NN, Inc.

Hello, and welcome to the NN, Inc. Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, than two. Please note, this event is being recorded. I would now like to turn the conference over to Jeff Troika from Investor Relations at NN. Please go ahead.

Thank you, MJ. Good morning, everyone, and thanks for joining us. I'm Jeff Troika, Investor Relations contact for NN Inc., and I'd like to thank you for attending today's business update. Yesterday afternoon, we issued a press release announcing our financial results The second quarter ended June 30th, 2022, as well as supplemental presentation, which have been posted to the investor relations section of our website. If anyone needs a copy of the press release or the supplemental presentation, you may contact Lambert & Company at area code 315-529-2348. Our presenters on the call this morning will be Warren Daltman, President and Chief Executive Officer, and Mike Felcher, Senior Vice President and Chief Financial Officer. Before we begin, I'd ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation, and in the risk factor section of the company's annual report on Form 10-K for the fiscal year ended December 31st, 2021, as well as other filings with the Securities and Exchange Commission. The same language applies to comments made on today's conference call, including the Q&A session, as well as the live webcast. Our presentation today will contain forward-looking statements regarding sales, margins, input cost inflation, supply chain constraints, the impact of the automotive semiconductor chip shortage, foreign exchange rates, cash flow rates, acquisitions, fees, cash, and cost savings, future operating results, performance of our worldwide markets, and the impacts of the coronavirus COVID-19 pandemic. and the Russian-Ukrainian conflict on the company's financial risk conditions and other topics. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside of the company's control. The presentation also includes certain non-GAAP measures as defined by SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation. Reviewing the agenda for today's call, Warren will open with comments on our long-term strategic priorities, building on what we outlined at our recent investor day, then provide an update from the second quarter. Mike will then provide a detailed update on the financial results before turning the call back over to Warren to discuss our segment results and markets, as well as our outlook for 2022, which has been based on our current view of business and external factors influencing our results. There will be a Q&A session following the conclusion of the prepared remarks. At this time, I would like to turn the call over to Warren Beltman, President and CEO.

