NN Inc (NNBR) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the NN Inc. first quarter results conference call. [Operator Instructions] I would now like to turn the conference over to Susan Garland with Financial Relations Board. Please go ahead, ma’am.

Thank you. Good morning. Welcome to NN Inc.’s 2006 first quarter conference call. If anyone needs a copy of this morning’s press release, please call my office at 212-827-3746, 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 on www.earnings.com.

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 an overview of quarter, and afterwards, we’ll open the line up for questions. Now I’d like to turn the call over to Rock. Rock, please begin.

Thank you, Susan. Good morning, everybody, and thanks for joining the call this morning. I have with me in Johnson City today Jim Dorton, our CFO and VP of Business Development, Will Kelly, our Chief Administrative Officer, and Tom [Burwell], our Corporate Controller.

Today, what we’d like to do is have Jim cover an analysis and commentary on the first quarter results through March 31st, 2006. And I will conclude the call with comments regarding the outlook for the balance of the year, as well as make some general comments regarding our growth strategy. I’d like to turn the call over to Jim.

Thanks, Rock. The first quarter was fairly strong for the company across our products lines. Sales in dollar terms were 0.8% less than last year, but adjusting for the fluctuation in the euro, sales would have increased by $4.4 million, or 5.1%.

The increase was due in part to price increases related to the pass-through of material costs from the prior year, and partly due to an increase in the sales of balls, cylindrical rollers, and plastic parts. The industrial side of the business was very strong, except for small balls, during the quarter.

Looking at results by business unit, U.S. Ball and Roller had a very strong quarter, with sales up significantly over the first quarter of last year. Although part of the increase was related to the transfer of former consignment inventory to a major customer, and part was due to sales to [INA], which will be decreasing through the remainder of the year.

Our plastic injection molding division continued its strong recovery over last year, with 7% sales growth, and a doubling of its net profit margin to about 6%.

Results in Europe were solid but mixed, with strong ball sales partially offset by lower tapered roller and cage sales.

Sales increased at both of our new facilities in Slovakia and China versus last year, although production is shifting more slowly than we had planned due to our customers’ needs.

Overall, net income increased by $1.2 million, or 31%. And EPS increased by $0.07 per share, up 30%, to $0.30 per share. The decrease in the value of the euro negatively impacted net income by $400,000, or about $0.03 per share.

As mentioned in the press release, we had a net after-tax gain from the disposal of assets of $784,000, or about $0.045 per share, which is the net of a gain on the sell of excess land and the write-off of excess production equipment at our Italian operation.

Gross margins improved by 1.3%, primarily due to material-related price increases and productivity improvements. We did experience significant inflation in energy costs versus last year, but savings from our Level 3 program offset the majority of this increase.

SG&A expense increased slightly compared to last year due to stock option compensation expense.

Although debt was down $13 million compared with the first quarter of last year, interest expense was flat because of the rise in short-term interest rates since that time.

Our average tax rate was 35.3% in the first quarter. This is down from the 36.5% in the fourth quarter due to a low capital gains rate on the land sale and higher earnings in Ireland, where we have a low 10% marginal tax rate. In the second quarter, the rate should be closer to our average of 36%.

Taking a look at the balance sheet, accounts receivable increased $12.6 million versus the year-end balance. This was primarily due to a seasonal timing of receipts from our major customers in Europe, similar to what happened in the first quarter of last year. We expect the AR balance to decrease in the second quarter.

Inventories were down $1.3 million, which was in line with our Level 3 inventory reduction goals.

We spent $1.9 million on capital expenditures during the quarter. Despite this relatively low spending level, our cap X outlook for the year is currently unchanged, at approximately $16 million.

Debt was reduced by $3.2 million during the quarter. And although cash flow from operations was low due to the increase in working capital, we used the proceeds of the Italian land sale to repay our European term debt in full. So at this point, we have repaid 100% of the borrowing for the Euro Ball and [Inaudible] Ball acquisitions.

Our goal for debt reduction in 2006 is $10 million, and that’s assuming that we spend $10 million on the stock repurchase program.

So those are the financial highlights, and I will now turn the call back over to Rock.

Thanks, Jim. I’d like to close this call today by commenting briefly on our 2006 outlook as well as our strategic growth initiatives. First, let me comment on the revenue outlook. As Jim mentioned, our first quarter year-over-year comparison on revenues was negatively impacted by the euro/dollar exchange rate difference in 2006 versus ’05.

Revenue for the first quarter of $86 million was in line with our original business plan. We still expect relatively flat full-year revenue of approximately $325 million for the full-year based principally on two factors. First, Jim touched on it, but the previously announced $12 million business loss at [INA], which will impact us about $7 million this year, did not impact our first quarter revenue. We anticipate the impact in the final three quarters of 2006, as they begin to in-source this business.

