Unique Fabricating, Inc.
Q2 2020 Earnings Call Transcript

Published: 13 Aug 2020

[Operator:]

Greetings and welcome to the Unique Fabricating Second 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, Jeff [Indiscernible] of FNK IR. Please go ahead.

[Unidentified Company Representative:]

Thank you, Devin. I'd like to welcome everyone to Unique Fabricating’s second quarter 2020 earnings conference call. Hosting the call today is 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, 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. As 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 quarterly report on Form 10-Q for the period ended June 30, 2020, which will be filed with the Securities and Exchange Commission, pursuant to Rule 424(b) and in particular, the section titled Risk Factors. All statements made on this call and 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:]

Thank you, Jeff and good morning everyone. Despite the significant challenges presented by the COVID-19 situation, our second quarter results with much stronger June net sales in April and May provide continued evidence that we remain boldly back on track. In June, we generated $10 million of our $14.8 million quarterly sales. With July's net sales exceeding June, we see a continued strengthening in our customer demand. While we ramped up production from the very low April and May levels, we're effectively able to maintain overall operational and SG&A cost discipline. In the second quarter, our SG&A costs, including an $0.3 million severance charge, were $6.3 million compared to $5.9 million in the first quarter, and $7.4 million in the second quarter of 2019. Despite the significant challenges over the last month, our operational and commercial improvements will continue to move the business positively forward. We have rebuilt the earnings power of the Unique Fabricating, and as the automotive industry rebounds, we are well-positioned for continued success. Based upon the foundational work laid over the last 10 months, the leadership team and entire organization are ready to deliver EBITDA improvement, debt reduction, and sales growth. With the strong relationship we have with our bank syndicate, we achieved successful agreements regarding our new loan amendment, providing sufficient liquidity in revised covenants. Combined with their operational improvements, the new amendment provides a firm basis for the company to focus its efforts fully on profitable growth going forward. Regarding the COVID-19 impact on our business and our corresponding actions, we continue to follow the guidelines regarding a safe work environment provided by the various governmental entities in the jurisdictions where we operate and have taken additional measures to protect our employees. Due inherent uncertainty of the unprecedented and evolving situation, including the production plants of our various customers, we are unable to determine the full impact of the COVID-19 situation on our future operations. We've maintained our current plans based upon the latest third-party provided North America automotive production outlook for approximately 12.4 million units versus the 16.5 million forecast at the start of 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. The July and August releases we have seen from our automotive customers do support this production outlook. In line with this increasing demand, we added back resources prudently. As a result, we ramped up our plant production to operate more cost effectively than we did before COVID-19. We continue our discretionary spending rationalization -- reduction or elimination. Regarding the COVID-19 impact on our second quarter business, the dramatic curtailment of automotive shipments in Q2, reduced net sales by approximately 24.1 million, or 62% from Q2 2019 despite more than 1.4 million new PPE product sales for the healthcare and manufacturing sectors, April and May respectively saw net sales of 2 million and 2.8 million while June did see a higher than expected increase to 10 million, resulting in second quarter net sales of 14.8 million, which are above the previously communicated 14 million. Our Mexico operations we started in June that are now near full production, as are all of our other facilities. In summary, the COVID-19 impact on our second quarter was significant. However, our cost reduction efforts, our pivot to new manufacturing of PPE, and our ability to react quickly helped us navigate this challenging time. We saw significant June volume improvement, which continued into July with 10.8 million net sales. The June and July increased volumes and our ability to deliver positive operating income on those improved, but still modest volumes, reinforce our confidence that the worst is behind us and that our actions taken over the last 10 months have positioned us very well for success going forward. Next, I will discuss our current and future key business activities and highlights. We completed the sale of our previously 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 took a non-cash restructuring charge of $0.1 million for the building site. Combined with the disposal of certain equipment as part of our continuing operational review, we incurred a total of $0.3 million in non-cash restructuring expenses in the second quarter. From the remaining organizational realignment and upgrades, primarily in our Mexico operations, we incurred $0.3 million in severance cost for the second quarter with an expected $0.6 million annual cost savings. We have now completed our location and organizational targeted restructuring activities with no expectation of further cash restructuring costs. We completed our realignment of the commercial teams with our transportation appliance, medical, and consumer/off-road market approach. With the recent additions to our executive staff noted in our prior earnings call, we now have a complete, experienced leadership team and an organizational structure capable of executing the various activities for us to achieve our strategy and meet our operational and commercial targets. We implemented our new CRM or Customer Relationship Management tool to facilitate all aspects of our commercial activities. We've already seen an improvement in the information available to our teams as we continue to develop our customer relationships and capitalize on commercial opportunities. In late July, we updated our Investor page linked to our new website, as part of our ongoing efforts to improve the information provided to our stakeholders. As a continuation of activities to produce new PPE for the medical and manufacturing communities, with 1.4 million in second quarter sales, we began production of N95 facemask in July in our Auburn Hills facility. We are evaluating the longer term potential for these new products as part of our overall growth target for the medical markets to be 10% of our total sales for the mid-term. With approximately 94 million in customer order intake or CLI through the second week of August, we continue our success and winning new business in our targeted markets, including a large recent award of a new-to-unique application of a Class A fire retardant reaction injection molded engine [Indiscernible]. Based upon our ongoing commercial and operational improvement activities, we remain 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 and service offerings, as well as to develop longer term strategic supplier relationships. We are confident that the team additions and the completed organization realignment enable us to create and communicate our unique selling points in our existing as well as our new targeted markets. Unique Fabricating remains boldly back on track. It is in a stronger position now to realize the identified commercial opportunities and to build on the sustainable operational improvements made to-date. Brian will now provide an overview of our second quarter financial results.

