NN Inc (NNBR) 2003 Q4 法說會逐字稿

Good morning and welcome to the NN, Inc. conference call. [Operator Instructions] As a reminder the conference is being recorded today, Thursday, February 26 of 2004. It also contains time-sensitive information and is intended for replay through March 4 of 2004 only.

I would now like to turn the conference over to Ms. Susan Garland with Financial Relations Board. Please go ahead, ma'am.

Thank you. Good morning, welcome to NN, Inc.'s fourth quarter and full-year 2003 conference call.

If anyone needs a copy of this morning's press release please call my office at (212)445-8473 and we will send you a copy.

Before we begin we ask that you take note of the cautionary language regarding forward-looking statements contained in the press release. The same language applies to comments made on today's conference call and live webcast, available at www.full disclosure.com.

With us is Rock Baty, Chairman and Chief Executive Officer, and members of NN's management team. First management will give an update and overview of the quarter and full-year results and afterwards we'll open the lines for questions.

Now I'd like to turn the call over to Rock. Rock, would you like the begin?

Thank you Susan, hello everyone and good morning and thank you for joining the call.

With me this morning I do have Dave Dyckman our CFO, Steve Fray our Corporate Controller and Will Kelly our Chief Administrative Officer. Today, Dave and I are going to cover the call and we would like to cover the following topics, the fourth quarter results, the full-year fiscal 2003 results, and then I'm going to conclude the call by providing a business overview of 2003 and our guidance for 2004.

With that, I'll turn the call over to Dave.

Thanks, Rock

In 2003, fourth quarter revenues were up 36.8% versus 2002's fourth quarter and up 31.4% for the full-year versus 2002. 2003's results include the contributions of our recently acquired operation in Veenendaal, which accounted for approximately two-thirds of the revenue improvement. And favorable currency translation, which provided approximately 30% of the increase. Excluding the impact of these two items, fourth quarter revenues in '03 were essentially flat versus the same period in 2002. And for the full year, 2003 revenues were up 3%, versus 2002.

Shifting focus to profitability, first under current guidance, gross profit, excluding the impact of depreciation, is considered a non-GAAP measure. However, in order to be consistent with how we have always presented them, the gross profit margins I'm about to discuss exclude the impact of depreciation. With this in mind, gross profit margins for the fourth quarter of 2003 were 21.1% versus 24.6% for the fourth quarter of 2002. We're down 3 1/2 percentage points. For the year, gross profit margins were 22.8% as compared to 25.2% in 2002, we're down 2.4 percentage points.

While several events impacted the fourth quarter comparison differently than the year, inventory changes, for example, roughly two-thirds of the reduction for the quarter and the year is explained by the same two items that we've previously discussed. First, the impact of Veenendaal, and second, modest material inflation in Europe, and the U.S. in the second half of the year. Modest as compared to what we anticipate experiencing in the second through fourth quarters of 2004. Which Rock will address later. For the fourth quarter, the remaining variance results principally from inventory changes, reductions versus builds, and for the year, a large portion of the remaining variance is associated with incremental expenses associated with new business ramp-up in the second and third quarter.

Looking at gross profit margins going forward, we are contractually able to pass through the majority of the 2003 material inflation during 2004. We are also forecasting significant cost reductions associated with the company's recently launched lean initiative, as well the non-repeating 2003 expenses I just mentioned. And finally, we anticipate modest leverage associated with incremental volume. Accordingly, excluding the impact of the current worldwide surge in steel prices, our forecast gross profit margin for 2004 would have been 24.2%. Which would have been an improvement of 1.4 percentage points versus 2003's gross profit margin. Unfortunately, we anticipate the recent surge in steel pricing will impact the improvement we had forecast delivering. Although we have the ability to pass along these increases, the bulk of the passthroughpass-through is contractually delayed until 2005, including these material increases reduces gross margins by approximately one percentage point. Accordingly, 2004 consolidated gross profit margins are forecast to be 23.2%, which is still roughly a half percentage point above the '03 levels.

