Unique Fabricating, Inc.
Q4 2018 Earnings Call Transcript

Published: 7 Mar 2019

[Operator:]

Greetings and welcome to the Unique Fabricating Fourth Quarter and Full Year 2018 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] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rob Fink of. Please go ahead.

[Rob Fink:]

Thank you, operator. I'd like to welcome everyone to Unique Fabricating's Fourth Quarter and Full Year 2018 Earnings Conference Call. Hosting the call today are John Weinhardt, President and Chief Executive Officer; and Tom Tekiele, Chief Financial Officer. Before I turn the call over to management, 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, including statements related to the Company's outlook, to be different -- materially different from any future results, levels of activities, performance or achievements expressed or implied by this morning's press release. Such forward-looking statements include statements regarding, among other things, expectation about revenue, EBITDA and earnings per share. All such forward-looking statements are based on management's present expectation and are subject to certain risk factors, uncertainties that may cause these actual results, outcomes of an event, timing 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 31, 2018 which will be filed later today with the SEC pursuant to Rule 424(b) and in particular, the section titled Risk Factors. All statements including on this call and including in this morning's press release are made of us today, and Unique Fabricating does not intend to update this information, unless required by law. Reference to the Company's website does not constitute incorporation of any of this information. 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 operations and prospects for the future. Unless it is otherwise stated, it should be assumed that any financials discussed in this call will be on a 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 over to John Weinhardt. John, the call is yours.

[John Weinhardt:]

Thanks, Rob, and good morning. Thank you all for joining us. Unique Fabricating continued to navigate productions, disruptions and inventory corrections in the auto sector and our ability to increase content for vehicle has continued to enable us to outperform the macro industry. We grew automotive sales during 2018 in excess of the growth in the underlying market and reach the higher end of our revised revenue guidance range for the year despite further reductions in North American production volumes. As we anticipated, OEM manufacturers continue to take actions to lower vehicle inventories during the fourth quarter, as a recalibrated production schedules to better address changing consumer demand for crossovers, SUVs and light trucks. This shift dampened the overall light vehicle sales in the second half of this past year, which in turn impacted our sales for 2018. However, as I will discuss on today's call, we believe, it will be a positive catalyst for us going forward. Based on our current visibility of awarded programs scheduled to launch over the next 12 to 24 months as well as a number of new joint engineering projects were engaged in with customers, we believe, we are well positioned to capitalize on incremental revenue opportunities in 2019 and 2020 and expect to continue to outperform the growth of the industry as a whole. At a macro level as we've shared before, the trends driving the automotive industry today, specifically, the shift from combustion engines to battery electric vehicles, vehicle light weighting, and enhanced infotainment and voice integration are beneficial for our product offering. Most notably, we shift to electric vehicles and the need for manufacturers to dampen noise that would otherwise be masked by a combustion engine leads to more acoustical content, which in turn drives demand for a number of our product lines. The financial impact to the actions we took earlier in the year to streamline our production assets and align our cost structure to better adjust our operations in anticipation of a lower volume environment were as Tom will explain in detail largely overshadowed by an increase in federal income tax on foreign sourced income as a result of the U.S. Tax Cuts and Jobs Act of 2017, and the timing of an interest rate swaps we had entered into in accordance with the terms of the senior secured credit facility that we amended in November, both of these items negatively impacted our earnings. As of these factors, we would have delivered similar growth to our bottom line and our profitability would have been within our guidance range. While we have limited control under the new tax law, we are taking steps to address our interest expense primarily by accelerating our deleveraging efforts. As a key part of this, subsequent to the fourth quarter, the board decided to reduce the quarterly dividend by provide the Company with additional financial flexibility in order to more aggressively reduce our long-term debt and provide enhanced operational and strategic operations going forward. Our business continues to generate strong cash from operations with more than $9.4 million generated in 2018 at 21% increase over 2017. We believe it was the right decision to adjust our allocation of this capital to decrease our financial leverage and increase flexibility, as the automotive industry continues to flex and evolve. We have continued to implement the further use of automation and robotics to improve our efficiency and we continue to pursue operating initiatives that will further reduce our fixed cost and improve our operational flexibility. We are cognizant of the challenges that our business and industry have faced during the last 12 months and the resulting impact on our performance, but we believe the adjustments we made during the second half of 2018 put us in a much better position to address overall industry production fluctuations going forward. Based on our current visibility of rewarded programs scheduled to launch in 2019 and 2020, we expect to continue to outperform the industry by leveraging our strong backlog and capturing incremental revenue opportunities. We are actively engaged in new product development programs for our molded products with both automotive and industrial customers. Earlier this year, you may remember we made a decision to close two manufacturing facilities that we had acquired as part of two separate acquisitions. While this decision allowed us to streamline our operations, reduce fixed cost, improve efficiency, it also impacted our supply relations with two local customers and the industrial market that were situated near our Fort Smith, Arkansas plant. In the short term, the decision to close the plant reduced our revenues with these customers more than anticipated. However, we expect to benefit to this closure to outweigh the loss revenue in the long run. I would now like to turn the call over to Tom Tekiele, our CFO, to review the quarterly and full year results. Tom?

