NN, Inc. (NASDAQ:NNBR) Q1 2024 Earnings Call Transcript May 7, 2024
NN, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the NN, Incorporated. First Quarter 2024 Earnings Call [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Stephen Poe, Investor Relations. Please go ahead, sir.
Stephen Poe: Thank you, operator. Good morning, everyone, and thanks for joining us. I’m Stephen Poe, Investor Relations contact for NN, Inc. and I’d like to thank you for attending today’s business update. Last evening, we issued a press release announcing our financial results for the first quarter ended March 31, 2024, as well as a supplemental presentation, which has been posted on the Investor Relations section of our website. If anyone needs a copy of the press release or the supplemental presentation, you may contact Alpha IR Group at nnbr@alpha-ir.com. Our presenters on the call will be Harold Bevis, President and Chief Executive Officer; and Mike Felcher, Senior Vice President and Chief Financial Officer. Tim French, our Senior Vice President and Chief Operating Officer will also join us for the Q&A portion of the call.
Please turn to Slide 2, where you’ll find our forward-looking statements and disclosure information. 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 when filed the Risk Factors section in the company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024. 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, inflation, supply chain constraints, foreign exchange rates, cash flow, tax rates, acquisitions and divestitures, synergies, cash and cost savings, future operating results, performance of our worldwide markets, general economic conditions and economic conditions in the industrial sector, the impacts of the pandemics and other public health crises and military conflicts 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 of the company’s control. The presentation also includes certain non-GAAP measures as defined by SEC rules. The reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation. Please turn to Slide 3 and I will now turn the call over to our CEO, Harold Bevis.
Harold Bevis: Thank you, Stephen. And good morning, everyone. Please turn to Page 4 in our earnings deck. NN had a successful first quarter, highlighted by growth in our core plants, continued execution of our business transformation strategy, which was underlined by a number of observable operational improvements at our underperforming locations. We also continued our commercial momentum winning new business in the quarter at a very strong pace, capturing more of the $17 million of new awards, which we estimate to be about three times market growth rates. Our transformation is fully underway and we’re now entering our second year. And I can say for the team its here time flies when you’re having this much funds. And we are indeed pleased with our results over the last year and we’re looking forward to highlighting some of them today and then taking questions at the end.
First, I’m happy to report that Q1 2024 was the third consecutive quarter of exceeding our upward goals and expectations for adjusted EBITDA, free cash flow and new business wins. We have been driving our trailing 12 month EBITDA up. We believe this is a function of natural company strengths, a stronger team made up of both homegrown leaders and outside professionals, a strong set of improvement initiatives and being accountable to outcomes to each other. First and foremost, we’ve been delivering strong operational improvements. Some of you might wonder what does that mean, operational improvements are a pretty, pretty big term. But for us it means rightsizing our headcount, negotiating with non-direct suppliers, leveraging our global procurement power, upgrading plant managers where needed, combining SG&A roles where possible and having an organized plan at every plant to take out costs.
Additionally, in certain areas, we’ve had to negotiate, engage with customers on basic economics. Another term for this is Continuous Improvement or CI. And we are committed to increasing our margins and profit rates on an ongoing basis and it’s working. To be sure it is sustainable and becomes a layer of goodness that we build upon, we have to change our culture in many areas and that’s working also. Sometimes winning and becoming successful is just plain hard work and we’re all about that. As we have noted in the past a year ago, the Company had seven unprofitable plants that were causing a big impact to our bottom line in our cash flows. Our aggressive actions over the last year, at these plants has shown clear and immediate results, with three plants returning to profitability already and the remaining four are making dramatic improvements.
The goal is for this group, to become profitable by year end 2024, this year. The commercial team has also been very successful over the last year, and we have secured growth at three times the market growth rates, by our estimations. This will enable us to layer in new growth and contribute to our adjusted EBITDA totals in future quarters. Before turning to our first quarter financial results, I’m happy to announce that we are reaffirming our free cash flow and new business win outlooks for the year, while also tightening our outlooks for net sales and adjusted EBITDA. We expect to deliver full year bottom line growth, along with continued strong growth in new business wins, and Mike will cover this in more detail in his section. Please turn to Page 5, in your deck.
