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Edited Transcript of UFAB earnings conference call or presentation 9-May-19 1:00pm GMT

Q1 2019 Unique Fabricating Inc Earnings Call

AUBURN HILLS Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Unique Fabricating Inc earnings conference call or presentation Thursday, May 9, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Richard L. Baum

Unique Fabricating, Inc. - Chairman of the Board

* Thomas Tekiele

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

* Rob Fink

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

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Conference Call Participants

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* John Nobile

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

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Presentation

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Operator [1]

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Greetings, and welcome to the Unique Fabricating's First Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Rob Fink of Hayden IR. Please go ahead.

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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 First Quarter 2019 Earnings Conference Call. Hosting the call today are Richard Baum, Unique Fabricating's Chairman; and Tom Tekiele, Unique Fabricating's 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 forward-looking statements are based on management's present expectations and subject to certain risk factors and uncertainties that may cause these actual results, outcomes of events, 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, 2008 (sic) [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 including in this morning's press release are made as of today, and Unique Fabricating does not intend to update this information unless required by law. 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 that 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 Rich Baum. Rich, the call is yours.

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Richard L. Baum, Unique Fabricating, Inc. - Chairman of the Board [3]

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Thanks, Rob, and good morning. Thank you all for joining us. Yesterday, we announced that for personal reasons, related to health issues, John Weinhardt has tendered his resignation. As many of you know, John was appointed to Unique's Board of Directors in 2008, and he has served as the President and Chief Executive Officer for the past 10 years.

On behalf of the Board of Directors and all of our employees, I'd like to wish John good health and thank him for his dedication and leadership over the past decade. John will remain on the Unique Board of Directors to ensure a smooth transition.

John stepped into the role as President and CEO in 2009 during a time of industry upheaval. As I'm sure you remember, 2009 was a challenging year for most companies, especially for those companies that serve the automotive sector. John played a vital role in stabilizing the business in the wake of rapid and dramatic production declines. And in the years since, he has been instrumental in evolving and diversifying Unique Fabricating into the company it is today.

While Unique has experienced some performance challenges over the last year, it's important to remember that Unique Fabricating enjoys a low CapEx business model, supported by a diversified customer base, revenue contributions from outside the automotive sector and the ability to quickly scale up or scale down expenses and staffing to adjust to near-term demand.

In recent quarters, these strengths have been obscured by unexpected short-term industry challenges. Unique's current debt service levels has made these challenges even more significant, but these are short-term issues. And longer term, we believe that the wind is at our back.

Unique has continued to focus our energies on the growing segments of the market, SUVs, electrical -- electric vehicles, and the pace of new vehicle launches in these segments is accelerating. This will help improve our product mix and reduce our vulnerability to certain segments of the market that are declining, like passenger cars.

One of the fastest-growing areas in the compact sport -- is the compact sport utility segment. That segment is experiencing a growing use of Unique's products to improve acoustical and sealing performance.

The Board's recent decision to reprioritize our capital allocation strategy coupled with unexpected improvements in revenue and profitability, as we continue through 2019, will position us to pay down debt. We anticipate that these changes will allow Unique to return to its historical track record of outperforming the industry.

The Board of Directors has established an executive search and oversight committee to identify a new Chief Executive Officer and to help support the management of the company until a successor is appointed. The committee is comprised of myself, Kim Korth and James Illikman.

As founder of 6th Avenue Group, Kim is an expert in improving sustainability of mid-market manufacturing and technology companies. Kim currently serves as the President and CEO of bb7, a privately held product development company, and previously, she was CEO of TECHNIPLAS, a privately held group of specialized plastic companies that primarily serve the automotive, commercial vehicle and infrastructure industries.

James has more than 20 years of experience in private equity, mergers acquisitions, corporate finance and operations management. He currently works for Peninsula Capital Partners, a mezzanine and equity capital fund manager, who is also our largest shareholder.

