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00:35 Thank you, Kate. I'd like to welcome everyone to Unique Fabricating’s third quarter twenty twenty one earnings conference call.

Hosting the call is Doug Cain, Unique Fabricating's President and Chief Executive Officer; and Brian Loftus, Unique Fabricating's Chief Financial Officer. 00:49 Before I turn the call over to Doug, I'd like to remind everyone that matters discussed on this conference call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of nineteen ninety five 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 to be materially different from any future results, levels of activities, performance or achievement expressed or implied by statements on today's call. 01:22 All such forward-looking statements are based on management's present expectations and are subject to certain risk factors and uncertainties that may cause actual results, outcomes, 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 thirty one, twenty twenty, which was filed in April of this year, with the SEC pursuant to Rule 424(b) and in particular, the section titled Risk Factors. All statements made on this call and including those in this afternoon’s press release are made as of today, and Unique Fabricating does not intend to update this information, unless required by law.

02:02 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 on this call will be on a GAAP basis.

Full reconciliations of GAAP to non-GAAP are included in the press release that was issued earlier today. 02:34 With that, I'd now like to turn the call to Doug.

Doug, the call is yours.

02:40 Thank you, Jeff, and good afternoon, everyone. Unique Fabricating, Brian and I appreciate your investment of time for our update of the company's outlook, overall operations and financial results.

Unique Fabricating continues to navigate unprecedented and ongoing challenges for the markets we serve, while providing our customers timely delivery of quality product and by winning new business. 03:09 As we began to emerge from the worst of the pandemic, new challenges from shortages of raw materials and labor plus inefficient logistics created new obstacles for our customers and the entire automotive and appliance to supply chains.

This has led to a continuing market condition of increasing raw material, labor and logistics cost with comprehensive operational inefficiencies, resulting in decreasing margins. 03:39 As volume projections and customer releases are constantly being revised, forecasting and planning effectively are very difficult.

Through all of this Unique Fabricating has been able to maintain or strengthen customer and supply relationships, while increasing organizational capability, albeit with results that are not what we had originally expected. We are not satisfied with our financial performance.

And as these challenges abate, we are confident that we have taken the steps necessary to show improved performance with higher volumes. 04:19 Our ability to maintain liquidity and to service our customers effectively, while working closely with our supply base is creating both near term, and longer term opportunities for us.

The impact of the continuing challenges on the supply base are leading to movements within the industry, including resourcing of business and supplier consolidation opportunities. Several of our customers are approaching us about takeover work from their suppliers who are unable or unwilling to navigate these challenging times.

I am encouraged with how our entire team has met these existential challenges head on. Taking care of our customers every day and maintaining our position as a partner upon whom our customers know they can rely.

05:10 As a part of the effort to better position the company to be opportunistic, we executed a private placement equity raise of approximately four million dollars in September. This demonstrates the ongoing strong support from our shareholders and Board for the actions taken over the last two years to build a highly capable organization, well positioned to profitably benefit from the expected volume increases in all our markets in twenty twenty two and beyond.

05:43 On the demand side through Q3, our transportation and appliance market customers reduced releases well below any previous third-party estimates resulting in our recording three percent lower net sales in Q3 compared to Q2. The primary causes are continued shortages of key materials, primarily chips and certain petroleum based products as well as labor and logistics challenge.

Compared to previous third-party forecast, and as has been widely communicated, that Detroit Three auto manufacturers and their tier suppliers have been more dramatically impacted by these shortages in Q3 than in Q2 causing greater production reductions than the overall market. 06:32 The previously communicated third-party estimates showed eighteen percent higher North American light vehicle production in Q3 versus Q2.

During our previous earnings call, we stated that we have been skeptical of the magnitude of these forecasted increases. But we had not anticipated actual North American production to decrease six percent from Q2.

With its corresponding negative impact on our Q3 net sales. 07:03 We see continued strength for our offerings to the appliance industry and our outlook for this market is improving.

We recently began shipments for our latest consumer goods order intake wins and expect this market to grow for the company. 07:20 On the supply side, the labor availability challenges related to COVID and cost increases in our supply chain, including labor, logistics, packaging and raw material have persisted with costs in Q3 continuing to increase over Q2 levels.

These factors negatively affected our margins along with the continued impacts of operational inefficiencies, resulting from the ongoing short. or no noticed customer order fluctuations.

