Q2 2021 NN Inc Earnings Call
Good day and welcome to the <unk>, Inc. Second quarter 2021 earnings Conference call. All participants will be in a listen only mode should the need assistance. Please to turn the conference specialist by pressing Star then zero.
After today's presentation there'll be an opportunity to ask questions to ask the question you May Press Star then 1 on the Touchtone phone.
Joining the question. Please press Star then 2 please.
Please note. This event is being recorded I would now like to turn the conference over to Mike <unk>. Please go ahead.
Thank you operator, good morning, everyone and thanks for joining us I'm, Mike Danahy director of Investor Relations and financial planning.
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 Mike <unk>, Senior Vice President and Chief Financial Officer.
Yesterday afternoon, we issued a press release announcing our financial results for the second quarter ended June 30th 2021.
As well as the supplemental presentation, which have been posted on the Investor Relations section of our website.
If anyone needs of copy of the press release or the supplemental presentation. You may also contact Lamberton company at 3155 to 92348.
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 in the company's annual report on form 10-K for the fiscal year ended December 31, 2020, and when filed the company's quarterly report.
On form 10-Q for the 3 months ended June 30th 2021.
The same language applies the 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 cost savings future operating results performance of our worldwide markets the impacts of the coronavirus COVID-19 pandemic.
The company's financial condition and other topics.
These statements should be used with caution and are subject to various risks and uncertainties many of which are outside of the company's control.
The presentation also includes certain non-GAAP measures as defined by SEC rules, a reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and in the supplemental presentation.
Reviewing the agenda for today's call Warren will provide a business update from the quarter, then Mike <unk>, who will provide a detailed update of the financial results before turning the call back over to Warren to discuss our segment results and markets as well as the outlook for the remainder of 2021.
At 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.
Before we get started today I wanted to take a moment to welcome Mike voucher or his first quarterly earnings call as our new Chief Financial Officer, Mike has been of valuable member of our finance team working closely with Tom to buyout to enhance our overall accounting and financial reporting functions, which has made this recent transition.
The smooth and seamless I have great confidence in Mike stability and look forward to him participating in our investor outreach in the coming years now if you would turn to page 5 we will review some of the highlights for the second quarter.
The second quarter marked the continuation of the recovery in our global markets from the depths of the pandemic in the second quarter last year, we generated strong revenue growth across both mobile solutions and power solutions demand continued to rebound.
The strong sales performance was essential in our ability to drive higher margins and improved financial results in the quarter.
The strong rebound in automotive continued during the quarter. Despite the ongoing supply chain challenges, which particularly benefited our mobile solutions business, which grew an impressive 80% year over year.
While we had strong growth across our business segments compared to the second quarter of 2020, I'll note that we faced increasing supply chain challenges within the quarter, which not only affected our customers the operations, but our own operations as well. This was evident in the 2.9% sequential decrease and.
The revenues compared to the first quarter, we continue to be flexible in our operations and responsive to the needs of our customers in light of the current market conditions as we work together to ensure we have adequate supply to maintain productions that meet the needs of our customers. The actions we took over the past year to improve.
Operating efficiencies and reduce overhead and administrative expenses generated another quarter of solid results in both GAAP and adjusted financial results during the quarter. Our SG&A expenses declined to 11% of sales, which is a significant improvement from the prior year second quarter.
And pre Covid periods, where sales were not adversely impacted by the pandemic.
Additionally, we reentered.
The reinstated a number of employee benefit programs at the beginning of the year. We have maintained the streamlined cost structure that will benefit our operations over the long term.
As we previously communicated our first quarter refinancing has provided a stable financial platform with prudent leverage levels and sufficient liquidity, our new capital structure has alleviated customer concerns regarding our financial stability that existed previously and provides us the ability to pursue investments.
For organic growth and tuck in acquisitions that will complement our strategic goals subs.
Subsequent to quarter end, we entered into a cost effective 3 year variable to fixed interest rate swaps to hedge our interest expense of $60 million of our debt. We did this to reduce our exposure to higher interest rates and when factoring in our fixed rate preferred stock achieved what we believe is the right variable.
<unk> versus fixed rate exposure.
We also maintained our focus on working capital by increasing turns for the fourth consecutive quarter, which we expect to enable improved free cash flow over the longer term.
We saw of use of cash in our free cash flow in the second quarter. This amount of included $9.2 million in payments related to the sale of life Sciences.
Turning to page 6 we have summarized some of the other key life key highlights for the quarter as I mentioned, our business continued its strong rebound from the significant impact of the COVID-19 pandemic as we once again posted solid year over year growth in the quarter sales for the quarter were $123.2 million.
