NN, Inc.

Q1 2024 Earnings Conference Call

5/7/2024

spk01: Good day and welcome to the NN Incorporated first quarter 2024 earnings call. All participants will be in a 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 touchtone phone. And 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 Mr. Steven Poe. Investor Relations. Please go ahead, sir.
spk05: Thank you, operator. Good morning, everyone, and thanks for joining us. I'm Stephen Poe, Investor Relations contact for NN, Inc., and I'd like to thank you for attending today's business update. Last evening, we issued a press release announcing our financial results for the first quarter ended March 31st, 2024, as well as a supplemental presentation, which has 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 Alpha IR Group at nnbr at alpha-ir.com. Our presenters on this call will be Harold Levis, President and Chief Executive Officer, and Mike Felcher, Senior Vice President and Chief Financial Officer. Tim French, our Senior Vice President and Chief Operating Officer, will also join us for the Q&A portion of the call. Please turn to slide two, where you'll find our forward-looking statements and disclosure information. 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 one filed in the risk factors section in the company's quarterly report on Form 10-Q for the fiscal quarter ended March 31st, 2024. 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, inflation, supply chain constraints, forwarding change rates, cash flow, tax rates, acquisitions and divestitures, synergies, cash and cost savings, future operating results, performance of our worldwide markets, general economic conditions and economic conditions in the industrial sector, the impacts of pandemics and other public health crises and military conflicts 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. Reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release in the supplemental presentation. Please turn to slide three, and I will now turn the call over to our CEO, Harold Beavis.
spk04: Thank you, Stephen, and good morning, everyone. Please turn to page four in our earnings deck. NN had a successful first quarter, highlighted by growth in our core plants and continued execution of our business transformation strategy, which was underlined by a number of observable operational improvements at our underperforming locations. We also continued our commercial momentum, winning new business in the quarter at a very strong pace. capturing more than 17 million of new awards, which we estimate to be about three times market growth rates. Our transformation is fully underway and we're now entering our second year. And I can say for the team that's here, time flies when you're having this much fun. And we're indeed pleased with our results over the last year. And we're looking forward to highlighting some of them today and then taking questions at the end. First, I'm happy to report that Q1 2024 was the third consecutive quarter of exceeding our upward goals and expectations for adjusted EBITDA, free cash flow, and new business wins. We have been driving our trailing 12-month EBITDA up. We believe this is a function of natural company strengths, a stronger team made up of both homegrown leaders and outside professionals, a strong set of improvement initiatives, and being accountable to outcomes and to each other. First and foremost, we've been delivering strong operational improvements. Some of you might wonder what does that mean, operational improvements, a pretty big term. But for us, it means right-sizing our headcount, negotiating with non-directed suppliers, leveraging our global procurement power, upgrading plant managers where needed, combining SG&A roles where possible, and having an organized plan at every plant to take out costs. Additionally, in certain areas, we've had to negotiate and engage with customers on basic economics. Another term for this is continuous improvement or CI, and we're committed to increasing our margins and profit rates on an ongoing basis, and it's working. To be sure it is sustainable and becomes a layer of goodness that we build upon, we have to change our culture in many areas, and that's working also. Sometimes winning and becoming successful is just plain hard work, and we're all about that. As we have noted in the past, a year ago, the company had seven unprofitable plants that were causing a big impact to our bottom line in our cash flows. Our aggressive actions over the last year at these plants has shown clear and immediate results, with three plants returning to profitability already and the remaining four making dramatic improvements. The goal is for this group to become profitable by year end 2024, this year. The commercial team has also been very successful over the last year, and we have secured growth at three times the market growth rates by our estimations. This will enable us to layer in new growth and contribute to our adjusted EBITDA totals in future quarters. Before turning to our first quarter financial results, I'm happy to announce that we are reaffirming our free cash flow and new business win outlooks for the year, while also tightening our outlooks for net sales and adjusted EBITDA. We expect to deliver full year bottom line growth, along with continued strong growth and new business wins. And Mike will cover this in more detail in his section. Please turn to page five. in your deck, NN delivered solid first quarter results with net sales of 121.2 million and adjusted EBITDA of 11.3. Year-over-year net sales volumes were mostly flat after some one-time movements, but adjusted EBITDA grew strongly through the actions that I just walked through. It was our third quarter of year-over-year growth in adjusted EBITDA, and our trailing 12-month adjusted EBITDA of 46.3 million is up 20% of the trailing 12-month adjusted EBITDA of a year ago, or about $7.7 million of improvement. Our adjusted EBITDA margin is now 9.3%, and it's up significantly compared to last year as the turnaround of treble plants and broader operating cost reductions continue to improve our bottom line. Before turning the call over to Mike, I'd like to recognize our global NNP. In a period of significant change for the company, a lot of it instigated by me, Our employees and colleagues are performing in an outstanding basis on on-time delivery, quality, and safety. We're reorienting and injecting best practices into our company as we go along and changing our culture. In-end sales pipeline is as large and as healthy as it's ever been, and we continue to aim to continue winning new business with both new and existing customers globally. With that, I'll turn the conversation over to Mike, who will walk through our financial performance in a more detailed manner.
