NN Inc (NNBR) 2002 Q1 法說會逐字稿

As a reminder this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Susan Garland of FRB Webber Stanwick. Ms. Garland you may begin your conference.

Thank you and good morning. Welcome to NN's first quarter 2002 conference call. By now you should have all received a copy of this morning's earnings release. If anyone still needs a copy, please call my office at 212-445- 8469 and we will fax you a copy immediately following call.

Before we begin, we ask that you take note of the cautionary language regarding forward looking statements contained in the press release. That same language applies to comments made on today's conference call and live webcast available on WWW.StreetEvents.Com Please note this call is being recorded on May 2, 2002, contains time sensitive information and is intended for replay through May 9, 2002 only.

With us this morning is ROCK BATY, Chairman and Chief Executive Officer and members of NN's management team. First management will give an update and overview of first quarter results and afterwards there will be an opportunity for Q&A. And now I would like to turn the call over to Rod. Rod, please being.

Thank you, Susan and thanks for the conference call participants this morning. I have four members of our management team with me this morning, Will Kelly, our Chief Accounting Officer and Manager, Investor Relations, Dave Dyckman, our VP of Business Development and Chief Financial officer, Steve Frey, our corporate controller and Frank Gentry, our VP of Global Operations.

Dave and I are going to handle the call this morning and what we would like to do is comment specifically on the first quarter results, confirm our prior guidance for the total year and also give you some guidance of the second quarter specifically. And then as we usually do, summarize kind of some ongoing business initiatives and strategic issues.

And with that I am going to turn the call over to Dave and let him discuss the first quarter results as well as the outlook for the balance of the year. Dave.

Thanks, Rod. First I would like to focus on the first quarter results. Sales in the first quarter of 2002 were up roughly 18% from the fourth quarter of 2001. Although still down about 6% from the first quarter of the prior year. By division the Ball & Roller and Euroball divisions were each down about 15% when compared with the prior year first quarter. IMG was up about 6% reflecting solid new program growth. Delta was up 100%, also reflecting solid new program growth, but the contribution from a full quarter. As you remember, we acquired Delta in February of last year. And ten NNRK contributing $400,000 in sales in the first quarter of this year versus in its first start up quarter last year. Net net the business was down about 6% as I mentioned earlier in the first quarter of this year. Despite being down 6% in the first quarter, earnings per share were up 33% versus the 2001 first quarter. Bridging the earnings per share of 9 cents in the first quarter of 2001 versus the 12 cents in this year's first quarter, we have the negative impact of volume as well as certain SGNA items that we mentioned or referred to in the press release. These were more than offset by the benefits of our adoption of FAS-142, which eliminated the goodwill amortization expense in the first quarter of this year.

We also had cost reductions associated with the closing of the Walterboro facility and efficiency programs at IMG and Euroball. In addition to that we had interest expense reduction as well as cash rate reduction which we referred to in our last call in February principally in Italy.

These all adding up to 12 cents.

I would like to comment on our SGNA levels in the first quarter. They were higher as a percent of sales from last year. However, we believe adjusting for the one time and then usual events that we mentioned in the press release, as well as accounting for more normal economic environment, these will provide fresh SGNA levels at closer to our historic 8% of sales levels. If we focus on the performance by division, IMG and Delta were both solidly accretive in the first quarter, combining for 3 cents per share. We are also excited that NNRK achieved breakeven in the first quarter, this being on plan. Ball & Roller and Euroball were also on plan for the first quarter. Now I would like to shift focus to debt reduction in the first quarter. Our net debt as of March 31 was essentially at the same levels at the beginning of the quarter. And this was due principally to a healthy wrap up in receivables associated with an improving economy, as well as a natural business cycle.

As you know, our first half is typically stronger than the second half, and this is particularly true compared to a very weak fourth quarter of last year. We are already experiencing receipts associated with these receivables such that net debt has been reduced roughly $4 million from the end of the first quarter. That puts our net debt to EBITDA level at 1.9 times and back on track with our $12 million reduction for the year.

Looking further into the second quarter, it is shaping up very similarly to the first quarter. We expect revenues in the neighborhood of $47 to $48 million, which is essentially flat to the second quarter of last year.

