balance sheet. The CapEx line is folded into the long-term debt. Is that correct or --?

[Doug Cain:]

I’m not sure that I fully understand what you mean. The CapEx is folded into the --

[George Melas:]

You previously showed – in the negotiation with the bank, they allowed you to have sort of a CapEx line or line that’s related to certain capital expenditures. It doesn’t show up on this balance sheet. I’m just trying to --

[Doug Cain:]

I’m sorry, George, for interrupting. Yes, it is in the long-term debt number absolutely.

[George Melas:]

Long-term debt, okay, great. Then on your prepared remarks you talked about $70 million of new customer intake in the first half of the year. So help us understand what does that mean, how does that compare with a year ago, how does that compare with your expectations and when you expect to start to realize these revenues?

[Doug Cain:]

Okay. Did you say 7 or 70?

[George Melas:]

I think I said 70.

[Doug Cain:]

Okay. Yes, 70 is the right number.

[George Melas:]

Okay, good.

[Doug Cain:]

So this is a measure that I’ve used in the last company that I was in for many, many years. It provides a very simple and clear measurement of a way to look at forward revenues. What it essentially amounts to is taking the average annual sales of a program award and multiplying it generally by 5 which is kind of the average length of a program time and that gives you a number. Then over five years if you look at your average of what those COI numbers each year, that then tells you what your sales are going to be at into the future. So it really provides a forward look. I can tell you that I am very happy and pleased with the $70 million number in the first half recognizing all of the challenges and issues and the delays in the awards that were not provided that are still in flux at this point in time. To give you another way of looking at it, if I were to be targeting $200 million in sales five years from now, we would need to have this number average on an annual basis 200 million per year and then this would fall out and have you with 200 million in sales with a slight amount for drop in business that occurs. The company never used this measure before so I have no way to compare, but I wanted to put this out there for our investors and for our shareholders so that they can understand this is going to be a clear metric that we’re going to present going forward that will be comparable and will be in my opinion one of the best measurements possible to have a future trajectory of how the business looks. So it’s a first-time shot for us. Also to be able to provide better information with the full implementation of our CRM tool that goes live at the end of this week and will be able to provide a little bit more transparency of that. But we were able to win business in each one of the markets that I indicated in the first half of the year and we were able to win the programs that we were really targeting. So I would tell you that I’m pleased with that activity and just know that we can do even more over the next 18 months.

[George Melas:]

Great. Let me ask you – I appreciate very much this new measure and I think it’s going to help us understand the levels of sales activity now. And as you said, it’s a great indication and hopefully starting to be an indication of what sales could be in the future. How much did you bid? So what is your – what are the metrics that – what are the KPIs that you look at to evaluate that $70 million in orders in terms of how much you bid, in terms of the win rate, in terms of the margins that you’re trying to achieve? So maybe you can help us understand a little bit more because that seems to be an important discussion to have with investors?

[Doug Cain:]

George, I’m going to have to have my office check for bugs I think because the questions you’re asking are – as you can imagine were all the same questions that I asked when I got here. So sometimes when you’re talking, I feel like I’m hearing myself ask myself the question. So the answer to that is that the systems that we currently have – previously had were fully incapable of providing that information that you’re looking for which is why we made the decision to go full bore into installing a fully capable – I’m not going to give them an advertising. It’s the first time I’m mentioning the name of the company, but a fully capable, sustainable, scalable CRM tool. We’ve been working on this for the last four months, okay, and so we’re able to take some of the, I’ll call it downtime that we had during COVID to make sure that we really go this thing installed and ready to go. So you’re questions are the right ones, I fully can’t answer those questions. What I can tell you over the last six months that with maybe one, an exception, maybe we won each one of the pieces of business that we were targeting and that we felt like we had the right to win. Sometimes their quotations go out, George, when somebody is just price shopping. People are just doing market test and things and sometimes this is difficult to call that chaff away from the wheat to understand what the real opportunities are, but our CRM tool will allow us to be able to do that better. So stay tuned.

