NN, Inc.

Good morning and welcome to the NN Inc. Third Quarter 2024 Earnings 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 try your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Stephen Poe with Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us. I'm Stephen Poe with NN Inc.' 's Investor Relations team, and I'd like to thank you for attending today's earnings call and business update. Last evening, we issued a press release announcing our financial results for the third quarter ended September 30, 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 the call this morning will be Harold Beavis, President and Chief Executive Officer, and Chris Bonner, 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 when filed in the risk factors section in the company's quarterly report on Form 10-Q for the fiscal quarter ended September 30, 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, foreign exchange 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. The 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 Davis.

Thank you, Stephen, and good morning, everyone. Thank you for joining us for a few minutes to talk about NN's performance in the quarter and going forward. If you wouldn't mind, please turn to page four in our earnings presentation. Wanted to make a few overall comments here, and then we have some information to share with you. We got some feedback after the last call to give a little bit of extra information, and we've made an attempt at doing that. You may be reading along with some of the auto industry public filers, Finia, Ford, Stellantis, some of the other people. There's a little bit of slowness in North America, not a lot, you know, a few percent, but enough for us to initiate another plant closure and another round of cost reductions in that business. And our goal is for our North American mobile business to be 10% adjusted EBITDA in our first pass roll-up at 2025. What this action included puts us over 10%. So we're on track to get to our goal. And the business at this point hasn't made money, so it will be a nice improvement for us. And we're successfully transitioning the legacy auto business from North America and ice centricity to be balanced with China production as well as across powertrain platforms. And we're on track. We're already showing record sales and profits in China and new awards as well in record capacity, up 19% in the period versus prior year. And the rest of the year looks to be more of the same. We're going to be breaking records going forward here for quite a while. We've mentioned before that we have to add significant amount of new equipment to onboard both increased production as well as new awards that we've achieved with top tier one customers and their China operations as well as for China. And that's all working very well, and we're working within our capital structure to grow as fast as we can with the cash flow that we have and reducing North American cost structure and footprint. So we're pretty excited. We're pretty happy with where we are right now with transitioning that business, which has been a problem child looking backwards. But looking forward, it looks to be on its way to be fixed, and sooner rather than later, looking into the early part of next year. The second big point, just kind of overall, is that our new business wind program is really performing. We've gone over $100 million now of new winds over the last 21 months. And October, we just reviewed October this morning before the call, and we had October also. So the program is doing fine. and we are underway with quite a few launches with quite a few customers, and it looks like our first pass at 2025, we're working with 2025 budgeting, obviously. Next year, we'll be turning the corner with year-over-year growth, and that's going to be a big watershed event for our company because that hasn't been true if you look backwards at the business, and so we're pretty excited about where we're headed here and we're ramping up the programs to make that happen. And the models that our analysts have out on us for next year's performance, you know, we're looking to be consistent with those right now. And our first pass on 2025 roll-ups on EBITDA and cash flow as well. Refinancing is the third point. You know, we've been out in the market to refinance our ABL and our term loan and We remain focused on making that happen, and we expect the refinancing process to result in expanded operational and financial flexibility. And it's still underway. We haven't consummated it yet. We're still out there in the process of doing it and getting all our asset values and all that kind of a thing. But we remain focused on making that happen so that we can accelerate the company's transformation. So that's just kind of a big picture. I'd like to turn to page five, please, and give a little more detailed information on the transformation plan that we have going here at our company. We continue to make solid progress. There's five major elements to it. We've used this same format for about a year. New leadership, supplementing the company's leadership with new leadership I'd say Tim French and I, you know, have kind of been the architects of this thing, and we gave ourselves a self-assessment here and used our judgment on where are we with each of these topics. And we believe we're around 