Plus supplier issues with allocations, force majeure, et cetera, over the last months. 08:00 However, with the limited specific exceptions, we've been able to secure necessary materials to meet our customer commitments for on-time delivery, with the result that our outbound expedite costs have got significantly since Q2.

We do expect to see continued challenges from the chip shortage and other factors outlined previously, as we move through Q4 twenty twenty one and into the first half of twenty twenty two. 08:28 During the quarter, we remain focused on ensuring that our customer cost increase recovery program was effectively implemented.

As we saw to partially offset the well documented in continuing input cost increases that are impacting all segments of our economy. This effort was at large part successful in mitigating a portion of these increased calls.

08:53 With our Q3 sales coming in at twenty six percent below our original twenty twenty one planning, the significantly reduced production volumes and the resulting loss of contribution margin have continued to be negative impacts of our financial results along with the challenges of effectively flexing cost to the changing release schedules. 09:17 With our customers ongoing focus on managing their own supply chain issues and labor shortages, we continued to see an overall reduction in new business sourcing activity throughout all our markets during Q3.

Despite this and our focus on the cost recovery activities, we have been awarded an additional twenty seven million dollars in customer order intake or COI since our last call for a total year-to-date of ninety three million dollars with sixteen million dollars of this in appliance and six million dollars in consumer goods. This compares to one hundred and sixty one million dollars at the end of October twenty twenty.

10:00 We have maintained our customer responsiveness to delayed and an accelerated timetables for potential new awards and platform launches. In Q4, we are now seeing an increase in quoting activity.

Despite the current challenges in the microeconomic environment, we remain confident in the longer term strength in each of our key markets we're at least twenty twenty four. The end customer demand, including commercial fleet and rental car companies remains very high and inventory levels continue to be historically low.

And customer backorders continue in the appliance and customer goods markets we serve. 10:44 Light duty new vehicle inventory has remained historically low with approximately zero point nine million units at the end of September compared to two point three million units for September twenty twenty and three point four million units for September of twenty nineteen.

Resulting from the low inventories and reduced production volumes, U.S. light vehicle sales continue to be lower than previously forecasted providing additional pent up demand supporting a positive longer term outlook.

11:15 The seasonally adjusted annual sales rate or SAR dropped to approximately twelve million dollars in September after averaging just over seventeen million dollars in the first half, and approximately thirteen million dollars in August and fourteen point seven million dollars in July. The mid-October independent North American automotive production forecast for twenty twenty one dropped one point six million units to thirteen point zero million dollars full year or approximately twenty five percent from the previously communicated mid-July second half volumes.

With first half at six point eight million units, this now indicates an approximate ten percent further drop in second half over the already low first half. This now places twenty twenty one on par with the twenty twenty low production.

12:12 In our last earnings call, we had expressed substantial scepticism on the earlier forecast volumes. But these additional reductions at approximately twenty one percent for second half twenty twenty one production are even greater than we had anticipated.

12:29 For twenty twenty two, the latest outlook was also decreased substantially by one point eight million units or ten percent to fifteen point two million units. This still does represent a seventeen percent increase over the low twenty twenty one full year volume and more importantly, indicates a twenty seven percent increase in production from second half twenty twenty one levels.

The twenty twenty three forecast now shows seventeen point three million units or an additional fourteen percent above twenty twenty two. 13:09 Continuing our cost review introduction activities, we further streamline our salaried organization, resulting in an additional annualized savings of approximately zero point five million dollars beginning in December twenty twenty one and fully effective in Q1 of twenty twenty two.

This is in addition to the approximate one point zero million dollars annualized benefit from the previously communicated salaried organization enhancements focused on increasing capability and reducing costs. 13:40 We did incur approximately zero point one million dollars in severance cost in Q3 and expect to incur up to one point three million dollars in additional severance in Q4 for these activities.

We believe that our comprehensive improvement activities implemented across all facets of the business during the last months have positioned us well for sustained profitable growth as customer releases increase. Our new program wins come into production.

And the supply chain challenges are resolved over the next month in all our markets. 14:15 During the quarter, we received confirmation of the SBA PPP six million dollars loan forgiveness in related zero point one million dollars in interest expense, resulting in a Q3 gain that did improve our balance sheet and debt ratios.

This game was partially offset by the five point one million dollars non-cash goodwill valuation adjustment. We continue our collaborative work with our bank syndicate to develop a longer term framework.