Up 56, 8% from a year ago the.
The improvement in sales volume coupled with the operational improvements we have implemented resulted in gains in the operating income and EPS reported operating loss improved significantly to $1.6 million versus the loss from operations of love.
1.2 million 1 year ago non-GAAP adjusted EBITDA was $13.4 million or 10.9 percentage of sales up from $4.9 million a year ago. When adjusted EBITDA was 6.2% of sales.
GAAP EPS from continuing operations was the loss of <unk> 17 per share versus a 49 per share of loss.
A year ago the improvement in our results was driven mainly by the improved gross profit generated from incremental sales volume along with reductions in SG&A and interest expense, partially offset by the reinstatement of employee compensation and benefit programs and other cost previously discussed.
The adjusted net income from continuing operations with zero cents per share versus a loss of 24 per share in the prior year now I'd like to turn it over to Mike voucher. So he can provide more in depth review of our financial performance for the quarter Mike.
Thanks, Warren Please turn to slide 7 which provides a high level view of our second quarter results along with the continued recovery in our sales trends with a $44.6 million of increase in revenue, we achieved an $8.5 million increase in adjusted EBITDA, which is lower than our norm.
The range of variable margin flow through of 30% to 40%.
This was primarily driven by rehiring of hourly and salaried employees laid off during 2020 reinstatement of cost suspended during the pandemic and the impact of precious metals pass through pricing.
Looking at the bottom chart, we can see the continued recovery in our markets as reflected in our net sales.
After falling dramatically in the second quarter of 2020 due to the impact of the COVID-19 pandemic and related production shutdowns at our customers. We have seen a rapid recovery over the past 4 quarters, we anticipate the recovery to continue in 2021, as we move paths of the pandemic related impact and shipped of more nor.
<unk> long term growth patterns.
Let's go to slide 8 which provides the look at our continued focus on working capital management.
The improvement in working capital turns has continued with higher sales and continued prudent working capital management of shown here.
Net working capital at the end of the second quarter was $110.1 million compared to $114.8 million in the prior quarter of decrease of $4.7 million.
Despite the reduction in net working capital inventory increased by $7.2 million as we made a conscious decision to build the inventory to prevent supply chain supply disruption impacting our customers.
We anticipate consuming the inventory build once the supply chain disruption we are experiencing as a result, we're.
<unk> capital turns were 4.5 turns versus 3.0 turns in the prior year as a result of the strong recovery in sales from the prior year.
Sequentially working capital turns continued to improve from 4.4 turns in the first quarter.
Turning to slide 9 we highlight the disciplined approach we have taken the capital expenditures over the past year as we remain focused on prudently managing our cash while continuing to fund growth related investments.
You can see we have increased capex compared to 2020, as we resumed a more normal level of investment as volumes recovered.
The $5.5 million of Capex for the quarter isn't the weinmann.
Alignment with our expected net investment of $22 million for the full year.
Cash capital expenditures were $5.5 million or 4.5 percentage of sales for the second quarter compared to $2.6 million or 3.3 percentage of sales in the prior year.
I'd also note the capex of approximately 70% of depreciation remains below our historical spend levels.
We are focused on efficient utilization of our existing asset base.
In the event, we identify an opportunity to monetize an underutilized asset we would use the proceeds to supplement our expected investment level.
For example, we sold the facility in Q3.2021 for approximately $1 million and are evaluating opportunities for further investments and automate automation with the proceeds.
Given the current labor market constraints.
Slide 10 shows a chart of our free cash flow for the quarter.
Free cash flow was the use of $7.5 million in the second quarter of 2021 compared to a net cash inflow of $1.2 million in the prior year.
Our free cash flow was negatively impacted by $9.2 million of cash payments related to fill of the life Sciences business, which was primarily driven by the tax payment related to the gain on the sale of the business.
During the second half of 2021, we expect to receive the net tax refund of approximately $10 million due to loss carry backs under the cares act, partially offset by an additional tax payment related to the life Sciences.
We remain focused on managing our working capital and capital expenditures, while improving our profitability to further improve free cash flow generation.
Please turn to slide 11.
Net debt at the end of the second quarter was $133.2 million versus $767.9 million in the prior year of <unk>.
Decrease of $634.7 million.
The reduction was due to the debt pay down following the sale of life Sciences as well as the impact of our recent refinancing.
Our net leverage ratio stood at 2.5 times at the end of the second quarter down from 6.6 times a year ago. The.
