NN Inc. Q1 2023 Earnings Call
Good morning, and welcome to the NN, Inc. First quarter 2023 earnings conference call.
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Customer relationships.
Please go ahead.
Yeah.
Thank you Anthony good morning, everyone and thanks for joining us I'm, Jeff Treichel Investor Relations contact for NN, NN, 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, 2023, 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 or the supplemental presentation. Please you may please contact Lambert and company at area code three one by 529 to 348, our presenters on the call. This morning will be Mike Voucher, Senior Vice President and Chief Financial Officer, Andrew Walsh Senior Vice President.
And Chief commercial officer, and Douglas Scaffolds interim Chief operating officer of mobile solutions.
Before we begin I'd like to ask that you take note of the cautionary language regarding forward looking statements contained in today's press release and 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, 2022, and when filed the company's quarterly Roe.
Port Arthur.
<unk> 10-Q for the three months ended March 31 2023.
The same language applies to comments made on today's conference call, including 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, including semiconductor chips foreign exchange rates cash flow tax rate acquisitions synergies cash and cost savings future operating results performance of our worldwide markets.
The coronavirus pandemic, and Russia, Russia, and Ukrainian conflict 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.
Resin tastes will also include certain non-GAAP measures as defined by the SEC rules a reconciliation of such non-GAAP measures is contained in the tables in the financial section of the press release and the supplemental presentation.
Reviewing the agenda for today's call Mike will open with an overview of the first quarter and an update of actions taken the company has taken to position and then for success. Andrew will then provide a market update and discussion of new business opportunities. Mike will then provide a detailed update to the financial results for the first quarter.
Douglas will then provide an update on each of our business segments before turning the call back over to Mike who will conclude with a discussion of our outlook for the remainder of 2023.
There will be a Q&A session. Following the conclusion of the prepared remarks.
At this time I will turn the call over to Mike Bell Senior Vice President and CFO .
Thanks, Jeff and good morning, everyone and thank you for joining let me start by noting that Warren is unable to join the call today due to a health situation or their families.
The first quarter of 2023 presented a number of challenges to our business, including the ongoing slowdown in residential and commercial construction that impacted our power solutions business.
Our team continues to be resilient and focus on effectively managing the areas within our control to minimize the adverse effects of the current macro economic environment.
If you turn to page four of the presentation, we have summarized some of the results from our first quarter.
Sales for the quarter were $127 1 million down <unk>, 8% from the first quarter of 2022.
Power solutions sales were down five 7% driven by lower electric component volume and customer inventory reductions, partially offset by pricing.
Mobile solutions sales were up two 6% from prior year driven by pricing actions taken throughout 2022, partially offset by lower volume we.
We had a strong start to the year on new business wins with a 75% increase from the prior year and was 76% and our strategic segments.
Net price inflation was a benefit of $2 million in the first quarter on a year over year basis, primarily driven by premium pricing achieved at our Irvine facility for us agreeing to extend production to meet customer requirements before we close the facility.
As previously communicated we implemented 5% plus price increases for power solutions customers that are not on long term contracts during the first quarter, which will most significantly benefit subsequent quarters.
First quarter results were also impacted by unfavorable overhead absorption and lower income from our China joint venture as a result of lower volume due to the end of COVID-19 restrictions and the Chinese new year.
Combined these factors contributed to loss from operations for the first quarter of $7 1 million and a non-GAAP adjusted loss from operations of 0.4 million.
non-GAAP adjusted EBITDA was $8 1 million or six 4% of sales for the first quarter of 2020 right.
We continue to maintain strong liquidity of $43 million or free cash flow in the first quarter was a use of $3 7 million, which was a considerable improvement over the free cash outflow from the prior year first quarter.
During the first quarter, we terminated our $60 million interest rate swap, resulting in proceeds of $2 5 million, which further enhanced our liquidity.
The improvement was a result of continued efforts to effectively manage working capital despite the more challenging operating environment.