As part of this transition, Tom Tekiele, Chief Financial Officer; Scott Reed, Vice President of Operations; and Brad Hazen, Vice President of Business Development will take on additional responsibilities to oversee operations and provide interim leadership, in conjunction with the executive search and oversight committee until a successor is appointed.

To help identify a new CEO, the Board has engaged a highly regarded and specialized executive search firm. In the meantime, the transition leadership team has the full support of the Board. And I am confident together, Scott, Tom and Brad, and the rest of the senior leadership team will provide the interim support and direction that is needed to keep our operation and business efforts running smoothly.

I'd now like to turn the call over to Tom to provide operational update and to review the financial results for the first quarter. Tom?

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

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Thanks, Rich. During the first quarter, Unique Fabricating continued to navigate production disruptions and inventory corrections in the auto sector. Heading into the year, independent industry analysts projected that North American auto production and sales would be flat. But as a result of some industry and economic turmoil, bad weather, changing consumer preferences and the higher-than-usual inventory levels from some of the largest manufacturers, new vehicle production during the first quarter declined an estimated 4.2% and industry sales declined 3.2% on a year-over-year basis.

For Unique, those headwinds were exacerbated by an unfavorable production mix as well as the loss of business due to the end of life of certain vehicle platforms and loss of business at 2 major nonautomotive customers as a result of our decision to close our Fort Smith facility last year, all of which compounded the impact on our financial results during the quarter.

In response to this, we accelerated efforts to reduce our fixed cost during the quarter, including a workforce reduction that will save approximately $850,000 on an annualized basis. In addition, we have identified opportunities to take additional action to improve our operational efficiency if lower-than-expected production and sales trends continue.

We are, however, beginning to benefit from new vehicle launches that commenced subsequent to the end of the first quarter, including a direct program with an automotive OEM for a large SUV platform where we have a significant amount of content.

It's important to note that new vehicle launches not only offer us product revenues that we have previously been awarded, but they create opportunities for new product sales as OEMs will need to quickly fix unplanned noise and sealing issues that are commonly found when the production of a new vehicle begins.

Historically, some of our highest-margin opportunities were created by providing a solution to an unplanned production issue. As the production of these new platforms ramp and potential opportunities are created, we believe we will be better positioned to mitigate the volatility we experienced during the first quarter. At the current time, we do not anticipate recovering the full scope of the business that failed to occur in the first quarter though.

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 we are engaged in with customers, we do expect that our results will improve incrementally over the course of 2019 and into 2020, positioning us again to outperform the overall industry trend and grow annual revenues in 2020 on a year-over-year basis.

As a direct result of the challenges that we faced in the first quarter and the impact it had on our financial results, we secured a temporary waiver from our lenders related to the violation of the leverage ratio covenant of our credit agreement. As a condition of this waiver, we are suspending our dividend program, which supports our strategic priority to reduce our financial leverage, giving us greater flexibility and enhanced operational and strategic options going forward.

At the macro level, the trends driving the automotive industry today, specifically the shift from combustion engines to battery electric vehicles, vehicle lightweighting and enhanced infotainment and voice integration, are beneficial for our product offering. Most notably, the shift to electric vehicles and the need for manufacturers to dampen noise that would otherwise be masked by a combustion engine lead to more acoustical content which in turn drives demand for a number of our product lines.

With these trends and our visibility into new awarded programs that are scheduled to launch over the next 12 to 24 months that I previously mentioned, our long-term outlook is strong. That said, we are cognizant of how recent production volatility has impacted the current market environment.

And given the transition that we are embarking on to identify a new CEO, the Board has made the prudent decision to eliminate our annual guidance until a new CEO is appointed. Again, we do expect our financial results to incrementally improve over the course of this year and for the second half results to be stronger than the first half.

