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Edited Transcript of UFAB earnings conference call or presentation 7-Aug-19 1:00pm GMT

Q2 2019 Unique Fabricating Inc Earnings Call

AUBURN HILLS Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Unique Fabricating Inc earnings conference call or presentation Wednesday, August 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Thomas Tekiele

Unique Fabricating, Inc. - Interim CEO, CFO & Secretary

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Conference Call Participants

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* John Nobile

Taglich Brothers, Inc., Research Division - Principal Equity Analyst

* Ron Fink

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Presentation

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Operator [1]

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Greetings, and welcome to the Unique Fabricating's Second Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Rob Fink of FNK IR. Please go ahead.

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Ron Fink, [2]

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Thank you, operator. I'd like to welcome everyone to Unique Fabricating's Second Quarter 2019 Earnings Conference Call. Hosting the call today is Tom Tekiele, UFAB's Chief Financial Officer.

Before I turn the call over to Tom, 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, level 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, expectations 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 has been filed with the SEC pursuant to Rule 424(b) and, in particular, the section titled Risk Factors.

All statements including on this call and included 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. Reference to the company's website does not constitute incorporation of any of this information.

In addition, certain non-GAAP financial measures will be used -- 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 an 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 GAAP to non-GAAP are included in the press release that was issued earlier today.

With all that said, I'd like to turn the call over to Tom. Tom, the call is yours.

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [3]

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Thanks, Rob. In the second quarter, the challenging macroeconomic and automotive industry conditions continued with softer-than-expected new vehicle production volumes. For Unique, the industry environment challenges we faced were again exacerbated by the impact of the loss of business at 2 major nonautomotive customers as a result of our decision to close our Fort Smith facility last year. The strategic decision to close this plant streamlined our operations, improved our operating efficiency and, along with the other actions we took, helped to reduce our annualized costs by more than $800,000. We'd hope the loss of these lower margin revenues would be offset by the ramp up of several new major production programs with higher margins, but these launches have been slower than anticipated.

We are watching industry trends and working closely with our customers to better anticipate their production strategies and product claims, so that we can optimally align our operations. We are cautiously optimistic that production will begin to ramp as forecasted soon and that the sales shortfall caused by this initial delay will be made up in the second half of this year.

As we have discussed in the last few calls, we have accelerated efforts to reduce fixed costs and further improve our operational efficiency in order to continue to improve our financial position and our flexibility.

During the second quarter, we made the strategic decision to accelerate plans to close our Evansville, Indiana plant in September of this year versus during the first half of 2020. On an annualized basis, this action will reduce our overhead by more than $850,000 per year. In addition, we continue to evaluate additional opportunities to better leverage our geographic footprint and believe there are several additional steps we can take to further streamline our organization to reduce our overall cost structure, while simultaneously improving our performance.

We continue to take proactive steps to help Unique get back to our longer-term objective of focused growth. Based on the current visibility of awarded programs and new business we are currently working to secure, we are gaining confidence that we will be back to a top line growth rate in excess of the underlying automotive market by the second half of 2020. This in combination with the actions we are taking currently to reduce our cost structure should yield a steady improvement in profitability.

We are actively looking to identify a new CEO and that effort is progressing as planned. In the meantime, our leadership team is focused on continuing to streamline the organization as well as ramping up new programs that will better position Unique to return to our historic positive levels of performance. 2019 has been a very challenging year for the company, but we believe we are making the moves that are necessary to lay the foundation for a successful 2020.

Turning to the financial results. In the second quarter, net sales for the second quarter of 2019 were $38.9 million compared to $45.7 million for the corresponding period in 2018, a decrease of 14.9%. The decrease was primarily driven by significant declines in production on some of our highest content vehicle platforms, the loss of business at 2 major nonautomotive customers, that I mentioned earlier, and a modest decline in North American vehicle production quarter-over-quarter. We anticipate a return to normalized production levels on our high content vehicle programs in the second half of the year. Of the $38.9 million in net sales for the second quarter, automotive represented 86.6% of the total, industrial was 8.9% and other was 4.5%.

Gross profit for the second quarter of 2019 was $8.2 million or 21% of net sales compared to $11.1 million or 24.4% 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 $7.4 million for both the second quarters of 2019 and 2018, but were 21.1% of net sales in 2019 compared to 16.1% of net sales last year due to the lower sales during the second quarter of 2019. During the second quarter of 2019, we recognized a $6.8 million charge for the impairment of goodwill due to a decline in our market capitalization, which resulted in the book value of the company exceeding its fair market value. In addition, we also recognized approximately $734,000 of restructuring charges during the second quarter of 2019 compared to $538,000 in the corresponding period last year.

