Q1 2021 NN Inc Earnings Call
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Good day, and welcome to the and and incorporated first quarter 2021 earnings Conference 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'll be an opportunity to ask questions to ask a question you May press star.
And 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 Mike Danny Director of Investor Relations and financial planning. Please go ahead Sir.
Thank you operator, good morning, everyone and thanks for joining us and Mike Danahy director of Investor Relations and financial planning and I'd like to thank you for attending todays business update our presenters. This morning will be president and Chief Executive Officer, Warren Veltman, and Tom the bile senior Vice President and Chief Financial Officer.
Yesterday afternoon, we issued a press release announcing our financial results for the first quarter ended March 31, 2021, as well as the supplemental presentation, which has been posted to the Investor Relations section of our website.
If anyone needs a copy of the press release or supplemental presentation. You may also contact Lambert and company at six one and 625857 and eight eight.
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 31, 2000, and 'twenty and when filed the company's quarterly report.
On form 10-Q for the three months ended March 31 2021.
The same language applies to comments made on today's conference call, including the Q&A session as well as the live broadcast.
Our presentation today may contain forward looking statements regarding sales margins foreign exchange rates cash flow tax rates acquisitions synergies cash and cost savings future operating results performance of our worldwide markets the impact of coronavirus COVID-19 pandemic.
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 the company's control.
The presentation also includes certain non-GAAP measures as defined by SEC rules.
A reconciliation of non-GAAP measures is contained in the tables and the final section of the press release and the supplemental presentation.
Reviewing the agenda for today's call Warren, who will provide an overview of key highlights from the quarter followed by a detailed financial results update from Tom.
Warren will then discuss our segment results and and markets as well as the outlook for the remainder of 2021.
And the conclusion of the prepared remarks, there will be a Q&A session.
At this time I will turn the call over to Warren Veltman, President and CEO.
Thanks, Mike and good morning, everyone.
If you would turn to page five we will review some of the highlights for the first quarter. The solid momentum we achieved and the second half of 2020 continued and in many ways, even accelerated into the new year with the tailwind of economic recovery boosting our business and that of our customers. We are encouraged by the progress being made.
Overcome the impacts of the COVID-19 pandemic, we completed our refinancing during the quarter, which has substantially reduced our overall cost of capital and put and then on a stable long term financial footing that will provide the flexibility we need to achieve our 2025 growth and margin targets.
With a broad recovery, we achieved another strong quarter.
And another quarter of strong growth and revenues both sequentially and year over year, we saw this growth, especially in our automotive products during the quarter, which had a significant influence on our mobile solutions business, which grew even faster.
The impact of our many cost improvement and operational initiatives undertaken in 2020 generated solid results in the quarter with year over year increases and both GAAP and adjusted financial results along with a high conversion of EBITDA on the incremental sales.
We also maintained our focus on working capital by increasing turns for the third sequential quarter, resulting in a rebound and free cash flow generation.
Turning to page six we have summarized some of the other key highlights for the quarter as I mentioned, our business continued to rebound from the significant impact of the COVID-19 pandemic as sales for the quarter were $126 8 million up nine 1% from a year ago and up six 5% from last quarter.
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The improvement and sales volume coupled with the operational improvements we have implemented resulted in a significant and.
And significant improvement and operating income and EBITDA as well as earnings per share reported operating income improved to $1 million versus a loss from operations of $103 9 million one year ago, though I'll note that the prior year results included included a significant goodwill impairment non.
GAAP adjusted EBITDA was $16 9 million or 13, three percentage of sales up from $10 1 million a year ago. When adjusted EBITDA was eight 7% of sales GAAP.
GAAP EPS from continuing operations was a loss of 46 per share versus a $5 96.
Per share loss from a year ago I would note that the loss from the current period was driven primarily by the cost associated with the refinancing transaction and the elimination of our interest rate swaps. Our adjusted net income from continuing operations was a profit of <unk> <unk> per share versus a loss of <unk> 16.
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Now I'd like to turn it over to Tom to bias. So he can provide a more in depth review of our financial performance for the quarter Tom.
