Q1 2022 NN Inc Earnings Call
Good morning.
Welcome to the NN incorporated first quarter 2022 earnings conference call, all participants will be in listen only mode.
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Note. This event is being recorded and if you object to this you may disconnect from the conference I would now like to turn the call over to Jeff Treichel. Please go ahead.
Thank you operator, good morning, everyone and thanks for joining us I'm, Jeff try to our Investor Relations contact Brian Ann Inc, and I'd like to thank you for attending todays business update.
Yesterday afternoon, we issued a press release announcing our financial results for the first quarter ended March 31, 2022, as well as the supplemental presentation, which have been posted on the Investor Relations section of our website if anyone needs a copy of the press release on the supplemental presentation, you may contact Lambert and company at 315.
Eight five to 92348.
Our presenters on the call. This morning will be one veltman, President and Chief Executive Officer, and Mike Voucher, Senior Vice President and Chief Financial Officer.
Before we begin.
I 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 July or.
December 31, 2021, 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 input cost inflation supply chain constraints the impact.
Of the automotive semiconductor chip shortage.
Foreign exchange rates cash flow tax rates acquisitions synergies cash and cost savings future operating results performance of our worldwide markets. The impacts of the coronavirus or COVID-19, pandemic and the Washington Ukrainian conflict on the company's financial conditions and other topics.
Statements should be used with caution and are subject to various risks and uncertainties many of which are outside of the company's control.
Our presentation also includes certain non-GAAP measures as defined by the FCC rules a reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and supplemental presentation.
Reviewing the agenda for today's call Warren will provide a business update from the first quarter, then Mike will provide a detailed update for 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 two of the 20th journey to fiscal year.
There will be a Q&A session. Following the conclusion of the prepared remarks.
At this time I would like to turn the call over to Warren Veltman, President and CEO Warren.
Okay.
Thanks, Jeff and good morning, everyone.
If you would turn to page five we will review some of the highlights and accomplishments of our team during the first quarter of 2022.
I am pleased with the results for the quarter, our sales were up 1% over a very strong first quarter last year, and we generated $13 4 million and adjusted EBITDA, which is our best result, since the strong first quarter of last year. Additionally, we posted a solid progression from Q4 2021.
On to Q1, 2022 sales group grew $17 7 million or 16% sequentially and our adjusted EBITDA and our adjusted operating margin improved 130 basis points.
Our results were impressive given several headwinds experienced during the quarter first COVID-19 continued to impact our operations employee absenteeism and several of our North American facilities reached a peak during Q4 2021 and early Q1 2022 is the honour crime variance spread throughout the year.
Added states this absenteeism and other supply chain interruptions, including those related to semiconductor chips continued to place pressure on our ability to operate efficiently second our first quarter cost structure was adversely impacted by inflationary cost pressures our sales team did a tremendous job conclude.
On numerous customer negotiations to secure additional pricing to mitigate a substantial majority of the inflation impact.
Likewise, our operations teams maintained strong delivery and quality metrics in spite of the difficult first quarter environment.
The inflationary cost pressures have impacted our material labor materials supply manufacturing supplies and utilities among other cost drivers the nature of our customer ordering patterns and power solutions, which is typically through discrete pose versus long term supply agreements allows us an opportunity to <unk>.
Cover nearly all inflationary costs.
Mobile solutions customer relationships are typically governed by long term agreements, which have required more direct customer negotiation and interaction.
We have been successful in securing 100% pass through our material cost for most mobile customers as for labor and other cost inflation. We have continued to work with our mobile solutions customers on balancing cost recovery with expectations for productivity gains within those relationships.
Free cash flow was a use of $9 $5 million this quarter driven by increased accounts receivable as a result of this sequential increase in sales our net debt and liquidity remained within our target ranges at the end of the first quarter.
On page six we will review, our sales pipeline, which grew 149% compared to the prior year.
Insistent with our long term goals, we saw electric vehicle projects in our pipeline increased from 6% of the total pipeline a year ago to 29% of the current pipeline likewise residential and commercial electrical increased from 8% to 13%.