Second, lackluster automotive demand in both Europe and North America is forecasted to continue for the remainder of the year. However, the reductions in automotive are being offset by good general industrial demand in both Europe and North America.

As was the case in the fourth quarter of ’05, the net results of these two factors is that our capacity utilization rates remained very strong in both North American and European manufacturing facilities.

With respect to our earnings outlook for the remainder of 2006, we reaffirmed our guidance for full-year earnings in the range of $0.86 to $0.92 a share.

As Jim pointed out in his comments, we had an excellent first quarter, with margin improvement achieved on relatively flat revenue. Given the excellent results of the first quarter, the logical question is why we think the full-year guidance will remain unchanged. First, I mentioned that the revenue forecast for the remaining three quarters will be slightly down from the first quarter on the basis of the share loss at [INA]. In addition, our forecasts for the third and fourth quarters historically reflect seasonality factors in Europe, and resulting lower volumes in the final two quarters of ’06.

Having made these points, however, we do see potential upside in our original guidance. If the dollar’s weakness continues in relation to the euro, and in Europe translation-related increases in revenue and earnings versus our original guidance, that original guidance would occur. In addition to the potential for positive translation adjustments, our margin improvement in the first quarter exceeded our original plan expectations.

We have good momentum in the cost improvement initiatives and areas related to our Level 3 initiatives.

Finally, I’d like to close today’s call by commenting just briefly if I could on strategic growth initiatives within NN. We recently concluded a company-wide global strategy development process. The process included significant oversight and approval from our Board, as well as the involvement of more than 50 global managers in the development of a plan as well as the future ongoing execution responsibilities. The plan reaffirms our belief that NN has continuing good growth opportunities in our bearing components business.

With respect to our bearing components business itself, our growth initiatives will continue in three major areas: further geographic expansion; acquisitive growth of both captive and independent businesses; and further bearing component product expansion, particularly in rollers.

In addition, we have identified potential growth avenues that leverage our manufacturing competencies in high-precision steel component manufacturing. Growth in this area will come from both new product development and acquisition.

Our five-year top and bottom line growth objectives are for low-teen compound annual growth rates, which would double the size of the company by 2010.

While we continue to focus on the disciplined management of our ongoing operations, our Board of Directors and NN’s global management team are concurrently working on oversight, which is our Board’s responsibility, and execution, which is management’s responsibility, of the long-term objectives outlined in our strategies. We believe the focus created by our commitment at NN to be strategically managed will created future value for our customers, employees, and shareholders.

With that, I’d like to open the call to any questions you may have.

Thank you, sir. [Operator Instructions] Our first question is from Mark Parr with Keybanc Capital Markets. Please go ahead.

Okay. Thanks very much. Hey, Rock. Good morning.

Good morning, Mark.

Hey, congratulations.

Thank you.

I had a couple of questions. First of all, on the margin improvement, where were you surprised positively? Could you give us a little more color there?

You mean by business unit?

Well, however you want to characterize it would be great.

Yeah. I mean, I think, Mark, it’s safe to say that each of our business units in the first quarter saw more than -- percentage-wise, some more than others, but each of our business units exceeded our margin expectations in the first quarter. And it’s comprised, of course, of a variety of drivers, including the relative contribution of Level 3 versus some of the inflationary factors that kind of hit the cost line that Jim mentioned, particularly energy.

Right.

And the energy inflation differs by geographic part of the world as well as our individual business units, as does the contribution in the improvement objectives of Level 3. So it’s really a combination of a variety of factors, but it was a pleasant surprise in the first quarter just generally across all of our business units. And we mentioned that in the press release, that it was pretty much across the board.

Do you think that -- well, let me put this a different way. Does the positive delta in the first quarter on margins --

Right. Can it be sustained?

Does it increase your confidence in the ability to offset negative leverage issues associated with the reduction of the [INA] business over the second half of the year?

Yeah. It does some, and I tried to speak to it optimistically, which we are. But having said that, as volume comes down -- not just [INA]. The [INA] impact, as we’ve mentioned, is kind of fixed. But our business is seasonal. And the third quarter in particular is always down based upon the fact that Europe -- the shutdowns in Europe occur.

Right.

And in fact, even the fourth quarter seasonality-wise has always been lower than -- the first two quarters have always been higher traditionally than the last two. That was an exception this past fourth quarter of ’05. So we’re being probably a little conservative by saying that we’re hopeful that it will continue, and certainly the Level 3 programs have great momentum. But having said that, we’re still kind of focused on, in terms of kind of providing guidance, looking at what we -- our original plan reflected for the last three quarters.