60% there on leadership. We still are strengthening our teams in the medical end market, electrical grid end market, and stamp products in general, as well as upgrading several plant teams that are not where we want them to be. So we think we're about 60% there on leadership. Fixing the unprofitable areas, the group of seven that Tim calls them, the money losing plants. Put some data here for you. Last year through three quarters, those plants lost 8.4 million of EBITDA, and this year we have it to 0.8. And Tim's statements were that he wanted to be breakeven this year, and we're tracking to do that. So it's a big improvement, a dramatic improvement in those plants. Another one is expanding our margins. Oh, I'm sorry. We said we're 40% along there because our goal really is to get those plants to make money, not lose money. We said we're not quite halfway done on that one. Expanding margins, we said we're halfway there. We're expanding our gross profit margins in each business and overall. We put the information there on what the actuals are year-to-date versus year-to-date. De-leverage and refinance our debt. We've made great progress in getting our leverage down. We did sell Lubbock in the quarter, right in July, and we used all the net proceeds to pay down our debt. And that's already given us some operational flexibility to go faster. And we're coupling that flexibility with a little bit of slowness to consolidate another plant. And we're underway with that. The last point, on fixing the sales engine and growing the company. We're happy to say that our declining and rationalized legacy sales will be fully offset by our new wind program already, and we're not done. And we expect the year-over-year sales growth to begin in 25. So we're tracking to what we wanted to do there as well. Turning to page six, just wanted to talk a minute about the markets that we serve. we're happy to say that they're healthy, which has enabled our business to be on track. There's some ebbs and flows, like Q3 was a little softer than what we wanted. We're a taker on our demand, really. We can't generate demand. But it's really just a temporary ebb and flow for us because we see forward into the quarter and what our customers say. And on the Passenger vehicles, we see some slowness in North America, but strength in China. And that's a net good mix for NN because our China operations are among our most profitable and our North American operations are among our least profitable. So what's happening in the market with the shifting from Europe and North America vehicle production to China production, that's net good for us and we're benefiting from it. General industrial market is growing a little bit. That's really our power business that serves into that. Our stamped products, power grid and electricity control continues to grow nicely. I think everyone knows that our big customer here is ITRON. But we serve the other big brand names that make control panels and circuit breakers and whatnot. And the housing construction has been weaker than everyone thought, if you follow that at all. But grid management and smart grid, that hasn't slowed down at all. And so we're benefiting in that market. Commercial vehicles, we're a small participant there on high-end. Diesel engines is primarily how we serve that market. And the business has been soft, but the outlook is for it to go up, and we can see our order books being consistent with that. And then medical is the last market we serve. And we're really focused in on orthopedic implants and orthopedic tools and parts and pieces. And that business is doing fine. The market grows a little bit, but we have outsized goals there because of our legacy knowledge and our equipment lineup. So the market update is overall healthy and constructive with what we want to do. Turning to the next page, please, on page seven. Our organic growth program continues to kind of get focused and get stronger, and it's performing. Very happy with the team here, and we're delivering. We're not perfect everywhere, so we're trying to get a little bit stronger in electrical and medical and stamp products. But the turnaround of underperforming plants that Tim has led has really been a key enabler for us. The big issue we had in those plants, operationally speaking, is that they were behind in their service. They had bad customer service, which led to a lot of expedited and premium behaviors like overtime and expedited material and shipments and that kind of thing. And we've got a hold of that pretty much. And we had a few pieces of business that we just had to say goodbye to. We couldn't get the prices that we needed. But the fact that we've improved our service has really given us some strength that we underestimated a little bit and has really opened the doors for us on more opportunities than we saw coming. We're still very, very comfortable hitting the goal we gave this year of 55 to 70, especially when we're right at 50, and we're still cranking. This program, we're going to keep driving it. We're going to keep doing it, and we expect to continue right into next year, and our pipeline is consistent with that. On the next page, I just wanted to highlight a new product that we've come out with on rear wheel steering. We innovated this product line in China, working with a couple steering tier ones. That's generally