Shifting to earnings per share, as mentioned in the press release, EPS for the 2003 fourth quarter of 16 cents compares favorably with the prior years' fourth quarter. EPS for the year of 62 cents also compares favorably with last year's 49 cents. Included in 2003, and 2002, are nonoperating costs which impact results by 14 and 5 cents respectively. Adjusting for these costs, 2003's adjusted EPS of 76 cents was 22 cents above 2002's adjusted EPS of 54 cents. Bridging this improvement, we had the negative impact of the material inflation I mentioned, minus 6 cents, costs incurred in the second quarter and third quarter associated with the new account ramp-up, minus 3 cents, and restatement charges in the fourth quarter of a penny. These more than offset by the benefit of the accretion from the Euroball buyout in Veenendaal, adding 15 cents, volume, currency and tax collectively adding for 12 cents, and inventory build and all other netting to 5 cents benefit. Adding to the fourth quarter 2003 EPS -- I'm sorry, year of 76 cents.

Now, changing focus to debt reduction. Debt peaked during the year at approximately 89 million in May, in connection with the Veenendaal and Euroball transactions, and ended out the year at approximately 84 million. While we paid down roughly 14 million, which includes 5 million from the net proceeds received from issuance of stock, during the secondary, there were several unique items which contributed to increasing the year-end debt level. First exchange rate movement by year-end, increased the dollar value of our euro denominated debt by approximately 4 million. Back in our Slovakian acquisition acquired approximately 3 million, which includes initial acquisition as well as post-closing capital. And third, initial working capital requirements of Veenendaal required approximately 2 million. With regard to interest rates, at current Libor and Euro-LIBOR rates, our weighted average rate is 3.25%. As we mentioned in the press release, we believe it is prudent to manage our floating interest rate exposure, and take advantage of historically low longer term rates, and though we understand this will increase interest expense in the short term, we believe it is sound, longer term rate management.

With that, I'd like to turn the call back over to Rock.

Thank you, Dave.

I would like to continue today's call, if I could, by first looking back to 2003, and then conclude with our outlook for 2004. In terms of a 2003 overview, with the exception of the disappointing closure of our NN Arte venture in Mexico, 2003 was a very good year at NN. We completed, as Dave mentioned, three major acquisitions, two of which were immediately accretive to our earnings. Veenendaal and the acquisition of SKF 23% ownership stake in Euroball. And the third acquisition, KLF's ball facility, in Slovakia, which will essentially be a start-up in 2004.

All three of these transactions were consistent with the three legs of our stated strategy. First to focus on captive outsourcing growth from our customers, second, expansion of our product bearing product offering, and third, further geographic expansion of our manufacturing base. These transactions along with solid contributions from our existing operations resulted in excellent profitability improvement during the year. Our adjusted net income of 12.5 million was up 47% from the adjusted net of 8.5 million in 2002, and as Dave mentioned, adjusted EPS of 76 cents a share was up 41% versus the 54 cents a share for 2002.

As a confirmation of our board and management team and employees' ability to execute the strategy I just mentioned, and more importantly, and to successfully integrate these acquired businesses, it's really important to recognize and consider that 70% of NN's consolidated revenues and 60% of our net income for 2003 came from businesses that weren't part of the company just four years ago. We believe our continuing focus on the execution of the strategy has delivered historically, and will continue to deliver in the future, excellent long-term value for our customers, employees and shareholders. I'd like to switch now and talk briefly about our outlook for 2004.

As we mentioned, in the release, we currently estimate revenues of 295 million for 2004, which includes a full-year revenue contribution from Veenendaal, a continuing strong euro, economic assumptions of essentially flat automotive build rates in both Europe and North America, and good growth in the industrial segments of our business of around 4%. In addition, we have forecasted new market share in business development programs totaling approximately $9 million for 2004. As most of you have heard by now, I'm sure, steel prices are rising rapidly driven by higher overall global demand, and enormous purchases of key steelmaking materials, scrap in particular, from China. For growing demand has sent scrap and the resulting finished steel prices significantly higher. Our 2004 guidance, EPS guidance, includes the negative impact of these higher steel prices. As we also mentioned in the release, rising prices will impact our earnings for 2004, we currently estimate the increase incurred by our Delta Rubber, U.S. Ball and Roller, and NN Europe operations will impact after-tax earnings by $2.1 million or 12 cents a share for 2004. Based upon current contracts with our customers, as Dave mentioned, we believe approximately 80% of this 12 cents a share impact will ultimately be recovered, but not until 2005.