Warren? Thanks, Jeff, and good morning, everyone. Thank you for joining us this morning. Let me start my comments by indicating that our teams have been constructively adapting to a very challenging environment characterized by supplier interruptions, inflationary cost pressures, labor constraints, and fluctuating customer volumes. That said, we are not satisfied with our second quarter results, and we need to do better. NN possesses an action-oriented culture predicated on improving every day, so I have strong faith that our teams will rise to meet the challenge presented by this current environment. As we discussed in our May 2022 Investor Day, we have positioned NN for future success through numerous actions and initiatives. If you turn to page four of the presentation, we will review some of the cornerstone initiatives. We have focused our sales efforts on key growth areas. As a refresher, our strategy is focused on the megatrends shaping the future of our markets, and specifically, the transition from a carbon-based economy to a sustainable energy economy. We view this strategy as not only good for the environment, but good for our business as the opportunity of content per vehicle for NN's products on electric vehicles is expected to be approximately triple that of traditional internal combustion engine vehicles. We are targeting sales in the electrical and EV markets to represent more than 20 percent of NN's consolidated sales by 2025. To deliver focused and accelerated penetration in our targeted segment markets, we are investing in electrical and EV expertise as well as organizing our commercial organization around the growth segments of our strategy instead of the historically narrower objectives of NN's operating groups. By doing so, we position ourselves to more effectively differentiate NN within a segment with the full arsenal of NN's capabilities, both mobile and power, with better insight, speed, and innovation to serve customers. Internally, we are adjusting elements of our compensation program to better align individual financial rewards with performance on delivery of incremental volume growth, or new business wins, as we call it. I am confident these actions will accelerate growth, including securing larger programs and drive a hunter's mentality across our organization. The relationships we have with our customers are key to our long-term success. The recent supply chain and inflation challenges has made the strength of these relationships more important and critical to our success, and we are pleased with our ability to secure full material pass-through on almost all Mobile Solutions customers. Pricing discussions with customers are ongoing, and we remain focused on eliminating pass-through lag, which is detrimental in an inflationary environment. We have maintained an open dialogue with all customers and have been proactive in addressing future inflationary impacts, including securing new contracts to provide additional flexibility and inflation protection. We remain committed to continuously improving our cost structure. This is especially important given the recessionary threat over the next 12 to 18 months. We have initiatives in process to improve our adjusted EBITDA by 10 to 12 million through a combination of cost reduction and operational efficiency improvements. The majority of this benefit will come from the optimization of our operating footprint, including the shifting of certain high labor content programs to lower cost facilities. We anticipate the closure of our Taunton facility, which was announced earlier this year, will improve adjusted EBITDA by 5 million annually when compared to the trailing 12-month results at the time of the announcement. We remain on schedule to close this facility by the end of 2022 and expect that we will be successful in securing a subtenant for the facility when it is vacated. We're in the process of closing three additional facilities that we expect will further improve adjusted EBITDA by another $5 million annually. We expect that these facilities will be closed by the end of Q1 2023. However, we have accelerated the closure of one facility in spite of the negative impact this action will have on 2022 free cash flow in order to achieve the benefits more quickly. We also have curtailed the hiring of indirect support functions and taken action associated with improved optimization of an indirect labor and reduced SG&A expenses. We have reduced our SD&A as a percentage of sales by over 300 basis points since 2019 and believe we can continue to gain efficiency in these areas. Our dedicating team has fostered our culture committed to operational excellence, whether that is identifying opportunities to drive profitability or right-sizing our labor and support costs to match production volumes in real time. We are also taking advantage of opportunities to develop and retain key talent in our manufacturing locations through a variety of creative development programs in this current tight labor environment. We will continue to leverage our unique manufacturing capabilities and comprehensive portfolio of world-class process technologies to meet the needs of our growing customer base. By actively collaborating with our customers as an extension of their teams, we can enhance manufacturability and support faster time to market while reducing total cost. Now, if you turn to page six, we will review some of the accomplishments of our team during the second quarter. Compared to the prior year period, sales increased 1.8% to 125.4 million despite ongoing supply chain interruptions and the resurgence of COVID in China. Sales in our power solutions business increased 5.6% from the prior year period. The increase in sales was primarily driven by higher volumes and favorable pricing in electrical components, partially offset by lower volumes in automotive and aerospace and defense. Mobile solutions sales decreased 0.7% from the prior year period. The decrease in sales was primarily due to lower volumes as a result of the pandemic and continued supply chain interruptions due to the semiconductor chip shortage, the Russia-Ukraine conflict, and other factors. Sales were also negatively impacted by FX as the dollar strengthened versus the prior year. Higher pricing offset most of the volume and FX impact during the quarter. While we continued to take actions to mitigate the impact of the ongoing supply chain and inflationary challenges, material and other non-labor inflation continues to exceed expectations. Our ability to pass through increased material costs to customers and maintain favorable pricing was responsible for the solid sales performance in our power solutions business. For the quarter, unrecovered inflation impacted our second quarter results when compared to the prior year period by approximately $3 to $4 million. Price negotiations with many of our customers continue, and in fact, approximately 1 million of pricing recoveries were concluded subsequent to the end of the second quarter and will be realized over the remainder of the year. We continue to deploy various strategies to mitigate the impact of current inflation, most of which are underway. We remain committed to prioritizing the health of our balance sheet and maintaining strong leverage ratios to support our strategic vision. Our liquidity position remains strong at $52.1 million with an EBITDA leverage ratio of 3.17 times. We remain committed to our three times leverage target ratio and expect to achieve that level by the end of 2022. We believe our current financial position offers us the ability to opportunistically pursue growth as we focus our strategy on the megatrends shaping the future of our markets. Lower operating results along with increased investments in working capital to support operations and mitigate current supply chain challenges resulted in free cash flow use of $2.8 million. Despite the need to maintain higher levels of working capital, including additional safety stock of inventory due to supplier interruptions and long lead times, total working capital turns remain consistent with the first quarter of 2022. On page seven, we will review our sales pipeline and how it aligns with our longer-term growth strategy. We are pleased with the opportunities generated by our sales and business development teams. Those teams have delivered a significant pipeline expansion and target growth markets associated with the electric grid space and electric vehicles, and we are currently pursuing several opportunities to strengthen our position in each market. Additionally, We have increased the average deal size in our pipeline from 0.9 million in the prior year quarter to 1.5 million this quarter. This focused approach, along with reductions in fuel system programs by OEMs, has resulted in a decline of ICE-dependent pursuits. We are also focused on the opportunity to further expand our presence in the medical market once our non-compete provision related to the sale of the life sciences business expires in the fourth quarter of 2023. Turning to page eight, we will review our new business wins. Year-to-date through the second quarter, we have secured new business wins with peak annualized sales of approximately 23 million as our efforts of our revitalized team have begun to generate results. Of note, 44% of the new business wins achieved through the second quarter were in the electrical and EV space, highlighting our team's alignment with our long-term strategy. We are also pleased with the low capital ratio we achieved as the new business wins require incremental capital expenditures of just $2 million, allowing us a strong opportunity to improve our financial return on our existing equipment base. Now I'd like to turn the call over to Mike Felcher so he can provide a more in-depth review of our financial performance for the quarter. Mike?