If you turn to page five of the presentation I will provide an update on several key initiatives.
Let me start with an update on the operational improvements we are implementing at two facilities experiencing inefficiencies, which we noted on our fourth quarter call.
The Wellington operational improvements are proceeding according to plan.
<unk> has been slower than expected improving the operating results at whereas as the number one focus area for our leadership team.
From an operations perspective, and our singles and Douglas Campos have transitioned into leadership of the power solutions and mobile solutions teams respect respectively.
You will hear from Douglas a little later as he highlights the performance of each operating segment during the first quarter.
We have worked to optimize our operating footprint with the closure of five facilities as previously announced all of which we expect to be close by the end of the second quarter of 2023.
We have secured sublease agreements for the Titan in Irvine facilities, which will offset our lease obligations over the remaining term.
These closures are expected to generate approximately $11 million improvement in adjusted EBITDA versus our 2022 results.
Beyond facility closures, we continue to review overall operating costs and during the second quarter, we reduced indirect labor by 10%, which we estimate will result in approximately 7 million in annualized cost savings with a benefit of over $4 million in 2020.
During 2022 and 'twenty three we were able to increase pricing to address inflationary costs, achieving approximately $13 million a year over year pricing.
The company anticipates, making an announcement regarding the CEO transition in the very near future.
And now I will turn the call over to Andrew who will provide an update on our markets and key growth initiatives.
Thanks, Mike and good morning, everyone.
I'm happy to be joining you on today's call to review our go to market strategy, new business wins and update on current market conditions.
Now if you turn to page seven I will review some of the new business wins in the first quarter of 2023.
We secured new business wins with total estimated sales of nearly $37 million through 2026, which was up 75% compared to the first quarter last year.
Peak annual sales for these wins totaled $13 5 million or 82% compared to the prior year.
I'd emphasize that these new business wins are the results of our revitalized team focusing on new business opportunities and attractive market applications, where Indians unique value proposition resonates most with potential customers.
With a refined approach we have improved the margins associated with these new business wins by approximately 12 percentage points compared to the prior year.
On the right side of this page you can see the breakdown of annual sales volumes of new business wins by market segment over the next three years.
We have taken a focused selective and disciplined approach to new business, resulting in significant portion of our new business in the EV and Universal auto segments, which is aligned with our strategy.
As we look ahead, we are well positioned for strong growth in the power and electrical space with multiple pursuits, we expect will be awarded over the next two quarters.
Finally, I would note the efficiency of our sales efforts with a low $2 7 million Capex investment to support these sales.
If you turn to page eight of the presentation. We will review an exciting when our team achieved with a global market leader in electric vehicles.
This customer is a key player that is expected to produce more than 3 million Evs. This year not only does this particular win represent $3 5 million in sales at program peak, we consider this a major breakthrough new business win as it's a new relationship with a global player that presents significant.
<unk> for additional programs in the future.
And his value copper contribution to this relationship reflects the heart of what we bring to every customer relationship, yes, our expertise and experience in electric power steering solutions was a key to winning this initial business, but our responsiveness and speed, including the ability to start up production less than.
Three months after the award will be critical to grow and the relationship over time.
This new relationship also highlights a wind it checks all the boxes of what we look for.
This represents growth in our strategic market in this case electric vehicle.
It also highlights high potential volume production with a market leader that has a significant growth potential.
This new relationship also leverage existing assets to generate near term financial results and significant growth potential over time.
Turning to page nine I will provide additional detail on some key commercial actions our team has implemented to drive growth.
To start we recognized that to effectively drive new business wins, we have to effectively motivate our sales force. So we modernized our compensation programs to incentivize and motivate new business growth.
We have shifted more compensation to variable components to enable higher total earnings opportunity based on bringing in new business. This eat what you kill approach.
Directly ties the work of our sales team members to their performance increasing payouts for high performers.
We also are closely tied these incentives to our strategic priorities, emphasizing a 60% target for electrical and EV hybrid new business wins.