Having said this, the current competitive environment faced by our customers is very difficult, especially in the automotive markets. These increases are significant and recent. In most cases, so recent that we have not yet had the opportunity to meet with our customers to discuss the impact on both our business and theirs. However, it can be stated that everyone in the steel-consuming global supply chain faces the same issue and we believe that the magnitude of these increases will necessitate that they be passed along in the form of either scrap surcharges or higher fixed prices, depending on the ultimate level of pricing that evolves over the next several years. Approximately 70% of our steel purchases for 2004, specifically Europe, will be impacted by quarterly adjustments in the form of scrap surcharges that change with market conditions. The majority of our U.S. prices have already been fixed at higher unit costs, and reflect not only the scrap situation, but the weak dollar as well. While we mentioned this issue in our release, it really bears repeating here, we have made certain assumptions regarding these surcharges and base price levels in our guidance. Should the prices and surcharges vary significantly from our assumptions our guidance for full year EPS of 76 cents a share would be of -- of course be impacted. These increases as Dave mentioned will be staged in beginning primarily in the second quarter of '04 and carry on through the balance of the year. About 33% have been fixed via new unit prices and the remaining 60% are subject to the scrap surcharges which can change quarterly. I would like to point out that in the absence of this issue, our earnings estimates for the year would have been approximately 88 cents a share for 2004, and an increase of about 17% over 2003 adjusted levels. Although our EPS guidance is flat, actual adjusted net income, even considering the negative impact of the steel increases, is improving 7%. We do anticipate an increase of approximately 7% in fully diluted shares outstanding for 2004.

As Dave mentioned we are forecasting solid cost and resulting margin improvements in our operations for 2004. We believe our Level 3 program, lean manufacturing, Six Sigma and productive maintenance will begin delivering excellent improvements in product quality and cost in the upcoming year. We are extremely enthusiastic regarding the long-term prospects of the continuing implementation of the program. Our first quarter guidance of 77 million in revenue and EPS of 19 to 21 cents a share reflects good demand in all of our facilities, and high capacity utilization rates. It also reflects the majority of the previously mentioned steel price increases in terms of beginning the impact beyond the first quarter on into the second and subsequent quarters.

Finally, I'd like to conclude with comments regarding our plans for 2004. From an overall capital and investment perspective, we intend to fund 13 to 15 million in capital expenditures, continue our dividend at the current rate of 32 cents a share and target further debt reduction of 10 to 12 million for 2004. We intend to proactively manage, with our customers, the impact of the steel price increase. We will fully comply with the new requirements of Sarbanes-Oxley during 2004. That compliance comes at a steep cost for a company the size of NN in terms of out of pocket costs as well as management time and resources. Our public ownership cost for 2004, reflected in the numbers, are 2.3 million, of which Sarbanes-Oxley costs account for approximately one-third of the total. From an operational perspective, we'll continue the integration of Veenendaal. We are planning and executing the start-up of two ball facilities in eastern Europe, Slovakia, by the second quarter of '04, and China, by the late, late in the fourth quarter of '04 and on into the first quarter of '05. As I have mentioned, we will continue a focused management and organizational resources on the continuing implementation of our company-wide level 3 program.

Last, but certainly not least, during 2004 we intend to focus on meeting our global customers' needs and concurrently pursuing the execution of our long-term business strategy, which I previously mentioned.

With that, I'd like to open up the call to questions.

Thank you, sir. At this time, ladies and gentlemen, we will open the question-and-answer session. [Operator Instructions] One moment, please. Our first question comes from Larry Baker with Legg Mason. Please go ahead with your question.

Rock, David, good morning.

Good morning.

Just a couple questions. First, the -- just to make sure I got the share count right, you're talking about 17.8 million for '04?

Yeah, we used 17.5.

Okay. I couldn't do the math that quickly. And then can you talk about your -- the Level 3 programs, the cost versus benefit for '04, your expectation there?

Larry, we anticipate Level 3 impacting expense, hitting us for a little over a million. And we're anticipating, although this will be more back-end loaded as the program kicks off, but -- Rock I think in the neighborhood of 3, on the benefit side. I don't think all of that will roll into necessarily '04, but a good majority of it will.

Okay. So more of a timing issue in '04.

Right.

But it should be positive?

Right. Oh, yes.

Okay. And then just another housekeeping question, tax rate in '04, still the 36% range?