spk00: Mike? Thanks, Harold, and good morning, everyone. I'll start on slide six, where we will detail our results for the first quarter. Net sales for the quarter of 121.2 million were down 4.6% compared to last year's first quarter. For the period, we had roughly flat sales volumes due to a rationalization of volume of approximately 4 million at underperforming plants, mostly offset by 3 million of sales growth at healthy plants. From a pricing standpoint, our prior year results included 3 million of end-of-life premium pricing associated with the closure of the Irvine plant. Looking to profitability, our operating loss at 4.8 million improved by 2.3 million compared to the 7.1 million operating loss in last year's first quarter. On an adjusted basis, our first quarter adjusted operating loss was 0.7 million which was slightly higher than the adjusted operating loss of 0.4 million seen in the prior year. As Harold referenced earlier, adjusted EBITDA results of 11.3 million grew by 3.2 million or 39% versus last year's 8.1 million results. Our consolidated adjusted EBITDA margin results expanded by 290 basis points to 9.3% versus last year's first quarter. This improvement on our profitability on a lower revenue base relative to last year speaks to our early success in improving our base business performance. As we continue through 2024, our focus on attacking any and all underperforming areas of the business will continue to anchor our priorities as part of our multi-year transformation effort. In particular, we expect to see a more pronounced pull through of the impacts from our operational improvement initiatives and total cost productivity programs, with those results accreting more thoroughly to our profitability figures, as many of these only began benefiting us in the second half of 2023. As we have stated in the past, we remain committed to capturing an additional $10 million in adjusted EBITDA improvement once all our actions are completed. Turning to our segment results starting on slide seven, in our power solution segment, where our business is largely stamp products, Our sales decreased 1.7% year-over-year to $48.2 million, down $0.9 million from the $49.1 million of sales in last year's first quarter. While we are experiencing strong demand in our business from U.S. customers focused on electrical grid, this demand strength was partially offset by volume rationalization as part of the Taunton and Irvine facility closures from last year. Despite the lower sales volume, the positive impacts from facility closures and cost reduction actions have driven solid results as seen through our improved adjusted EBITDA. Our quarterly adjusted EBITDA of $7.8 million improved by $1 million compared to the $6.8 million delivered in last year's first quarter. We believe it is a testament to our refocused efforts and commitment to our strategic transformation plans, both operationally and commercially. that the business delivered higher adjusted EBITDA and expanded margins by 290 basis points year over year. As we begin to layer in stronger sales figures from new business wins, we expect to continue expanding our profitability as we capture improved fixed cost absorption through operating leverage, combined with the commitment to our costs and productivity programs that Harold walked through earlier on the call. Operationally, our focus remains on expanding our Connect and Protect business improving underperforming plants, continuing to right-size the cost structure, contemporizing our engineering and processes, and ultimately executing on a healthy and strong growth pipeline across growing key end markets. Turning to slide eight in our mobile solution segment, which covers our machine products business, sales decreased 6.4% versus the prior year's first quarter, declined by 4.9 million to 73.1 million for the period. The decrease was primarily driven by rationalization of underperforming business and the impact of some mixed shift in our retained business. In line with the trend we have seen across the company, our profitability in the mobile solution segment grew versus last year's first quarter as the segment adjusted to the result of 8.6 million increased by 3 million compared to the 5.6 million in the first quarter of 23. This markedly improved adjusted EBITDA performance was driven in part by stronger profits from our China joint venture, which continues to show market strength and attractive growth. Additionally, operating performance improvements within our underperforming plants reflect the early impact of our cost and productivity programs, which continue to gain momentum. Now turning to slide nine, you can see a summary of our free cash flow, capital expenditures, and net debt and resulting leverage. We are committed to maintaining positive free cash flow and will therefore take a measured approach on capital investments required for our new business wins. This includes utilizing equipment financing opportunities as we did in the first quarter where we executed a 4.9 million equipment sale-leaseback transaction. With that, I will turn the call back to Harold to discuss some of our additional developments before wrapping our prepared remarks. Harold?
