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Edited Transcript of UFAB earnings conference call or presentation 9-Nov-18 2:00pm GMT

Q3 2018 Unique Fabricating Inc Earnings Call

AUBURN HILLS Nov 21, 2018 (Thomson StreetEvents) -- Edited Transcript of Unique Fabricating Inc earnings conference call or presentation Friday, November 9, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Weinhardt

Unique Fabricating, Inc. - CEO, President & Director

* Thomas Tekiele

Unique Fabricating, Inc. - CFO & Secretary

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Conference Call Participants

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* Christopher Ralph Van Horn

B. Riley FBR, Inc., Research Division - Analyst

* John Nobile

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

* Matthew Butler Koranda

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Rob Fink

Hayden IR, LLC - EVP and General Manager of New York Office

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Presentation

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Operator [1]

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Greetings, and welcome to the Unique Fabricating Third Quarter 2018 Earnings Conference Call. (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 Hayden IR. Thank you. You may begin.

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Rob Fink, Hayden IR, LLC - EVP and General Manager of New York Office [2]

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Thank you, operator. I'd like to welcome everyone to Unique Fabricating's Third Quarter of 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 2018 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, 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, 2017, and was filed 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 as 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.

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [3]

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Thanks, Rob. Good morning, and welcome to Unique Fabricating's Third Quarter 2018 Earnings Call. Thank you all for joining us. During the third quarter, we faced headwinds as our customers continued to manage their vehicle inventories down rather than making up the volume they lost in the second quarter due to a supplier fire as they had indicated that they would. Despite this challenge, we delivered growth and continued to advance initiatives to streamline our production assets and align our cost structure to better adapt our operations to the fluctuations in demand that we're experiencing as a result of changing macroeconomic conditions. Industry-wide and customer-specific production changes have been disruptive to our business for the better part of 2018. The mix of new vehicle sales continues to shift away from passenger cars towards crossovers, SUVs and light trucks. While that mix shift dampens total light vehicle sales in the short term, it serves as a key driver to our longer-term outlook and planned program launches. Fortunately, we have a business model that provides us with some ability to flex and adjust our cost of operations in response to these changes.

Our operational efficiency, product launches awarded on crossovers, SUVs and light trucks and the continued demand for additional acoustical content on all vehicles are expected to enable Unique to continue to outpace our industry going forward. As we head towards year-end, all indicators point to production levels that will not overcome the reductions that have occurred year-to-date. In fact, while we had assumed 2018 light vehicle production would be back-end loaded based on industry forecast, it now appears that the fourth quarter is being used by our customers to make further downward adjustments to their inventory levels. As a result, we are lowering our 2018 full year guidance to align with current circumstances. We are lowering revenue by $10 million for a new range of $171 million to $175 million. We are lowering adjusted diluted earnings per share by $0.24 to a new range of $0.58 to $0.62, and we are lowering adjusted EBITDA by $3 million for a new range of $17 million to $18 million. The primary drivers of these revisions are the recalibration of our production schedules and industry forecast data, driven by the continued efforts of the OEM manufacturers to lower their vehicle inventory levels.

I remain encouraged in our longer-term outlook as our book of future business remains robust and we continue to pursue new programs, both domestically and abroad for our molded products and TwinShape duct programs. We are filling our pipeline with new programs for 2019 to 2020 and beyond, creating a foundation for future performance. New program launches scheduled now and -- between now and the end of first quarter 2019 remain on schedule and on budget, and our customers are pleased with our performance to date. At the same time, the level of new business proposal and quota activity has remained steady. The shift from combustion engine to battery electric vehicles continues to accelerate, and as we've shared before, electric vehicles typically include more acoustic content than traditional vehicles, which plays directly to our product offerings.

We are encouraged by the trends we're seeing in this segment of the market and the opportunities it represents for our business. We are actively engaged with customers to be a primary source for acoustic content for new models. During the third quarter, we were awarded a new program for our TwinShape ducts for a new electric vehicle that is scheduled to launch in China late next year and begin ramping up in 2020. Production of our ducts for this new program is slated for Malaysia through one of our licensees. Also during the third quarter, we completed the closing of 2 manufacturing facilities that we had acquired as part of 2 separate acquisitions: one in Port Huron, Michigan; and one in Fort Smith, Arkansas. These closings further streamlined our operations and improved efficiency. Production has been transferred and assets relocated, and the closings are now complete. We estimate annualized cost savings from this rightsizing of our production footprint to be more than $800,000. We are now beginning to realize these savings.