NN delivered solid first quarter results, with net sales of $121.2 million and adjusted EBITDA of 11.3. Year-over-year, net sales volumes were mostly flat after some onetime movements, but adjusted EBITDA grew strongly through the actions that I just walked through. It was our third quarter of year-over-year growth in adjusted EBITDA, and our trailing 12 month adjusted EBITDA of $46.3 million, is up 20% of the trailing 12 month adjusted EBITDA of a year ago, or about $7.7 million improvement. Our adjusted EBITDA margin is now 9.3% and is up significantly compared to last year as the turnaround of troubled plants and broader operating cost reductions continue to improve our bottom line. Before turning the call over to Mike, I’d like to recognize our global NN team.
In a period of significant change for the company, a lot of it instigated by me, our employees and colleagues are performing in an outstanding basis, on-time delivery quality and safety. We’re reorienting and injecting best practices in our company as we go along and changing our culture. NN sales pipeline is as large and as healthy as it’s ever been. And we continue to aim to continue winning new business, with both new and existing customers globally. With that, I’ll turn the conversation over to Mike, who will walk through our financial performance in a more detailed manner. Mike?
Mike Felcher: Thanks, Harold and good morning, everyone. I’ll start on Slide 6, where we will detail our results for the first quarter. Net sales for the quarter of $121.2 million were down 4.6% compared to last year’s first quarter. For the period, we had roughly flat sales volumes due to a rationalization of volume of approximately $4 million underperforming plants, mostly offset by $3 million of sales growth at healthy plants. From a pricing standpoint, our prior year results included $3 million of end-of-life premium pricing associated with the closure of the Irvine plant. Looking at profitability, our operating loss of $4.8 million improved by $2.3 million compared to the $7.1 million operating loss in last year’s first quarter.
On an adjusted basis, our first quarter adjusted operating loss was $0.7 million, which was slightly higher than the adjusted operating loss of $0.4 million seen in the prior year. As Harold referenced earlier, adjusted EBITDA results of $11.3 million by $3.2 million or 39% versus last year’s $8.1 million result. Our consolidated adjusted EBITDA margin results expanded by 290 basis points to 9.3% versus last year’s first quarter. This improvement on our profitability on a lower revenue base relative to last year speaks to our early success in improving our base business performance. As we continue through 2024, our focus on attacking any and all underperforming areas of the business will continue to anchor our priorities, as part of our multiyear transformation efforts.
In particular, we expect to see a more pronounced pull through of the impacts from our operational improvement initiatives and total cost productivity programs, with those results accreting more thoroughly to our profitability figures, as many of these only began benefiting us in the second half of 2023. As we have stated in the past, we remain committed to capturing an additional $10 million in adjusted EBITDA improvement, once our actions are completed. Turning to our segment results. Starting on Slide 7. In our Power Solutions segment, where our business is largely standard products, our sales decreased 1.7% year-over-year to $48.2 million down $0.9 million from the $49.1 million of sales in last year’s first quarter. While we are experiencing strong demand in our business from US customers focused on electrical grid, this demand strength was partially offset by volume rationalization as part of the Taunton and Irvine facility closures from last year.
Despite the lower sales volume, the positive impacts from facility closures and cost reduction actions have driven solid results as seen through our improved adjusted EBITDA. Our quarterly adjusted EBITDA of $7.8 million improved by $1 million compared to the $6.8 million delivered in last year’s first quarter. We believe it is a testament to our refocused efforts and commitment to our strategic transformation plans, both operationally and commercially, that the business delivered higher adjusted EBITDA and expanded margins by 290 basis points year-over-year. As we begin to layer in stronger sales figures from new business wins, we expect to continue expanding our profitability as we capture improved fixed cost absorption through operating leverage, combined with the commitment to our costs and productivity programs that Harold walked through earlier on the call.
Operationally, our focus remains on expanding our connect and protect business, improving underperforming plants, continuing to right-size the cost structure, contemporizing our engineering and processes, and ultimately executing on a healthy and strong growth pipeline across growing key end markets. Turning to slide 8, in our mobile solution segment, which covers our machine products business, sales decreased 6.4% versus the prior year’s first quarter, declining by $4.9 million to $73.1 million for the period. The decrease was primarily driven by rationalization of underperforming business and the impact of some mixed shifts in our retained business. In line with the trend we have seen across the company, our profitability in the mobile solution segment grew versus last year’s first quarter, as the segment adjusted EBITDA results of $ 8.6 million increased by $3 million, compared to the $5.6 million in the first quarter of 2023.