spk04: Thank you. Please turn to slide 10. Our structural and process improvements have been accretive to our bottom line since the initiation of our global continuous improvement program last year. And our trailing 12-month EBITDA is now up to 46 million, and it's up, you know, almost 20%, as I mentioned, since the first quarter last year. And it's improved for four quarters in a row. And additionally, as a result of targeted cost reductions, better operational planning and headcount rationalization. Our EBITDA per headcount is up 42%, and I just wanted to share a look into the operational improvement program that we have underway, led by our Chief Operating Officer, Tim French, who's on the phone later for questions. But we've progressively been working down our headcount over time, and this chart shows you what our headcount is outside of our JV, because we have another 700 people inside of the JV. But these are on our non-JV headcounts. And you can see that we've been taking down our headcount while taking up our EBITDA, therefore driving up our productivity. So we're going to continue this balanced focus on growing earnings through growth as well as cost-out initiatives. And it's helping us make improvements in our free cash flow generation also by having quite a bit of people off the payroll. And this remains an important focus going forward. This story is not over. We're underway. with optimizing here, a lot of it's focused in our underperforming plants, and it will lead to an improvement in our overall capital structure also. We believe that we'll be able to put the periods of financial stress behind us, if we haven't already, as we evolve our capital structure to be more reflective of our current performance continued impact on implementing our transition strategy. This is one quarter to time. One improvement at a time, sequential improvement, staying accounting, taking forward actions, and improving base productivity. Highlighted on page 11, if you just turn the page, I'd like to flip and turn about our commercial program. Our organic growth program has been performing very well, and we're encouraged by our early success and ongoing success. Accelerating the growth of new business wins is another key to our transformation plan. And after having won a record 63 million of new business awards during calendar year 23, we delivered another 17 million of new awards in the first quarter this year, making a total of $80 million in a short amount of time. We're on pace to deliver a similar amount this year, 55 to 70. We put in a range there because it's really hard to tell, you know, when you're going to close on things in your pipeline. But we're on pace now for the middle point of our guidance range here, as you can see from the results. which would mean 120 million to 135 million of new business won over eight quarters. Our key growth areas continue to be the China automotive markets, which are just flourishing with indigenous and export opportunities, the U.S. electrification and grid technologies, where we specifically are on the grid edge, and selective vehicle programs in the markets of North America, South America, and Europe. We're continuing to be selective in the medical markets. We're mindful of the amount of CapEx we've attached to growth plans. Tim French is the minder of our CapEx budgets. And we've walked away from some opportunities that were just too CapEx intense for us. So we continue to leverage our installed base on an ongoing basis. And this batch of growth is much more capital effective. capital efficient than prior experiences by the company, and we're leveraging our installed capacity very well. If you turn to page 12, we'd like to reaffirm our free cash flow and new business win outlooks while slightly tightening our net sales and adjusted EBITDA guidance ranges. And for the full year, just to repeat it here, we're expecting net sales in the range of 45 to 505, up slightly. from prior year at the midpoint, just at EBITDA in the range of 48 to 54, up over 20% at the midpoint, free cash flow in the range of 10 to 15, up again slightly at the midpoint compared to improved free cash flow generation of last year, and new business wins in the range of 55 to 70. Our guidance continues to reflect steady in-market demand, despite some observed weakness in North American industrial markets relative to 2023. Specific to NN, We expect to continue executing our aggressive growth program, ultimately driving free cash flow and profitability across several new markets and customer platforms. With that, I'd like to thank you for listening, and I'll turn the call back over to the operator for questions.
spk01: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Joe Goms with Noble Capital. Please go ahead.
spk07: Good morning. Thanks for taking my questions. Nice quarter.
spk01: Thank you, Joe.
spk07: So just briefly, You mentioned on the seven facilities that three are back to profitability now, and you're hoping to get the other four by year-end. And I think previously you talked about there's $100 million of revenue associated with them that was unprofitable. How much of that $100 million of revenue would you say is now returned to profitability?
spk04: Yeah, it's about half of it, Joe. And we're underway with a goal by the end of the year for that group to cross the line and make money for us on the way to making 5%. So we're going to go from losing over 10% to making plus 5%, which is slightly below our average. But those plants specifically have some of our older assets in them, some special purpose assets. So we've set realistic goals for now. But right now we're kind of clearing waivers on about half of the revenue, Joe.
spk07: Excellent. And then you kind of touched on it a little bit. I just wanted maybe to give us a little more color on some of the medical efforts and the Connect and Protect. Is there anything specific you can point out, maybe contract wins or size of some of the stuff that you're bidding on in those markets?
