NN, Inc.

Good morning and welcome to the NN Inc. Third 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 your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jeff Trika. Please go ahead.

Thank you, Andrea. Good morning, everyone, and thanks for joining us. I'm Jeff Trika, 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 for the third quarter ended September 30th, 2022. as well as a supplemental presentation, which have all been posted on the investor relations section of our website. If anyone needs a copy of the press release or the supplemental presentation, you may contact Lambert and Company at 315-529-2348. Our presenters on the call this morning will be Warren Veltman, 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 factors section of the company's annual report on Form 10-K for the fiscal year ended December 31st, 2021, and other filings with the Securities and Exchange Commission. The same language applies to comments made in 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, statements regarding the planned management transition, foreign exchange rates, cash flow, tax rates, acquisitions, synergies, cash and cost savings, future operating results, performance of our worldwide markets, and the impacts of the coronavirus pandemic and the Russian-Ukrainian conflict on the company's financial condition 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 an update on actions the company has taken to position NN for success and then provide a business update from the third quarter. Mike will then provide a detailed review of 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 revised based on our current view of the 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 will turn the call over to Warren Beltman, President and CEO. Warren? Thanks, Jeff.

Good morning, everyone, and thank you for joining us this morning. Before we dive into a discussion of our results for the third quarter, I would like to review the other news we announced last night regarding the Management Transition Plan. This transition includes my plan retirement as NNCEO effective at the end of the first quarter of 2023. I've given this decision a great deal of thought and consideration as it was very important to me that the timing be right for both me personally and for the company. In the three plus years I served as CEO, we have made significant progress to improve the company's financial structure, operating cost drivers, and reposition our growth strategy to be focused on the high growth electric vehicle and electrical markets. I believe these and other initiatives have placed NN on a path for continued success and will ultimately drive improved shareholder value. Our efforts regarding rationalizing our manufacturing footprint is an example of cost reduction efforts to create a more competitive cost structure for NN. We have taken action to close five manufacturing facilities by the end of the first quarter of 2023. When complete, we expect to see annualized improvement in adjusted EBITDA versus our 2022 outlook of $10 to $12 million. The finalization of these closures will be a huge step in creating a more competitive global footprint for NN to support our growth objectives and our actions I hope to complete before my retirement. To address my planned retirement, our Board of Directors has engaged Korn Ferry, a global organizational consulting firm, to identify a range of potential candidates with particular emphasis on individuals with skills and experience in the electric vehicle and residential and commercial electric grid markets. The Board is targeting to announce a new CEO during the first half of 2023, and I expect that I will remain in my role until a successor is in place. Additionally, I will remain available on a consulting basis beyond that time, as necessary, to facilitate a smooth transition. In addition to my retirement, we also announced several other management changes, starting with the planned retirement of John Buchan, our Executive Vice President of Mobile Solutions and Power Solutions. John and I have partnered together for many years to create value for our shareholders, and I thank him for his commitment to our organization. As we search for John's successor, we have named two experienced leaders at NN to new positions to help ensure continuity of our leadership team. NN named Gunnar Zwinkels to be Interim Chief Operating Officer of Power Solutions and Douglas Campos to be Interim Chief Operating Officer of Mobile Solutions, each reporting to John Buchan. Gennar's has almost 30 years of relevant experience within power solutions and currently serves as the vice president of operations with a focus on the electrical business. Douglas has experience in a variety of leadership roles, providing a breadth of commercial, operational, and geographical experience within mobile solutions. We are confident in the abilities of these two executives to guide our operating teams through this transition. I would be remiss to not thank the incredible MN team. It has been an honor and my absolute pleasure to have worked with such a talented and dedicated group of individuals. I want to thank all my colleagues for the commitment demonstrated to make such progress in the transformation of NN. We all recognize that the work is not complete and that we must continue the work to make NN better each day. I also want to thank our customers who continue to value our products and capabilities. And lastly, I want to thank all our shareholders for their continued support in NN. Let's now turn our discussion to our performance during the third quarter. On page four of the presentation, we will review some of the key strategic initiatives our team completed during the quarter. We continue to focus our sales efforts on key growth areas centered on the megatrends shaping the future of our markets, including the electrical and EV markets. Our 2025 goal is to generate in excess of 20% of our revenues from these markets. And year to date, we continue to make progress against that goal with 36% of our new business wins associated with electrical or EV markets. To advance these efforts, in the third quarter, we showcased NN's process technology and components at the Battery Show in Novi, Michigan. For those of you who might be unfamiliar with this show, It's one of the largest trade shows dedicated to advanced battery and electric and hybrid vehicle technology, also known as the EV Tech Expo. The show attracted more than 15,000 attendees and nearly 800 suppliers to the industry. This was a great opportunity for NN to showcase our process technology and components to a large audience. As I previously discussed, our efforts to optimize our production footprint and reduce cost has been a significant initiative. we announced the closure of the Power Solutions Irvine, California facility in October, which was the culmination of our strategic review of our aerospace and defense business. Additionally, we continued efforts to close four additional sites by the end of the first quarter. Turning to page five, we felt it important to summarize how we anticipate the company will perform by depicting the expected benefit