[George Melas:]

Okay.

[Doug Cain:]

But it is absolutely the way we’re going to manage the business, 100%.

[George Melas:]

I think what you just said if I understood it correctly is that with one exception you won basically what you wanted to win?

[Doug Cain:]

Yes.

[George Melas:]

Okay.

[Doug Cain:]

The best reason I can say I’m pleased with that effort. The opportunities were limited for the reasons I’ve mentioned, but we went out and won that business. I can also tell you without getting into something I’m not going to say publicly for any number of reasons, but we have very specific criteria set relative to profit margin relative to acquired CapEx and different things associated with that opportunity calls for selling that production. But we are in a position that pre-COVID, okay, and then it certainly continues today in which not only do we have the geographic advantage of having three plants in Mexico, two plants or three plants in the relative South and having three plants in the relative North that we have from the logistics and from an on time delivery into OEM plants, but also the fact that we have I can call it excess capacity, we have sufficient capacity in each one of our locations that we can take business without having to add brick and mortar and that’s one of the things I clearly wanted to indicate despite the plant closures that have negatively impacted the net income of the business over the last years and the profitability of the business. We have reviewed this multiple times. We have sufficient brick and mortar space and primarily sufficient manufacturing capability and capacity to be able to grow the business without having to add that specific tooling for a program, yes, potentially as specific add-on piece of equipment for technology that we’re trying to promote, yes, but not significant capital improvements to be able to grow the business. This puts us in a better cost competitive position to be able to win business. That combined with now having a fully functioning and capable purchasing department and with the add of Dave Zaidan, and I mentioned his name as well as Adam Treloar’s name on purpose for anyone who’s interested to look him up, but they are both extremely capable people that I know their backgrounds well. I worked with Adam previously and these people fully understand what we’re trying to do and will be able to enable us to work better with our suppliers and continue taking cost out of our raw material, again making us even more competitive as we go forward from winning new business.

[George Melas:]

Okay, great. And let me just ask you a final question, I’m sorry I have so many questions, but just about customer relations. Just give us a quick sense of where you think customer relations are now compared to a year ago?

[Doug Cain:]

Okay. I’m going to give you a direct answer. I don’t know a year ago because a year ago I’m not sure I even heard of Unique yet at that point. It was maybe about that time. What I can say nine months ago, the relationships are better, okay. We have made a real focus on being easy to do business with. That’s one of our mantras and it’s part of the 'Boldly Back on Track'. I have met with several of the executives that are customers providing them the vision and what we are trying to do. We have realigned people and refocused people in what they need to do as far as customer relationships. Our quality situation with our customers is good. Our delivery performance with our customers is good. And there are always challenges because customers don’t always love their suppliers. But overall I would say that our relationships are very good and are not a hindrance to what the plans are at this point.

[George Melas:]

Okay. Thank you so much for taking all my questions and good luck.

[Doug Cain:]

Thank you. Good to talk to you again.

[Operator:]

Thank you. At this time, I would like to turn the call back over to Mr. Doug Cain for closing comments.

[Doug Cain:]

So I really do appreciate the questions. They were comprehensive. Again, the team is energized. I know that sounds a little bit maybe difficult to understand out of the challenges and chaos and anxiety that everything has done over the last months. I really appreciate the Board’s support, the lead bank, the syndicate bank, our suppliers and all other stakeholders in supporting us going through this time and what I really intended to do and we were able to accomplish it is to maintain a forward look improving ourselves each and every day and I hate to use the term take advantage of, but let’s say use the opportunity to move very rapidly and aggressively into the medical which was just an idea literally [indiscernible]. Now it’s actually something that’s come into fruition and we’re going to build upon that as we go forward. So again, I appreciate everybody’s attention in the meeting and thanks for the questions. And we will be talking to you in the near future. Thank you.

[Operator:]

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a great day.