spk04: Yes. There's a couple constraints that we look at with regards to saying yes to some of the growth awards when we get down to the final line. We've walked away from a couple big opportunities, to be honest, that were extremely capital intense. And when we say capital intense for us, it means it's more than a dollar of capital for a dollar of sales. we're way below that right now because we've been careful about leveraging the company's assets and adding two into adjacent markets where if you say you need four machine centers to complete a product, we have a capacity on two and need to de-bottleneck two. Some of the opportunities in medical, because we weren't in it for three years, if you say there's four machine centers needed, we don't have any of them. So we've been careful about those opportunities, whether they're in medical or other adjacent markets. We're stretching our growth capex. So I would say the overriding metric for us is largely financial. And we've been stretching the capex across some of these. We'll eventually get to the point where we have a little more firepower. But with the capital structure we have at the moment, and they're required to step down in our covenants and be compliant. We need to be frugal on capital spending, and we are. Tim French is on the phone. Tim's looked forward 12 quarters into our cash capex requirements. And, Tim, I know you've looked at the details more than me here. Do you have anything you want to add?
spk03: I'd just echo what you said, Harold, that our we're being very efficient in how we're spending capital on new business wins. And as you suggested, it's significantly below a dollar for a dollar of revenue. So we're really focusing on utilizing idle assets or underutilized assets today, and it's proving to be very effective on how we're gaining new business.
spk07: Okay, great. And that leads right into the next question I had. You talked about open capacity, underutilized assets. How much, if you were to utilize them at your normal utilization rate, what kind of revenue, additional revenue could you generate just from the existing assets in open capacity?
spk04: Yeah, that's a good question. A lot of the assets that we have are older vintage and capable of making certain products but not able to handle tolerance on certain others. For instance, we have a decent amount of equipment in our automotive engine parts areas. We make a lot of parts for high-end engines, especially diesel. And on a piece of paper, it looks like they ought to be able to make medical products. When you get down to the tolerance needed, they can't hold the spec. So they become what we call special purpose assets. So we have a decent amount of that. If you look at our balance sheet, we have over $400 million worth of machines. And generally speaking, we're running one shift. And if you say that the growth programs are running $0.50 to $1 of growth, And that's a lot of potentially financially speaking, a lot of open capacity, a lot of open capacity. But it's kind of fake news because the capacity is only capable of certain type of supporting certain type of growth initiatives. And on a growth basis, we're really focused on accretive growth versus just filling up stuff. And so a lot of it remains idle, Joe, and To be honest, we're thinking through what our rooftop footprint should look like. And especially it turns back to the underperforming plant areas where they're mainly light on volume, light on volume. And they're mainly light on volume because they can mainly make commodity products. So you look at, do you want to invest in those machines to be able to do other things? Or do you want to call it a day? So we're getting progressively machine by machine smart about that. If I had to just give you a number, though, Joe, I would say the numbers between 50 and 100 million is what's realistic. On paper, you could come up with a lot higher number. By going through the math I just laid out there, but it's around 50 to 100.
spk07: Thanks for that, Harold. And then one last one for me to get back in queue. Last quarter, you had talked about the potential more equipment sale, leaseback transactions, just wondering kind of what the status of those are.
spk00: Yeah, Mike, you want to take that one? Sure. Yeah, we did, as I noted on the comments, $4.9 million in Q1. We're evaluating doing a little bit more this year. It's going to tie into our CapEx projection. So we're, you know, our viewpoint is we want to maintain positive free cash flow in the range we provided, and we'll look to supplement CapEx spend with either equipment sale leasebacks or financing.
spk07: Great. Thanks for taking my questions. I'll get back in queue. Thank you, Joe.
spk01: The next question will come from John Franzrab with Sidoti & Company. Please go ahead.
spk02: Good morning, everyone, and thanks for taking the questions. I guess I can start with the changes you made to your guidance. It wasn't much, but I'm curious as to what were any underlying assumptions you might have changed, either positive or negative, to maybe a revenue assumption in the year ahead?
spk04: Yeah, Mike, you want to take that one?
spk00: Sure. You know, it wasn't a big change. We pulled down the top line on revenue a little bit. The high end of the range left the bottom the same. And that's, you know, we're over four months into the year. We just had a better feel for where we see the year coming in from a revenue standpoint. I don't think anything overall changed in viewpoint other than just where we've been seeing the volume and how we see the rest of the year shaping up. And then on the EBITDA side, Really, we just pulled the bottom end up a little bit and tightened that. And again, that's based on us being a third of the way through the year and having a little bit more confidence in where we see that coming in for the full year.
spk02: So there's no specific end market that you think is going more slowly than previously?