To date, we continue to maintain sufficient liquidity for us to operate in these challenging times. 14:52 Brian will now provide an overview of our third quarter twenty twenty one financial results.

14:58 Thank you, Doug. Good afternoon, everyone.

Turning to the third quarter results. Net sales for the third quarter of twenty twenty one decreased to twenty nine point nine million dollars compared to thirty five point six million dollars in the third quarter of twenty twenty.

The decrease in net sales as compared to the same period in twenty twenty is primarily due to decreased demand for our products as some automotive original equipment manufacturers cancelled or reduced planned production due to semiconductor and other supply shortages. 15:37 Of the twenty nine point nine million dollars net sales for the third quarter customers and the transportation market accounted for approximately eighty eight percent, appliance at approximately ten percent with the remaining two percent primarily attributable to our consumer off road market.

15:58 Gross profit for the third quarter was three point three million dollars or ten point nine percent of net sales compared to eight point two million dollars or twenty three point one percent of net sales for the same period last year. The decrease in both gross profit and gross profit as a percentage of net sales reflects the higher materials freight and labor costs, the inefficiencies of our current operating environment and the impact of lower operating leverage because of lower sales volumes.

16:36 Material costs as a percentage of net sales increased approximately three hundred and twenty basis points compared to the same period last year, caused by the well documented significant raw material and logistic cost increases resulting from the various COVID and weather related issues throughout our supply base as well as significant demand competition for our raw materials from other industries. 17:06 During the third quarter of twenty twenty one, direct labor as a percentage of net sales was negatively impacted by operating inefficiencies resulting from customer launch delays, release cancellations and reductions due to the previously discussed supply shortages as well as the increasing labor rates to secure sufficient labor to meet demand.

17:32 As I mentioned during our second quarter call, many customer release cancellations are occurring with minimal notice, which limits our ability to flex our labor capacity. Also, negatively impacting our direct labor costs was the impact of increasing staff levels to support new program launches, which ultimately were delayed as a result of the supply shortages previously mentioned.

Unfortunately, our customers made the decisions to delay those launches after we had increased our staffing level and began training the workforce to support start of production on those launches. 18:21 Manufacturing overhead was negatively impacted by increased outbound logistical costs, including freight, packaging materials and shipping supplies, as well as higher energy and people costs including salaries and benefits as compared to the third quarter of twenty twenty.

18:41 Selling, general and administrative expenses for the third quarter of twenty twenty one were down to five point seven million dollars compared to six point four million dollars for the third quarter of twenty twenty. The decrease in SG&A was the result of certain intangible assets becoming fully amortized resulting in a zero point five million dollars reduction of amortization expense as compared to the same period in twenty twenty in addition to lower people costs, including salaries and benefits in an effort to control cost in light of the current operating conditions for automotive suppliers.

19:20 Partially offsetting lower amortization and employee cost were zero point four million dollars of higher legal and professional service fees related to our forbearance agreement with our bank group, and our efforts to remediate the previously identified material weaknesses in our internal control over financial reporting. Despite the operating challenges, we have faced the last six months, we have continued to prioritize our remediation efforts.

19:53 While there remains more work to be done, including testing and operating effectiveness of the new or redesign controls, we have implemented as part of this process, We are cautiously optimistic that we will achieve our goal of remediation by year end. 20:11 During the third quarter of twenty twenty one, we identified indicators of impairment that required us to complete and interim impairment analysis of our intangible assets, including goodwill.

As a result of our interim impairment analysis, we recorded a non-cash impairment of goodwill of five point one million dollars during the third quarter of twenty one. 20:37 The impairment is reflective of the near term operating challenges faced by us and many other automotive suppliers, including rising material and labor costs and lower demand for our products as a result of the chip supply shortage previously discussed.

20:55 Operating loss was seven point six million dollars for the third quarter of twenty twenty one compared to operating income of one point eight million dollars the same period last year. Excluding the five point one million dollars goodwill impairment charge recorded in the third quarter of twenty one, our operating loss would have been two point five million dollars driven primarily by the lower sales volumes, and lower gross profit because of rising input costs.

21:24 Interest expense was zero point eight million dollars for the third quarter of twenty twenty one compared to zero point seven million dollars for the third quarter last year. The year-over-year increase was primarily due to higher borrowings on a revolving line of credit in addition to higher interest rates because of our forbearance agreement.