Operating loss, inclusive of the goodwill impairment charge and the restructuring expenses, was $6.7 million for the second quarter of 2019 compared to operating income of $3.2 million for the corresponding period last year. Interest expense was $1.3 million for the second quarter of 2019 compared to $860,000 for the second quarter of 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, which we amended and restated in November of 2018 as well as higher interest rates on the floating portion of our debt. 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 benefit for the second quarter of 2019 was $389,000 compared to tax expense of $632,000 in the year ago period. The decrease in income tax expense was due primarily to the lower earnings this year.

Net loss for the second quarter of 2019 was $7.6 million, again including the approximately $7.5 million in extraordinary charges related to goodwill impairment and restructuring expenses, or $0.78 per basic and diluted share compared to net income of $1.7 million or $0.18 per basic and diluted share in the second quarter of 2018. The decrease in net income was primarily due to the charges for goodwill impairment and the restructuring expenses incurred, the higher interest expense due to the unfavorable mark-to-market on the interest rate swap as well as lower sales resulting in a gross profit decline.

Adjusted EBITDA for the second quarter of 2019 was $2.9 million compared to $5.6 million in the second quarter of 2018. Adjusted diluted earnings per share was $0.02 for the second quarter of 2019 compared to $0.23 in the year ago period.

Shifting now to our year-to-date results. Total revenue for the first 6 months of 2019 decreased to $78.4 million, down from $93.1 million in the same period a year ago. Gross profit for the 6 months of 2019 was $16.5 million or 21.1% of total revenue compared to $22.3 million or 23.9% of total revenues for the corresponding period last year. Restructuring expense for the first 6 months of 2019 was $800,000 compared to $1 million in the same period last year.

Net loss for the first 6 months of 2019 was $7.8 million or $0.80 per basic and diluted share compared to net income of $3.3 million or $0.33 per basic and diluted share in the corresponding period last year. The net loss for the period was primarily due to the goodwill impairment and restructuring expenses we have discussed as well as the lower sales during the year that resulted in a gross profit decline and higher interest expense due to a noncash unfavorable mark-to-market on an interest rate swap as well as higher interest rates.

Adjusted EBITDA for the first 6 months of 2019 was $5.8 million compared to $10.5 million in the same period last year. The decrease is primarily a result of the lower sales and gross margins as a percentage of sales, as I had previously discussed.

Please refer to the financial tables for a reconciliation of GAAP to non-GAAP results. Adjusted diluted earnings per share for the first 6 months of 2019 was $0.03 compared to $0.43 in the same period last year.

Turning to the balance sheet. The company had cash and cash equivalents of approximately $1.1 million as of June 30, 2019. Also as of June 30, 2019, the company had total debt of $52.3 million, which includes long-term bank debt of $33.8 million and revolving line of credit borrowings of $15.6 million net of debt issuance costs. The company had $13.9 million on available unused bank lines of credit with our primary lender, further subject to borrowing base restrictions and outstanding letters of credit under our revolving credit facility as of June 30, 2019.

To further enhance our financial position subsequent to the end of the second quarter, we were able to secure an amendment to our credit agreement with our lenders, which included a permanent waiver for our leverage covenant violation as of the end of the first quarter as well as revised covenant levels, which we believe are consistent with our current financial outlook going forward.

In summary, we continue to take proactive steps to help mitigate the challenges we face as we work towards our longer-term objectives of restoring growth and profitability. Based on our current visibility of awarded programs and new business we are currently working to secure, we expect that our results will improve incrementally over the second half of 2019. We will continue to look for opportunities to reduce our costs, improve our operational efficiencies and grow our overall revenues.

Again, the first half of 2019 has been a very difficult period for Unique, but we believe we are making the necessary moves to returning the company to sustained profitability.

With that, we will open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from John Nobile with -- of Taglich Brothers.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [2]

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You've made a significant reduction in your cost structure in the first half. And I'm just curious if you expect the current cost structure to remain at this level? Or are there going to be further cost reductions planned? And then, if so, I was wondering if you could quantify them? I know you talked about Evansville, Indiana, the closure there, and you're looking at about, was it $800,000, $850,000 or the other cost reductions. If you could just expand a little bit about that, in particular, just talk about what they are and actually monetize what we should look for maybe in the second half of this year?