During October, we closed on the sale of our Arkansas property, which resulted in a onetime gain on sale of approximately $143,000. The net proceeds from the sale of approximately $870,000 were used to pay down our revolving credit facility. In the industrial portion of our business, we continue to explore a number of new product opportunities. We are actively engaged with customers for opportunities utilizing our molded product processes. In one case, we're entering a prototype phase with the customer in order to determine viability in terms of cost, performance and reliability. In another, we have been engaged to present new production design concepts to improve the performance of that customer's products, while addressing issues they are experiencing with their current designs. All of these development programs are targeted to produce incremental revenue opportunities that Unique can capitalize on in the next 12 months or so.

On the acquisition front, our appetite and level of activity remains unchanged. We continue to explore bolt-on acquisitions that can expand our product capabilities and offerings, affording us growth opportunities by cross-selling within our broad customer base. Before I turn the call over to Tom, let me touch on tariffs for just a moment since the topic remains in the headlines. We continue to monitor developments in trade policy closely. We have reviewed the current and publicly available documents related to the proposed U.S.-Mexico-Canada Agreement or USMCA, and at the present time, it does not appear that there would be any direct negative impact to our business. Naturally, it's difficult for anyone to predict the final outcome with a high level of certainty. We will keep you updated as events transpire and we gain more clarity about any changes.

I would now like to turn the call over to Tom Tekiele, our CFO, to review the quarterly results. Tom?

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Thomas Tekiele, Unique Fabricating, Inc. - CFO & Secretary [4]

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Thank you, John. Net sales for the third quarter of 2018 were $42.1 million compared to $41.2 million for the corresponding period in 2017, an increase of 2%. The increase was primarily driven by an increase in North American auto production of 4% quarter-over-quarter and offset by specific customer production disruptions that John referenced earlier. Of the $42.1 million in sales for the third quarter, automotive represented 84.6% of the total, industrial was 10.2% and other was 5.2%. Gross profit for the third quarter of 2018 was $8.5 million or 20.3% of total revenue compared to $9 million or 21.8% of total revenue for the corresponding period last year. The decrease in gross profit was primarily related to short-term operational inefficiencies that arose when we shifted production from our Fort Smith, Arkansas facility to our other company facilities as well as from excessive labor turnover in some production facilities due to tight labor markets. Selling, general and administrative expenses were $7.2 million for the third quarter of 2018 or 17.2% of net sales compared to $7.3 million or 17.6% of net sales last year. The decrease in SG&A on a dollar basis was primarily due to lower overall implementation costs incurred for our new ERP system. Operating income for the third quarter of 2018, inclusive of restructuring expenses, was $1.1 million or 2.7% of net sales compared to $1.7 million or 4.1% of net sales for the corresponding period last year.

Interest expense was $837,000 for the third quarter of 2018 compared to $770,000 for the third quarter of last year. The year-over-year increase was a result of higher overall debt balances and higher interest rates on the floating portion of our debt. As we discussed in the last quarterly earnings call, we closed 2 facilities in the first half of the year. In conjunction with these closings, we estimated a pretax restructuring charge of between $650,000 and $1.1 million for expenses related to severance, transition assistance for the employees impacted by the decision and for the relocation of equipment to other facilities. On an after-tax basis, this equates to approximately $0.05 to $0.08 in diluted GAAP earnings in 2018.

During the third quarter of 2018, we recorded restructuring expenses of $175,000 on a pretax basis, bringing the total restructuring expenses incurred so far related to the 2 plant closings to approximately $1.16 million or slightly over the $1.1 million estimate that we had given previously. All of the restructuring expenses related to the 2 plant closings have been recorded, and we do not expect to incur any additional expenses. As John mentioned in his remarks, during October we sold the Fort Smith, Arkansas facility and use the proceeds of approximately $870,000 to pay down our revolving credit facility. As a result of the 2 plant closings, we anticipate annualized pretax cost savings in excess of $800,000, and we are beginning to realize those savings in the fourth quarter. Income tax expense for the third quarter of 2018 was a benefit of $321,000 compared to income tax expense of $261,000 in the year-ago period. The income tax benefit was due primarily to onetime provision- to- return adjustments on the 2017 tax return related to research and development credits and domestic production activities deductions. Net income for the third quarter of 2018 was $627,000 or $0.06 per basic and diluted share compared to $715,000 or $0.07 per basic and diluted share in the third quarter of 2017. The decrease in net income was primarily due to the gross profit decreases and the restructuring expenses I mentioned, which were partially offset by higher sales. The diluted weighted average shares outstanding remained steady at approximately 9.9 million in the third quarters of both this year and last year. Adjusted EBITDA for the third quarter of 2018 was $3.4 million compared to $3.7 million in the third quarter of 2017. Adjusted diluted earnings per share was $0.11 for the third quarter of 2018 compared to $0.10 in the year-ago period.

