Unique Fabricating, Inc.
Q4 2019 Earnings Call Transcript

Published: 26 Mar 2020

[Operator:]

Greetings and welcome to the Unique Fabricating Fourth Quarter and Year-End 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]It is now my pleasure to introduce your host, Rob Fink of FNK IR. Thank you. You may begin.

[Rob Fink:]

Thank you, operator. I'd like to welcome everyone to Unique Fabricating’s fourth quarter 2019 earnings conference call. Hosting the call today is Doug Cain, Unique Fabricating's President and Chief Executive 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 and 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 made 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, outcome and performance to differ materially from those expressed by such statements. These risks and uncertainties include but are not limited to those discussed in the Company's annual report on Form 10-K for the period ended December 29, 2019, 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 and including 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 financial measures are used by management to make strategic decision, 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 in this call will be on a non-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.First, I would like to provide a brief commentary concerning the coronavirus outbreak’s effect on the Company. 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 are executing a comprehensive set of actions to prudently manage our resources while keeping our customers supplied with the products they continue to require. While demand in the automotive segment has been reduced for an indeterminate period, we continue to have customer orders across our various markets and in all of our plants. Currently, we are operating our facilities.We are following the guidelines provided by the various governmental entities in the jurisdictions where we operate and are taking additional measures to protect our employees. Considering the current decline in demand, we are modifying our shift schedules and plant employee count, limiting our raw material ordering and restricting all discretionary spending. As our supply base is almost exclusively North American, we have not yet seen disruptions in our supply chain.Due to the inherent uncertainty of the unprecedented and rapidly evolving situation including the duration of the actions taken by the various customers and governments, we are unable to determine the full impact of the COVID-19 situation on our future operations.Now, I will shift to the progress we have made with our business.In the six months since joining Unique Fabricating, I confirm my beliefs formed during the hiring process in my first week at the Company that we are fulfilling our Boldly Back on Track vision that I outlined in my first earnings call.Boldly Back on Track is a foundation of the overall challenge I made to the organization to improve the culture and instill a passionate pride in all of what we do and in all the places we work. This involves looking carefully at everything we do, improving every process, eliminating wasteful or duplicative expenses and revitalizing our culture. We now have a forward momentum to enable the dramatic and necessary changes underway.With a focused sense of urgency, we are executing the cultural, organizational and operational changes to achieve sustainably the ambitious targets for EBITDA improvement, debt reduction and sales growth that we collaboratively set. We continue to have full Board and management team support for the actions undertaken and the direction set forth.Since I last spoke with you in November and as of the end of 2019, we completed our Evansville, Indiana facility’s closure with the final moves of production to our LaFayette, Georgia and Louisville, Kentucky facilities. We have been winding down operations at our manufacturing facility in Bryan, Ohio and expect to complete the closure by the end of March 2020. We have moved production from the Bryan facility to our operations in Mexico and Georgia.As a result of these activities, we recognized restructuring charges of $1.0 million during the fourth quarter of 2019 compared to zero in the corresponding period last year. The closure of our Evansville, Indiana facility’s incurred an $0.4 million charge related to future lease payments and another $0.3 million from various other costs. We also incurred one-time severance cost of $0.3 million for our Bryan, Ohio plant closure. We do anticipate an additional $0.6 million in restructuring charges in the first quarter of 2020 to finalize the Bryan plant closure.The real estate related to the Evansville operations includes one owned building that is listed for sale and one warehouse facility for which we are under lease through November of 2022 with future lease payments of approximately $1.1 million. We have engaged a third-party firm to assist with the sale and the subleasing of the facilities.While these decisions are never easy, these plant closures better align our capacity with customer demand and are expected to provide approximately $2.0 million annualized costs savings, ramping up from the first quarter of 2020.From a human resources perspective, we simplified and realigned the organization, including the executive level. Our goals in this effort were to, first, eliminate redundancies; second, reduce layers of management; third, better position resources to optimize value to the business and ultimately to create a more agile organization that can respond quickly to customer needs and changing market conditions. During the fourth quarter of 2019, we eliminated an additional 12 salaried positions.As part of our investment in the leadership team, we committed to a comprehensive development program during the first half of 2020, which incorporates 70 associates across our U.S. and Canada locations.During the first quarter of 2020, we added new directors of Human Resources, Lisa Yaldo and of Purchasing, Tom Charnley, both with extensive industry and functional experience. We also made an internal promotion of Tyler Stokes to Director of IT. In the second quarter, we will be bringing on Board the new position, Director of Materials Engineering, to facilitate our commercial activities and this very critical area for our business.As filling the CFO position remains a key next step in completing the executive leadership team, our search has continued. In the interim period, I continue to serve in that role where my CFO experience and active CPA license remain an asset.With the return to revenue growth, a critical aspect of meeting our ambitious targets, we have continued the approach outlined in November to increase revenues through market share gains, new product and materials development, and the expansion of the heavy truck, medical and aerospace markets. We have to overcome the negative impacts on sales from the plant closures over the last two years, as well as customer decisions for new programs, where our product was decontented or we were not awarded the successor business.During the last months, we have been very active in strengthening the relationships with our diverse customer base, while communicating clearly our competitive advantages including our geographical footprint, diverse manufacturing processes and materials flexibility.We confirmed that sufficient capacity exists in our manufacturing locations for us to grow our revenue over the next few years with limited, targeted capital expenditures focused on increased automation, improved material utilization, reducing scrap and technological enhancements for our increased value added processes. We remain one of the largest suppliers in the markets we serve, and we have confirmed that we have significant opportunities to grow our market share organically.We completed the realignment and refocusing of our commercial organization, including the additions of the senior sales manager in Mexico to grow and support our Mexico business and a soon to be on Board, Director