Yeah, 36.5 good [inaudible] to use.

Okay. And then, Rock, can you discuss the strategy of going back to China, how you're going to do that? I know you got out of there a couple years ago.

Yeah, Larry, I'd be glad to. We learned some valuable lessons with respect to China in our first venture. And it was a joint venture, a three-way joint venture. And I mean, I guess the lessons we learned were that most of the heavy lifting, from our perspective, was done by us in that venture, and the risk and rewards for our shareholders in the amount of time we were putting in just wasn't there. And so our new approach, we have hired and named a managing director of NN Asia, Tom McKown with excellent experience, He spent about 13 years in Asia over the last 15, and he has done precisely what we want to do. And that is start a Greenfield operation in '04 on two different occasions. Wholly-owned operations, as you probably know, Larry, are happening in China, and have been over the last three to five years. We believe there's minimal risk associated with that. And from the perspective of 100% ownership, 100% control, and 100% of the management in the venture, we really believe that we've got a solid strategy in place. We have located and are in the final stages of negotiation, an individual site, a site that we have the ability to build and/or lease and own the physical structure, and it's a sight that's within a 100-mile radius of 85% of our existing customers.

Okay. And then just on the Veenendaal, can you talk about progress made there in terms of margin improvement, expectations there for a continued margin improvement in '04?

Sure. Larry, we anticipate, although the ramp-up we see more potential post '04, we are forecasting currently just under a point and a half of margin improvement, pretax. In other words, gross profit margin improvement, we anticipate being up about 1.3 points. And a lot of that's related to the material line, we've talked about that in the past. We envision some SG&A benefit, although that's always a touchy issue, as you move forward. So the majority of the benefit we see at the GP line.

Okay. I'll get back in queue. Thank you.

Thank you. Our next question comes from Mark Par with McDonald Investments. Please go ahead with your question.

Good morning, guys.

Hi, Mark.

Hey, just a little more housekeeping. Do you have the revenue and profit breakdown for the segments that you can share with us?

For '03?

Yes, for the fourth quarter, for '03?

Yeah. I guess we're looking at each other. Technically we're really not supposed to provide that to you in this call, Mark. It will be in the K obviously.

And when will the K be filed?

Mid-March.

March 15th?

Right.

Okay. All right. At this point, based on what you know about Slovakia, and China, I realize that there are a lot of balls still up in the air, would you anticipate either one or both of those to have a positive impact to earnings in '05?

Yes, Slovakia definitely will have a positive impact in earnings in '05. And China, our current plans call for production to begin in late in the first quarter of '04 -- excuse me, '05. And operating the plant, at least for the first three to five months, at a breakeven level, Mark, so potentially a contribution by the fourth quarter of '05 for China.

Okay, what's the anticipated capital allocation for the Chinese growth opportunity?

The first -- what we're calling Phase I and Phase II, which would incrementally add about 9 million of revenue -- 9 to 10 million of revenue,

Right.

Would require about 5 million in capital. And that 5 million would be spread over '04 and '05.

Okay.

Approximately three and two, Mark, although we're not absolutely certain yet.

Okay, all right just a -- one other thing. The a -- related to the balance sheet restructuring that you've alluded to, is there any more color that you can give us as far as potential timing? I mean, is the 4-cent hit you're talking about just a result of higher interest costs, or are there -- you know, you're looking at any prepayment types of issues, or expensing of unamortized fees associated with the previous facilities, or can you talk a little bit about the composition of that 4 cents?

Yeah. It's inclusive of potential unamortized loan costs also, Mark. I would say it's about 75% [indiscernible] rate and 25% unamortized costs.

Okay. And, you know, anticipated timing of the transaction, is what, second quarter? First quarter?

Mark, we really have to stay away from commenting on that.

Okay. Just asking.

Unfortunately -- unfortunately, we do.

You can say no, it's okay. [LAUGHTER]

[LAUGHTER]

[ LAUGHTER ]

All right, well, I'm a little disappointed that the earnings wouldn't be coming more quickly, but it certainly seems like you guys are doing the right thing, you know, continuing to build the business and basically you're definitely doing the blocking and tackling that needs to be done in this environment. So, any way, just one last question: Could you talk a little bit about your, you know, the past-through clauses in your contracts? Are there any specific breakpoints or could you talk a little bit about the assumptions that you've made as far as, you know, what's going to happen to costs, you know, on these quarterly adjustments that you're going to be -- going to have imposed upon you?