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [3]

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Well, we did make some headcount reductions in -- late in the second quarter, John, that will have a annualized impact of $1.5 million. Now again that didn't happen until late in the quarter, so we'll start seeing some of that benefit during the third and fourth quarters.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [4]

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That's $1.5 million on an annual basis is, what that was?

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [5]

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That's correct. Then like you mentioned, we are planning to close the Evansville, Indiana plant, the minimum savings that we should generate from that will be $850,000, could be more than that. It just depends on what we can do with a warehouse -- some warehouse space that we're leasing today, we're trying to sublet it. And if we are able to do that, the savings will be even more than $850,000 on an annualized basis. There's also, like I said, some opportunity for additional cost reductions. We're looking at things we can do to further reduce our geographic footprint and whatnot. If we do something like that of how we wouldn't be till 2020, but there's another opportunity for, I'd say, another $1.2 million on an annualized basis in cost reductions sometime -- starting sometime during 2020.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [6]

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And I was hoping you could talk a little about the new programs that you're about to launch or that have been recently launched. And if you could quantify how these programs will benefit your sales in the second half of this year and into 2020?

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [7]

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Yes. So one of the largest programs that was planning to launch was starting in June of this year. And it's actually gone a little slower than we had hoped not because of anything that Unique has done, but, I guess, there are some trouble that the OEM is having with ramping that production up to full production levels. So sales are a little bit lighter than we anticipated in Q2, basically due to that large platform that was new to us. We do anticipate -- we're hoping that they're going to make up the production that they lost during June at some time during the third quarter, and that they'll get up to a full production speed here shortly, and that will have a nice impact on our revenues. That's a large platform for us. It's about $10 million on an annual basis. So that will have a good impact on our revenues going forward.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [8]

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Okay. And you said it was a slow start in June, July is in the books. Any progress in that platform?

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [9]

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It's still a little slow, but I think it's starting now to get back to normalized levels so. And from what we understand, they're going to work weekends and whatnot to try to make up what they've lost. This is a very important platform for this OEM. It's a very popular SUV. So we're anticipating that they'll make up of what they lost.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [10]

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Okay. And I know, not just this quarter, but in the first half, you have the end-of-life of certain vehicles, which adversely impacted your results. Do you expect that there's going to be any further end-of-life issues in the second half of this year?

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [11]

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There are programs that will come to their end of their life. But I don't anticipate that it's going to have any impact that you've seen in the first half of the year. I think that will be more than offset by some of the new platforms that we're on, that we'll be launching or that have recently launched. So I anticipate revenues in the second half of the year to be marginally better than they were in the first half, depending on what happens with some of the ramp up of these new platforms. But I don't anticipate the challenges that we faced in the first half recurring in the second half.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [12]

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Okay. And when you mentioned incremental improvement in the second half. You're talking basically sequential improvement over the first half or compared to last year. Only because you usually have seasonality because your first half is pretty strong compared to your second half. So I just wanted to get an idea that we're looking at improvements from the first half into second half, not necessarily comparing a Q3 to Q3 of last year.

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [13]

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That is correct. You should see sequential improvement from Q1 and 2 into Q3 and Q4. And you're right, there is some seasonality in our business and typically Qs 3 and 4 are lighter than Qs 1 and 2, but even with that, I -- we see some sequential improvement in revenues during the second half of the year.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [14]

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Well, that's good to hear. I just have one further question, I'll open it up for others that may have some questions. But you mentioned the reduction in high content vehicle platforms. That hurt you in the first quarter. It hurt you, again, this year -- excuse me, the second half -- second quarter. So your outlook for the -- your involvement in these platforms over the next year, how does it look the visibility that you have right now as far as these high content vehicles are for the second half of this year.

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [15]

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Yes. They look back -- they look to be back to normalized levels. So I think there were some inventory reductions that happened during the first half of the year on some of these vehicles and these are popular SUVs in a lot of cases. But they might had some inventory issues at the OEMs that they were trying to correct in the first half of the year. From what we can tell, they will get back to normalized levels in the second half of the year and from there on.

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Operator [16]

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And sir, there appear to be no further questions at this time. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [17]

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Thank you.