who we work with on next generation products. And rear wheel steering is becoming more popular due to the advantages that it gives in terms of safety and braking distance and agility at low speeds and parking. and improved trailer pulling. And we've come out with a new product here and we're working with two top providers. It's new equipment for us and new products. We are really focused in on steering and braking and vehicle control in terms of how to use our knowledge of sub-micron manufacturing. And we've had some big wins here early. So we talked about medical last time and we got good feedback on highlighting that. So we wanted to highlight another product that we've innovated that's leading to some of our wins. So overall, operationally speaking, we're happy with our transformation progress. We're happy with the new wins that we've achieved. We're happy with the turnarounds of our underperforming plants. We would have preferred a little stronger pulse in the quarter. from North America, but we didn't lose any positions. The only business that we're shedding is business that the prices are unfixable. And our initial look at Q4 and the rest of the full year looks fine, and Chris is going to cover that for us numerically. So I'll turn it over to Chris now. Thank you, Harold, and good morning, everybody. Today I'll be presenting information on both a GAAP and a pro forma basis in order to provide additional transparency in our operating results since we've had quite a few changes in the business with the transformation undergoing, namely the sale of Lubbock and migrating away, as Harold mentioned, on certain unprofitable business. So we hope this presentation is indicative of how we're performing and how we're transforming NN over time. Pretty excited about that transformation and pretty excited to to share with you some of the faster accelerated transformation activities and how they've impacted the financials this quarter. So I'll be starting on slide nine, where we detail our financial results for the third quarter. This slide shows our as reported gap numbers and adjusted numbers along from the left to the right. So hopefully it's clear there. The adjustments in the middle section show the sale of Lubbock, which contributed 5.6 million revenue in the prior year, which did not contribute, obviously, any revenue in the third quarter this year, so we're adjusting that out, and the associated EBITDA. So those adjustments help to show the transformation that we're making to the business. Second, the rationalization of about 2.4 million of unprofitable business, along with two profit benefits in the prior year, which did not repeat, and negative FX impact kind of shape out the adjustments for the quarter. So Pro forma revenue, operating profit, and adjusted EBITDA are shown on the right-hand side of the chart. On an as-reported basis, net sales for the quarter were $113.6 million, declining by $10.8 million versus last year in the third quarter. On a pro forma consolidated basis, accounting for the adjustments I noted earlier, net sales were down only 0.5% or about $600,000. Our pro forma revenue performance reflected an unfavorable mix in our power solutions business, However, that business has started to recover already in the fourth quarter, so we're not concerned about that mix that occurred in the third quarter. This mixed shift was partially offset by stronger organic sales growth in the power solutions as well as solid sales from our China-based operations, which actually increased 19% year-on-year in the mobile solutions segment. This was obviously offset by mobile North America segment sales. Our operating loss for the third quarter was $3.8 million, an increase of $1.1 million compared to the prior year third quarter. On an adjusted basis, operating income was $1.3 million versus $3.6 million in last year's third quarter. This was driven partially due to the non-cash impact of lowering our inventory. Adjusted EBITDA results were $11.6 million compared to $14.6 million in the prior year period. On a pro forma basis, our adjusted EBITDA declined slightly by $1.3 million. mainly due to the unfavorable mix in power solutions, which has now corrected itself. We accelerated our progress during the quarter in optimizing our sales mix through the transformation, and we expect to capture these benefits as we progress in fiscal 2025, as Harold has mentioned. This will support our long-term margin improvement goals, especially in mobile, as Harold talked about. Our efforts in attacking all underperforming areas of the business and cost cutting are now moving at a faster pace, as noted by the recent plant closure and cost reduction plans in the third and soon-to-be fourth quarters and 2025. So now just turning to our segment results on slide 10, in our power solution segment where our business consists largely of stamped products, revenue was $42.9 million compared to $45.5 million in the prior year period. However, on a pro forma basis, excluding the sale of Lubbock, quarterly revenue increased by $3 million, or 7.5%, as noted on the charts on the right. This sales growth was primarily due to solid demand growth from a key electrical customer as we actively worked to reduce the associated backlog after extended supply chain interruptions, in addition to higher pricing pass-throughs on precious metals. New