This markedly improved adjusted EBITDA performance was driven in part by stronger profits from our China joint venture, which continues to show market strength and attractive growth. Additionally, operating performance improvements within our underperforming plants reflect the early impact of our cost and productivity programs, which continue to gain momentum. Now turning to slide 9, you can see a summary of our free cash flow, capital expenditures, and net debt and resulting leverage. We are committed to maintaining positive free cash flow and will therefore take a measured approach on capital investments required for our new business wins. This includes utilizing equipment financing opportunities, as we did in the first quarter where we executed a $4.9 million equipment sale-leaseback transaction.
With that, I will turn the call back to Harold to discuss some of our additional developments before wrapping our prepared remarks. Harold?
Harold Bevis: Thank you. Please turn to slide 10. Our structural and process improvements have been accretive to our bottom line since the initiation of our global continuous improvement program last year. And our trailing 12-month EBITDA is now up to $46 million, and it’s up, almost 20%, as I mentioned, since the first quarter last year. And it’s improved for four quarters in a row. And additionally, as a result of targeted cost reductions, better operational planning, and headcount rationalization, our EBITDA for headcount is up 42%, and I just wanted to share a look into the operational improvement program that we have underway, led by our Chief Operating Officer, Tim French, who is on the phone later for questions. But we’ve progressively been working down our headcount over time, and this chart shows you what our headcount is outside of our JV because we have another 700 people inside of the JV.
But these are on our non-JV headcounts. And you can see that we’ve been taking down our headcount while taking up our EBITDA, therefore driving up our productivity. So we’re going to continue this balanced focus on growing earnings through growth as well as cost-out initiatives. And it’s helping us make improvements in our free cash flow generation also by having quite a bit of people off the payroll. And this remains an important focus going forward. This story is not over. We’re underway with optimizing here. A lot of it’s focused on our underperforming plants. And it will lead to an improvement in our overall capital structure also. We believe that we’ll be able to put the periods of financial stress behind us, if we haven’t already, as we evolve our capital structure to be more reflective of our current performance continued impact on implementing our transition strategy.
This is one quarter at a time, one improvement at a time, sequential improvement, staying with counting, taking forward actions, and improving based productivity. Highlighted on page 11, if you just turn the page, and I’d like to flip and turn about our commercial program. Our organic growth program has been performing very well. And we’re encouraged by our early success and ongoing success. Accelerating the growth of new business wins is another key to our transformation plan. And after having won a record $63 million of new business awards during calendar year 2023, we delivered another $17 million of new awards in the first quarter this year making a total of $80 million in a short amount of time. We’re on pace to deliver the similar amount this year $55 million to $70 million.
We put in a range there because it’s really hard to tell, when you’re going to close on things in your pipeline. But we’re on pace now, with the middle point of our guidance range here as you can see from the results which would mean, $120 million to $135 million of new business won over eight quarters. Our key growth areas continue to be the China automotive markets which are just flourishing with indigenous and export opportunities. The U.S. Electrification and Grid Technologies, where we specifically are on the grid edge and selective vehicle programs in the markets of North America, South America and Europe. We’re continuing to be selective in the medical markets. We’re mindful of our — of the amount of CapEx. We’ve attached to growth plans.
Tim French is the minder of our CapEx budget. And we’ve walked away from some opportunities that were just too CapEx intense for us. So we continue to leverage our installed base, on an ongoing basis. And this batch of growth is much more capital effective and capital efficient and prior experiences about a company. And we’re leveraging our installed capacity very well. If you turn to page 12, we’d like to reaffirm our free cash flow and new business line outlooks while slightly tightening our net sales and adjusted EBITDA guidance ranges. And for the full year just to repeat it here, we’re expecting net sales in the range of $485 million to $505 million up slightly from prior year. The midpoint adjusted EBITDA in the range of $48 million to $54 million up over 20% at the midpoint.
Free cash flow in the range of $10 million to $15 million up again slightly at the midpoint compared to the improved free cash flow generation of last year and new business wins in the range of $55 million to $70 million. Our guidance continues to reflect steady end market demand, despite some observed weakness in North American industrial markets relative to 2023. Specific to NN, we expect to continue executing our aggressive growth program, ultimately driving free cash flow and profitability across several new markets and customer platforms. With that, I’d like to thank you for listening. And I’ll turn the call back over to the operator, for questions.
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