Thanks, Warren please turn to slide seven which highlights the big picture view of our first quarter results along with the continued recovery and our sales trends.
We saw a much stronger increase and our adjusted EBITDA than you might expect given our usual incremental margins.
With an $11 million increase in revenue, we achieved a 7 million dollar increase and our adjusted EBITDA, which is higher than our normal 40% variable margin flow through.
Sales volume JV net income and the impact of absorption into inventory increased EBITDA year over year.
Note that management made a conscientious decision to increase inventory to prevent and supply disruption impacting our customers.
The improvement and EBITDA was partially offset by the impact of temporary cost reductions such as gain sharing which was reinstated at the beginning of 2021.
Looking at the bottom chart. We can also see the continued recovery in our markets as reflected in our net sales.
After falling dramatically and the second quarter of 2020 due to the impact of the COVID-19 pandemic and related production shutdowns at our customers. We have seen rapid sequential recovery over the past three quarters, we anticipate the recovery to continue into 2020, one as we move past the pandemic related.
Pack and shift to more normal growth patterns.
Let's go to slide eight which provides a look at our continued focus on working capital management.
Our recovery and working capital turns has continued with higher sales and continued prudent working capital management and showing an improvement over the past three quarters net.
Net working capital at the end of the first quarter was $114 8 million compared with 104 million in the prior year and increase of $10 8 million. This.
And this was primarily due to an increase in accounts receivable and ultimately driven by higher sales volume within the quarter.
Inventory was also higher and as previously mentioned to prevent supply disruption impacting our customers.
Working capital turns were four four turns versus four five turns and the prior year.
Sequentially working capital turns continued to improve from four three turns and the fourth quarter.
Turning to slide nine we highlight the disciplined approach we have taken to capital expenditures over the past year and remain focused on prudently managing our cash.
You can see on an absolute basis, we have reduced capital spending by 26% compared to 2020 and in comparison to depreciation expense, we have come down from nearly 100% of depreciation to about 70%.
Cash capital expenditures were $5 5 million or four 3% of sales for the first quarter compared with $7 4 million or six 4% of sales and the prior year.
We approach capital expenditures in terms of both sustainability as well as growth over the past you have eliminated or deferred projects that were not of immediate need.
And even as we invested in projects critical to our long term growth. In addition, we have available capacity and a number of our facilities, we remain flexible and responding to increased demand.
And as it continues to rise.
Slide 10 shows a chart of our free cash flow for the quarter.
And free cash flow was $2 4 million and the first quarter compared to a use of cash of 1 million and the prior year, which still included life Sciences on.
Our free cash flow in 2020, one will be impacted by two items in future quarters.
And the second quarter, we will be negatively impacted by a $9 million cash tax payment related to the spinoff of the life Sciences business.
Second we are estimating and the fourth quarter debt, we will receive the tax refund of approximately $11 million due to the loss carry backs under the cares Act.
We are focused prudently on managing our working capital and capital expenditures, while improving our profitability to increase free cash flow throughout the year.
Please turn to slide 11.
Net debt at the end of the first quarter was $123 3 million versus $768 9 million in the prior year, a decrease of $645 6 million.
The reduction was due to the pay down of.
Of debt following the sale of life Sciences, and our recent refinancing.
Our net leverage ratio stood at two three times at the end of the first quarter down from five four times, a year ago, maintaining a leverage ratio at or below three times is important for our long term growth initiatives and that alleviates concerns from our customers and suppliers regarding our long term financial stability.
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A couple of more points before I turn the call back to warrant first we have over $75 million of liquidity as of March 31, 2020, one and currently have not drawn on our revolver.
And so our liquidity decreased by approximately $17 million versus the fourth quarter of 2020. We believe we have ample liquidity to support our needs.
The refinancing decreased the size of our revolver from 60 million to $50 million and we had a $5 1 million dollar increase in working capital versus our fourth quarter of 2020, resulting and a decrease and our cash balance.
Second in the lower right hand chart, you can see that our term debt increase from the fourth quarter 2020. This is due to our refinancing as we shifted our capital structure from our higher cost preferred stock to a lower cost term debt.