Mark, there really is no feeling on any of the contractual material passthroughpass-through situations. Having said that, as I mentioned, the impact of this is so recent, I mean, we just literally have gotten our arms around what we believe is the impact within the last 10 days, 8 to 10 days. And we haven't been in front of our customers. Obviously, there are a lot of steel and finished bearings, not beyond the components we supply to our customers. And they are facing the same issue we are, only on a much larger scale. And as I mentioned, the competitiveness of their end markets is a real concern to us, you know, but -- I mean, I think, in the absence of talking to them, which we have every intention of doing over the next two to three weeks, four weeks, that the magnitude is such that it's going to have to be passed along in the entire supply chain. I don't know, you follow the steel companies and you probably have a better line on that issue than we do.

Well, just, you know, just curious about, you know, what you're experiencing. I realize a lot of this has been relatively recent, and a lot of the steel you buy is, you know, much more specialized and unique than your standard commodity carbon grades of steel.

Yes.

But we've been getting recent trade press about scrap surcharges showing up in Europe, which is relatively recent. And then, you know, some of the special alloy companies starting to put iron-related surcharges on, just in the last couple of weeks, I guess, last month or so. So, yeah, I certainly agree with you that it does appear to be a relatively recent phenomenon. I don't know what I can tell you, I can't add anything to the outlook, though, that's for sure. It's really a crazy market out there right now. Anyway, good luck with the growth initiatives, and you know; hopefully we can, you can see '04 emerging a little more -- get a little more to the bottom line based on all the good news you've got on the top line.

Thanks, Mark.

Thanks, Mark.

Thank you. Our next question comes from Boyd Kostin with A.G. Edwards Asset Management. Please go ahead with your question.

Thank you. Could you remind us what percent of the total sales is U.S. automotive and international automotive?

We have -- Boyd, this is Dave. We have traditionally been around 50% automotive, and as more of our ball sales are in Europe, we tend to have about a 2/3rd, 1/3rd split on that, on exposure to European auto versus North American auto.

Uhm-hmm. And your industrial businesses or end markets, can you say which ones are still weak, which ones might be showing some signs of recovery, give us a little color on some of those?

Honestly, Boyd, it's difficult to say because it's a flow-through even from our customers. So I don't know that we have a clear line of sight on that, that would be any more clear than you do.

Uhm-hmm. On your CapEx number, 13--15, I might have missed this. Can you break that down a little bit by projects?

I think we can say that eastern Europe and China will consume about five of that this year we anticipate, and then the remainder we would bucket into, not only maintenance, but some nice cost reduction programs associated with lean, and other cost improvements, for example, at Veenendaal. Traditionally maintenance CapEx is in the neighborhood of 7 1/2 to 8 million. So it leaves about a million, million and a half for incremental programs project.

Okay, thank you. Thank you.

Thank you. Our next question comes from Brian [inaudible] with Morgan MC Capital Management.

Good morning, Rock, good morning, guys.

Good morning.

Can you give us kind of a capacity utilization across maybe NN Ball and Roller here in the U.S., IMC Delta Rubber, and then Euro Ball, where you are and maybe how many shifts you guys are running?

We run all of our facilities three shifts, and principally five days a week.

Okay.

There are a few exceptions to that, but by and large, three shifts, five days a week. And our capacity utilization is high, it's running in the 85% to 90% range right now.

Okay, pretty uniform across all divisions?

Yeah, yeah, I mean the demand in Europe, the improvements on the industrial side that we were just talking about, have been pretty consistent in the U.S. as well. It's pretty much in Europe and North America as well.

Could you give us a little historical guidance relative to some of the contractual passthroughspass-through? On the front end, there's a delay. On the back side, if we see some material deflation, say two, three, years into the cycle, how quickly do the customers come back to recover the collapse in material prices?

It's the same delay.

Okay. So it's fairly uniform?

Yes.

Okay. Anything going on as far as new products, applications with IMC?

As you know about two-thirds of their business is non-bearing component. We envision in the neighborhood of about 7% of -- 7% of the growth from them this year being in new tool or transfer tool-related product programs.