Although we do expect the Ball & Roller business to be down 6 to 7% on a quarter to quarter comparison, which does provide negative mix impact. Having said that we anticipate earnings per share in the second quarter of this year to range between 12 and 14 cents per share. This compares to the 11 cents we delivered in the 2001 second quarter, that number being adjusted for certain one time gains we experienced last year.

And, again, similar dynamics as experienced in the first quarter are driving the increase from last year's second quarter.

At this point I would like to turn back over to Rock to walk through the remaining items on the agenda today.

Thanks, Dave, I am going to discuss just briefly some basic business issues as well as strategic issues that we face. As you know, sales and revenue is a critical issue, obviously and our sales forecast for the second quarter and the balance of 2002, assume what we said before, and that is a continuing but most recovery in the domestic U.S. economy. And we classify the European economy in terms of forecasting it as soft by stable with no further reduction.

Despite the solid results we did see in the first quarter, particularly over the fourth quarter, coupling that with the recently announced strength in the U.S. first quarter GEP growth, we still are cautious with respect to the near term outlook.

As you may know, the robust first quarter or 5.8% annualized growth rate in the U.S. economy included a significant improvement from replenishment of inventory levels. In fact, if you kind of read the press over one-half of the growth rate was attributable to the inventory effect, as it is called.

Having said this, we don't want to express pessimism, in fact, we see reasons for optimism moving into the second and third quarters of the year. But IMC and Delta have been awarded nice new business, pieces of business, some of which are in our plan and some is incremental beyond our plan. And both Ball & Roller and Euroball have stabilized their first quarter levels in the second quarter. Our immediate short term plans, as we have mentioned before, are still kind of a wait and see and call for some continuation of conservatism with respect to our cost structure, balance sheet management and capital expenditures.

I would say at this point that we have picked up the pace somewhat relative to pursuing acquisitions of our customers captive varying component manufacturing operations, and although that pace has quickened and it is always difficult to predict any closure rate on the outsourcing related acquisition.

We presently have very active four projects underway with respect to these outsourcing acquisition transactions.

As we have mentioned in the last call and the previous press releases, the board has established a committee to consider and recommend to the full board which, if any, alternatives the board might pursue to assist certain founders in liquidating their holdings in NN company stock. As I mentioned, both McDonald investments and Price Waterhouse Coopers have been retained to assist the committee and the board and as we expected, they are still in the process of evaluating the alternatives that we are looking at. At this point we still don't' have anything to report, but we believe there should be a conclusion by the end of the second quarter. And as I have also mentioned, we will update you as soon as we have any relevant information associated with the process.

I would also like to acknowledge that at our April 4, 2002 Board of Directors meeting, the board established a new corporate governance committee to provide broad oversight of the following issues. It will include nominations, a more formal nomination process of directors for shareholder election to the NN board, a more formal annual written performance evaluation of the chief executive officer's performance, a formal annual evaluation of the board in total and other governance issues as the board determines appropriate.

While establishing a governance entity at the board level is certainly currently in vogue, we have been discussing the need for such a committee over the past year, for over a year at NN. And the basis for it as we continually seek continuous improvement of the board's effectiveness in meeting not only the governance responsibilities but the fiduciary responsibility we have to our shareholders.

We really believe at the board level that the committee will further strengthen and improve the board's effectiveness moving forward.

I would like to conclude by saying that we have a solid first quarter and we are particularly pleased with the execution from our operations; that is our employees and the management teams in a variety of our global operations. They helped provide incremental earnings despite lower volumes in a difficult economic environment.

Again, this improvement came as a result of proactive decisions made by the management teams and employees in 2001. These decisions, many of which were very difficult to make, have established a foundation at NN for providing really healthy results even in the current economic environment. I would also like to make the point that we remain optimistic and very focused regarding the execution of our long term strategic plan, a plan that we really believe will deliver solid long term revenue and earnings improvements, not only for 2002 but in the future as we move forward.

With that we would certainly like to open it up with any questions that you may have.

Thank you. Ladies and gentlemen, if you have a question at this time, please push the one key on your touchtone telephone. If your question has been answered or if you wish to remove yourself from the Q, please press the pound key. Our first question from Mark Par of McDonald Investments.

Good morning.

Hey, Mark.