In the first quarter, net sales were $39.5 million compared to $47.3 million for the corresponding period in 2018, a decrease of 16.6%. The decrease was primarily driven by the 4.2% decline in North American vehicle production quarter-over-quarter, the loss of business due to the end of life of certain vehicle platforms, the loss of business at 2 major nonautomotive customers as a result of our decision to close our Fort Smith, Arkansas, facility in June of 2018 as well as significant declines in production on some of our highest content vehicle platforms.

Of the $39.5 million in net sales for the first quarter, automotive represented 86.2% of the total, industrial was 9.5% and other was 4.3%.

Gross profit for the first quarter of 2019 was $8.3 million or 21% of net sales compared to $11.1 million or 23.4% 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 $7.3 million for the first quarter of 2019 or 18.4% of net sales compared to $8 million or 16.8% of net sales last year. Despite the decline in gross dollars quarter-over-quarter, SG&A did increase on a percentage of sales basis, due again to the lower sales in the first quarter of 2019.

Operating income was $937,000 for the first quarter of 2019 or 2.4% of net sales compared to $2.7 million or 5.7% of net sales for the corresponding period last year.

Interest expense was $1.1 million for the first quarter of 2019 compared to $736,000 for the first 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 higher interest rates on the floating portion of our debt. The valuation of the swap had a negative impact on GAAP EPS and adjusted EPS of approximately $0.02 per diluted share.

Income tax expense for the first quarter of 2019 was $43,000 compared to $387,000 in the year ago period. The decrease in income tax expense was due primarily to the lower earnings this year.

Net loss for the first quarter of 2019 was $189,000 or $0.02 per basic and diluted share compared to net income of $1.5 million or $0.15 per basic and diluted share in the first quarter of 2018. The decrease in net income was primarily due to lower sales resulting in a gross profit decline as well as higher interest expense due to higher interest rates and the noncash on favorable mark-to-market on the interest rate swap.

Adjusted EBITDA for the first quarter of 2019 was $3 million compared to $4.9 million in the first quarter of 2018. Adjusted diluted earnings per share was $0.01 for the first quarter of 2019 compared to $0.21 in the year ago period.

Turning to the balance sheet. The company had cash and cash equivalents of approximately $1.3 million as of March 31, 2019. Also, as of March 31, the company had total debt of $54.3 million, which includes term bank debt of $36.8 million and revolving line of credit borrowings of $17.5 million net of debt issuance cost. The company had $12.5 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 March 31, 2019.

As I mentioned earlier, we secured a waiver from our lenders subsequent to the end of the first quarter related to the violation of the leverage ratio covenant of our credit agreement. As a condition of this waiver, we are suspending our dividend program, which supports our strategic priority to reduce our financial leverage, giving us greater flexibility and enhanced operational and strategic options going forward.

With that, we will now 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 comes from the line of Matt Koranda of Roth Capital Partners.

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Unidentified Analyst [2]

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This is Mike on for Matt. And first of all, I just wanted to give our well wishes to John, and we hope everything's all right on his end.

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Richard L. Baum, Unique Fabricating, Inc. - Chairman of the Board [3]

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Thank you. I'll pass it along to him.

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Unidentified Analyst [4]

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Okay. Great. And so I'll jump right into questions. I calculate a 16% decline in auto revenue in the quarter versus, I think, it was roughly a 4.2% decline for industry production. And we knew about some of the headwinds, like the GM headwind and the 2 lost customers from the Fort Smith closure. So I was just wondering, was this level of decline in your plan or were there some additional unexpected headwinds that occurred? And if so, can you touch on those and quantify them, if possible?

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

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Yes. Some of the headwinds, in addition to what you mentioned were that some of the high content platforms that we have, which include SUVs and light trucks, obviously. The production on those platforms was significantly down quarter-over-quarter.

It was not forecasted to be down as such according to IHS' and LMC's production forecast that we use for our plan. But actual production in the quarter was significantly less on about 8 or 9 large platforms -- some of our largest platforms that -- than was originally thought that they would be down.