Preferred stock component of our capital structure, allowing us to maintain a leverage ratio of below 3 times supports our long term growth initiatives by alleviating concerns from customers and suppliers regarding our financial stability.
Turning to our overall liquidity, we have nearly $67.5 million of liquidity, including cash and availability on our revolver as of June 32021.
Compared to the first quarter of 2021, we saw a reduction of our cash balances due in large parts of the tax payment relating to the gain on life sciences during the quarter, while our availability increased modestly as a result of available assets to support the ABL, which remains undrawn.
With that I will turn it back to Warren.
Thank you Mike.
Page 13, we outline our view of current marketing conditions within each of our operating groups within mobile solutions. We are seeing continued strong demand for vehicles, including demand among consumers for light trucks, and Suvs with global production expected to increase approximately 10% in 2021 in addition.
Battery electric vehicles are now expected to take a 10% share of global production by 2024, we remain well positioned to take advantage of this trend with our product offerings of electrical connectors terminal tab safety disconnect components and bus bars, along with electric motor warms and <unk>.
SaaS and other high precision components for electric power steering and regenerative braking.
Industry inventory levels are also at their lowest since 2009 currently less than 1.5 million units or 30 day supply with the positive demand drivers.
Excuse me while these positive demand drivers are important I would also note. The industry is still grappling with the ongoing semiconductor shortage, which impacts the variety of applications within each vehicle as well as shortages of more specialized materials such as specialty stainless steels.
Which impact throughput at the Oems from an industrial perspective, the need of medium and heavy truck markets continue their steady growth in North America, Europe, and China, which has driven demand for diesel engines. We've spoken in the past about China 6 emission standards, which originally had a deadline of July 2000.
'twenty 1 the latest indications are that these new standards have been modified.
<unk> seen inventories of components maintenance still be sold in the market, providing some breathing room for our key customers in the space.
Within power solutions, we see long term demand drivers of municipal and privately owned power companies are pushing to address aging infrastructure to prepare for new emerging technologies needed. After the smart grid, we see emerging demand for power and related infrastructure, particularly with increased adoption of electric.
Vehicles for private and commercial use these new demand sources for electrical power will mean, new charging.
Infrastructure as well as storage infrastructure to meet the evolving demands.
While the current administration and Congress continue to negotiate the details of the infrastructure deal. We remain optimistic that the final plan will include investments in technology and power infrastructure, along with incentives to adopt more green technologies that will benefit our business over the long term ultimately the market is our ally.
And supportive of our.
2025 transformational growth initiatives.
We have presented additional information for each of our operating groups, starting with mobile solutions on page 14 mobile.
Mobile solutions sales grew 80% in the second quarter from 1 year ago. As we saw continued recovery from the pandemic as well as strong growth of diesel component demand driven by E Commerce logistics.
GAAP operating profit for the second quarter was $2.5 million compared to an operating loss of $4.6 million in the prior year adjusted EBITDA increased to $11.1 million or 15% of sales from $4.1 million of a 10 percentage of sales in the second quarter of 2020, the increased profitability was driven.
By the higher sales volume improved margins, resulting from our cost improvement initiatives and the positive impact of our China joint venture where sales increased $22.3 million in Q2.2021 from $14.7 million in Q2 of 2020 of these.
These positive factors were partially offset by the resumption of certain cost of spend it in the prior year, including employee salaries benefits bonuses and the resumption of travel expenses.
The second quarter last year reflected hourly and salary employee layoffs during the peak of the pandemic. The majority of whom have returned to work as of the second quarter of 2021.
Looking forward, we see continued strong demand in all regions. Despite the semiconductor.
Shortage impacting the automotive industry currently our focus will be on free cash flow generation through disciplined capital spending and working capital management. In addition, we see a solid foundation for a long term growth with continued recovery in global auto production, which will benefit our customer base.
On page 15 of our power solutions group experienced a 31, 4% year over year increase in sales in the second quarter, which was primarily due to higher demand within the end markets negatively impacted by the COVID-19 pandemic and the prior year.
Sales were also positively impacted by increased selling prices for precious metals due to the sharp rise in the underlying silver and gold cost since 2020.
On a sequential basis power solutions recognize the modest 200000 sales improvement over the first quarter of 2021.
GAAP income from operations for the second quarter was $2.9 million compared to 1.5 million in the prior year adjusted EBITDA increased to $6.8 million of 13, 7% of sales from $6.2 million or 16, $16.5 percentage of sales in the prior year as the mobile solutions.