[Tom Tekiele:]

Thank you, John. Net sales for the fourth quarter of 2018 was $39.8 million compared to $41.7 million for the corresponding period in 2017, a decrease of 4%. The decrease was primarily driven by the loss of business at two major non-automotive customers as a result of our decision to close our Fort Smith, Arkansas facility, as well as extended plant holidays shutdowns by some of our customers to reduce vehicle inventories. Of the $39.8 million in net sales for the fourth quarter, automotive represented 85.6% of the total, industrial was 9.9% and other was 4.5%. Gross profit for the fourth quarter of 2018 was $8.5 million or 21.5% of net sales, compared to $9.3 million or 22.3% of net sales for the corresponding period last year. The decrease in gross profit was primarily related to the decline in revenues. Selling, general and administrative expenses were 7.2 million for the fourth quarter of 2018 or 18.1% of net sales compared to $7.3 million or 17.5% of net sales last year. The increase in SG&A on a percentage of sales basis was primarily due to the lower sales during the fourth quarter of 2018. Operating income was $1.3 million for the fourth quarter of 2018, or 3.3% of net sales, compared to $2 million, or 4.8% of net sales for the corresponding period last year. Interest expense was $1.3 million for the fourth quarter of 2018, compared to $657,000 for the fourth quarter last year. The year-over-year increase was primarily due to the impact of recognizing an unfavorable mark-to-market on an interest rate swap that we were required to enter into in accordance with the terms of our senior secured credit facility that we amended and restated in November as well as the write-offs of some of the deferred financing costs associated with the old credit agreement, as well as higher outstanding debt balances and interest rates. The valuation of the swap resulted in a negative impact to GAAP EPS and adjusted EPS of approximately $0.03 per diluted share. Income tax expense for the fourth quarter of 2018 was $163,000, compared to a credit of $724,000 in the year ago period. The increase in income tax expense was due primarily to the net benefit from corporate tax reform that we posted during the fourth quarter of 2017, as well as an increase this year in federal income tax on foreign sourced income as a result of the global intangible low-taxed income or GILTI provisions of the 2017 Tax Cuts and Jobs Act. The introduce increased tax on foreign sourced income heading negative impact on GAAP EPS and adjusted EPS of approximately $0.03 per diluted share. Net loss for the fourth quarter of 2018 was a $191,000 or $0.02 per basic and diluted share, compared to net income of $2.1 million, or $0.21 per basic and diluted share in the fourth quarter of 2017. The decrease in net income was primarily due to lower net sales in the impact of non-operational or below the line items including the interest rate swap valuation on the tax and the tax on foreign sourced income. The diluted weighted average shares outstanding remain steady at approximately 9.9 million in the fourth quarters of both this year and last year. Adjusted EBITDA for the fourth quarter of 2018 was $3.2 million, compared to $4 million in the fourth quarter of 2017. Adjusted diluted earnings per share was less than a penny for the fourth quarter of 2018 compared to $0.17 in the year ago period. Turning to our full year results now. Net sales for 2018. We're $174.9 million at the high end of our revised guidance for 2018 and compares to $175.3 million for 2017. The year-over-year decrease of 0.2% was primarily driven by 1% decline in North American auto production year over year as well as the loss business and two of our non-automotive customers as a result of our decision to close our Fort Smith, Arkansas facility as I mentioned earlier. Despite the decline in auto production during 2018 when compared to 2017, our sales to