With that I'll turn the call back to Warren.
Thanks, Tom.
On page 13, we outline our view of current market conditions within each of our operating groups within mobile solutions mobile solutions. We have seen a continued recovery of automotive production with 2021, North American volume is expected to increase 24% and nearly reaching the levels of 2019.
The industry is also combating the ongoing shortage of chips that are essential for a variety of applications within each vehicle as well as the shortage of materials such as specialty stainless steels with these supply chain issues, we remain proactive and supporting our automotive customers through various actions, including increasing inventory safety.
Stack, which has generated positive customer feedback.
From an industrial perspective, the medium and heavy truck markets continue their steady growth and North America, Europe, and China, which has driven demand for diesel engines, specifically with China's CN and sixth emission standard deadline of July 2021, approaching we are experiencing acceleration and volume prior to the effective date.
Within power solutions power companies have continued to justify and execute upgrades for aging infrastructure to prepare for installations of smart grid systems Green power generation and storage solutions, we believe grid infrastructure investment will continue to grow with future power demand, resulting from increased penetration.
<unk> of electric vehicles and the market.
The current administration is also prioritize green initiatives and carbon reduction and the recent 225 trillion infrastructure proposal.
And with renewed focus and incentives on electric vehicles, and the related grid infrastructure necessary to support them, we expect to see additional demand to benefit both of our business segments over the long term.
We have presented additional information for each of our operating groups, starting with mobile solutions on page 14.
Mobile solutions sales grew 11, 3% and the first quarter from one year ago. As we saw continued recovery from the pandemic as well as strong growth and general industrial demand driven by E Commerce logistics GAAP.
GAAP operating profit for the first quarter was $6 1 million compared to an operating profit of $3 million and the prior year adjusted operating profit increased nearly 377% to $7 1 million or nine one percentage of sales from $1 5 million or two one person.
Sent a sales last year and.
Adjusted EBITDA increased to $14 9 million or 19, 2% of sales from seven 4 million or 10, 6% of sales and the first quarter of 2020.
The increased profitability was driven by the higher sales volumes fixed cost absorption and inventory increased variable margin, resulting from our cost improvement initiatives and the impact of our China joint venture.
Let me address our China joint venture for a moment, we saw strong growth and improved profitability from our joint venture during the quarter as it contributed $1 $4 million to the bottom line and increase of $1 7 million from one year ago.
Our JV generated over $23 million and sales during the quarter almost tripling the sales from the year earlier period. Obviously, we are pleased with these results and look forward to continued excellent performance throughout 2021.
Looking forward, we see continued strong demand in most regions, but managing supply chain requirements and manpower will be key to our success as both remain issues due to the pandemic. We will continue to focus on free cash flow through disciplined capital spending and working capital management.
On page 15, our power solutions group experienced a five 8% year over year increase in sales and the first quarter, which was driven by an increase and precious metals pricing, particularly partially offset by lower overall demand, which continued to be adversely impacted by the COVID-19 pandemic.
Prior year sales and many power solutions markets did not begin to see and impact from COVID-19 until the second quarter. And addition, Q1 2021 sales were also adversely impacted by inventory adjustments for smart meter components at a key customer on a sequential basis power solutions recognize.
$5 1 million of sales improvement over Q4 of 2020.
Although our total sales were positively impacted by higher precious metal costs. These cost increases are directly passed through to customers at lower margins, resulting in a headwind to overall margins GAAP income from operations for the first quarter was $2 4 million compared to $2 6 million and the prior year excluding the.
Goodwill impairment impact of $92 9 million from the first quarter of 2020 adjust.
Adjusted operating profit decreased to $5 5 million or 11, two percentage of sales from $7 million or 15% of sales and the first quarter of 2020 adjust.
Adjusted EBITDA decreased to $6 8 million or $13 nine percentage of sales from $8 4 million or 18, 1% net sales and the prior year.
Prior period results were adjusted to exclude certain development costs and new facility costs incurred before the commencement of normalized production, which are included in our.
Operating results for 2021.