We are also expanding our sales team by 20%.
With more feet on the street chartered with undiluted focused on selling we will be better positioned to proactively engage customers understand their problems and needs and close business. We're in it.
We are focused on attracting new sales talent with specific experience and relationships in the electric power and EV hybrid vehicle markets, improving the depth of our team to drive results.
Finally, we are working to enhance market awareness of Indians capabilities differentiation and value proposition is.
As well as the differentiated approach of leveraging our multiple process technologies.
We are accomplishing this goal by expanding and deepening our participation in the industry associations forums and trade shows to connect our business development people with key decision makers in our target markets.
In addition, we have and will continue to increase the volume of press releases and social media posts and target advertising to enhance awareness of NN NN re.
Reaching and most importantly, creating value added connections with existing and prospective customers in our target markets is vital to our growth journey.
We are positioned these sales and business development team to win through tools and training that enable them to drive new business growth. These efforts include a lot of the basics such as our refreshed website varieties and pitch decks in white papers and most importantly.
<unk> training for cross selling opportunities.
Now if you turn to page 10, we have outlined an example of our successful efforts to drive growth by solving problems in the electrical space.
One of our customers in the renewable energy space with face with a compressed timeline for the integration and installation of a large solar project.
With our in house resources to develop a durable stent without.
In house resources to develop a durable stamped electrical granting assembly that safely met that's that met safety and durability requirements. This customer turned to in it.
We were able to bring them the engineering expertise to help finalize the design.
Optimized for manufacture ability.
We brought to bear our global manufacturing footprint to support solar projects in multiple countries at scale and we did this with speed that allowed the customer to meet their compressed timeline to completion.
This win provided in N with multiple growth opportunities, we start with additional.
Potential orders from this customer for future solar projects leveraging our strengths.
Perhaps more importantly, this provides us with a foothold in the renewable power industry that can be leveraged with solar developers across the market.
On page 11, we highlight the targeted approach to new business with nearly 80% of our 546 million dollar new business pipeline focused on the electrical EV hybrid and universal auto segments in alignment with our long term strategy.
Looking at the pipeline, we do have a reduction in the total active proposals under pursued.
This decrease was.
As the result of several factors some of which are the result of our strategic actions.
We eliminated pursuits that do not align with our strategic growth objectives as well as projects that are capital intensive or providing unattractive cash flow.
We also reviewed projects within the pipeline to eliminate potential duplicative proposals with different customers for the same program providing for more consistent data.
The pipeline was also impacted by the closures of Taunton and Irvine facility.
Overall, we feel good about the size of our pipeline, particularly given the greater strategic focus of those opportunities we're going after.
On slide 12, we've highlighted key macro trends in the residential and commercial construction markets as widely reported current macroeconomic conditions and increasing interest rates have presented a drag on construction activity.
Despite the near term demand softness in the residential and commercial electrical components as well as inventory reductions by certain customers. The mid to long range outlook remains robust.
Industry forecasts project, a long recovery and growth in the residential construction as demographics and new home formations drive demand for housing.
Yeah.
Turning to slide 13, you will find that.
Excuse me you will find that we have provided a macro automotive market update.
In their March executive update LLC has forecasted global light vehicle production to increase approximately 5% with a positive production outlook in all key regions, while L. A N C notes a deep recession in 2023 is not expected the effects of higher interest rates and lingering.
Asian will likely drop will likely result in a drag on global growth in the second half of the year.
Long term, we see the continued rapid expansion of hybrid and EV adoption in the industry through the end of the decade eventually comprising a majority of global production. This high growth market is our target and where our entire team is focused on positioning and to win.
I will now turn the call over to Mike who will provide an update on our first quarter financial results Mike.
Thank you Andrew.
Now if you turn to page 15, I will review some of the financial highlights for the first quarter.
