Q3 2024 NN Inc Earnings Call

[music].

The

Company.

We continue to make solid progress there's five major elements to it we've used the same format.

For about a year.

New leadership.

Speaker Change: Supplementing the company's leadership with with new leadership, I'd say with Tim French and I, you know kind of been the architects of this thing and we gave ourselves a self assessment here and then we use our judgment.

Speaker Change: On where are we with each of these topics and we believe we are around 60% their own leadership.

Speaker Change: We still are strengthening our teams and the medical end market electrical good end market and stamp products in general as.

Speaker Change: As well as upgrading several plant teams.

Speaker Change: Or that are not where we want them to be.

So we think we're about 60% there on leadership fixing the unprofitable areas of the group of seven that are Tim calls them the money losing plants.

Speaker Change: <unk> put some data here for you last year through three quarters of those plants lost $8 4 million of EBITDA and this year, we havent to 0.8 in Tim's Tim statements, where that he wanted to be breakeven this year and we're tracking to do that.

Speaker Change: So it's a big improvement a dramatic improvement in in those plants.

Speaker Change: Another one is expanding our margins.

Speaker Change: Oh I'm, sorry, we said, we're 40% along there because our goal really is to get those plants to make money not just I'm not not lose money.

Speaker Change: So we gave we said we're not quite halfway done on that one.

Speaker Change: <unk> margins, we said we're halfway there.

Speaker Change: Today I'll be presenting information on both a GAAP and a pro forma basis in order to provide additional transparency into our operating results. Since we've had quite a few changes in the business with the transformation undergoing namely the sale of Lubbock and.

Speaker Change: And migrating away as Harold mentioned on certain unprofitable business. So we hope. This presentation is indicative of how we are performing and how we're transforming and then over time pretty excited about that transformation and are pretty excited to share with you some of the faster accelerated transformation activities and how they've impacted the financials.

Speaker Change: This quarter, so I'll be starting on slide nine where.

Where we detail our financial results for the third quarter. This slide shows our as reported GAAP numbers and adjusted numbers alone from the left to the right. So hopefully it's clear there.

Speaker Change: The adjustments in the Middle section show the sale of Lubbock, which contributed $5 6 million of revenue in the prior year, which did not contributed obviously any revenue in the third quarter. This year. So we're adjusting that out and the associated EBITDA. So those adjustments help to help to show the transformation that we're making to the business.

Second the rationalization of about $2 $4 million of unprofitable business, along with two profit benefits in the prior year, which did not repeat and a negative FX impact kind of kind of shape out the adjustments for the quarter. So pro forma revenue operating profit and adjusted EBITDA as shown on the right hand side of the chart.

On an as reported basis net sales for the quarter were $113 6 million declining by $10 8 million.

Partner to support in its transformation.

Now turning to slide 13, this presents our outlook for 'twenty 'twenty four we're maintaining our outlook for 2024 and these ranges are subject to shifts obviously in market demand, particularly in North American auto we expect to continue winning new business at a strong rate focusing on power medical in the electrical markets as I noted.

And then as investing cash flow intelligently in support of these new business programs and our cost initiatives and footprint Rationalizations will continue to have a positive impact on underlying results improving the overall cost structure that we carry.

So with that I'll turn the call back over to the operator for questions. Thank you.

Operator, we will now begin the question and answer session to ask a question you May press star one on your telephone keypad.

Speaker Change: If you're using a speakerphone please pick up your handset before pressing the keys.

Speaker Change: If you would like to withdraw your question. Please press Star then two.

The first question.

Comes from Joe comes at local capital.

Good morning, Thanks for taking my questions.

Hi, Joe Good morning, Joe.

So I wanted to start off I mean, you have the chart in there with the you know for the year to date.

Gross margins, increasing but gross.

Speaker Change: Gross margins in the third quarter were a little bit below where we had anticipated and they were below the year ago quarter or is that all just due to mix or was there anything else behind that.

Speaker Change: Yes, Joe good. Thanks for the question, Yeah, generally due to mix as I outlined in the in the call. So power solutions had a little bit of a mix issue, which has corrected itself. So we don't anticipate that mix issue going forward.

Okay, great on that and then.

Speaker Change: Uh huh.

When when you're looking at.

Speaker Change: Going through the queue. This morning.

Kind of break out the revenues.

Our initial golf for for those businesses and that'll be a watershed event for us and then.

We were focused in on being free cash flow positive. There for you know for the ongoing future and we're on track and we're thankful for it.

Speaker Change: A lot of hard work.

Okay great.

Next question is on the on the kind of the new growth markets and you laid out a number of market you're going after but specifically in the power grid area are there you know are there growth dynamics. There that you can maybe take greater share or see some growth there.

Oh some of the other markets or is there kind of have your customers there.

Speaker Change: And that's kind of more incremental.

Well we have.

We have a portfolio of opportunities there.

Our I'll say, our biggest largest single opportunity is in is in power grid.

Speaker Change: But we also have a lot of small ones.

Speaker Change: And a big one for us would be like $20 million, a year kind of a thing.