Power's profitability was also impacted by the resumption of certain cost reduced or suspended in the prior year margins were also impacted by precious metal cost increases, which convert the selling price at lower margin driving down overall margins by approximately 2% in the second quarter compared to 1 year ago.
Looking forward, we continue to see consistent demand trends in power solutions and managements focus will center around supply chain management labor productivity and free cash flow longer term. We are encouraged by the continuing shift in the power generation side toward renewables renewable energy resources, which have now surpassed coal.
Within the U S power supply renewed.
The renewable energy generation as a driver to the power solutions business as utilities need innovative storage solutions to be honest the generation of solar and wind energy with demand.
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 as well as the recent industry supply chain issues. We are still not in the position to resume formal revenue of our earnings guidance at this time.
But we wanted to share how we see the second half of 2021 unfolding.
We expect the consistent sales environment for the second half of the year compared to the strong post pandemic recovery seen in the first half with an adjustment for normal fourth quarter seasonality.
We will continue closely monitoring the industry and supply chain conditions, particularly with regard to semiconductor issues facing the automotive market. We are fully engaged in achieving synergies between our mobile solutions and power solutions business. Both in terms of the sales and operations leveraging client relationships and operational best practices.
Across the organization.
We have a stable long term capital structure in place to support our growth, which is now enhanced by an interest rate swap to hedge the potential rate risk. This foundation provides us the flexibility to invest in our growth opportunistically, both organically and through smaller tuck in acquisitions.
Cash generation will remain a priority as we exercise of disciplined approach toward operational efficiency capital expenditures and working capital. We will also evaluate opportunities to optimize our production footprint targeting organic growth to fill current capacity of rationalized as needed as.
As for specific measures under underlying our 2021 outlook. We continue to anticipate net cash capex of approximately $22 million and expect depreciation of approximately 33 million amortization of approximately $14 million in cash interest expense of approximately <unk> <unk>.
All of them.
In summary, we are pleased with the continued momentum across our business segments with solid growth in revenues and income compared to the prior year. We are now positioned to grow our business improve profitability and deliver increased shareholder value. This concludes our prepared remarks, and I will now turn the call back to the operator for questions.
<unk>.
We will now begin the question and answer session.
The ask a question you May press Star then 1 on your Touchtone killer. If you are using a speakerphone. Please pick up the typical question. The key is there.
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Thank you at this time of even pause momentarily to assembler of Austin.
The first question comes from Rob Brown with Lake Street Capital markets. Please go ahead.
Good morning.
Good morning, Rob Good morning.
Just first wanted to kind of clarify your comments on some of the supply chain challenges you were managing I guess internally in particular.
Some of the key manage them pretty well in the quarter of those are those still in flux or and kind of could you kind of outlined with the challenges are.
Yes, sure we've had I mean first and foremost has been the semiconductor chip issue impacting our customers during the second quarter. We had several instances, where we had customers shutdown their facilities during the quarter, obviously limiting our ability to.
<unk> them product.
And honestly impacting the.
Efficiency of our operations with more of a start stop type of an approach. In addition, Rob we've had several instances.
Where we've had customers because of <unk>.
Covid related issues within their facility or other supply issues that theyre struggling with notifying us that they would expect to be sure on deliveries of.
The raw materials that we utilize in our manufacturing processes now when that happens obviously we.
Look for another source of supply, but given inc.
Instances, the specialty nature of some of them.
Lloyd's that we machine, sometimes it's difficult.
To get of replacement so in that case, we work directly with our customers to find another solution. Unfortunately during the second quarter and we didn't have any significant interruptions as a result of those types of situations.
Okay, great Great and then in terms of the kind of the EV growth could you give us a sense of the kind of ship <expletive> ship set increase you have on a per vehicle basis for an EV versus maybe irregular vehicle or just some some gauge of what would an EBIT growth means to you.
Well I think Thats I think thats still.
The electric vehicle car evolves I think that's still certainly.
Moving around a little bit as the Oems become more of.
The <unk>.
And the transfer of power within the vehicle, but as we look at it.
Certainly we think that there is significant opportunity, especially on the power side I listed some of the types of components that we have the ability to manufacture.
For an electric vehicle and certainly our teams are pursuing that regular rigorously.
At this point.
Okay, great. Thank you for the color I'll turn it over.
Yes.
And the reminder, if you have a question. Please press Star then 1 can be joined into the queue.
The next question comes from Steve Barger with Keybanc capital markets. Please go ahead.
Hey, good morning, guys, it's Ken Newman on for Steve.
Yes, good morning.
Okay.
I'm just kind of wanted to circle back to the stop start comments that you've made.