spk04: Only one. Our exposure to the U.S. residential construction market, John, We have a specific mix exposure. We make shafts for HVAC compressors. And because of our machinery and the heritage of that business, our mix is towards the low-end side of those products. And with the high interest rates and what's happening with housing starts, we expected it to be soft. It's just a little softer than we thought. We haven't lost position, and if you look at housing from the NAHB or any of the housing forecasters, there's expected to be relief when the Fed gets after rates. But right now, rates are higher for longer, and so we're staying softer for longer. Our customers in that area continue to give us flat, and then it's going to turn up, flat, and then it's going to turn up, but it just keeps being flat. we're calling it flat for right now, John.
spk02: Makes sense. Thanks, Howard. And as far as rationalized volume is concerned, I assume that means that you're exiting the businesses. Where do you stand in that process and how much additionally do you rationalize and how does it flow through the year?
spk04: Yeah. So if you look at Kind of right now, I think you're talking about right now for John, the outlook? Yeah. Yeah. So we're still staring at customer economics at one of our main underperforming plants. That's Juarez. We are evaluating a potential consolidation of rooftops, which when you do that, It automatically makes you look at the specific strips of business and should you spend money to move them or should you attempt to end a life program. So we don't have a concrete plan today. We're just doing evaluation on what's next for the facilities. We've taken out, we think, a lot of the excess headcount that was just standing around in those operations. And we're going to get them to slightly profitable with no closures needed and no attacking customer contracts needed, but that's not good enough. So when, you know, we're already laddering our improvement program into 2025 at this point. And our, our goal is to continue, you know, sequential improvement, um, and our trailing 12 month EBTA. And if we're looking forward, we know we're going to have to attack, Oh, I'm going to say 20 to $30 million of business, John, um, that, that, it doesn't make sense yet in terms of the cost to make the products and what we get for a price so we've 80 20ed it um but we have we have probably 20 million to go tim french would you modify my answer in any manner no harold i think uh i think you you've hit the number um we're we are looking at them in detail and and i think there is some some more to go and i think you've captured the quantity
spk02: And just for me, that 20 to 30 is not part of the 100 you expect to actually turn around in profitability.
spk04: No, it is.
spk02: Oh, it is embedded in that number. Okay. It's within that number.
spk04: Yeah.
spk02: Okay. One last question. In the fourth quarter, you had a slide that talked about where you were in the process. and I'll use the process because it's basketball playoff season. You had 30% as of the end of the last quarter. Can you give us an update of where you stand in that process and your thoughts about where you expect to be at year end?
spk04: Yeah, sure. The last year has been characterized by Tim and I coming in and working with the team that was here. Dealing, embracing our realities, decisioning upon items, and just being firm, fair, and friendly and moving out and making decisions and moving. And I'd say we're through that. Phase two is supplementing our in-place homegrown management with professional management, professional leaders who can take us to the next level. We're starting that now. And then secondarily for the plants where we've been tried to improve them as much as we could in place, we've sheltered them in place. Uh, and they're still dilutive, uh, addressing that, uh, from a rationalization standpoint, either with the customer or if we're going to retain it with our own actions, we spent almost, we spent no money, um, in rationalization. Tim and I haven't since we've been here. So that's next. So. I'd say we're 30% to 40% along, John. In the next phase, we'll be addressing our footprint and bringing in a little bit more outside management to steer our actions that have been through these things before. So we're building upon the great work that we've done in the last year, but we're climbing a ladder here. And we're looking forward on people. and actions and laddering into 25. Tim is the cat on the hot tin roof here managing the CapEx because at the same time we want to generate free cash flow and pay down debt as we go. So the things I just said want to spend more. They want to consume more CapEx. So we're picking and choosing carefully. We don't have a 25 plan yet. We're not ready to give 25 guidance, but obviously we know we're going to increase So we're putting in place a set of actions to do that. Tim, all the operations report to you. How would you answer his question of what percentage along the way are you?
spk03: I think we're right in that 40% range. As you mentioned, we're looking at bringing in professional managers to help with the next phase. And the next phase tends to be a little more difficult than what we've done so far when you look at footprint rationalization and that type of thing, consolidation. So 40% is a good percent for me as far as where we are today versus where we hope to be.
spk02: Excellent. And one last question, I'll get back into queue. Can you just update me on the interest expense cost? What was the cost of debt during the end of the first quarter? I haven't seen a 10Q filing yet, so I'm just curious what that looked like.
spk00: Mike? Yeah, just give me one sec to get you the actual P&L expense.
spk04: We did file the 10Q, John. I know that you have a lot of things you read all at once in a burst here, but our queue is on file.
spk02: Then I'm going to blame FactSet.