They are to the prior year sales decreased <unk>, 8% to $127 1 million driven primarily by lower volumes and foreign exchange headwinds, partially offset by pricing actions from a profitability standpoint, net price inflation was approximately 2 million favorable year over year.
This benefit was offset by unfavorable impacts of approximately $5 million due to lower volume and a reduction of China joint venture income of $1 8 million driven by lower volume associated with eliminating COVID-19 restrictions and the Chinese new year.
Favorable overhead absorption.
Million.
Turning to slide 16, working capital turns improved in the first quarter of 245 turns from $4 three in the previous quarter.
We saw our working capital increased by $2 9 million compared to the fourth quarter as a result of normal seasonality, but decreased by $9 9 million from the first quarter of 2022, as we more effectively managed inventory receivables and payables in the current environment.
Turning to slide 17, we have slightly increased capex for the first quarter, two 5 million from $4 3 million in 2022.
As we continue to maintain.
We maintain focus on cash we will maintain our stance I'm, taking a disciplined approach to capex and allocate capital expenditures to higher growth in key end markets that we have previously identified as part of our long term growth strategy.
Please turn to slide 18.
This slide illustrates our free cash flow for the quarter.
Free cash flow was a use of $3 7 million in the first quarter of 2023.
Our results in the first quarter were positive positively impacted by $2 5 million from the terminated interest rate swap along with a $1 8 million benefit from equipment sales, including advanced payments on some of those sales.
The outflow of $3 7 million in the first quarter as compared with an outflow of $9 4 million in the first quarter of 2022, an improvement of $5 7 million.
We incurred approximately $2 6 million in cash costs for severance settlement and facility closures during the quarter.
Turning to slide 19 net debt at the end of the first quarter was $147 7 million versus $146 3 million in the fourth quarter of 2022, an increase of $1 4 million, our net debt to adjusted EBITDA ratio stood at 382 times at the end of the first quarter compared to three.
Three three times at the end of the fourth quarter.
We have $43 million of global liquidity, including cash and availability on our revolver as of March 31 2023.
Our ABL was drawn by $1 million and our domestic liquidity was $33 million.
We are still evaluating potential preferred equity raise the decision will be based on our ability to execute the raised by June 30th.
Secure a reduction in our term loan pick interest and warrant costs of approximately 3 million through Q2 of 2025.
We would target of 10 million preferred equity raise which would improve domestic liquidity and reduced domestic liquidity covenant from $20 million and $15 million I.
I would like to emphasize that we are not required to complete an equity raise and we would only do so if we conclude the net costs on the incremental capital and liquidity is attractive.
With that I would like to turn it over to Douglas to cover our first quarter segment highlights. Thank.
Thank you, Mike and good morning, everyone.
We have presented additional information for each of our group.
Starting with power solutions on based win one.
Power solutions sales decreased five 7% year over year, primarily driven by degrees electrical and general industrial components sales due to lower housing starts.
As you can see on the graph they were down almost 19% year over year for the first quarter, along with customer inventory reductions will recognize favorable movements of steaming from premium pricing in connection with the closure of our Irvine, California facility, which helped improve sales and profit in the first quarter.
Profitability inquiries compared to the prior year period, driven by favorable impacts from the Irvine premium pricing and rationalizing unprofitable business with the thoughtful facility, partially offset by lower volumes.
Looking forward the closures of our Tortoni nearby facilities continuing to proceed on schedule and we expect them to be completed in the second quarter.
We expect the new business wins and market dynamics, we will continue to drive growth through the remainder of 2023.
On page 22.
Sales in our mobile solutions group increased two 6% versus the prior year period.
The increase was primarily driven by increased pricing, partially offset by reduced volumes through the quarter as well as foreign exchange headwinds due to the stronger dollar.
Profitability degrees in mobile solutions compared to the first quarter of 2022, driven by performance challenges in our Wilen point of waters facilities. We are addressing performance issues at each of these facilities as Mike previously mentioned.
We're seeing good progress in our Wellington facility operations, but the widest facilities a bit more challenging and will require additional time.