Looking forward, we see consistent demand trends and power solutions that we remain cautious given the continued uncertainty and the pandemic pandemic recovery, we will remain protective of cash flow in this segment through prudent working capital and Capex management.
And as I conclude my remarks on page 16, we share our outlook for the remainder of the year with the continued uncertainty surrounding the COVID-19 pandemic and related recovery. We are still not and are positioned to implement for formal guidance at this time, but we wanted to share how we see the rest of the year. The rest of 2021 unfolding we.
Strong growth for the first half of the year, particularly and the second quarter compared to the heavily impacted results last year material shortages, including semiconductor chip shortages driving Oems to selectively shutdown certain production facilities.
Could create both.
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And consistent consumer demand and production interruptions.
Our teams will focus on supply chain and logistics to ensure a source of material supply to meet consumer demand customer demand.
Free cash flow generation will remain a priority as we remain.
A disciplined on capital investments and working capital optimization, we will continue our efforts to achieve synergies between our mobile solutions and power solutions businesses. Both in terms of revenues and costs leveraging client relationships and operational best practices across the organization.
Additionally, we will evaluate our global facility footprint for optimization and other continuous improvement cost reductions.
As for specific measures underlying our 2021 outlook, we continue to anticipate capex of approximately $22 million as we look to make necessary investments to support our long term growth. In addition, we expect depreciation and the range of 33 million and amortization of approximately $14 million and summer.
And we started the year strong with solid growth and revenues and improved profitability. We expect the economic recovery momentum we have seen in Q1 to continue into Q2, but remain wary of certain stress points I have discussed associated with shortages of material and labor in spite of these challenges our management team will remain focus.
On meeting our customers expectations for both delivery and quality over the coming quarters, while continuously improving our cost structure.
And that concludes our prepared remarks, and I will now turn the call back to the operator for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys 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 Steve Barger with Keybanc capital markets. Please go ahead.
Good morning, guys.
Good morning, Steve.
Good morning.
Good to see some things stabilizing but you did note unpredictable volume through <unk>, but.
But your mix should mitigate some of the chip shortage.
First do I have that right and second do you expect revenue will be up sequentially and mobile.
First you have it right.
We are concerned about the semiconductor chip shortage, Steve but.
A significant portion of our product in North America ends up on SUV and large truck platforms I should say.
A disproportionate share of it.
The majority.
And that has protected us somewhat because the Oems and thats the high high margin products for them. So they are prioritizing that as it relates to supply shortages. So we have I think benefited somewhat from that.
And it relates to sequential I mean, we were looking at the second quarter at this point, we're seeing consistency of volumes.
In comparison to the first quarter at this point and time.
Consistency okay.
And slide 13 shows North America auto production is expected to recover 24% from last year.
Do you expect your mobile segment will be up a similar amount.
Again, we're not going to give guidance over the long term, but certainly our volumes fluctuate with.
Overall automotive production, but we are a global supplier right. So that that statistic was primarily related to North America.
Right.
Still is it a reasonable way to think about what the year over year increase could look like.
I think so I mean is there.
The overall automotive production volumes recover we should benefit from that certainly.
And what about the class eight side are that have heavier trucks do you have confidence and on the production schedule or is there risk and disruptions for the same reason.
Yes, I think.
Obviously, we actually and that business, we have had some interruptions because of material shortages unrelated to the semiconductor chip issue. Our teams and this is something that has been.
I wouldn't say pervasive, but it has cropped up throughout the first quarter, where we've had to solve problems.
In conjunction with the cooperatively with our customers.
And so far we've been our teams have been very diligent and and.
Fixing any of those types of situations.
No.
And I think where he is the word we are still wary of that but as it relates to overall volumes and our discussions with our customers. We expect those to hold reasonably well throughout the end of the year.
Got it and.
One more for me.
And with all this talk about chip shortages and just investment flowing in that direction for capacity do you make any parts for the semiconductor capital equipment part of the world or is that something you've explored.
And certainly it's something that we've explored and.
And I would have to look into the.
The exact.
But my guess is is that on the power solutions side there are some connectors.
And products that we make that ends up and semiconductor or electronics related applications for sure.