21:48 Net loss for the third quarter of twenty twenty one was approximately one point nine million dollars or zero point one nine dollars per basic and diluted share compared to net income of one million dollars or zero point one zero dollars per basic and diluted share in the third quarter of twenty twenty one. 22:06 We had an income tax benefit of approximately zero point five million dollars in the third quarter of twenty twenty one compared to income tax expense of zero point two million dollars in the third quarter of twenty twenty.

The income tax benefit is driven by our foreign subsidiaries as we have a valuation allowance position in the U.S. Tax Jurisdiction.

22:29 I will now provide an update on our financial position and liquidity. Net debt or total debt less cash and cash equivalents was forty six point four million dollars as of September thirty, twenty twenty one inclusive of one point one million dollars of cash and cash equivalents compared to forty nine point six million dollars as of December thirty one, twenty twenty inclusive of zero point eight million dollars of cash and cash equivalents.

23:03 As previously announced, we received notice that the SBA had approved our application for full forgiveness of our PPP loan, which resulted in a six point one million dollars gain on debt extinguishment in the third quarter of twenty twenty one. 23:19 We ended the quarter with approximately one point one million dollars of cash and cash equivalents and seven point four million dollars of net availability on our revolving line of credit.

As of September thirty, we were not in compliance with the minimum EBITDA covenant set forth by our forbearance agreement as amended, which counts to a default. We have been working with our financial advisors and banking group to enter into an amendment and waiver to cure the covenant default.

However, there is no assurance that the bank group will waive to default or agreed to an amendment to the current provisions set forth in the forbearance agreement. 24:00 As of today, we are still able to borrow on our revolving line of credit.

However, the bank group could exercise their rates as defined in the credit agreement at any time, which could include eliminating our ability to borrow on our revolving line of credit. 24:17 Doug, will now provide some closing remarks.

Doug back to you.

24:21 Thank you, Brian. In the near term, we continue to navigate low customer releases, demand volatility, industry wide supply chain challenges and the continued impact of COVID.

We are confident that new business awards combined with strong in customer demand and low inventory levels indicate greater revenue volumes for us after the recovery beginning in twenty twenty two. 24:49 As the customer release situation improves and supply issues are resolved, we believe we are poised to generate improved results.

We are longer term very positive and believe the transportation market is entering a multi year growth cycle. For twenty twenty and twenty twenty one, North American light vehicle automotive production is forecasted to be only approximately thirteen million units each year.

This follows a full year average from twenty sixteen to twenty nineteen of approximately seventeen million units. 25:27 This production decline of four million units each and consecutive years has significantly depleted inventories and has resulted in substantial pent up demand.

Our team continues to operate more effectively, which should benefit operating results as released volumes rebound in our markets. We remain committed to our vision of delivering sustainable, profitable growth and increasing shareholder value that follows from our brand of providing innovative, optimized and sustainable solutions for our customers.

26:04 With that, we will open the call for questions. Operator?

26:45 Hi, Doug. I'm calling in for John.

How are you?

26:48 Fantastic, Leonard. Is John, okay?

26:51 Yeah. No, he had another competing call.

So, I'm helping out. So, when you were presenting at the Taglich Conference at September, you said that why you didn't have a lot of confidence in the North American production forecast for the second half of twenty one coming through fruition.

You placed more confidence in the projections for twenty twenty two. So do you still have a healthy level of confidence for twenty twenty two’s current North American production forecast?

27:22 I appreciate the question. And as you recognize that's somewhat difficult question, I answered with a percentage of confidence level.

What I would tell you is that I have a high degree of confidence in what we expect to see in the second half of twenty twenty two. But I think that the first quarter of twenty twenty two is certainly going to remain somewhat challenged.

We hear communications from our customers, both Tier 1 and OEM that they are marshaling their resources on chips, and et cetera, to make sure their twenty twenty two starts off more positively, but I remain somewhat skeptical of that. So as I said in the conference, it's kind of the far around it goes the more confidence we have.

Coverage intuitive for sure. But what I would say is second half absolutely much stronger, Q1 likely to be somewhat better than what we're seeing in Q3 and Q4 and then Q2 somewhere in between those two.

But by the time, we get to the back half of twenty two and into twenty three, we have a high degree of confidence in the forecast that we're seeing.