Good morning, Mark.

Congratulations on a great quarter.

Thank you, very much.

It is nice to talk with companies that have positive surprises for a change. I was wondering, just kind of on a housekeeping, could you share the Cap-X of the first quarter and also the differential in growth between domestic and Euroball?

Yes, Mark, this is Dave, Cap-X for the first quarter was about just under $900,000. And growth for the first quarter, are you referring to quarter over quarter growth?

Yes, year over year.

Okay, Euroball was down about 50% and the remaining businesses down somewhere around 10 on an average basis. Obviously, there is as lot of mix, the ball and roller business was down 16 to 17 while you've got the penetration programs that Delta and IMC and NNRT comparing to due shag of the first quarter of last year.

Okay, just kind of a follow on, I know that there was, you know part of this Euroball process there was an opportunity for the domestic business to increase its penetration with some of the existing customer relations. Rock, could you talk a little bit about how that process is unfolding, whether you are going to get much benefit from that this year or whether that is next year or what the status is of that?

We have seen some benefit, Mark, late in the fourth quarter, first half of this year from that program. And by benefit, though, we have always called an off bet, and by that I am referring to the fact that we are giving business up out of our U.S. operations Mark to the Euroball operation. This is product that we were shipping into Europe.

Right.

And serving European customers out of our U.S. operation. And it is not a dollar for dollar offset, but about 80% of the business we are losing to Europe we still have active programs in place to offset 80% of the loss with both our partners in Euroball. And we have made, to give you an update, we were about 30 or 40% of the way through the transfer of that business and about 30 or 40% of the way through the offset of the business in terms of penetration here in North America.

So, we are on schedule, we are making progress with some of the programs better than we are with others, but we are still confident that when we conclude the transfer, which will not totally take place until the end of this year or early next year, that it will all be in place.

One final question and I will pass it on, I just wanted to get an update on to what extent you can talk about the various, you know, call and put situations related to potential changes in your ownership position at Euroball, for this year and maybe through 03, you know, to what extent you can give us an update on that or, you know, what is going on there.

Okay, it is important to note that there exists only put options. We do not have a call option to buy the remaining 46%, 23% each from our partners. They do have a put option to sell off at the end of 2002 their 23% each ownership.

And it is a very important question mark, something that we are focused on not only at the board level but from a management team perspective, getting a sense of what the intention of our partners are relative to exercising the put option or not. At this point we don't have a clear indication of what their indications are.

We are comfortable either way. We would welcome the opportunity to have them exercise the put option and retain 100% ownership in Euroball. We are also comfortable in keeping them as partners.

And it is our intention, we have had some preliminary discussions with both partners regarding the issue and it is really our intention to try to get a sense this year, not waiting until late in the fourth quarter to find out, but try to get a sense from some time mid third quarter, mid second quarter on into mid third quarter, to get a sense for kind of what their intentions are.

We said publicly that they liked the way the joint venture is going. As a matter of fact, they love the way the joint venture is going, it has met and I think exceeded their expectations. And I believe that at least it is difficult to predict what the outcome will be at the end of 2002.

But both of our partners have long term expressed the desire as we have mentioned to be completely out from an outsourcing and captive production point of view.

So, I don't know if that answers your question or not, Mark, it is still kind of up in the air, but we are attempting to get a line on kind of what the intention is.

Is there anything you can say, Rock, a far as, you know, what would be, you know, the potential value transfer if the put option was exercised and how much would it cost - I mean, how much money are you going to have to spend, can you share that or share kind of how that is going to be valued?

It is valued totally and completely based upon, I think we said this publicly too, although we have not said what the actual multiples are, but we have said that it is based upon an average of net earnings and EBITDA multiples and historical 24 month trailing results of Euroball.

Yes.

Yes, Mark, I was going to say, we actually have made in, with the K this year, we attached the formula base that Rock was just walking through. I think also in that K and in the Q segment reporting breaks out Euroball earnings and the formula is attached to of walk your way there.

Okay, all right. Terrific, I appreciate it. Congratulations again on a solid quarter.

Thank you, Mark.

Thanks, Mark.

Our next question comes from Michael Corelli of Barry Vogel & Associates.

Good morning.

Good morning, Michael.