Conversely, we have seen automotive gasoline ice dependent pipeline decreased from 31% to 14%.
These movements are aligned with our strategic focus on electric vehicles, and electric grid opportunities with more selective pursuit of ice dependent opportunities with higher return on invested capital expectations.
Now I'd like to turn it over to Mike voucher. So he can provide a more in depth review of our financial performance for the quarter Mike.
Thanks, Warren turning to page seven we have summarized some of the key items for the quarter.
Sales for the quarter were $128 1 million up 1% from the strong performance of a year ago, and up $17 7 million or 16% sequentially inclusive of our pricing actions. We saw resilience in our power solutions group, resulting in year over year revenue growth of 6% for the segment.
This growth was offset by a two 2% decrease in revenues in the mobile solutions business due to decreased demand stemming from the continued supply constraints, which affected us most in the automotive sector, including our tier one supplier customers.
Throughout the first quarter of 2022, we continue to face inflationary cost pressures on material and labor results.
The results were also impacted by operational inefficiencies due to supply chain disruption, particularly with automotive supplier customers impacted by the ongoing semiconductor chip shortage affecting the industry as well as COVID-19 pandemic related employee absenteeism.
Our power solutions results also include a $1 8 million charge related to an agreement to settle breach of contract claims brought by a former customer regarding the sale of products by us in 2016.
non-GAAP adjusted EBITDA for the first quarter was $13 4 million or 10, 5% of sales down from $16 9 million or 13, 3% of sales a year ago.
Our EBITDA margin was adversely impacted by material and labor cost inflation, although we passed the majority of these costs on the customers through price increases those increases were often done at lower zero margin and therefore had a dilutive effect of approximately 60 basis points on our adjusted EBITDA margin.
Lower inventory absorption also reduced margins by approximately 50 basis points.
GAAP diluted EPS was a loss of <unk> 13 for the quarter versus a loss of <unk> 46 per share in the first quarter in 2021.
Our current quarter results reflect the $2 $9 million increase in other income primarily due to warrant revaluation in a zero point $7 million increase in our share of income from our China joint venture, partially offset by higher interest expense of $1 4 million.
The first quarter of 2021 included a loss of $6 1 million in connection with our refinancing for the write off of debt issuance costs and costs associated with terminating an interest rate swap or.
Our non-GAAP adjusted diluted EPS was breakeven versus income of <unk> <unk> per share in the prior year.
Turning to slide eight our working capital turns improved by zero point in turn two turns in the first quarter from the fourth quarter of 2021.
Inventory remains above normal levels due to safety stock needed to address increased lead times due to the ongoing semiconductor shortages as well as other supply chain issues with.
The carrying amount of our inventory has also increased due to the material inflation we have experienced.
We remain focused on managing working capital to ensure our ability to serve our customers while anticipating a return return to more normal levels as the current supply chain issues returning to historical trends.
Turning to slide nine we provide a look at our continued disciplined approach that we've taken the capital expenditures over the past year as we fund investments in our long term growth you can see on an absolute basis, we have decreased capex compared to 2021 down to $4 3 million from $5 $5 million last year.
We are still projecting full year capex to come in between 20 and $22 million.
Slide 10 shows our.
It shows a chart of our free cash flow for the quarter free.
Free cash flow was a use of $9 5 million in the first quarter of 2022 compared to free cash generated of $2 4 million in the prior year.
Free cash flow in the quarter was primarily driven by an $18 million increase in accounts receivable as a direct result of the sequential revenue growth of $17 7 million from the fourth quarter.
In addition, we incurred approximately $1 8 million in cash costs for the final life Sciences tax payment severance and litigation costs during the quarter.
These cash outflows were partially offset by $3 6 million received from the China JV dividend net of tax.
Regarding our previously expected receipt of our cares act tax refunds and the timing of receipt continues to be uncertain as the refund is in the IRS review process.