[Brian Loftus:]

Thank you, Doug. Good morning, everyone. Net sales for the second quarter of 2020 decreased to 14.8 million, down 62% or 24.1 million from 38.9 million during the second quarter last year. Our April and May 2020 sales totaled 4.8 million as our transportation customers' facilities were idle due to the ongoing COVID-19 pandemic. June net sales were 10 million or 68% of our total net sales for the second quarter of 2020. Of the 14.8 million in net sales for the second quarter, customers in the transportation market accounted for approximately 75%, appliance at approximately 14%, with the remaining 11%, primarily attributable to the medical market as we transition some of our manufacturing capacity to personal protection equipment. Gross profit for the second quarter was $1.7 million or 11.8% of net sales compared to $8.2 million or 21.1% of net sales for the same period of 2019. The decrease in gross profit was due to the loss contribution margin on the 24.1 million lower sales, partially offset by reduced structural and other overhead costs. Selling, general, and administrative expenses for the second quarter of 2020 were down $1.1 million to $6.3 million compared to $7.4 million for the second quarter of 2019. The decrease in SG&A results from several cost reductions, including management headcount, commissions, and professional services in addition to the savings from plant closures, which were partially offset by $0.3 million of salaried severance costs recognized in the second quarter of 2020. Operating loss was $4.8 million for the second quarter of 2020 compared to an operating loss of $6.7 million for the same period last year. The decrease in operating loss was primarily due to the $6.8 million impairment of goodwill recognized in the second quarter of 2019, which did not recur in 2020 in addition to $1.1 million lower SG&A and $0.4 million lower restructuring expenses. The loss contribution margin on the 24.1 million lower net sales in the second quarter of 2020 as compared to 2019 more than offset the lower impairment, SG&A, and restructuring expense. Interest expense was $0.6 million for the second quarter of 2020 compared to $1.3 million for the second quarter last year. The year-over-year decrease was primarily due to the impact of the reduced total debt levels, lower expenses related to our interest rate swap, and the composition of our debt compared to last year, as the PPP loan has an interest rate of 1%. Net loss for the second quarter of 2020 was $4.3 million or $0.44 per basic and diluted share compared to $7.6 million or $0.78 per basic and diluted share in the second quarter of 2019. The net loss is the result of the impact of the 24.1 million lower net sales partially offset by the lower SG&A, impairment, restructuring, and interest expenses. I will now provide an update on the financial -- on our financial position and liquidity. Net debt or total debt, less cash and cash equivalents, decreased $5.4 million to $45.8 million as of June 30th, 2020, inclusive of $4.7 million of cash and cash equivalents compared to $51.2 million as of June 30th, 2019, inclusive of $1.1 million of cash and cash equivalents Since year-end, net debt has decreased $1 million inclusive of $0.7 million of cash and cash equivalents at December 29th, 2019. The increase in cash and cash equivalents is primarily due to the $6 million loan we received in April as part of the Small Business Administration's Paycheck Protection Program. During the second quarter, we use $3.5 million of the PPP loan proceeds for allowed expenses as defined in the CARES Act, which left $2.5 million in cash and cash equivalents at June 30. By the end of July, we had fully exhausted the proceeds. We expect to apply for forgiveness no later than October, and we believe a substantial portion, if not all of the PPP loan will be forgiven. As we have not gone through the forgiveness application process or any audits related to forgiveness, there is inherent uncertainty to what amount of the PPP loan will ultimately be forgiven. In addition to our earnings announcement this morning, we also announced that we had successfully completed the Eighth Amendment to our credit agreement on August 7. The Seventh Amendment, which we completed in April, waived our financial covenant requirements for the second quarter. As we anticipated the COVID-19 pandemic would significantly impact our financial results. We knew that the waiver provided by the Seventh Amendment did not address our ongoing covenant needs. The Eighth Amendment resets our financial covenants, beginning with the third quarter of 2020, which excludes the second quarter of 2020 results from our future covenant compliance calculations. We ended the quarter with $4.7 million of cash and cash equivalents and $0.7 million of net availability on our revolving line of credit. We believe we have sufficient liquidity to meet our obligations. And we've remained focused on controlling discretionary spend, and capital expenditures, so we can generate strong cash flows to deleverage the company. Doug will now provide some closing remarks. Doug, back to you.