of fully implemented cost improvements that are underway and will be substantially complete by the end of Q1 2023. First, I will review the impact of the closure of Taunton and Irvine on the power solutions business. Both of these facilities manufactured product primarily for the aerospace and defense industries. On this slide, we depict the pro forma nine-month results for the power solutions business by removing the financial results of the Taunton and Irvine facilities for the same period. On a pro forma basis, the closure of Taunton and Irvine will result in a significant improvement in operating income and adjusted EBITDA of $7.5 million and $5.8 million, respectively. These pro forma adjustments would increase Power Solutions' nine-month operating income and adjusted EBITDA to $23.2 million and $25.3 million, respectively, on sales of $148.5 million. Proforma adjusted EBITDA would represent 17% of sales, which is more in line with our long-term targets for the business. Further, the strong nine-month performance on our electrical business demonstrates that we have been successful in adjusting our product pricing to recover inflationary cost increases. We have excluded our medical business from the Proforma carve-out as that business will be relocated to our production facility in Attleboro, Massachusetts. We expect approximately $2 million in closer costs for these facilities, but also anticipate proceeds from the sale of equipment in the range of $2 to $3 million. Lastly, although we have not secured tenants for these facilities, we expect sublease income will approximate our current lease obligations, as we believe our current rental rates are consistent with market terms. Now, if you turn to page 6, we will review the impact of our cost improvement initiatives on the mobile solutions business. On this slide, we show a $7.8 million nine-month pro forma impact of our cost improvement initiatives had they been completed at the beginning of 2022. We estimate the annual cost savings associated with facility closures to be approximately $5 million or $3.9 million for the nine-month period. The nine-month savings can be allocated to $1.7 million associated with reduced facility costs, and $2.2 million associated with shifting production to a low-cost facility where certain operations that were previously outsourced can now be performed internally. Although we have been proactive in addressing the effect of inflation, we have experienced a lag from the time of an inflationary cost increase to the time of recovery from our customers. The pro forma impact on adjusted EBITDA of realizing constraints customer price increases at the time of the cost increase would have increased our adjusted EBITDA by $3.2 million during the nine-month period. Note that the pro forma impact on adjusted EBITDA is higher than the pro forma sales adjustment due to the additional inflation recovery at the company's China joint venture. Our China JV sales are not consolidated in our reported results. Lastly, we have reflected a $700,000 pro forma adjustment for excessive production startup costs. We are tracking these expected cost reductions with area improvement team action plans that are expected to eliminate these cost overruns by the end of Q1 2023. After considering these pro forma adjustments for cost reduction initiatives underway, Mobile Solutions' nine-month pro forma sales and adjusted EBITDA would be $228.2 million, and $36.2 million, respectively. This would yield a 15.9% adjusted EBITDA margin, much closer to our expectation for this business. Turning to page eight, we have summarized some of the results from our third quarter. Let me start my comments by saying that in spite of the fact that several financial metrics show year-over-year improvement, we are not satisfied with our financial results for the third quarter and they clearly did not meet our expectations. We did not see the sales volume increases we were expecting, inflationary cost increases adversely impacted margins, and we experienced poor operating performance for program launches and mobile solutions and within power solutions, aerospace, and defense facilities. I had previously discussed the actions we are taking surrounding these issues. These issues also impacted our free cash flow during the quarter, which was a use of 4.4 million. Sales for the quarter were 127.3 million, up 8.6% from the same period in 2021. Our power solutions business experienced a 5% increase in sales compared to the same period in 2021, driven primarily by higher pricing, and volume partially offset by lower precious metal pass-through pricing and unfavorable foreign exchange effects. Pricing and increased demand within the end markets of our mobile solutions group resulted in a year-over-year revenue growth of 11% for this segment. We continue to maintain strong liquidity at $44.7 million, and our $60 million swap has provided us a level of protection in an environment of increasing interest rates. On slide nine, we review new business wins. Year-to-date through the third quarter, we have secured new business wins with peak annualized sales of approximately 31 million. The new business reflects segment growth aligned with our long-term strategy, as well as increased share of wallet with industry leaders, particularly component share gains with our long-standing customer base. Of note, 36% of the new business wins secured through the third quarter We're in the EV and electrical segments, further supporting our team's focus on aligning growth consistent with our long-term vision. We continue to take a disciplined approach to programs requiring capital and have maintained a low capital ratio with the year-to-date wins only requiring $2.1 million of incremental capex. We continue to invest in additional sales resources. with demonstrated expertise in electrical, battery storage, and electric vehicle markets to improve our coverage in business segments that are consistent with our strategic growth initiatives. Turning to page 10, focused execution from our sales and business development teams continues to deliver pipeline expansion in high-growth markets aligned with our strategy. While the overall pipeline has decreased in recent quarters, it is important to understand that the opportunities in our target markets that our high growth has increased. The decrease also reflects canceled opportunities following the Irvine and Taunton facility closures. The opportunities generated by our teams are encouraging and we remain committed to expansion in our EV and electrical segments. We are currently pursuing several initiatives to strengthen our position in each market. ICE dependent pursuits continue to decline and can be attributed to the reduction in programs by OEMs and our selective approach to pursuing opportunities in this end market. We are also focused on the opportunity to further expand our presence in the medical market once our non-compete related to the sale of the life science business expires in the fourth quarter of 2023. I will now turn it over to Mike Felcher, who will provide a more in-depth review of our financial performance for the quarter. Mike? Thank you, Warren.