Please turn to slide 11.
Net debt at the end of the first quarter was $141 million versus $123 3 million in the prior year, an increase of $17 7 million.
The year over year increase was mainly due to the reduction of our cash balances from the prior year, which was driven by higher working capital and tax payments associated with the sale of <unk> life Sciences.
Our net debt to adjusted EBITDA ratio stood at two nine times at the end of the first quarter up from two three times, a year ago and still below our three times target.
We had $58 $4 million of liquidity, including cash and availability on our ABL as of March 31, 2022, which was a decrease of $6 3 million from Q4 2021, driven by our use of free cash flow in Q1 2022 due to our sequential sales growth an increase in accounts receivable previously known.
Good.
With that I will turn it back to Warren.
Thank you Mike on page 13, we broadly outline our view of current market conditions within each of the main markets within automotive we continue to see supply chain challenges related to the ongoing semiconductor chip shortage as well as new factors relating to the recent COVID-19 outbreak in China as well as the impact of the Russia, Ukraine wore on.
Overall light vehicle production.
Semiconductor chip shortage has impacted global auto and light truck production, resulting in continued uncertainty for the industry over the near term 2022 base production outlook has been revised down to $81 6 million units or up 6% from 2021 with a lower boundary of 70.
$7 1 million or effectively flat over 2021 volume disruptions related to the semiconductor issue are expected to decrease sequentially from approximately 2 million units per quarter in the first quarter to approximately 500000 units in the fourth.
The transition to Evs continues to gather momentum with significant OEM investment, including additional shift and their employee compensation plan design to support <unk> development and commercialization.
We are well positioned to support the growth in evs through both our mobile and power solutions group.
Within the electrical space, we see rapid transformation of the energy and electrical equipment markets with a three pronged focus on decarbonization decentralization and Digitization.
Governments around the world are.
Changing policies and implementing incentives to accelerate the adoption of sustainable energy.
<unk> Institute expects that U S utilities will invest approximately 140 billion annually over the next two years to meet government mandated renewable energy goals as well as to improve grid infrastructure to meet increasing demand.
We have presented additional information for each of our operating groups, starting with mobile solutions on page 14.
<unk> solutions sales fell two 2%.
In the first quarter from one year ago, primarily due to lower sales volumes stemming from supply constraints as well as comparison to a strong first quarter of 2021, which reflected demand driven by pandemic recovery.
This was partially offset by pass through price increases and favorable FX exchange rates.
The lower profitability during the quarter was driven by variable cost inefficiencies associated with supply chain interruptions uneven customer ordering patterns and labor constraints caused by COVID-19 pandemic related interruptions, particularly in January the.
Prior year also included higher overhead absorption associated with an inventory build finally, our pricing actions on the mobile side, primarily reflect material cost recovery at zero margin.
Looking forward customer demand has continued to improve however, the semiconductor chip shortage reemergence of COVID-19 in China, and the Ukrainian and Russian conflict continued to present risk to demand, we continue to negotiate with customers with the expectation.
Additional inflationary cost recoveries to.
To protect cash flow, we are actively managing working capital and capital expenditures.
On page 15, our power solutions group experienced a healthy year over year increase in sales in the first quarter, which was driven by stronger demand for electric components for residential and commercial and general industrial applications, including inflationary pricing actions prop.
Profitability in power solutions was adversely impacted by manufacturing cost inefficiencies associated with mixed shifts.
Continued supply chain interruptions and labor constraints due to COVID-19 related absenteeism.
The closure and consolidation of our Taunton, Massachusetts facility is proceeding on schedule similar to mobile solutions, we remain protective of cash flow by managing working capital and Capex needs within power solutions.
Turning to page 16.
We are reaffirming our guidance for 2022 for the full year, we are anticipating net sales to increase between 8% and 13% from 2021, resulting in.
Net sales in the range of $515 million to $540 million, we anticipate that the semiconductor shortage and supply chain issues will remain a headwind throughout the first half of the year with a gradual recovery in the second half of the year our guidance does not anticipate production disruptions due to COVID-19.