spk00: All right. Interest expense for Q1 was $5.4 million.
spk12: What was the rate on that?
spk00: The majority of that would be the term loan, which is currently at 14.3%. Okay.
spk02: Thank you, Mike. Thank you, guys. I'll get back into Q. Thank you, John.
spk01: The next question will come from Rob Brown with Lake Street Capital Markets. Please go ahead. Hi, Harold and Mike.
spk08: Hey.
spk12: Just following up on kind of the new business award activity, how would you characterize the margin profile of that? I assume it's profitable, but how does that sort of fit into where you're trying to get to?
spk04: Yep. It's a good question, and there are some prisms onto that answer. Largely, we're trying to leverage the capacity we have in place, and the capacity we have in place except for the plants, just a few plants that are negative, have their costs covered in generating margin at the plant level. So then you get into how do you treat the use of an existing asset? Do you re-spread it across new business, or do you look at it totally on a variable basis if all your costs are already covered? I can tell you that we set IRR goals on the new business, and they're reviewed by Tim and I. And it's accretive as a group. And how much do you keep to the bottom line also interweaves into what optionality do you have over the existing capacity? Because in some cases, we're getting awards for which if you look at your existing capacity, you're constrained. But if you look at swapping out and keeping the existing and reusing, repurposing the capacity for the new business, It's just a net margin improvement of several points. But overall, it's accretive. We're being pretty disciplined about that. We use Salesforce.com and Tableau. So we have contemporary tools to house all of our pipeline activity as well as our one business. And then it goes out by quarter on the use of cash for both capital and working capital. So we can see what we're obligating the company to in four periods. We've been capital efficient, so the show is still going here of filling in the future periods. I'm not ready yet to discuss exactly how accretive it is, but I'll take that as an action item for the next call.
spk12: Okay, great. Thanks for all the color there. Then he went through several categories of the new business activity, the grid and electrical was one of the areas you highlighted. What are you sort of seeing there in terms of activity and how do you see the growth looking in that area?
spk04: So we have two main product lines there. One is, you know, your old-fashioned circuit breakers and distribution box, flexible distribution and control. And the other is grid edge devices for control of grids. In the case of grid edge devices or smart meters and that sort of a thing, They're actually used in electrical and water. And so if you look at the public filings by our customers there, they're growing in both water utility control and electrical utility control. Their customers are utilities in cities and municipalities and water districts. And so the grid edge devices, which we're associated with, they're seeing steady growth. And we have a good mix there. On electrical distribution and control, a little different because we're tied in mainly, again, the residential. And that's tied into the same dynamic as I mentioned earlier for us on shafts in our machining business. That one, though, we've had some decent amount of new wins. And so we're not trending down in that area due to share gain. But the base business is a little soft. I think contactors, connectors, grounding, and all types of electrical distribution across points. So we're able to make that with powdered metal. We have powdered metal products as well as assembled copper bar and bus bar. So overall, it's growing a little bit and has sizable backlogs. sizable backlog so in that arena our customers talk about book to bill and there's a couple year backlogs the backlogs go over a couple years okay great thanks for the color i'll turn it over thank you rob the next question will come from mike crawford with b riley please go ahead um thank you and that you've given some
spk06: prior pipeline information, like you had a $500 million pipeline at year end. Did you state what the pipeline is currently?
spk04: It's grown a little bit. It's closing in on around $550 million, Mike.
spk06: Okay. And then I was hoping you could maybe elucidate on how these new program wins layer into your existing base of business. So NN Inc had $489 million of revenue last year, but is there a related metric of how much of that is somewhat recurring or somewhat bleeding off? Yes.