Profitability at waters is further complicated by the strengthening of the peso relative to the U S. Dollar as our sales are primarily in dollars, but labor expenses are generally paid in pesos.
Profitability was also adversely impacted by volume reductions through the quarter, including the impact of the China joint venture income due to the Chinese new year also known as Spring Festival when business was shut down.
Due to the relaxation of the COVID-19 restrictions in China. This year the festival involved longer business closures been experienced since the start of the pandemic.
Looking ahead, we continue to see positive trends in customer demands and expect stronger sales in the second quarter as compared to the first quarter.
We should start to recognize some of the incremental cost savings and efficiencies associated with the three facility closures in the second quarter of this year and the right sizing of indirect labor in our operations with that ill now turn it back over to Mike Mike.
Thank you Douglas.
Turning to page 23, we are updating our outlook for 2023, which reflects lower expected volume across end markets driven by market conditions as well as customers resetting inventory levels and taking a more cautious approach to ordering patterns.
As a result of these drivers we are updating our outlook as follows net.
Net sales in the range of $515 545 million a reduction of $10 million from our previous range.
Adjusted EBITDA in the range of 47 to 57 million a reduction of $3 million from our previous range.
Free cash flow in the range of $7 million to $17 million, a reduction of $3 million from our previous range.
Our adjusted EBITDA and free cash flow outlook outlook reflects the conversion impact of our lower sales volume expectation.
As well as slower than expected improvement in the war is operation.
We implemented a 10% reduction in indirect labor, which will begin to show results in the second quarter. Our free cash flow guidance includes an estimated $7 million in cash outlays for severance settlement and facility closure costs, but does not include the cares act tax refund of approximately $11 million due to uncertain timing.
Yeah.
I would like to conclude my remarks, noting that our team continued to make solid progress.
Position our company for long term success by focusing on top line growth and expansion of our new business pipeline. These efforts are enhanced as we maintain cost discipline in every area of our operations, while looking for new opportunities to drive efficiency and we are focused on effectively managing working capital and capital expenditures to drive improved free cash flow I will.
I'll 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.
Excuse me speaker phone please to comprehensively rhopressa are the keys to.
To withdraw your question. Please press Star then two.
At this time.
Cause momentarily to assemble roster.
Yeah.
Our first question will come from Raw Brown with Lake Street capital markets you.
You May now go ahead.
Hi, good morning.
Good morning, Ravi on the revised outlook.
Could you give us some color is it is it mostly in the power solutions market or is it sort of evenly split between power solutions and multiple in terms of the lowered outlook.
Yes, I think the volume softness we saw particularly in the first quarter was with a little bit more weighted towards towards power.
I think in terms of the operational challenges obviously more as is within the mobile solutions segment.
And as we saw.
Slower than expected.
Recovery.
For the war as profitability as well as some of the volume impacts for the year.
We obviously took a pretty significant action in the Q2 with a 10% indirect labor reduction that will benefit both groups pretty evenly starting in Q2 and with full realized savings in Q3 and Q4.
Okay, and then on the on the power solutions business.
How much visibility do you have there I know I know you gave some overall market statistics, but you know.
At this point.
But what's the visibility for the rest of the year.
Confidence level.
No.
Yeah I'll take that one this is Andrew Hey, Rob.
Yeah. So you know looking at the power solutions business.
Yeah, we have been studying it very carefully that the recent trends and some that have been you know a little bit further back.
And in assessing that we're talking to customers are regularly.
About their outlooks and getting their feelings, we baked all of that obviously into our year end you're into outlook I think.
You know the.
What's going to go on with interest rates going forward, all certainly play a role and how the year pans out so if.
If we think about our our our view I think it's going to be a tough year, but at the same time you know we've got a line of sight to still achieve what we're estimating to have for power solutions.
We're watching it carefully getting a lot of feedback and just making sure that.