of Material Engineering, to further enhance our product offerings as well as to develop longer term strategic supplier relationships. We are confident that these additions among others will enable us to create and communicate our unique selling points in our existing markets, while expanding in the heavy truck, medical and aerospace.During the first quarter of 2020, we initiated our implementation of sales force, our customer relationship management tool, to facilitate all aspects of our commercial activities. In addition, we are actively pursuing targeted technical collaborations with leading raw material suppliers.During the last week, in the medical and healthcare areas, we've been able to rapidly and effectively support multiple requests for products and value-added processing to manufacture face shields and protective masks among other items.Our strong North American geographical presence combined with our advanced technology, engineering, manufacturing and customer service capabilities provide us with the resources to pursue many opportunities where our products support vehicle light-weighting, improved interior comfort and cabin noise reduction for telematics and infotainment. We believe these trends create opportunities for us to achieve market share gains from increased content per vehicle, new solution-oriented products, geographic shifts in vehicle and component production, and evolving customer sourcing strategies with a renewed emphasis on North American production.We have been successful in winning new business in these areas including a recent weight and cabin noise reduction solution, utilizing our TwinShape foam air duct with an SOP in August of 2022 and an $0.8 million annual sales value or $6.4 million life-of-program value.Beyond automotive, we are a leading provider of fabricated non-metallic components in the appliance, HVAC and water heater industries. Our component solutions primarily consist of products used in gasketing, heat deflection, packaging, insulation, water seals, noise reduction, and vibration control. As we believe there are also many opportunities to grow our business in this market, we have refocused customer engineering and support activities in this segment.With our strength in engineering, commercial, purchasing, human resources, manufacturing and program management capabilities, I’m confident that we will achieve sheer growth in each of our markets.Independent of the plant closure savings, we have developed detailed, comprehensive performance improvement plans for each of our locations and functional areas that are expected to generate substantial positive operating income impact over the next quarters.We are now capitalizing on opportunities to extract synergies from previous acquisitions in the areas of improving manufacturing processes, filling underutilized capacity, reducing overall logistics costs and sharing best practice knowledge across the enterprise.As another key lever of improving operational performance, we are executing several activities to reduce our high-cost debt levels while improving our overall financial condition.Today, Unique Fabricating truly is Boldly Back on Track. We are winning new business, improving our profitability and cash flow and reducing debt while our employees are engaged and empowered, and our customers are happy.I will now provide an overview of our fourth quarter financial results.As you can see from our fourth quarter results, the cost reduction efforts are having a meaningful impact on our profitability. For the fourth quarter, net income inclusive of restructuring chargeswas $0.0 million, despite lower sales compared to a net loss of $0.2 million in the fourth quarter of 2018. This improvement is a direct result of the decisive actions we took to lower our overhead cost structure, improve operations, and reduce the carrying cost of our debt.Total debt reduced by $3.3 million to $47.5 million as of December 29, 2019, compared to $50.8 million as of September 29, 2019, and $55.9 million as of December 30, 2018 as the Company utilized operating cash generated from an increase in earnings and decreased usage of working capital due to improved inventory and accounts receivable management.Net sales for the quarter ended December 29, 2019 decreased to $35.6 million, down 10.6% or $4.2 million from $39.8 million during the same period last year. The decrease included the loss of net sales of $2.9 million related to several customer platform cancellations, plus the end-of-life for three major program platforms, where the Company did not win the successor business or customers made a change, eliminating the Company's product on the platform. We also experienced a $1.0 million loss in sales due to a general decline in industry production volumes and a net sales loss of $0.3 million from a combination of the Fort Smith, Arkansas and Evansville, Indiana plant closures and discontinued work with several major air conditioning customers.Of the $35.6 million in net sales for the fourth quarter, automotive represented 85% of the total, industrial was 9% and other was 6%.Gross profit for the fourth quarter of 2019 was $7.8 million, or 21.9% of net sales compared to $8.5 million, or 21.4% of net sales for the corresponding period last year. The decrease in gross profit was primarily related to the decline in revenues and resulting loss of contribution margin, partially offset by the reduced structural and other array of cost.Selling, general and administrative expenses were $5.5 million, or 14.2% of net sales for the quarter -- for the fourth quarter of 2019 compared to $7.2 million, or 17.1% of net sales for the fourth quarter of 2018. The decrease in SG&A is a combination of cost reductions including management, labor and benefits, commissions and professional services in addition to the savings from plant closures.Operating income inclusive of the $1.0 million of restructuring expenses and with the $4.2 million decline in sales, was $1.4 million for the fourth quarter of 2019 compared to $1.3 million for the corresponding period last year, which included zero restructuring expenses. The various cost reductions outlined previously offset the lost contribution margin from the lower sales.Interest expense was $0.7 million for the fourth quarter of 2019 compared to $1.3 million for the fourth quarter of last year. The year-over-year decrease was primarily due to the lower total debt levels and the impact of the interest rate swap.Net income for the fourth quarter of 2019 was $0.0 million, including the $1 million in restructuring expenses, or 0.0 for basic and diluted share compared to a net loss of $0.2 million, or $0.02 per basic and diluted share in the fourth quarter of 2018. The improvement in net income was primarily due to the impact of the comprehensive cost reduction and organizational alignment activities, offsetting lower net sales.Adjusted EBITDA for the fourth quarter of 2019 was $4.4 million compared to $3.4 million in the fourth quarter of 2018. This increase is the result of the multiple cost reduction activities that began in early 2019 and accelerated in the fourth quarter.While I spoke with a few of you since joining the Company, I do look forward to getting to know more of you over the next month as we outline with greater specificity the targets and activities by which we will measure and manage the business. As we have accomplished a great deal in the last six months, I remain highly energized by the continuing opportunity to develop the organization, maximize profitable growth, and create significant shareholder value at Unique Fabricating. I'm excited about being a shareholder in Unique Fabricating, and I can confirm that many of our employees are likewise looking forward to participating in our success through share ownership. We have a unique opportunity to create something of which we can all be proud. I can confidently state that Unique Fabricating, Inc. is Boldly Back on Track.With that, we will open the call for questions. Operator?