[Doug Cain:]

Thank you, Brian. It remains our intent to meet with many of you virtually or if possible in person over the next year, and circumstances allowed. Through the significant challenges we have faced over the last months, the Unique team has not just survived, but in fact has continued to improve all aspects of our commercial and operating performance. We've established a strong foundation to meet our ambitious targets and stakeholder expectations for profitable growth as we deliver significant shareholder value. As we continue on our path to realizing our boldly back on track vision, are now complete management team and our employees are excited about the opportunities then we have in front of us. With that, we will open the call for questions. Operator?

[Operator:]

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

[John Nobile:]

Good morning, Doug and Brian. Thanks for the call and taking my questions. We appreciate it. I'd like to know, if you could comment on how your current auto related business is looking now that we're almost halfway into the third quarter, I know, you had mentioned that total business was a 10.8 in July, but the couple of weeks extra here if you could talk just specifically about the auto related business?

[Doug Cain:]

Okay. So again, as we've mentioned in here a few different times, everything we say is with a certain amount of caution, and reservation. The U.S. everybody else on this call was familiar with the inherent uncertainty that exists right now with the changing outlook relative to closures, et cetera. But again, we communicated the July sales, we thought that was important. It 10.8 million which was above the 10 million in June, through August, we're seeing similar trends. And as I indicated in the overall outlook using the production third-party provider production, again and based on what we see today this trend can continue. I guess, the best way that I would say.

[John Nobile:]

Okay. I had a feeling in August would be a better trend, a better numbers in the one of related business so versus July. I know you didn't provide the break on us for your total business, which talks about your appliance business also. But actually, the same question I can ask you is in regard to your appliance business, how is that shaping up now halfway through the quarter?

[Doug Cain:]

Yes. So again, thanks for the question. And again, I appreciate the understanding that we do have a somewhat diversified business, absolutely is concentrated in transportation. But we're working diligently to diversify that somewhat as we move forward. As we've indicated before, what I've said in the earnings release itself, is that we also see very positive trends, macro and specific to our customers related to appliance, whether that is supporting the very strong housing market, both new housing and refurbishments. A lot of businesses being done there, and anecdotally, I can say that, we have evidence of people trying to get washer dryers and refrigerators that are on backorder. So, we see a strong outlook, at least for our visibility over the next 60 days, and then that part of the business too. But it also remains subject to all the different things. And this is clearly supported by the very low interest rate environment that we have which also can change, but that business remains strong at this point in time, as does relatively strong as the transportation business.

[John Nobile:]

Okay. Thanks for that. That sounds encouraging. And are you still targeting about 10% of your total sales to come from the medical market in the mid-term? I think last quarter you alluded to the fact that midterm I think you're looking at like 18 month to 24 month period here. Are we looking at that still 10% to come from it?

[Doug Cain:]

Yeah. I would tell you that is clearly the target that we have internally, and we have restructured our commercial team to be able to access and deliver that, that certainly is more whitespace than what we have in our transportation and our appliance business. And appreciate your noting the mid-term comment that we're looking to be there, we would say no later than the actual end of 2022. Because it does take some time to get started in that and that remains our target. As I noted previously, again, we are doing the face mask production, the N95 that it started, but it started at the very end of July. We're in production now. And we are assessing the longer term efficacy of what that business can be and that would certainly provide a foundation in being able to deliver that 10% in the midterm.

[John Nobile:]

Okay. Lastly, you did answer a question, I was going to ask about the $6 million PPP loan. There is a good chance. I mean, we don't know for sure now, but most if not all of it will be forgiven. I think you had made those comments earlier or Brian did. I was going to bring that up, but I had just one. One final question here, I noticed that your interest rate swaps expire this September. And overall, it's kind of added substantially to your interest expense after they expire. What interest rates should we expect going forward from the September period?

[Doug Cain:]

Well, some of that, obviously, will partially depend on what the -- the LIBOR rate will be, but it would be confusing with our credit spread that we currently have.

[John Nobile:]

Okay. So basically, whatever obviously what -- the rate -- the base rate plus LIBOR, that's the rate that specific rate is when I should basically model out going on, saying in Q4 and on?

[Doug Cain:]

Correct.

[Doug Cain:]

Okay, great. Thank you for taking my questions.

[Operator:]

[Operator Instructions] There seem to be no further questions up in the queue. And I would like to turn the floor back over to Mr. Chain for any closing remarks

[Doug Cain:]

On behalf of the Unique Fabricating management team and the Board of Directors, and all of our employees, and I want to express our appreciation for your continued interest in our business, the investment of time today. And we look forward to again, hopefully seeing some of you, talking with some of you over the next weeks and months and for certain we'll see you again as we provide information regarding our third quarter results. Thank you very much.

[Operator:]

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation. And have a wonderful day.