Got it thanks.
Yes.
The next question will come from Dan Moore with CJS Securities. Please go ahead.
Hi, Good morning, it's Pete Lukas for Dan.
Can you just talk a little about a little bit about your expectation for gross margins over the next couple of quarters in light of rapidly rising steel prices and the impact that that's going to happen.
Yes, Tom I'll take that one to start.
Yes.
We've talked at length about our our ability to pass through material cost to our customers.
Most of the contracts I would tell you on the mobile side most of the contracts that we have allow us to pass through material price adjustments, where theres, a movement greater than 10% and.
And depending on the customer relationship that true up occurs and some cases that occurs quarterly and some cases that occurs at the end of each year, when we sit down with the customer and review the cost of materials, primarily the specialty stainless steels and.
Either get paid back or paid the customer depending on which way. It goes right now obviously, there's more pressure on the upside. So we would be talking to our customers about a price increase and our contracts allow us to do that on the power solutions side, and we have the ability as it relates to precious metal.
And <unk> those metals are actually price on the day of shipment. So that's a real time price that's pass through to the customer on the day of shipment.
As it relates to other types of materials typically we have the ability to reprice when new purchase orders are given because that business is not although we do have some long term supply.
Arrangements, that's not the norm and that group.
So we do have the ability to re price as customers order new products.
Very helpful. Thanks, Yeah.
In terms of general industrial demand seems to be gaining momentum there as far as looking at that from our side any particular end markets or geographies worth noting that stand out to you.
Well on the GI side, we do report our business.
With diesel engines and diesel dosing and that because it's not passenger car related and that has been a strong product group for us so far and 2021.
Great. Thanks, and the last one for me just in terms of looking at M&A. How do you think about that going forward in terms of how wood.
Sourcing deals what size deals you are focused on and our Lord large deals on the table and if so what type of leverage would you be comfortable with going forward.
Yes, we are.
When we did our investor.
Conference.
And I call about a month ago, we talked a little bit about that and I think our thought process is consistent what we would like to show here is some positive free cash flow over Q1 and Q2.
We are starting to look at some transactions to see what's out in the marketplace and what could fit us.
Certainly if we saw the right fit.
And the size was right it would be something that we would look at probably in the third or fourth maybe early 2022 period.
We'd like to get our leverage down below three and that's our objective on and overall basis and to maintain that type of leverage position.
Would we go up to three and a half if something.
And really fit.
With our strategic plan and gave us and additional technology or landed us a better position with a strategic customer certainly.
Would evaluate that.
Very helpful. Thank you very much.
You bet.
Again, if you have a question. Please press Star then one our next question will come from Rob Brown with Lake Street Capital markets. Please go ahead.
Hi, good morning.
Just wanted to follow up a little bit more on the on the kind of the market disruption risks. It sounds like Q2 is sort of you're managing through it but how do you kind of see that playing out for the back half of the year or do you sort of see that now is as uncertain do you feel like and it can kind of stabilize.
Just give us a sense of how you sort of see that stepping on for the rest of the year.
Yes, I think for sure it's going to be with us at least that risk.
I'll be with us through the end of the second quarter and based on what I've read and what we're seeing it's probably going to be there and the third quarter as well given the timeframe that it will take some of the.
Semiconductor chip manufacturers to bring on additional production lines. So.
No.
On.
And we're looking at it.
Over the next six months certainly is something that our teams are aware of and focused on we do get.
Production schedules on the mobile side, which would be most impacted obviously from an automotive standpoint, and those schedules tend to run now for a period of 10 to 12 weeks.
That are they're not firm, but theyre planning schedule. So it gives us a reasonable amount of comfort.
Subject to any unusual interruption that may occur.
As it relates to what we can expect and Q2.
Q3, right now is it a little bit.
We're expecting a reasonably strong Q3 and Q4, but again, we don't have any current forecast from customers and we want to see how things develop with how the Oems are dealing with the chip shortage going forward.
Okay. Thank you and then on the <unk>.
Power business some of the new growth areas you've talked about.
Where are you in terms of getting customer activity for sort of the EBITDA products in particular I guess.