[Operator:]

[Operator Instructions] Our first question is coming from John Nobile of Taglich. Please go ahead.

[John Nobile:]

Good morning, Doug. And thanks for the call. Thanks for taking my questions. I just have a few. I was hoping that you could talk a little about your industrial business, in particular, how much was it down for the year? And just assuming, the coronavirus does start to subside, say in the next few weeks or months, what type of prospects might you have for the industrial business in 2020?

[Doug Cain:]

Yes. I appreciate that question. And at my fingertips, I don't specifically have the number for the industrial decline last year. It is sitting inside of a note in the 10-K, I can tell you that. I'm going to say it may be in the $6 million to $7 million range was the number for the industrial. What I would tell you is interesting. I'd mentioned the medical comment in there where we are seeing real opportunities that we're actually running product on now that the industrial has also seen some pickup for a variety of different reasons and we've not seen a decline there through the first quarter at this point in time.What we did though is that we -- when we did the plant closures -- and we as a company in the past I think underestimated the true impact of what this was, and we lost our focus in that area. And that's for the comments that I made earlier, when I viewed our opportunities, this was a clear chance for us to recapture a share of wallet and then use some of our new products and capacity that we have. And that's the reason I bring that up as being something that is a true opportunity, both recapturing and winning some new business that we have.

[John Nobile:]

Is it possible to quantify -- I know you said you was going to be supporting manufacturing of face shields and protective mask. Do we have any kind of an idea what this might help as far as -- not Q1 but looking into Q2. Just a rough number, I'm not sure if it would be significant or not. Can you shed some light on that?

[Doug Cain:]

I'm going to be a little hesitant about giving much there because there are a couple of things we're trying to conclude right now. But, I would tell you, it's in the -- for the quarter, I would tell you, it should be in the more than $1 million opportunity just for the quarter potentially. And part of this ends up being from a revenue standpoint, I know you like to talk about revenue, some of it is related to the supply chain because some of the material that's coming in here purchased by the customer or the sub customer and then we're doing significant value added process. And this tends to modify the revenue number somewhat too, John.