We're removing all roadblocks to keep the volumes going through the business and and I'm working with customers. One thing that that has impacted us that's going to be an improvement I would say is that you know as the supply chain has had healed or gotten a lot better I'll say over the last several quarters.
Yeah.
A number of customers have reduced their inventory levels and we're starting to see that wane off where they're starting to think about reordering again at the at the older right. So so that will probably help us in terms of completing the year as well.
Great. Thank you that's very helpful color and then my last question is on a kind of a new pit.
With the EV.
Factor.
I guess I think.
Slide one product there, what's what's the sort of product and what's the opportunity are there several other products that.
Could become.
Products, you supply them at that point or was it just yeah, absolutely yeah I'm glad you asked about it so that the the component as part of their electric power.
System for.
The electric power are driving system.
And so.
It's a breakthrough it's an awesome win for us our electric power steering sorry.
Our brain freeze for a moment.
And what that what that already is represented is now that they've seen what we can do what our capabilities are how we do things how we're ramping up the business. We're already seeing a number of other opportunities from that same customer right. So.
We're in that early stage proven ourselves out but.
Based on the size of where we're at this particular customer is we anticipate this opening some really good market for us and they are a true leader in the space. So.
Okay, great. Thank you I'll turn it over.
Again, if you have a question. Please press Star then one.
Our next question will come from Tom correct.
<unk> investment research.
You May now go ahead.
Good morning, guys.
Couple of quick ones I think most of my questions have been answered can.
Can you talk about the timing of the China slowdown.
Because I thought you said in the last earnings call. It was.
I think the word was snapping back in January did it.
That snapback as expected or did it turn for the worse or what.
What was going on there during the quarter.
Hey, this is Douglas I'll take that one.
So of course, we've been in close contact with the team there and.
In Q1, it was mostly impacted by.
And extended.
Holiday.
What they call the spring festival, which is the Chinese our new year's Eve.
He was the first time after several years. After you know since the Covid pandemic that they were able to travel around this the family. So most business shutdown window was extended okay. So that impacted Q1 going forward are.
We see an improvement.
Compared to Q1.
And and but of course, we are monitoring the market closely.
Overall, Chinese economy, and how the overall market.
Gibbs keeps going there.
Alright, Okay alright. Thanks.
Another area can you refresh my memory on the challenges there or is that just a labor issue or is there a process that's involved.
I don't recall the details on that.
And I will take that one too.
<unk>.
So first of all Oh I I since I took this role in early January of this year.
Being go into why does myself and.
Often basis, they're in close contact with the leadership and it seemed there.
I would highlight three main factors affecting the Hawaii.
First one is regarding labor you know the high labor turnover that we have there in the region is kind of a it's kind of a region thing.
There are there is affecting us because we need.
Skilled labor we're not.
Not only on assembly type of company.
So that's number one number two is associated with our process capabilities that we have with new business launches.
So where we're facing some.
Lower efficiencies regarding this.
This capability.
And the third one.
Some struggles and also inefficiencies because of the machines condition.
And overall efficiency.
In some other areas.
<unk>.
We are we are we have a very clear assessment of what's going on.
We understand.
We have a plan okay.
It's a complex issue of course, not not everything is under our control some of the solutions and the plans that we have are are linked to conversations we are having with our customers there. So.
That's how we're going to address it.
Alright, great. Thanks for the color on that one quick one for Mike I didn't see the need.
A comment on capital expenditure.
Outlook for this year is it still in that.
$17 million range.
Yeah, I think the original outlook. We gave was 16 8 million of net capital expenditures, which would be net of.
About two and a half million of proceeds from equipment sales from Taunton in Irvine.
That we we expect I would say we're still in that range.
Alright, great Alright, that's all I have for now thanks.
This concludes our question and answer session.
I'd like to turn the conference back over to Mike <unk> for any closing remarks.
Thank you I'd like to thank everyone for joining the call today and certainly look forward to speaking with many of you on follow up calls later in the day. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.