business wins reached $3.4 million in Q3, and as Harold noted, we've had great success there and continue to expect success even through October, as he talked about. Encouragingly, we have seen the sales opportunities and program awards that we're bidding on increase in their overall size, and our segment pipeline has grown to roughly 230 million. We're supporting this momentum with additional sales specialists across the electrical grid and medical markets, the two areas that we're focusing on, and remain very excited by the pace and direction of the business overall. While the Just EBITDA margins face near-term headwinds from a less favorable mix, we've seen a 200 basis point step up in our margin performance year to date. We remain focused on capacity expansion with new advanced equipment and improving our hit rates and key product categories, which include bus bars, electrical shields, connector components, and medical applications. Now switching over to our mobile solution segment on slide 11, it covers our machine parts, our products business. Our mobile segment continues to lead the successes of our new business wins program. And this quarter was no exception as we continue to capture solid demand with our capabilities. The mobile segment has won over 50 million of new business awards secured in the past year and captured 11.5 million in this year's third quarter. Encouragingly, we're seeing our wins driven by new awards across many of NN's best, most high-quality products. Additionally, the successful turnaround in the performance in some of our historically underperforming Group of Seven plans and improvement to our overall scorecards with customers has opened up additional new business opportunities, helping support continued momentum in new business wins. In China specifically, where we make many of NN's best products, we saw the 19% sales growth year over year, with this solid growth supported by key global tier one customers. So for the quarter in mobile solutions, sales were 70.7 million compared to the prior period pro forma results of 74.4 million in last year's third quarter. Further, sales comparisons were impacted by unfavorable foreign exchange effects and select contractual reductions in customer pricing. Lower volumes in mobile North America impacted margins in the quarter and were also impacted year-on-year by $1.1 million in a customer settlement benefit in the prior year, which did not repeat this year. Our third quarter adjusted EBITDA on mobile solution segment was $8.9 million, down $0.9 million from last year's third quarter on a pro forma basis. We're making very good progress on our group of seven initiatives to improve our operational performance, and we remain solidly on track to delivering positive adjusted EBITDA for the group on a consolidated basis. Additionally, we want to achieve a minimum 10% adjusted EBITDA margin in the North America mobile solutions business, as Harold mentioned. As we look ahead, our focus remains on key growth areas, steering, braking, vehicle control components, and high efficiency fuel injection systems. As Harold noted, we're having tremendous success in China, where we make many of NN's best products, and success across these products will help lead our organization for future growth and profitability. Please turn to slide 12, where I'll briefly speak about our actions to de-lever NN and improve the capital structure. As you'll note, in Q3 2024, we continue to see improvement in our leveraged positions supported by the proceeds of our divestiture and non-core plastics plant in Lubbock, Texas. When taking a look back to where we were about a year ago, leverage has notably declined, falling from 3.9 times in Q2 of 2023 to just under three times in Q3 of 2024. This decline reflects both improved adjusted EBITDA contribution, further supported by the strategic divestitures we've executed to streamline our operation and reduce our debt load. As we look forward to refinancing strategy remains focused on enhancing financial flexibility and expanding the capacity to support our growth initiatives. As we have articulated in the past, our refinancing process is continuing, and we expect to make incremental improvements to our current debt structure. This remains a critical component to our long-term capital structure optimization strategy and overall transformation. That said, from a macro perspective, interest rates are still elevated in the U.S., aspects of the global economy are challenged, and the U.S. elections are around the corner. So we're not in a rush to refinance, and we're looking to get the right refinance deal and right partner to support NN's transformation. Now, turning to slide 13, this presents our outlook for 2024. We're maintaining our outlook for 2024, and these ranges are subject to shifts, obviously, in market demand, particularly in North American auto. We expect to continue winning new business at a strong rate, focusing on power, medical, and the electrical markets, as I noted. NN is investing cash flow intelligently in support of these new business programs, and our cost initiatives and footprint rationalizations will continue to have a positive impact on underlying results, improving the overall cost structure that we carry. So with that, I'll turn the call back over to the operator for questions. Thank you. Operator?