These are customers like Siemens Schneider and eating.

The power grid people.

A b b.

Speaker Change: But I would say that is similar to the rest of the business you know the average size of opportunity might be.

Speaker Change: We were looking at it the average win value. This year is around $400000 per year and it has a longer program a higher program value, but that peak annual sales around 400 and powers like that but we do have a couple of big ones.

Speaker Change: In that arena and it's.

Speaker Change: Its stamped products are predominantly and.

Speaker Change: And we have a couple that you know that would require plant expansions.

Speaker Change: No.

I don't know.

Oh, what the what else to say other than.

We're pretty excited about it and we're gaining steam.

We've added some people.

That had had prior relationships in the industry and we've been able to unlock a lot of opportunities here and Chris mentioned, the pipelines up to 230 million now so.

Where we're picking and choosing here so that that we can get on a steady path of growth in that business.

Okay. Thank you and congratulations on all the progress and its turnover. Thank you. Thank you.

As a reminder, go ask a question you May Press Star then one on your telephone keypad.

Speaker Change: The next question comes from Tomcat at Zacks investment research.

Good morning, guys I'm quoting him on a couple of a couple.

Couple of quick ones. All these new business wins in 2024 are these contracts materially different than what's been going on the last three to five years and then related to that is the contract signing to revenue is still in the 24 month range or something like that.

The what was the second part of the question Tom.

The signing to revenue generation I think you guys said it was.

The 24 months or something I have that right yeah yeah.

Speaker Change: So.

Speaker Change: I'm a little more information on page seven so the first question was is there anything different about the business youre winning versus the business, that's going end of life or they're irrationally rising the answer's, yes.

Generally speaking we are not pursuing takeover business, we're not just going in and trying to bust off a piece of existing business with by just going in with our pricing.

Instead of that were participating and then the new products and innovation that these customers. So generally speaking the awards, we're getting or are for new products and most of the time the new product has some type of a new machine feature.

Enabling it to have a new product feature that we're replacing generally older legacy business. That's in you know not being innovated and then and it's basically into an economic you know steady state cycle and we're generally pursuing new business that has some initial.

Value and pricing in it because of its newness and where we had previously given some information that the average gross margins on the new business or over 20%.

And Theyre generally replacing business, it's around 11%.

So it's a it's a big increase in gross profit.

Speaker Change: And.

And and that's that continues that continues to be true so.

We're going to keep doing that usually we've looked at it a little bit of takeover business, but generally speaking the.

IRR isn't that good when you look at the working capital that you have to put against it.

And they're taking up a machine time, it's better to pursue something with a better initial pricing. So we're saying we're staying true to that.

Speaker Change: Okay. Thanks, and then.

Oh on the refi of the ABL and the term loan does that work.

That involves a preferred stock.

Speaker Change: Refinance or take out or I guess the question is what else can you do about the preferred stock is that a second transaction then sort of refinancing the terminal B L.

Yeah, Yeah, yeah, so Chris.

Yeah, I wouldn't take that Harold thanks, Yeah. So right now we're focused on trying to get some additional flexibility to support our growth initiatives. So that that's our key focus right now obviously the pressures out there and you know it's going to be part of our optimization of the capital structure at some point, but initially we want to get the a b L.

The term loan setups that we've got the capacity and the ability to grow the business and and I think the the press may or may not be part of that but probably our second our second tier or second approach.

Got it and last question for me on the China It.

Speaker Change: It seems like good growth there, but you know you look at the macro and you see the economy slowing down the consumer slowing down car sales slowing down. So what is the dynamic there that you guys can grow in sort of a slowing.

Speaker Change: Market.

Yeah, So the China market is growing and the and they have some government.

Speaker Change: Mandates and government incentives to to encourage our auto procurement.

But also earlier this year, you know China past, Japan in terms of the largest exporter of vehicles globally and they they are a large export or so that they have are a.

Speaker Change: Our goal to lead in the export markets. There are some tariffs in the United States, but.

On on products made in China, but not not so in the rest of the world as much so some smaller ones in Europe, but.

They're big export markets are.

They're doing fine so the there's a lot of pressure on people that are serving the market like us where we're nearing capacity and our ability to produce products. Both for vehicles that are going to be made and sold in China and vehicles that are going to be made in exports from China. So.

Speaker Change:

The the the impact is on vehicles that are high priced.

Speaker Change: And.

The overall global production of cars is flat year to year its not declining there's some sport on powertrains with ice going down a little bit electric vehicles going up a little bit hybrid going up.

And you can get into powertrain talk but overall the number of vehicles being made globally is up just a little bit.

And and China's winning in that market and we're supplier into it. So we're we're benefiting from that.

Great. Thanks for the answers are nice job.

That's all that up and down.

Speaker Change: Thank you. Thank you.

At this time there are no further questions I would like to turn the conference back over to management for closing remarks.

Thank you for calling in we appreciate it and we're pretty excited about our forward looking here and we look forward to speaking about the fourth quarter and 2025 goals in our next call. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Okay.