Turning to our year-to-date results now. Total revenue for the first 9 months of 2018 increased to $135.1 million, up 1.1% or $1.5 million from $133.6 million during the same period last year. Gross profit for the first 9 months of 2018 was $30.8 million or 22.8% of total revenue compared to $30.7 million or 23% of total revenue in the comparable period last year. Net income for the first 9 months of 2018 was $3.9 million or $0.40 per basic and $0.39 per diluted share compared to $4.4 million or $0.45 per basic and diluted share in the comparable period last year. Adjusted EBITDA for the first 9 months of 2017 (sic) [2018] $13.9 million compared to $14.1 million in the same period last year. Adjusted diluted earnings per share for the first 9 months of 2018 was $0.54 compared to $0.52 in the same period last year. The diluted weighted average shares outstanding were approximately 9.9 million for each of the first 9 months of 2018 and 2017.

Turning to the balance sheet. As of September 30, 2018, the company had cash and cash equivalents of approximately $1 million compared to $1.4 million as of December 31, 2017. As of September 30, the company had total debt of $55.8 million, which includes term bank debt of $27.7 million and revolving line of credit borrowings of $27.6 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 of 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 $4.6 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 September 30, 2018.

Earlier this week, we entered into an amended and restated credit agreement with our bank group. The agreement combines our 2 previously outstanding U.S. term loans and increases the principal amount of those loans to an aggregate total of $26 million by terming out a portion of the borrowings currently outstanding on the revolving line of credit, while continuing to provide for borrowings of up to $30 million under the revolver, which is subject to availability. In addition, the agreement creates a new 2-year $5 million line of credit to fund future capital expenditures, extends the maturity date of all borrowings from April 28, 2021, to November 7, 2023, and revises the amortization schedule of both the new U.S. term loan and the current Canadian term loan. We believe the new agreement will provide adequate liquidity for the company for years to come. Finally, earlier today, the company's Board of Directors approved payment of a quarterly cash dividend of $0.15 per share to be paid on December 7, 2018, to shareholders of record as of the close of business on November 30, 2018.

I'll now turn the call back over to John.

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [5]

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Thanks, Tom. In summary, we are navigating a challenging market environment to maintain growth in excess of the industry and prudently managing our cost structure, while continuing to invest in product development that supports our pursuit of new business. We remain optimistic about the prospects for our business in 2019 and beyond, despite the challenges we have faced in 2018.

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) Our first question is from Chris Van Horn from B. Riley FBR.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [2]

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So it sounds like you had some new award activity during the quarter. You highlighted in the 8-K around truck and SUV. I'm just wondering if you could get into some more clarity on those wins. Were those new customers? Were those new programs, new launches for you? What was the detail there?

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [3]

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Yes. In one case, it's a relatively new customer. They're new within the last year, and all of them are on new programs that'll launch in either '19 or '20.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [4]

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Okay. Great. And as you look at the pipeline and maybe some of the new award activity as well, how is that playing out from a regional perspective? And is Europe and China playing a bigger role for you?

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [5]

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Well, we primarily focus on North America, but as I mentioned earlier in the call, we have been awarded some TwinShape duct business on a SUV that's all-electric SUV that's being launched in China. Now that vehicle is intended eventually to be exported to the U.S. and exported to Europe, but production is in China. And obviously, China being the largest battery electric vehicle market in the world, initially, they're going to serve that market. But at the moment, that's our only direct Asia business, and we'll just see how that plays out.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [6]

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Okay. Great. And then looking at the product launch cadence heading into 2019 and beyond, have you -- how -- what does that kind of look like? And how is -- how are product launch costs kind of set up for you all? And how do you see those going forward?

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [7]

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Well, the cadence is pretty steady through '19 and '20. As far as launch costs, we don't -- the capital investment -- a lot of the capital investment for the programs that launch early in '19, we've already expanded this year and got the equipment on the floor, and the tooling is nearing completion. As far as the actual cost of the launches themselves, we don't anticipate anything unusual. It should be pretty much business as usual.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [8]

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Okay, okay. Good to know. And then I think you talked about an $800,000 in potential savings. Are you at that run rate right now? Is that something that we can expect for the full year of 2019?