28:36 Okay. Thank you for that.

28:37 Yeah.

29:01 Good afternoon, Doug and Brian. Quick question on the customer order intake.

Twenty seven million dollars in the September quarter. How do you evaluate that?

Was there a lot of activity covers your run rate and how do you think about that?

29:23 As I communicated in the Q2 call and then earlier in script and I know I provided a lot of information through Q3. We still saw an overall very reduced level of quoting activity out there again as our customers.

Supply chain management was far more focused on trying to resolve their issues are related to demand. We have seen an uptick in quoting activity in Q4 and we've seen an uptick in this activity related to, I'll say moving some sourcing around, as I mentioned in the call, so, I would say that while in absolute numbers, we would always be disappointed in the value of twenty seven million dollars in relative terms.

We were actually fairly positive about that and until good about especially in line of the fact that we also spent a great deal of our time in the latter part of Q2 and Q3 going through the cost recovery activity. And that took a lot of time in focus with the company and doing that as a very necessary aspect.

So I'll balance not ambulant by any means, but certainly positive and we're seeing more positive occur over the last forty five days, and expect to see this continue to accelerate. 30:50 The thing I was more pleased about it and that's the reason I highlighted in the call George, sorry to interrupt you, is the fact that out of that customer order intake for the entire year, and a lot of -- and we did actually end up with an outsized view of this in Q3 also was the appliance at sixteen million dollars of the COI number, and I believe the consumer goods was about seven million dollars.

So, you ended up having a seventeen percent of the order intake and a seven percent or eighty percent of the order intake within those two businesses that we're trying to grow. And we know the transportation order intake will come.

So it shows our focus on those two areas was having a positive impact.

31:37 Great. I’m glad that you pointed that out again.

And in terms of the relationship, which you have with your customers, and I don't know to that extent you can say that in comparison to your deal competitive, but how would you evaluate the relationship with your customers and how has sort of the last six months strain them or strengthen and them way?

32:08 It's my very long history in a couple of three different industries with this, out of, I'll say sometimes conflict and challenges, you can develop the stronger relationship. It would be not accurate if I said that all of what's going on over the last six months is not put a strain on supplier customer relationships, not only with our suppliers to us, but also from us to our customers.

So there has been greater strain. but what I would say is the reason I commented at this way, is through that it is forced, I'll say more in-depth discussions and more transparency and that's always good.

And we as a company have always been very forward very forthright and very responsive and transparent with our customers as to what's going on. And so, therefore, that's reason I’m able to comment, but I think it's been strengthened.

We've seen this in two ways. One, to date, okay, we have no evidence and have no belief that despite our activities relative to cost recovery, et cetera that we have lost any business that we currently have.

And in fact, as I commented we have seen some resourcing activity come our way. And just to me is an indicator of the fact that this supply and the customer base remains with the high of confidence in our ability to deliver.

33:35 And I would also say we were earlier and what we had to do relative to cost recovery. We've been mentioning this for a couple of quarters.

Some of our competitors were delayed in this and they're now coming in late and perhaps even more aggressively than we did and therefore, that may be also part of it's contributing to the resourcing activity. And last, as I mentioned, we have been able to maintain continuing the ship quality product on time, creatively working with and collaboratively working with our customers in substitution and other activities to make sure supply has continued.

And again, that also develops a closer relationship with the customers.

34:22 Great. Thank you, Doug.

Appreciate it.

34:37 Thank you very much again. Brian and I and the entire leadership team here at Unique Fabricating appreciate the continued interest.

And what we are doing and the continued support of what we're doing, it is without that been a challenging period of time, been a challenging two years, it's been a challenging last nine months, but we believe that the actions that we have taken in my commitment and I made the board into the investor group and each one of these calls is to continue to strengthen the organization, strengthen the capability, strength of the customer and supply relationships despite the external challenges so that we are extremely well positioned when this business does turn and it will turn. And I provided several examples of that during the earnings the script I've read from.

So, we are very confident that we have the organization and the relationships and the capability to see much improved results when it returns. And that ends up the question is exactly when that return occurs, but having been without eight million units of production over what had been the average in the preceding four years to twenty twenty and twenty twenty one there is absolutely significant demand that's out there and we're well positioned to take advantage of it.

35:58 Thank you all and we look forward to talking and sharing with you in our next call, plus we are always available in the interim period as necessary. Thank you.