Okay. Has there been any thought to expanding either, you know, your spherical tolerance in balls or changing -- expanding into ball size differences as we've gone out here into '04? You guys have always talked about adding some incremental sales to the roller side. Any initiatives on a product size or specification-wise?

On the sizing question, we -- with the exception of miniatures, we cover virtually every size supplied in the world. And I say with the exception of miniatures, you know, kind of below 5/32 of an inch we don't supply.

Okay

On the roller side, as we mentioned, kind of mentioned on the three-legged part of our strategy, we're continuing to look at further expansion of roller product offering beyond our current cylindrical and tapered offering. And that's active, and it will always be active. We've mentioned the potential of needles and sphericals and other forms on the roller side.

Okay. Has there been any ramp-up in demand and market for rollers vis-a-visvis-à-vis versus what you're seeing in balls? Are you talking about more demand on the industrial side. Is that -- because I would guess, and correct me if I'm wrong, a roller is a little more of a heavy load-bearing, you know, bearing, like heavy-duty agricultural equipment and that, do you have any more end market demand for that?

That's a good question, the reality, it depends on what form of roll you're talking about. The tapered roller side does tend to focus or serve heavy vehicle end markets. On our tapered roller side of the business, it serves virtually all industrial applications. So you know, on the total Veenendaal revenue, it's driven by what's happening on automotive and heavy truck, and then on the cylindrical, it's driven by industrial.

Okay. What are you guys seeing relative both domestically and Europe relative to wage and salary pressure, employee retention, health care benefits? And then have you guys had any -- there's been a lot of talk in the trucking industry about passing on with these hours of service constraints. Any freight surcharges? Because you guys obviously ship a very heavy material. Do you go more toward rail versus trucking? Kind of give me a flavor for that.

We have as of yet not experienced any freight surcharges, to my knowledge. And the question on wages and wage increases, we do have contract negotiations that -- with our employees in Germany that I think will begin in the third quarter of this year. The bar in terms of what kind of what's been set in national contracts has been very, very moderate increases.

A couple of percent, 1%?

One to 2% and that's probably the guide for what we will experience.

Everyone's getting hammered on health care, what kind of inflation pressure are you seeing there?

We actually, particularly in the U.S., have been able to see no inflation for 2004. And part of that, unfortunately, was going to our employees, and asking for larger contributions. We, in fact, did experience some inflation, but it was offset by higher contributions from our employees.

You guys have an insurance carrier there or are you self-insured.

We're essentially self-insured, but we do have an administrator.

Okay. Has there been am I progress, we talked in the past about kind of the rolling out of kind of a BIMS electronic data interchange for Europe like you do have in the U.S. Is that something still evolving, is it something that's -- you know, where is that in Europe?

That's something that actually there are some systems in place, just given the link that the component operation had with the parent, it's more migration to a system that's more compatible with what we do in the U.S., and, yes, that work is still underway. I can't tell you the exact timing and completion, but I understood that we had hoped to have it done towards the end of this year. But to be honest with you, I think that the -- it will help more seamlessly information flow between the operating units. I already think we have a lot of the benefit directly with the customer.

Okay. And then just could you kind of give us a sense of the type of balls you guys are going to be rolling out, fabricating in China? Is that a lower end commodity, any special sizes, any special applications?

It's really a good question, and we intend to start both our Slovakian operation in eastern Europe, as well as the operation in China, not necessarily on the low end of -- I mean, if you want to call it commodity, in all of our product offerings, we participate in the high end of the precision ball market. Having said that, we do intend to focus both in Slovakia and China on the automotive applications where the pressure for price reductions is the greatest, and the competitiveness is the greatest. And so CV applications and hub wheel bearing applications will be the first applications that we produce, first product that we produce in those two facilities.

Do you guys relative from a strategic level, do you have any issues, now obviously you're going with the Greenfield plan in China, do you have any issues in technology piracy? It seems a lot of the manufacturers I talk to, you do a deal with the Chinese, you shake hands and you got to count your fingers. Do you have a sense, is that an issue for you guys?

Frankly, I mean, what you're mentioning is precisely why we want 100% ownership and 100% control from a management perspective in the venture in China. We think we have the ability to protect that much better. We have an American manager as managing director of NN Asia that's very familiar with ways to proactively protect that. And he's on the ground and he's there permanently. This isn't the kind of an individual that's going to be here in Johnson City and go to China every once every quarter.