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

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Yes, so starting in the fourth quarter, we should be at that annual run rate. So for 2019, we believe we'll have a full year of those benefits.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [10]

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Okay. Great. Is there anything else from an operational perspective that you see outside of that $800,000 that looks like low-hanging fruit? I think you mentioned you found some things this quarter as well. Just anything else there?

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [11]

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We have -- well, we have a number of ongoing continuous improvement programs, Chris. And we're adding robotic trimming to some of our molded products operations. We've added visual camera inspection on a number of lines. So we continue to add things that reduce our labor cost and also frankly, improve our quality. And that's kind of an ongoing process.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [12]

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Okay. Got it. And then you talked a little bit about the new NAFTA 2 or the USMCA. I'm wondering if the China tariffs have any impact for you. I know we're going up to 25% at the end of the year. Both from a input cost perspective but also from a competitive perspective, does that -- do you compete with some Chinese importers on some of your products? And will this maybe be a potential share grab for you from that perspective?

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [13]

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It's -- for us, it's a pretty neutral event. The -- our products are pretty light in weight, and many of them are bulky relative to their weight. So if you have to ship them very far, then your transportation cost becomes a disproportionate part of the delivered cost. So the good news is that, that shields us or protects us from anybody exporting business from China or exporting business from Europe to North America. So the tariffs won't have a direct impact on us because we don't really compete with offshore competition. If a competitor wishes to compete on our products in North America, they have to set up shop in North America and compete as a domestic supplier. Having said that, the only real impact would be long term, if it had an effect on overall vehicle sales. And at this point, we can't really make any predictions about that because presumably, if something isn't being imported as a vehicle, then that demand would be met by some other vehicle that's being produced domestically.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [14]

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Right. Okay. Got it. And then as I see, you guys have been able to kind of outperform underlying production, even in some challenging times. When I look at 2019, do you -- maybe even beyond, do you expect that continued performance to continue? And then any kind of variation to that, any clarity around that would be interesting as well.

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [15]

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Yes, obviously, we're still trying to determine what the market itself is going to do. Their -- the bulk of the forecasts for next year say it will be flat with this year. At this point, I guess, I hope that's the case. Regardless though, in answering your question, yes, we do expect to outperform whatever the underlying market is. So if it is indeed flat, we would still expect to see 4%, 5% kind of growth.

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Thomas Tekiele, Unique Fabricating, Inc. - CFO & Secretary [16]

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And to John's point, I mean through Q3, Chris, our auto sales are up 4.5%, and auto production is down 0.5 a point year-over-year through Q3. So we are 5% over the market in -- so far in 2018.

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Operator [17]

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(Operator Instructions) Our next question is from Matt Koranda from Roth Capital Partners.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [18]

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Just the guidance revision, I guess, suggests that in Q4, we're turning negative year-over-year in terms of the top line. So just anything specific about the mix or certain programs that's driving the change to the outlook? And maybe just by vertical, if you could, as well.

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [19]

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There really isn't. The -- I mean the mix overall this year has continued to trend more toward crossovers, SUVs and light trucks, but the mix in the fourth quarter is frankly no different. It does not appear to be any different than the mix in the first 3 quarters. What we're seeing is just general softening in the industry and specifically, some of our customers truing up their inventory or frankly reducing their inventory prior to year-end.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [20]

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Okay. And then over the I guess, the next year or medium term or longer term, I guess does this change at all your expectation, which I think you guys have stated on a number of occasions that you should be growing in excess of production by maybe, call it, 500 basis points or so?

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [21]

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It does not change the fact that we expect to outperform the market. The $64,000 question is, what will the market be? But if the market's flat, I would expect us to be up 4% to 5%. If the market's down 1% or 2%, then I'd expect us to be up 2% or 3%.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [22]

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Okay. Got it. And then just in terms of the gross margins, I guess you've referenced there was some inefficiencies with labor and some turnover. So I was curious, I mean, is the problem more on the wage inflation side for you guys or is it inefficiencies from the labor turnover. Could you get into the details there a little bit?