spk04: There's a few important metrics. One is that the average time from Securing an award nomination, which is the industry lingo, to hitting peak annual sales or run rate sales is about 18 months. Generally speaking, we're a tier two provider to a tier one making a subsystem that's going through their internal development in the case of vehicles, vehicle crash testing and vehicle certification and PPAPing, which is a quality term used in the industry. So a vast majority of our new win profile is at 18 months from award to peak annual sales. On the second point you touched on, which was comparing last year to this year, I think the inferred question is why isn't it going up more now? That gets into the lack of winning that was going on in 22 and early 23 that would have manifested itself around now. So there will be an inflection on the contribution of new business onto our base business. What's the takeaway? Business that's going through end of life production, EOP, end of production. And we have looked forward and we kind of know what that is and we know what the look of it is. And our goal is to do much higher growth than market growth. And so The business we're securing, if you do the math on it, you know, we're 165 million on 500 million. So that's way above our market growth. Our market's growing 3% to 5%. You know, we're winning around 13% to 15%. The takeaway is in the production, which is just a – gets into single digits takeaway. So the game plan here is to create a growth portfolio that layers in, gives us – the confidence to say no to continuation of underperforming business and walk away. And we're just starting. So we're right at four borders here since Tim and I have been here. And the commercial team, which is led by a gentleman named Verlin Bush. Verlin was new in the job after I got here. I promoted him into that position. And he's been winning, his team has been winning at a much higher rate than the company ever has. And it's not slowing down. So the net amount is coming to us in future quarters. Sometimes we'll get dropped in business, Mike. Like in the first quarter, we did have a decent amount of immediate startup wins. Immediate startup usually means it'll start in two or three quarters versus five or six. And right now inside the company, we're launching close to 40 programs, which is a very high level of new product launching than the company's ever been associated with. Tim's put in place a phase gate program, phase zero program, and PPAPing discipline. He's bolstered his ops team with professional managers who've done this at a high level, mass quantity. It's the numbers and then it's do it properly so you don't stumble. And right now we're operating near our capacity for our ability to quote launch. And we have space on CapEx to do more, but these programs need to be implemented. So we're kind of comfortable with where we are right now, Mike. Not ready to take that aspiration part of our go forward plan up. We're really committing to do that amount. And when we've proven we can launch programs and they are accretive and we do postmortems and we got it right and it's muscle now, we will look at taking up the dollars of growth that we intend to get. The market's there. We're seeing the opportunities. We're just kind of cherry-picking right now. Tim, anything else?
spk03: Any other modifiers on that? No, again, Harold, I think you nailed it. I wouldn't have anything to add to that. Thank you.
spk06: Thanks, Mark. Okay, thank you. Just one follow-up to that question. So when you have your 18 months on average from award to peak revenue, and then what on average is the EOP tail after that?
spk04: Are you asking how long do we generally retain a program?
spk11: Yes.
spk04: Around eight years.
spk09: Mm-hmm.
spk04: So they're like annuity strips. If you look at the amount of business per year numerically that the company has, you know, it's not all eight-year business. We have some PO business too, but it times out and then needs to be replaced. I'd say the net amount, you know, the net amount, probably half of the win rate. We'll get smarter on that for the next call, Mike.
spk06: Okay. And then just a final question from me. So you're right now thinking you can capture another 10 million EBITDA once your restructuring actions are completed, particularly with these maybe four other plants that remain below profitability. What is the anticipated spend that you need to invest to achieve that? This goal and maybe if you could frame that in the context of, you know, EBIT versus adjusted EBITDA, that would be very helpful for us. Thank you.
spk04: Okay. Look, I'm going to talk a little Tim and Mike on the adjusted EBITDA. The business that we spoke about that loses money, In 2023, we had about $100 million of business that lost a little more than 10 million at the plant level. We articulated a goal to rationalize that business, trying to retain business strips that were good, but to increase in 24 versus 23, about 10 million of EBITDA. So if you do that math, that gets you back to about break even on an annualized basis. But that's not the end point for those assets. The goal really is to get to plus $5 million. So then you say, how much capital was needed to get from, you know, minus 10 to zero? Basically nothing, not much, de minimis. The second part of your question is, so how much capital would be needed to get from zero to plus five? Okay, that's a different question. So right now, Tim and I foresee some capacity rationalization, which will take some money, plant closures, plant consolidations, whatever title you want to put on it. It will also take us going in for a couple hard talks with a few customers, not a lot, but a few. And then in the case of assets that become idled through that process, do you move them? Or do you modify them? Right now, Tim and I think a conservative assumption is that we're going to have to modify some of the equipment to be able to compete and be repurposed into our growth program. So that has a use of capital, and that's one reason Tim's looking for 12 quarters here against our current capital market constraints. And right now it all works, so we're going to be – probably 60-40 capex on growth versus cost. We haven't spent a lot of capital and cost since we've been here. We've been using it mainly on growth and maintenance of business. But we're going to need to spend some money on making that capacity profitable on a go-forward basis, either through facility rationalization or investment in equipment so it can be repurposed to do something else. I'll hand it to Tim, and then Tim, if you'll hand it to Mike on the financial question.
spk03: sure and and we're we're putting that analysis together now so i don't i wouldn't want to quote a number as far as what the capital required for that is because we're just finalizing that and we can take that as an action item for future calls but um harold harold is completely correct it was virtually no capital to to or will be virtually no capital to get it to that group uh facilities to break even But there will be some form of capacity rationalization, and it will require capital. But at this point, I couldn't quote a number.