Obviously and probably the auto sector can you just quantify what the impact of the supply chain challenges word of revenue and EBIT in the quarter end.
What are your expectations for that persisting into the into the third quarter.
Yes so.
I would tell you obviously.
When we look at the second quarter the.
Of the falloff from the first quarter I think certainly can be attributable to some of the semiconductor chip issues.
As we look out into the balance of the year, we're still seeing we've kind of extended our outlook on that given the fact that.
We're still seeing issues our customers are still experiencing issues, you've seen GM talked about the fact that they've had to in certain instances.
Idaho briefly.
All of the production lines on the truck side that the.
If they're doing that you know that the.
Semiconductor chip issue is still prevalent if the apples, having difficulty getting chips for their phones.
It is still an issue for us in the third quarter and Thats why as we look at the volumes in the third quarter.
Still a little bit cautious and Thats 1 of the reasons that we've hesitated to give additional guidance because of the interruptions that were still seen as the result.
Okay and from a longer term, we still think that this is going to be an issue in the third quarter and probably won't be fully resolved.
Until the latter part of the fourth quarter or the beginning of 2022.
Right. So when you think about that in the context of <unk>.
The plant inefficiencies I mean, how do you how do you view running your plants.
Are you expecting to run that on a normalized schedule, if theres a volume to manage the costs or.
Any way that you can kind of help us think about sequential improvements and in.
And margins.
Given the limited visibility.
Yes so.
For us.
As our businesses as our facilities run and most of them running of repetitive type of environment on the auto side.
Certainly consistency in supply is important for us to fine tune, our facilities and when customers pull all of significant.
A portion of their volume with very short notice due to.
The plant shutdown or that type of an issue, it's a little bit harder for us to react, especially as it relates to our inventory levels.
And the flexing down of our variable costs involved in the business. So if we can have more of a more stable environment. Certainly we can become more efficient I can't specifically quantify a margin issue for you, but I would tell you we've talked in the past as it relates to the.
The positive impact of incremental volume on the business being in the 30% to 40% incremental contribution.
The EBITDA or gross margin and we start we still certainly think that that's the.
And the appropriate metric in which to use.
Okay.
So I guess signs of it together.
If the back half revenue is expected to be similar to the front half.
Is there any way that you can kind of help us contextualize, what the step up in operating income should be for the second half versus the first half.
I guess I'm trying to also get a better sense of if you'd expect adjusted net income to be greater than breakeven.
In the second half.
Yes.
We're not we're not going to give guidance on that I would tell you that some of the factors that come into play for US certainly will be the volume that we talked about.
Mentioned the seasonality in the second half of the year.
Normally during the Thanksgiving and the Christmas holidays, where we can potentially lose.
3 to 4 ship days in comparison to the first year and certainly I think all of the cost drivers in the business at this point in time, we don't expect the change considerably.
At least the upward there's still opportunities to improve the.
Of the business and.
And improve the margins, we're still seeing improvement as you saw this quarter and our overall.
Selling general and administrative expenses and some of the indirect type of costs that we have.
<unk> seen an improvement there.
Okay.
Maybe just 1 more then I'll jump back in queue.
You talked a little bit about benefiting from buying ahead on inventory.
I'm curious how much of an inventory step up are you looking for in the second half and just your confidence and your your thoughts on the.
The potential of being free cash flow positive ahead of the working capital.
Mike do you want to address that.
Yes so.
From an inventory perspective, both in Q1 and Q2, primarily on the mobile side.
We had an inventory build and where we had some favorable overhead absorption. The favorability in Q2 from an overhead standpoint, it was favorable but it was less favorable sequentially than Q1.
So really.
Our ability to monetize that inventory in the second half.
That inventory build was largely to protect our customers with the supply chain disruption factors as we noted and.
Our ability to monetize that in the second half as Warren said, it was going to be dependent on how things materialized from the supply chain chip shortage standpoint, but.
If thats largely resolved, we would expect to be able to reduce that inventory to normal year end levels and monetize that investment we made them firsthand.
Yes.
Got it thanks.
This concludes our question and answer session I would like to turn the conference back over to Warren Nelson for any closing remarks.
Yes, just like the thank everybody of heart.
For participating on the call today, certainly we'd like to think.
<unk> teams around the globe.
We're continuing to provide value here in a very difficult environment with the interruption of supply and certainly the ongoing dealing with the.
Covid pandemic certainly appreciate their support.
Yes.
Over the last quarter and with that we'll conclude the call with just the final. Thanks I appreciate the time.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.