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Thomas Tekiele, Unique Fabricating, Inc. - CFO & Secretary [23]

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Well, in the third quarter, Matt, the biggest issue was the move of the Fort Smith production to other facilities in the company, which caused some excess scrap and excess labor at those facilities. That was the biggest issue. We are also still experiencing some labor inefficiency in terms of turnover, which has caused us to have to raise some starting wage rates and whatnot in certain facilities to be able to keep people on board.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [24]

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Okay. And does that, I guess, mean that we're sort of running in the low 20s for the foreseeable future? Are there levers that you can kind of pull to get us back in the 25% range?

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Thomas Tekiele, Unique Fabricating, Inc. - CFO & Secretary [25]

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No, I -- obviously, the sales declined in the third quarter versus as well, and we're not covering our fixed costs as well. And in the fourth quarter, that's going to be a challenge also. But as the sales increase, I don't think that we'll be running in the low 22s going forward, no.

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [26]

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We expect it to return to more typical levels, Matt.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [27]

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Okay. That's helpful. And then on the TwinShape, when -- in the launch of production in Asia, I think you guys referenced you've got a licensee producing that product. So do you envision that as sort of a model that may play out with additional program wins on a global basis? I mean, how -- I guess how does the licensing model impact your P&L going forward? And is that any meaningful part of your bid pipeline on a go-forward basis?

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [28]

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That would depend on what wins we got. Frankly, the situation on those -- the award that we just received is it's certainly business that we want, but it's not enough business for us to justify putting a brand-new production facility in China. So we elected to go with our licensee in Malaysia. And again, as the volumes continue to grow, because they're shipping more business behind us, at some point, as long as it's a market we can serve from Malaysia, we're content to do it with a licensee. If it gets to the point where both they and we feel that it warrants a production facility in China, then we would probably approach that as a joint venture. So I don't think you should assume any given model. It's going to be situational. If the -- if we get a big enough business in China, we'll eventually put something in China. But we're not prepared to make that kind of investment in time or energy or money until we have a whole lot more business and a lot more clarity on the future. So for now, we're content to work with a licensee, and it's a good royalty rate, but it's not quite the same as making it yourself.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [29]

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Okay. So we shouldn't read anything into that first licensing sort of agreement that maybe you're making a bigger push on that front to develop a big licensee pipeline or anything like that?

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [30]

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No. I wouldn't reach that conclusion because eventually, if there is enough business to be had, whether it's in Asia or in Europe, we would expect to eventually have a presence there.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [31]

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Okay. And then just last one. You referenced and talked a little bit about the shift toward electric vehicle. But what I wanted to understand was are you seeing more of a shift like in your quotation activity as it pertains to EVs? And then could you remind us like what is the content per vehicle difference between a typical internal combustion engine vehicle and a battery electric vehicle?

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [32]

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All right. Well, as far as the shift, what we're seeing is that our customers are developing more battery electric and plug-in hybrid vehicles that they're going to be introducing from 2020 through 2025. So the vehicles that are being designed and developed as we speak, they're just a higher percentage of the total is becoming battery electric or plug-in hybrid. So we would -- it will grow as a segment of or a sub-segment of the market, and we expect to grow with it. We're not quoting more because at this point that -- we only quote them as they get close enough to production that they put business out for bid. So we're seeing anything launching in '19 and '20, we are seeing the stuff that's going to launch in '21, '22 and '23, which is where you'll really start to see an even bigger uptick. That business is not yet out for award. As far as the percentage, I can't put a hard percentage on it, I would just say the battery electric vehicles are much quieter because there's no engine noise producing what amounts to white noise. So they have to have more acoustical content in order to offset that. Having said that, it's hard to say what the percentage is because in some cases, it's not more product. To the extent it's more product is 5% more per vehicle. The bigger impact is it's frequently better product, a higher grade of product, which is more costly. And that can jump it up 10%, 15%, depending on what they use.

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Operator [33]

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(Operator Instructions) Our next question here is from John Nobile from Taglich Partners.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [34]

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All of my questions were addressed already, but any comment to the auto production for the quarter? North American production, it was up 4.2%. Obviously, the customers reducing their inventory affected you to the point where you grew less than the industry. And it looks like that's going to continue into the fourth quarter judging by your guidance, actually, even to a greater degree than we saw in the third quarter. But I just wanted to find out the reasoning for the OEMs' reduction in inventory levels. And when do you see this basically behind you? I mean are we looking at -- I don't know if you have any visibility into Q1 right now as far as the buildup in inventory. I'm trying to get an idea of when you might be able to start to exceed industry production levels.