Okay.

He's there, located in the Shanghai area, lives in the Shanghai area.

Does the Greenfield location in China, obviously, hiring Chinese labor, does that get you by the Chinese content issues of being able to compete on some of these contracts?

Yes.

Okay. And then just could you give us a sense what type of -- you guys use the word "modest" material inflation. Could you put a number on that, what would you say across the board in steel, you guys are up this year, say from January 1 to December 31, '03? What have you seen?

Versus '02,

Yeah

We're in the neighborhood, -- depending in the U.S. up 4%.

Up 4%?

Yes, in '03 versus '02.

Okay.

Now, because we, in the U.S., we roll on a six-month basis, on the quarterly comparisons can get skewed versus the average for the year. For example, the back half the year was up 9% versus the back half of '02. And but it averages out to four. And obviously, that's modest, we think, compared to what is happening now, which -- which right now we think could be in the neighborhood of somewhere between eight to 10%.

Okay. All right. Good enough. Hang in there, you guys are doing a good job, [inaudible].

Thank you very much.

All right, thanks.

Thank you. Ladies and gentlemen, if there are any additional questions please press the star followed by the 1 at this time. [Operator Instructions]

Our next question is from Greg Eason with SafeCo Asset Management. Please go ahead with your question.

Thanks, good morning.

Good Morning

Good Morning, Greg.

I think this question was asked earlier, but I wasn't clear on the answer, I wanted to make sure I got this right. On these cost pass-throughs, there's a lag until 2005, to recover most of them, most of what you're going to recover.

Yes.

When prices of those materials start going down, as inevitably they will someday, do you maintain those passthroughspass-throughs after the prices have already gone down? Is there a lag on the back end?

Yes.

So you'll have a revenue benefit, unlike the way currency works?

Yes.

Even after prices of the material go down?

There's a 12 month -- it depends at what point in the year they hit, but we, in the contractual language, adjust as of January 1, unit prices, on the basis of what happened the previous 12 months.

Uhm-hmm. Okay. Second question: Do you see yourself in the next year to 18 months looking to take on any other pieces of business? Are you looking -- actively looking to take on any other pieces of business from other manufacturers that basically outsourcing their ball and roller operation, like you've done in the past?

That's a really good question, and you know, I tried to speak to it a little bit in terms of kind of our focus for 2004. We're obviously always going to continue to look at outsourcing opportunities. Having said that, at least for the next 12 months, given our stated objectives of getting these two ball plants started up in Slovakia, as well as China, and our debt reduction goals, I think it's more probable that it would occur in an 18 month period of time, and the tail end of that 18 months versus the next 12. Of any consequence. I mean, there could be a small transaction here or there, but no major.

Yeah. So unless someone makes you an offer you can't refuse.

Yeah.

Okay. I get you. Thanks a lot.

You bet.

Thank you. Our next question is a follow-up from Mr. [indiscernible] Please go ahead.

A question for you Rock. You're fairly diverse spread across the world, are there any cultural, philosophical differences? We've talked about the social welfare in Europe over the years, and relative to the application of Six Sigma, lean manufacture, and Slovakia or China versus what you might get out of Holland or Germany or the U.S.?

It's really a good question, and we're -- the first wave of this lean sigma program is about 40% complete in terms of getting to all nine of our existing manufacturing plants. And I would tell you that the employees and the individuals that we've picked organizationally to go through the process have embraced it almost equally, with equal zeal is the best way to put it, across the cultural divide. One of our plants that probably has embraced and has in place more elements of lean manufacturing and Six Sigma is Pinerolo, Italy. So, no, we really frankly were concerned about it when we first started the project, it's a great question, but there is tremendous enthusiasm in the company right now regarding the program.

Good. Good. Thanks, guys.

Yes.

Thank you. Gentlemen, there are no further questions at this time. Please continue.

Again, I'd like to thank each of you for participating in today's call. Thank you.

Ladies and gentlemen, this concludes the NN, Inc. fourth quarter conference call. If you would like to listen to a replay of today's conference call please dial 1(800)405-2236, followed by the pass code 571079. Once again, if you would like to listen to a replay of today's conference call, please daildial 1(800)405-2236, followed by the pass code 571079. Thank you, and have a good day.