[John Nobile:]

Okay. And you're talking Q2, not Q1, right, or is that Q1?

[Doug Cain:]

I guess, what I was saying is we have people working creatively, remotely, different ways and meeting all the criteria we're supposed to meet, but the opportunities are coming in. And I challenged the organization to find a way to creatively support the government, the hospitals, the medical industry, the health industry in whatever way possible. So, we are working through these things, even as we speak.

[John Nobile:]

And the end-of-life programs, how much did that actually impact your results? And, I'm not sure if you have that number. In 2019, I know that -- at least in the first half or even the first three quarters, there was an impact there, the end-of-life program. So, I don't know, if you know what that might've been? And also if you could talk about -- and once again, I'm going to just say, assuming the coronavirus concerns start to diminish maybe in the weeks or months coming up, the prospects on the end-of-life programs for 2020?

[Doug Cain:]

Okay. So, a couple of things there. I flipped over to the earnings release right now to give you a better number because I did highlight this in the earnings release also that went out a little bit earlier today. So, under the -- basically, I’ll say, the platform cancellations and some of the successor business that I mentioned is $11.7 million trough in 2018 to 2019. The industrial appliance was $5.5 million. So, that was pretty close with 6 point -- I mentioned before. So, it’s pretty much in line.And again, like I said, it's hard to say that there are -- they are looking to us to provide solutions for them in a variety of ways because now they recognize that we are open for business in this area where we had somewhat ignored it over the last year and a half before I got here.

[John Nobile:]

Okay. That was encouraging also to hear that you’re operational because that was one question I had. Granted reduced demand in the auto sector, but you are operational and still shipping product, as we speak. I wasn't sure about that. So, that was somewhat encouraging. But, if I could talk a little bit -- I know you're talking about cost reduction measures, and in light of the issues -- I mean, it definitely impacted your revenue in 2019 cost and you're looking to take costs -- you have taken costs down. I was hoping you could talk a little bit more about what we should anticipate as far as reductions in your cost structure and maybe just expand on that a little bit. Thank you.

[Doug Cain:]

Okay. So, I mean, I outlined three or four specifics that I had there. What I would tell you is that as of the end of the year, we have basically completed the organizational realignment and restructure. That's the reason I noted in my commentary that we had reduced an additional 12 salaried employees that were effective and done as at the end of the year with no carryover costs associated with this. However, that total cost savings, which would be approximately about $1.2 million, will not be seen in 2020 because also as I noted, and I noted in the first earnings call that I had that there were very clear specific requirements within the organization to either upgrade talent or to fill holes that were here before. So, we've tactically or strategically, I should say, better fulfilled these positions with high-caliber individuals to allow us to operate more efficiently, effectively, and to be able to do the growth plan that we have. And the $2 million of cost savings that I mentioned before from the restructuring, again, there's a little bit of lingering into the first quarter of 2020, but through the second quarter of 2020 we would see a full impact of that. But anything I'm telling you -- and I hate this as much as I hated the first call that we had is, it is all sitting underneath the enormous cloud or the enormous fog that we have related to the coronavirus.So to talk about specific cost savings but then to have the volumes reduced in a certain way, becomes a little more challenging to track that straight into the P&L. But, I will tell you that the organization is fully aligned, that we are doing all prudent measures to ensure, not only that we're keeping our employees safe and that we're adhering to all the governmental guidelines which are diverse, depending upon states and countries, since we operate in three countries and in multiple states, but also making sure that again -- that we are supplying to the customers that require it. Because we've been deemed an essential supplier to several of our customers. And we're working through that process right now.So, I would just -- I would hold off on giving you any hard numbers relevant to what you should cost reductions, but we have modified shift schedules. We've offered the people to take time off if they want. We're doing all the different things. And as we know, that the Bill is theoretically hopefully, potentially, maybe passing tonight or tomorrow through the House. Then of course, we have to read to know what's in the Bill and there are also certain aspects of that challenge specifically related to employment. Some number of employees will like the cusp of that number, and we're monitoring that very closely. We're working with all of our stakeholders that we have to make sure that we do the right things, both near term and for the longer term health of the business.

[John Nobile:]

I appreciate that. And I just want to thank you, Doug, for you for your comments and answering my questions. And hopefully, this virus, the concerns related to this start to diminish quickly, and we can get back to business as usual. And even in the lean position here, you should be able to take advantage of that. So, I wish you the best. Thank you.

[Doug Cain:]

Thank you, John.

[Operator:]

Ladies and gentlemen, we're showing no additional questions in queue at this time. So, this brings us to the end of our event. We thank you all for participating. You may disconnect your lines at this time. And have a wonderful day.