19 beyond the first quarter, nor does it reflect any significant disruptions that may arise due to the Russia, Ukraine Ukrainian conflict.
Based on these assumptions, we expect to generate non-GAAP adjusted EBITDA in the range of $57 million to $63 million for the full year, an increase of 9% to 21%.
Turning to free cash flow, we expect to generate between 14% and $20 million for the full year. Our guidance includes approximately $7 million of cash outflows for the final life Sciences tax payment.
FICA deferral repayments litigation severance litigation and severance and facility closure costs.
This amount increased by $1 million from our initial outlook as a result of a settlement agreement, we executed with a former customer.
As noted previously our guidance does not include the expected cares act tax refund of approximately $10 million due to the uncertainty of timing of receipt given it is in the IRS review process.
In summary, our team remained diligent throughout the quarter and executing in a challenging environment and negotiating pricing with customers. We continued to build a pipeline of strategic opportunities to drive future sales and maintain the strength of our balance sheet to support our long term growth.
We still have a number of challenges and uncertainties ahead of us, but we will continue to make.
Make the measured investments necessary to improve our operations and meet the current and future needs of our customers, which is the key to our future success Lastly, I'd like to provide an update on our upcoming virtual Investor day on May 20, we have been working hard on this event and hope that providing the opportunity to meet.
With our management team and to see videos from a number of our global facilities will provide you with a better sense of our overall strategic direction and the growth we expect to achieve in the coming years you can register for the event on the Investor Relations section of our website at investors Dart I and N.
I N C dot com.
That concludes our prepared remarks, and I will now turn the call back to the operator for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble the roster.
Our first question comes from Rob Brown with Lake Street Capital. Please go ahead.
Hi, good morning, Thanks for taking my call.
On the.
The EV growth pipeline.
Good growth during the quarter.
Could you give us just a sense of sort of what's happening are you are you just having more opportunities because because they are happening in the market or have you adjusted your sales effort and develop new products around that market, but just sort of what's driving that growth more.
More specifically.
Sure Good morning, Rob Thanks for thanks for the question.
I think it's really a combination of both certainly our focus our focus has changed over there.
Last 18 months as it relates to the programs that we're pursuing.
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As we've talked about over the last year, we've made a concerted effort to expand our sales team to pursue these types of activities, we've refocused them.
Away from some of the applications that might be more ice dependent and we've done that by changing the parameters internally, whereby we would accept that type of business.
We've increased the requirements surrounding the return on invested capital goals.
For that type of business as well as some of the contract parameters surrounding that as it relates to term and other issues. So our focus clearly has been on the electrical grid and the EV.
And our teams have reacted accordingly.
Okay, Great. That's helpful and then in terms of the supply chain and some of the chip shortage stuff.
Have you seen that getting better throughout or so far in Q2 here or is it still about the same and you're sort of looking to the customer signals for the back half of the year I guess, just sort of what's the more real time update.
Yes look I think if you look at the chart that we had I think on the.
The mobile.
Update it shows that there has been some consistency of that at 2 million unit. So it has.
I think it's stabilized.
At the current level and our understanding based on analyzing the market talking to people in the market, including experts is that we still expect some of that disruption, but as I said, we expect it to get better throughout the year and gradually come down to the 500000.
<unk> as it relates to the potential disruption in the fourth quarter.
Okay, certainly we're still seeing.
We're still seeing.
Our customers reacting to outages with some inconsistent demand signals.
We will run hard for a period of time and then we will have to dial it back because they might not be ready as it relates to <unk>.
<unk> needing some more of our parts.
Okay, great. Thank you very much I'll turn it over.
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This now concludes our question and answer session I would like to turn the conference back over to Warren Veltman for any closing remarks.
I'd like to just thank everybody for their time today, thanks for dialing into the call and we definitely hope to speak to everyone again on our upcoming Investor day on May 20 <unk>.
Have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.