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [35]

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Well, I think the inventory correction is a response that our customers are making to their vehicle sales. I mean they've produced more vehicles than they see selling, and so they're cutting back production to kind of get it more in sync with the actual sales that they're seeing. That -- basically they should have that trued up by the end of the quarter, and assuming that they do it properly, we would not expect -- what'll happen instead is they will reduce their production for next year to match whatever they perceive the sales to be. So what I -- I'm not sure how to answer the question, John. The specific inventory adjustment will be in this year, and they'll make other adjustments next year if they need to because of a mismatch. As far as the overall market, whatever vehicle production level they settle at, then yes, we still expect to exceed it. But I don't know what that level will be. Right now, everything we're seeing says that level will be flat. Rolling into the first quarter next year should be similar to the fourth quarter of this year, except for the fact that fourth quarter this year also has a number of holidays in it, so there are just fewer production days. So in absolute numbers, the first quarter next year will be higher, and we would expect to be up accordingly.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [36]

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Okay. I mean up accordingly, but from what you see, up in relation to the industry. I mean, typically, you're fairly easy to model out because of the 4% to 5% growth above the industry. I'm just trying to get a handle on when to expect that, to get your visibility into, say, Q1. Do you believe at this point...

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [37]

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I -- yes, I -- the -- in terms of the model, yes, we expect to be 4%, 5% above whatever the industry level is beginning, again, in the first quarter next year.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [38]

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Okay. I just -- I wanted to see if you had the visibility at least into that first quarter being we're halfway through the fourth quarter right now. Now if I can get back, in late 2017, you had booked $10 million in new business. Now that is supposed to be, from what I heard last, I think, on last call, that's supposed to be scheduled to start shipping in the fourth quarter. I just want to get a feel for is that still on track. Are we looking at that $10 million in new business to be starting to kick in, in this fourth quarter? I'm not sure, judging by the guidance. And also into 2019, I think it was supposed to be a full run rate of $10 million for the year. Are we still looking at that contract to be fully accretive to top line in 2019? And will some of it show up in the fourth quarter?

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [39]

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The -- no. Some of the production has already started, but it's what they call system fill or preproduction. The actual run rate of $10 million will start toward the end of the first quarter next year. So to see a run rate of $10 million a year, we will not see that run rate until Q2 and beyond of next year. We'll be gradually ramping up between now and then.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [40]

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Okay. But you said the full production by the end of the first quarter of that $10 million annual business, so we should see at least 3 full quarters of it. Or if I could just make it linear, at least $7.5 million?

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Thomas Tekiele, Unique Fabricating, Inc. - CFO & Secretary [41]

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That's correct.

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [42]

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That's correct. I mean, it's never quite linear, but yes, in principle, we'll see 3 quarters of it next year.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [43]

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All right. And just one final question because the press release talked about the new TwinShape contract, and I think it was scheduled for a year from now, the fourth quarter of 2019. Was it -- I know there were no numbers put in there, but I was hoping you might be able to quantify that on an annual basis. What are we looking at as far as 2020 is concerned with that contract?

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [44]

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I honestly don't remember off the top of my head, but it's a single vehicle, John. So its -- typical volumes on something like that are going to be about 100,000 vehicles. So it's going to be...

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Thomas Tekiele, Unique Fabricating, Inc. - CFO & Secretary [45]

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Less than $0.5 million, probably.

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [46]

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Initially.

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Thomas Tekiele, Unique Fabricating, Inc. - CFO & Secretary [47]

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Initially, yes.

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [48]

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It's the first of a series of 3, and they haven't announced the launch dates for the next 2. So I would say in 2020, it would probably amount to $500,000 or $600,000 of business that could go up if they launched at least the second vehicle during 2020.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [49]

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Okay. I just wanted to get -- I know because the numbers weren't put in there. I wanted to get an idea of the magnitude or just to see how significant this could be. Last and a lot of my questions were addressed. That's all I have.

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Operator [50]

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(Operator Instructions) If there are no further questions, I'd like to turn the floor back to management for any closing comments.

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John Weinhardt, Unique Fabricating, Inc. - CEO, President & Director [51]

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Well, as we said earlier, it's disappointing to see the industry volume has dropped here at the very end of the year, but the longer-term forecast suggests that next year should be flat with this year. And again, the longer-term forecast sees the industry increasing in '20 and '21. Regardless of that, based on our book of business and the programs that we're engaged in, we still expect to exceed whatever the industry level is in 2019. And so although this year is ending on a somewhat disappointing note, we're looking forward to continuing to outperform the industry going forward. I'd like to thank everybody for joining us.

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Operator [52]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.