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Unidentified Analyst [6]

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Okay. That's helpful. And switching gears a little bit. Regarding the covenant violation, how long would the proposed waiver last for? And when do you expect approval from the other members of the syndicate?

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

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The waiver has been approved by other members of the syndicate. So it's approved through June 15 at this point. The plan is to have the banks out for a meeting shortly after the earnings week here and do an amendment to the credit agreement to amend the covenants as necessary on a go-forward basis.

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Unidentified Analyst [8]

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Okay. And so do you have any color on, or knowledge yet, of what the covenant will be? And maybe how much incremental interest expense you expect to obtain the higher covenant?

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

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I don't have any indication on what that higher interest rate is going to be if at all. There is nothing with regard to the waiver in terms of a higher interest rate. But if we win and if we amend the credit agreement, there will be, I'm assuming, some sort of higher interest cost. I don't have an answer for that just yet.

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Operator [10]

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Our next question comes from the line of John Nobile of Taglich Partners -- Taglich Brothers, pardon me.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [11]

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Actually, some of my questions were already addressed. But I have a couple I'd like to just get some insight into. In particular, I was wondering if you could talk a little about how the closing of a facility adversely impacted your appliance business? And what should we expect going forward in regard to this?

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [12]

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The closing of the facility -- when we closed it, we told the customer that we'd be moving that production to another of our facilities. They were -- they would like to have or they wanted to have somebody close by to them to supply those parts. So they informed us that if they could find somebody, their plan would be to move the business, again, if they could find somebody that would locate close to their facility. They ended up getting somebody to move into a facility in the Fort Smith, Arkansas area and, therefore, took the business from us after we had moved it.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [13]

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And how much -- yes, I'm just trying to get an idea of the revenue of that business.

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [14]

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It was about $5 million to $6 million annually, John.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [15]

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Okay. And in regard to the reduction in cost, you made some good strides there. But you're talking about further reductions. I was wondering if we could get some kind of an idea, if you could quantify how much further you believe you could reduce the cost in 2019.

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

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We'd be -- we're thinking that we can take out about another $1.4 million on an annualized basis in 2019 and then in 2020, over $2 million on an annualized basis also. So...

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [17]

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On top of the $1.4 million?

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [18]

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Correct. So that is the strategy that we're following at this point.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [19]

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And in the press release, you talked about end of life of certain vehicles. I just wanted to get an idea of how much that really did impact sales in the quarter, the end of life of these vehicles. If you could shed a little more light on that, please?

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [20]

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It impacted the sales in the quarter by about $2.2 million, John. So there was a particular platform where we had a large content, specifically parts that were made in our London, Ontario facility. These parts were not carried over to the new version of the vehicle. They were adhesive parts that attached certain things on the outside of a pickup truck. And the new pickup truck launch did not have these body side moldings and things like that that were attached by our die-cut tape.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [21]

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Okay. And I just have one other question in regard to the interest expense. I noticed the -- actually it surprised me, it was $1.1 million. But you had mentioned that there was an interest rate swap impact that adversely affected that. So I was wondering if you could quantify what that impact was from the interest rate swap to get an idea of what the actual interest was.

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [22]

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It was about $270,000 of additional interest expense due to the swap.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [23]

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And going forward...

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [24]

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Noncash, obviously.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [25]

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Yes. I know, noncash. But going forward, should we -- I mean, interest rate swaps, do you still have any on the books? I mean should we look at the -- a potential (multiple speakers).

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Thomas Tekiele, Unique Fabricating, Inc. - Interim CEO, CFO & Secretary [26]

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Yes. The swap is on the books. It obviously depends on -- it's marked-to-market every quarter. And obviously, if interest rates stay where they are today, it won't get any worse. If interest [multiplies], it'll get better. And if they go down, obviously, we're going to continue to have the unfavorable mark-to-market.

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Operator [27]

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At this time, there are no further question over the audio portion of the conference.

This does concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.