Just a couple of quick numbers questions. First on the tax rate, should we look for something similar for the full year?

Yes, I think it is appropriate.

Okay, and then on the other income line I noticed you were up a reasonable amount from the first quarter of last year, what is mostly in that line?

There are a number of things, actually. We had a demutualization where we sold shares of that entity in the first quarter and made a gain. Obviously we are not in the business for trying to ride an equity investment like that.

We also had just timing of some fire proceeds on insurance, insurance proceeds. That gets you probably two-thirds of the way there. The other item in there is we have a hedge as you know in Europe on our Huperverods Bank debt and marking that to market gives you another $60,000 or $70,000 give or take. Good news.

Okay, so some of these things obviously won't be repeated going forward.

No, in fact, most of them won't.

Okay, and just a question about your goodwill, I mean, you have a pretty sizeable amount of goodwill on the balance sheet now, it is almost, you know, $40 million, your equity is only about $63 million. Is there any possibilities that we should be looking for some kind of write down to that goodwill? And what is most of that goodwill tied to?

That's a good question. We said that we have adopted FAS-142. And we have until the end of the second quarter to effectively determine if we have an impairment on that goodwill.

At this point and you will see this in the Q, at this point we have no reason to believe we have an impairment.

With regards to what Generated the good will, it almost a third, a third, a third from the Delta, IMC and Euroball acquisitions.

Okay, great, thanks a lot.

Sure.

Our next question comes from Greg Ramsey of the DePrince, Grace & Gullo.

Good morning, guys, excellent quarter.

Thank you, Greg.

A quick question on Delta and IMC which you touched on briefly in terms of improved results there. You mentioned you were working on some new programs, I was hoping you could kind of just give a little bit more flavor for what to expect from those two businesses going forward, it sounds like you are gaining a little momentum there.

We really are, Greg and, in fact, as we mentioned, they exceeded their business plan in the first quarter, and we expect both operations, given the fact that they've got some incremental volume that we weren't forecasting, particularly Delta has some incremental volume we weren't forecasting in the business plans in place, we were - there is real momentum in both operations and it is essentially driven by not only them taking care of the cost side of their business, but also seeing some really nice new programs come in place on the top line.

And I would add that it is leveraging the relationship that we have had with our global bearing customers and utilizing those relationships in a more meaningful way in terms of trying to own up relative to the strategy that we put in place.

So, we are really optimistic about the results out of both those acquisitions for the balance of the year.

Okay, great, thanks a lot.

Our next question comes from Brian Rappin of Slotter Capital.

Good morning, guys.

Good morning, Brian.

Good morning.

Rock, can you kind of talk to, bringing up every quarter, where the roller business is and what you kind of anticipate this year?

I have mentioned that the actual roller business in terms of revenue, year over year comparisons has been relatively flat. And, again, this year we are forecasting around flat, yes, between $6 and $7 million in revenue.

And having said that, we've got in business, because otherwise we would have had to overcome a 15 to 16% reduction just from a pure economic point of view.

We still believe in a couple of our active outsourcing projects that I mentioned in the call, our opportunities on the roller side of the business and if you look at the global market for rollers, it is about twice what the precision ball market is. And, you know it is about 1.8 billion market

And we, in the management team, are really focused on the roller piece and growing it. WE think the growth is there and the outsourcing opportunities long term are there.

I don't have anything specific to report in terms - as I mentioned, I mean, there is no way to know how some of these will play out, but the same factors relative to outsourcing in many instances on the ball side of our business and other component fields and retainers. The same factors that are driving our customers to look at outsourcings involve - are there relative to rollers.

What would be the percentage of that $1.8 billion number of captive retention of that roller business?

99% captive.

So that's really in its infancy then basically?

That really is. And I think it is important for you to understand that there are some characteristics relative to rollers and in our customers finished bearing products that make it a little bit more difficult from the outsourcing point of view and that is, I mentioned this before, but the roller business customers have unique designs rather than somewhat standard designs. I am not saying that in the ball instance they don't have specific specifications that are unique for each of our customers, they do, but it is a little bit more of a standardized product involved than it is in rollers. And so making a standardized product in rollers will never be the case. But we think from a competency point of view, we are pretty good, particularly at the cylindrical roller level. And there are other rollers that based on our core competency that we think we can capture.