the automotive market increased by 2% year-over-year. Gross profit for 2019 was $39.3 million or 22.5% of net sales compared to $14.1 million or 22.9% of net sales in the comparable period last year. The modest decrease in gross profit dollars and margin was primarily related to operational inefficiencies experienced from moving the manufacturing of products previously produced in the Fort Smith, Arkansas facility to other manufacturing facilities during the third quarter, partially offset by the savings realized from the plant closures we completed during 2018. Restructuring expenses for the full year 2018 were $1.2 million and were related to the closure of manufacturing facilities in Port Huron, Michigan and Fort Smith, Arkansas and compares zero dollars in 2017. We estimate annualized cost savings from this rightsizing of our production footprint to be more than $800,000. Net income for 2018 was $3.7 million or $0.37 per diluted share, compared to $4.4 million or $0.66 per diluted share in 2017. The decrease in net income was primarily due to the restructuring expenses, the gross profit decline previously mentioned along with the higher interest expenses due to the unfavorable mark-to-market on the new interest rate swap entered into during the fourth quarter, higher interest rates and higher average outstanding debt balances in the 52 weeks ended December 30, 2018. Adjusted EBITDA for the full year 2018 was $17.1 million compared to $18 million for 2017. Adjusted diluted earnings per share for the full year 2018 was $0.55 compared to $0.69 in the full year 2017, excluding the $0.06 impact from the interest rate swap in the GILTI tax provision, which I discussed as part of the fourth quarter highlights. We were within our guidance range for adjusted EPS of between $0.58 and $0.62. The diluted weighted average shares outstanding were approximately $9.9 million for both 2018 and 2017. Turning to the balance sheet. The Company had cash and cash equivalents of approximately $1.4 million at both December 30, 2018 and December 31, 2017. As of December 30, 2018, the Company had total of $55.9 million, which includes term bank debt of $37.5 million and the revolving line of credit borrowings of $17.9 million. Net of debt issuance costs and subordinated debt of approximately $500,000. This is in comparison to the end of 2017 when the Company had total debt of $53.6 million consisting with term bank debt of $30.6 million and revolving line of credit borrowings of $22.5 million net of debt issuance costs and subordinated debt of approximately $500,000. The Company had $11.6 million in available unused bank lines of credit with our primary lender, further subject to borrowing-based restrictions and outstanding letters of credit under our revolving credit facility as of December 30, 2018. During the fourth quarter, we entered into an amended and restated credit agreement with our bank group. The agreement combined are two previously outstanding U.S. term loans and increased the principal amount of those loans to an aggregate total of $26 million by turning our portion of the borrowings that were outstanding and the revolving credit facility, while continuing to provide for borrowings of up to $30 million under the revolver subject to availability. In addition, the agreement created a new two-year $5 million line of credit to fund future capital expenditures, extended the maturity dates of all borrowings from April 28, 2021 to November 7, 2023, and revised the amortization schedule of both the new U.S. term loan in the current Canadian term loan. We believe, the new agreement provide us with adequate liquidity for the Company for years to come. The Company pay quarterly cash dividend of $0.05 per share earlier today to shareholders of record as on the close of business on February 28, 2019. This compares to $0.15 per share paid in the previous quarter. I'll now turn the call back over to John.