Are they on the design and discussion stages are you quoting on things and maybe give us on.
And how the pipeline is looking there.
Market.
Yes, I would tell you it's fluid.
Our teams are focused on that product has been sourced.
You know every every quarter.
Yeah.
I'd tell you and the last six six or seven weeks, we received new business Awards on.
On three $5 million to $4 million of products that ends up on electric vehicles battery electric vehicles some of that relates to.
Connections.
Electrical connections within the vehicle on some relates to is an example of power steering system.
And that is solely going to be used on a battery electric vehicles. So it's been a focus.
As we've talked about of the teams our sales groups from a strategic standpoint, those are the programs that we're looking at and we're pressing hard on to <unk>.
Get those awards and we've seen some pretty good traction I would tell you over the last five or six weeks with some of the awards that are on battery electric vehicles. So it's ongoing obviously it will take time and as we've talked about we think that transition may be as a little bit longer than what the.
And what's portrayed in the media.
And given some of the constraints that may exist with the ability to manufacture batteries and that volume charging infrastructure and those kinds of things.
Yes.
Okay. Thank you very much and turn it over and.
The next question will come from Steve Barger with Keybanc capital markets. Please go ahead.
Hey, thanks for the follow up.
Lauren on your comment about the power companies accelerating efforts to drive grid upgrades are those initiatives funded and approved by regulators or is that more of something that you're just kind of see out there and as a wishlist.
No.
And.
I think Steve every public utility has to go through their process, especially if they are making an investment as I understand it if theyre, making an investment they have to look at their rates to make sure that it supports the investment and each individual utility has to work with the with the regulators in order to get.
That type of investment improved so I would just tell you is based on the research that our team has done what we're seeing in the marketplace and talking to experts and people that are engaged and the process and the marketplace. That's how we formulated our decision and.
And how we view that from a growth perspective.
And and as you look at that you know once those programs start how long does it take to benefit you and and does that give you quarters or years of incremental work is.
Our grid upgrade.
So I.
I think most people think that and I'm in that group that the inferred the great infrastructure is going to happen over a longer period of time, so I think that.
And for Us.
Continuing to pursue our existing customers on that expanding our.
And our breadth of reach and wallet share with them is going to be critical and then I think that that will benefit us for a long period of time and I would say a decade and this is this is going to take some time to update our grid and and infrastructure across this country and many countries.
It has been in place for.
50 to 80 years right or more.
Yeah.
It seems like it's been a long time coming and it's certainly been slow to materialize. So hopefully we're going to do that and how do.
Do you track those projects for planning that business, whether its grid upgrade of renewable projects or smart meter installations.
And what sources do you use.
So we use we have different market research firms that we utilize for that on the automotive side, we use.
Obviously, we use a company called markets and markets as.
And as another one that we used for research and then obviously you've seen the companys interest and this has manifested itself and putting industry experts on our board we have.
One of the preeminent.
On a.
And individuals with knowledge about how green.
Renewable energy is going to be connected to the grid, including battery storage and those types of things.
Apologize for that Theres, a lawnmower running outside my office and you can hear that but.
So we're excited directionally on on <unk>.
Where we're going.
And the knowledge that we have on the board that will assist us and developing and fine tuning our strategy yes.
Yes makes sense.
And Tom just a couple quick ones for you on what should we use now for quarterly interest expense.
Quarterly interest expense it'll be roughly $4 million.
And excuse me 3 million going forward.
Alright, yes.
And minority interest certainly had a nice.
Benefit this quarter is that a good run rate.
We're not giving guidance, but yes, I mean as Warren talked about earlier the JV is.
And very strong so I would say that that would probably be reasonable.
Okay. Thanks.
Alright.
Again, if you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to Juan Beltman for any closing remarks. Please go ahead Sir.
Well. Thank you for your time this morning, and listening to our results for the quarter obviously.
We're very excited about the quarter not only the sales and the earnings but the free cash flow.
During the first quarter was certainly and our view and a significant accomplishment.
And again I appreciate the time and wish you all and good day. Thank you. Thank you again.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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