Would that require, if you would aggressively begin to capture some of that business, would that require some significant reordering of your cellular layouts or machine tools or finishing equipment or anything going to a similar roller versus the ball bearings?

Yes. I mean, I think the answer is we would expect that the investment associated with growing our roller business would be slightly higher than it has been involved, as we have mentioned before, you know, we manufacture and design our own ball manufacturing equipment on the roller side of the equation. That's not the case. And so we would expect the investment to be slightly higher per dollar of revenue generated and earnings generated on the roller end of the equation. But we have also mentioned that we, you know, we see rollers as a real profitable opportunity in terms of the margin that you capture because of the specialty nature of the characteristics of the design itself. RAPPIN; Okay, with the kind divestiture of the Chinese, the Jangsu subsidiary that was looking at, and correct me if I am wrong, come more of a commodity as far as grade wise in the ball area and a little lower end quality. Is that an area that will now be targeted by NN Ball or just an area that you guys are just going to stay out of and stay more towards the higher grade?

Well, as the quality requirements, particularly in China improve, and the quality demand of the global bearing companies that are already over there improve relative to the Chinese domestic market, as well as kind of what is going on in other Asian countries, there is no question in our minds that we need to have a manufacturing presence in Asia. I would not say necessarily that it is absolutely 100% China potentially, but we are actively and part of our ongoing strategy looking at how best to enter the Asian market, moving forward, and globally, in the Americas and in Europe we have particular strength and obviously from a manufacturing presence point of view in Asia, we do not today. So, it is something that you can expect.

I would move it in closer than that.

Okay. Is it dependent upon what happens when the put options with FAG and your partners?

Not necessarily. I mean, it is not dependent upon that at all. It is dependent certainly on, you know, some of our global customer's needs and what they would like us to do. And where we have particular share strength with some of our global customers.

Do you have an aversion between a Greenfield plant versus something that you buy as a kind of a growing concern?

it is a good question, and I think that we are definitely focused more on a Greenfield approach, where we can own 100% and control 100% of the operation moving forward.

Okay, you mentioned, correct me if I am wrong, looking at accelerating kind of the M&A activity and some of the captive bearing component areas, what are you seeing pricing wise on deals?

I think that, you know, when you are dealing with a customer situation, pricing in the normal sense, you have to go in and create a new business model, in some instances our customers have been transferring these components at cost to their using operations. In some instances there hasn't been a stand alone operation in terms of meaningful earnings and or balance sheet reporting from a financial statement perspective.

I will say that the motivation to outsource and improve their return on capital employed, numbers, in a sense is more driven by what their asset base is then multiples on an M&A and a standard M&A situation. And given the fact that they focus on removing the investment from their balance sheet as a real critical criteria, in most instances that means from a valuation point of view, reasonable valuation, because they view it that we can do an excellent job for them moving forward that creates immediate value, immediate earnings improvements, immediate return on capital employment improvement and so that they are not so much focused on, well, is the valuation right as they are making sure that the don't necessarily have to take a write off on the effort side of the equation, on the physical plant side of the equation.

Okay, all right. Just one final, what are your thoughts going forward budget wise on Cap X for 02?

6.8 million is the plan, it would be around $7 million, I would guess.

Okay, good enough. Best of luck, guys.

Thank you, very much.

Our next question comes from Mark Par of McDonald Investments.

Yes, I just have a quick follow-up, Rock, I was wondering if you could just talk about, you know, what the assumptions are and the difference in the assumptions between 12 and 14 cents for the second quarter?

Yes, I am going to let Dave cover that.

Mark, probably the biggest difference is in uncertainty in economics, uncertainty in the ball and roller volume impact. It is still not checking out quite where they are going to be down three or four percent or seven or eight percent. It looks like between six and seven. But just unsure.

You know, we internally are obviously targeting the 41 cents, but there is some cautionary spread in there, I guess.

All right. That's all I needed, thanks.

Okay.

Gentlemen, at this time it appears we have no further questions.

Thank you, again, for joining the conference call and as I have mentioned, at NN we look forward to a continuing improvement in not only our revenue and earnings but the general global economic conditions as well. Thanks again for joining the call. Bye-bye.