[John Weinhardt:]

Thanks, Tom. As we have shared on today's call, we have taken action to enhance our operational efficiency and prudently cut our dividend to provide the Company with additional financial flexibility to more aggressively reduce our long-term debt. We entered 2019 in a better position to weather production volatility and operate in a lower volume environment. Independent industry forecasts are projecting the production of light vehicles to decline in 2019, based on this and our current visibility of awarded programs, we are providing the following guidance. Full year 2019 revenue between $167 million and $172 million, adjusted diluted earnings per share between $0.45 and $0.55, and adjusted EBITDA between $16.6 million and $18.1 million. With that, we'll open the call for questions. Operator?

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Koranda with ROTH. Please proceed with your question.

[Unidentified Analyst:]

This is Mike on for Matt. So first question, in your 2019 outlook, I maybe missing something here, but it looks like revenue is expected to decline slightly more than North America production when you typically outgrow the industry by several hundred basis points. Can you talk a little bit about what's driving that and provide some clarity there?

[John Weinhardt:]

Sure. Probably, the biggest factor, Mike, is the loss of the two industrial customers that we mentioned in the prepared remarks this morning. Those two customers made up of significant amount of revenue and because of our decision to close the Fort Smith Arkansas facility, they decided to move that business to another company.

[Unidentified Analyst:]

And then, just one more on the gross margin decline of 80 basis points in the quarter. Can you just talk about some of the other puts and takes there? I know you mentioned revenue decreasing is sort of the main driver, but anything else from there.

[John Weinhardt:]

That really is the main driver. The revenue not covering the fixed costs that we have, so that was the main reason Mike.

[Operator:]

Our next question comes from a line of Chris Van Horn with B. Riley FBR. Please proceed with your question.

[Christopher Van Horn:]

I just was wondering if you could update us, now that you've, kind of, seen some production headwinds. What your passenger car exposure is here in North America? And then, as we look at -- with passenger car coming down likely, I think you will have an opportunity to shift into the SUV and truck market more aggressively. Just remind us what that does for content per vehicle for you? If you could quantify that, that would be great.

[Tom Tekiele:]

So our forecasts for 2019, we have our mix of SUV versus passenger cars about 7525 which is basically mirroring what the market is expected to do.

[John Weinhardt:]

Which is a further shift from '18, the transition continues, but we've anticipated that in our figures.

[Tom Tekiele:]

Now as far as what SUVs bring to us, obviously, they're bigger. So some of the parts that we provide would be bigger and provides opportunity for more revenue and more margin dollars on a net-net basis between them and passenger cars.

[John Weinhardt:]

Yes, the percentage margins are not appreciably different, but the margin dollars or greater on the light trucks and SUVs.

[Christopher Van Horn:]

Okay, got it. And then if I think about your lunch cadence, is it still that 75/25 split or is it a little bit more weighted as I think about just your new launches, is it more weighted to the SUV side?

[Tom Tekiele:]

Definitely, it would be more weighted to the SUV side because that's really the new vehicles that the OEMs are launching.

[Christopher Van Horn:]

And then, next question is around, remind us how infotainment plays into your business? I mean, I think EV and light weighting makes a lot of sense, but how infotainment kind of rolls in there?

[John Weinhardt:]

Sure, as there's increased use of infotainment and the vehicles, you're really dealing with more voice activated devices. You're also you know in some cases going for easier listening but that is primarily the voice that activation that's an issue. And as a result, you need a quieter cockpit or a quieter passenger compartment in the vehicle for the hands-free cell phones and the infotainment systems to function properly. So as they need to make to the cabin quieter, the OEMs are designing additional acoustical material into the vehicle. And in many cases, it's a better higher quality acoustical material, which typically cost more and provides us in turn with a slightly higher margin. So, as the transition goes to outright more content of acoustical products. And then within that, higher dollar value, higher margin acoustical products, in order to make all of the infotainment systems function properly, we see increased dollar content and the actual product content for vehicle.

[Christopher Van Horn:]

And then last one for me. Remind us two-fold on China. One, are you source -- do you have a sourcing exposure there from a cost of goods sold perspective? And then, how has if at all the competitive threat from China changed as a result of these tariffs, given you should likely see decrease competition from a Chinese competitor, if their costs are higher, but didn't know if that was coming through?

[John Weinhardt:]

That's typically -- let me address the competitor question first. Our products are light in weight and they tend to be bulky at least many of them do. As a result, if you have to ship them too far, the transportation costs becomes a disproportionate part of the total delivered cost of the product. As a consequence, we were really kind naturally sheltered from a lot of foreign competition, including China. It's virtually impossible to build product overseas and ship it here and be a competitive with domestic production. As a result, as most of our competitors including foreign competitors have to come here and set up shop in order to really compete. So, we have kind of a natural protection there, but it also gives us a further benefit in that we have deliberately situated our plants geographically. So that they are, in close proximity to the customers that we serve which actually gives us a slight competitive advantage. As it relates to us in the China market, we have been awarded a substantial piece of business on a new electric vehicle, it's going to be produced in China and will launch in the third quarter of this year and the fourth quarter this year, but we've chosen to serve that market at the moment through a licensee in Malaysia. So, we don't have any production exposure, we just have upside opportunity as that vehicle launches, and it has two subsequent vehicles planned to launch in 2020 and 2021 that we've also been awarded the business for. So, it'll generate its own growth first.

[Operator:]

[Operator Instructions] Our next question comes from a line of John Nobile with Taglich Brothers. Please proceed with your question.

[John Nobile:]

I was hoping if you could provide us an estimate with how much debt you believe you will be able to pay down in 2019?