spk04: We're working within our overall idea of spending around $20 million, Mike, on CapEx. So right now, we're not letting go of that constraint, self-imposed on ourself. Right. And then on the third point, on EBITDA, Mike, would you handle that one?
spk00: Yeah, I think you covered it in the sense of the $10 million embedded in our 24 outlook relative to 23. And then going forward, you know, as Tim said, if we spend some capex for facility rationalization, that wouldn't impact EBITDA. If we had any costs incurred for plant consolidation, we would typically exclude those from our adjusted EBITDA. But you have to be defined in terms of capital and expense for future footprint decisions at this point?
spk04: Mike Crawford on plant consolidations, as you know, no one likes adjusted EBITDA, us included, but there's some GAAP accounting to follow if you're going to consolidate a facility. And so I would say we're not going to do anything other than follow GAAP accounting on rationalization that we're going to do. And it's not a big thing. It's a minor thing. It's not going to be a big use of capital. but it'll be a use of capital. At Tim's point, we'll get our arms around it and be able to give numerical information next time.
spk06: All right. Well, thank you very much. Thank you, Mike.
spk01: Again, if you have a question, please press star, then 1. Our next question will come from Tom Kerr with Zacks Investment Research. Please go ahead.
spk10: Good morning, guys. Most of my questions have been answered. Just curious about the China business and what's driving that sort of growth and improvements there. Is it product specific or more back row type issues?
spk04: Yep. I'd say it's mostly self-caused. So a year ago when Tim and I came in and we kind of challenged the global commercial teams to grow in adjacent areas that make sense for us and don't pursue any kind of silly moonshots, The China team had a lot of opportunities in front of them with the top 50 OEs in China and has been very successful, the team there, led by Rex Huang. And it's very heavy, Tom, into steering, electric power steering, EPS, we call it. So we've steered away from engine components in that market. Obviously, there's government mandates to switch to it. fully electric vehicles, new generation vehicles they call them. And so we haven't pursued engine parts in that market. We're primarily after vehicle control sensors, steering, braking, seat controls, window controls, anything that has a worm gear. If you look at our machined business, our machined business is primarily turned parts, turned parts. There's a lot of different types of machining in the world. We're an expert in turned parts down to the nano level. So that's a smaller group of people that can do what we do with that level of precision. And so we're fundamentally in China looking at where are turned machine parts on vehicles and getting after them. And obviously there's a tremendous amount of steering. And if you look at self... self-driving vehicles and automated vehicles, the precision of steering and braking is dramatically increased. Um, and so there's a higher need for precision parts. So, um, we, we saw the opportunity to, to grow in adjacent markets are basically low risk for us and basically leveraging existing capital. Um, some cases with new customers, some, some cases with existing customers and in our company, That's the only facility that's nearing capacity 24-7. So they've done a great job there. And if you look at the vehicle production inside of China, in China, there's an ability for the industry to produce two times the amount of vehicles consumed indigenously. So I know you follow the market, but last year or recently, China passed Japan on the global – Number one, global vehicle exporter, and that's getting a lot of press and the wall street journal and president Biden and Trump and, and. Uh, premier G is in Europe right now with Macron and, and meeting with European leaders and top conversation is, Hey, you guys are coming in hard with your automotive products here. Um, and so they've, they're really aggressive about exporting in this industry. And the biggest export markets for China right now are Russia, Australia, and Mexico. And we're participating in that. So we're participating in the Chinese government's strong export behavior on vehicles made in China. And we're participating in the China for China program of electric autonomous self-driving vehicles. And additionally, China is one of our lowest cost plants. that in our Brazil plant and these customers are global and we've become globally approved as a supplier when we win these positions. So it's actually opening up opportunities for us in the United States. Normally you'd think a US based company like us would leverage its relationships into China. This is the reverse. We're leveraging our successful business model in China and becoming approved in the US and Europe and in Brazil. It's really key to our future. If you look at our growth strategy, Tom, it was a big pie chart. Growing in China is about a third of that, so we're going to continue doing that in China. It's very important to us.
spk11: That's good. Thanks for the color, and I think we're almost out of time, so I'll take the rest of the questions offline. Thanks.
spk04: Well, thank you, everyone, for joining us today and for the conversation. For the excellent questions, Tim and I and Mike got some action items here, and we'll be responsive to them next time. Our transformation continues to take shape operationally, commercially, and culturally. And while there's more to be done, we believe that we're going to continue to execute and deliver profitable growth for all of you shareholders on the phone. And we're a committed global team and excited about this year, really excited about this year. And we're getting excited about 25 also. And we look forward to sharing our successes with you in future quarters. And with that, I appreciate it, and everyone have a good day. We're on the call now.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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