[Tom Tekiele:]

I believe in our leverage ratio down to around the mid-2s, John.

[John Nobile:]

Okay, into the Mid-2s. What would that be as far as the balance sheet debt?

[Tom Tekiele:]

I'll have to figure that out we get back to you, if I could. I don't have the number off the top of my head, but it will be mid-2s in our leverage ratio. So, our EBITDA is between $16.6 million and $18 million, what is that equate to about $45 million in debt I think.

[John Nobile:]

So, that would be $45 million in debt on the balance sheet.

[Tom Tekiele:]

Yes.

[John Nobile:]

I was hoping you could also quantify the revenue that was lost from the two major non-automotive customers in the fourth quarter. If you can even provide us with what that would be on an annual basis that would be great?

[Tom Tekiele:]

The revenue on an annual basis that was lost with those two customers was between $5 million and $6 million. In addition to that, we had some significant content on the vehicle that GM has decided to discontinue including the Buick LaCrosse, the Chevy Cruze, the Chevy Volt and Cadillac XTS. That is also impacting our guidance for 2019 somewhere between $2 million and $3 million.

[John Nobile:]

So, industrial more or less the level right now so you roughly 10% or even slightly less going forward of total revenue that's what they're looking at?

[John Weinhardt:]

That's correct. In terms of current business that's correct John. We've got a number of engineering programs with those same industrial customers on other new molded products. But at this point that's purely in the prototype and testing stage. So, we have no timing on the launch or anything else.

[John Nobile:]

In the inventory reductions, they had an adverse effect on your fourth quarter from the OEMs cutback on inventory. Do you see any significant impact of this spilling over into the current first quarter?

[John Weinhardt:]

As there as we can tell, they’ve got most of the correction that they wanted in the fourth quarter by extending their holiday shutdown periods. For any given plant, there may still be some additional inventory corrections during the first quarter of this year, but if we're not looking for the same kind of dramatic reduction that the OEMs we're trying to achieve by the end of 2018.

[John Nobile:]

So, it's relatively insignificant compared to what was in the fourth quarter?

[John Weinhardt:]

Yes.

[John Nobile:]

And I was hoping you could provide an update on I know that you had new program launches at least last you had mentioned, you had new program launches that was scheduled for this first quarter. I was hoping you might be able to shade some light on to how that is going?

[John Weinhardt:]

All of the new program launches are currently on schedule. Most of those launches begin towards the end of the first quarter and extend through the second quarter, John. But everything is on schedule at the present time.

[John Nobile:]

I know you had said before the big jump in interest expense in the fourth quarter. Let's see it was about $1.3 million which was a pretty big jump in that quarter. You said that, it was primarily due to the unfavorable mark-to-market on the interest rate swap, $0.03 a share. Could you actually give us the number, the line item number, that impacted the interest rates because that was like about a $600,000 jump in interest expense that quarter?

[Tom Tekiele:]

It's not a rate. It's actually a charge, John. It's a mark-to-market.

[John Nobile:]

That's what I mean. How much that impacted, because I know it's just a one-time item in the quarter, correct?

[Tom Tekiele:]

Yes, well, it was over $300,000. So, every $100,000 is a penny of EPS, basically.

[John Nobile:]

I just wanted to make sure and obviously interest rates were higher too because that impacted about 300k, but it was about 600k, the rest of it really being from the anticipate.

[Tom Tekiele:]

That is also the write-off of some of the deferred financing costs on the old credit facility. So that had an impact, a significant impact as well. That's a one-time cost.

[John Nobile:]

I just wanted to make sure what I was looking at, it wasn't something I was going to model out into 2019 for the loan.

[Tom Tekiele:]

No.

[John Nobile:]

Just two quick questions. CapEx for 2019 and also what the tax rate for 2019? I know you just finished with a 19% rate in 2018. What can we expect in 2019?

[Tom Tekiele:]

For CapEx, I would anticipate to be between $3 million and $3.5 million. And the tax rate, the effective tax rate in 2019, I would anticipate to be around between 25% and 27%.

[Operator:]

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

[John Weinhardt:]

We would like to thank everyone for joining us on the call today. Obviously, we're not as any happier than anyone else with the current trend in the industry, but we think we've made the appropriate provisions, both operationally and financially for us to actually grow stronger and improve our performance as we move through 2019 and 2020. So, thank you for joining us and stay tuned.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.