That’s fine. Did you experience any positive arbitrage on raw material pass-through in the first quarter?

A little bit in Europe, because the way the pass-through works is essentially based on historical information and historical costs from ’04 to ’05, and what delta occurred there. And there’s a variable component of that, and that’s the scrap surcharges in Europe. And they have been down, although they spiked up just this last week in Europe with no real explanation on what’s going on there. So we had a little bit -- we had a slight favorable impact in the first quarter associated with that. But we anticipate that that won’t continue in the second, third, and fourth, honestly.

Okay. Anything you can provide incrementally as far as the discussions with SKF regarding the renewal of the Euro Ball contract?

A lot of activity with both SKF and [INA]. We’re in negotiations with both customers. And we’re [inaudible], we’re pretty far down in terms of concluding it. We certainly hope it’ll be concluded by the end of this quarter, and have answers there by the end of the quarter. Although it’s certainly more time consuming and taking more time than we had anticipated.

Okay. All right. Lastly, and then I’ll pass it on. Does the sale of the land at Pinerolo, does that indicate anything, or does that say anything, regarding your longer-term outlook for potential expansion of the Pinerolo operation?

Not really. The land was truly excess. And Mark, I believe you visited Pinerolo.

Yes.

And you’ve seen the facility and the ability -- we still have ability to expand that facility. It’s the iconic facility in terms of technology and the overall manufacturing processes in the company, where the technology in the company resides relative to our ball business within Europe. And so it really doesn’t say anything other than there was land that was very excess that actually couldn’t have ever been used for manufacturing. And we just took advantage of it and sold it.

Okay. Terrific. Well, hey. Congratulations on the great results.

Thank you.

Our next question is from Michael Corelli with Barry Vogel and Associates. Please go ahead.

Hi. Good morning.

Good morning.

Just a couple of questions. First of all, you mentioned that you had $1.5 million pre-tax gain -- or after-tax gain on the sale of land, and a $667,000 after-tax write-off related to equipment. Could you tell us what the pre-tax numbers were, and where they were in the income statement?

Yes. Hey, Michael. This is Jim.

Hi, Jim.

Let’s see. The proceeds of the land sale were $2.8 million. The pre-tax gain, $1.8 million, had a very favorable capital gains tax rate of 19%, so that left an after-tax gain of $1.5 million.

I’m sorry. What was that amount pre-tax? The gain?

$1.8 million.

Okay.

And it shows up in the gain and loss on disposal of assets in the income statement.

So how come it shows only $730,000 there?

Okay. Well, you net that against the after-tax loss on the sale of scrapping equipment.

Okay.

$667,000. Oh, I’m sorry. Pre-tax. Pre-tax. I’m sorry. Pre-tax loss on the equipment disposal, $1.1 million. So the net of those two is what shows up on that line.

Okay. All right. Thank you. And then I had another question for Rock. Did you say that you expect to grow low teens and to double your revenues by -- or that your goal is to do that and double your revenues by 2010?

Yes.

How much of that would be organic versus acquisitive?

Excellent question. It depends on how you define organic, Michael.

Well, I would think the --

If you’re talking about pure organic growth based upon our core businesses growing with kind of how global economies do, I think you know that number is -- it’s kind of in the 3% to 5% globally number on an annualized basis for the next five years. The remaining growth, which is the majority of the growth, would occur via principally acquisitive growth, although in the plan are some elements of what we would consider organic growth, assuming product offer -- for product expansion, where we would -- as opposed to going out and acquiring this potential for green-field startups of new product offerings.

But the majority of the growth, like the last six years at NN, beyond the kind of the [GDP] growth, would be via acquisitive growth.

All right. So you just finished this strategy that you developed. But does that mean we should be looking for some activity in the not-too-distant future?

I think you can -- the activity over the last six years that you saw from us was -- it ebbed and flowed over a five or six-year period of time, and I think you can expect the same thing moving forward as we begin to execute this strategy. We had in the six years -- over the last six years in executing our 1990 -- or our ’98 and 2002 strategies. We had years where there was no activity. In other years, where there was a multitude of activity in terms of multiple deals. So yes. You can expect to see activity in the not-too-distant future, but I’m not going to define that.

Okay. And then just one question on the share repurchase. What was the dollars you spent, or the average price you paid?

Michael, total, we paid I think around $245,000 for the 20,474, so that --

It was $12.99. Just right at the --

No, $11.99.

I’m sorry. $11.99, right below the $12.

Okay. Thank you very much.

Our next question is from Shaun Nicholson with Kennedy Capital. Please go ahead.

Hey, guys. Great quarter.

Thanks, Shaun.

Just wanted to kind of get your sense -- I know in the press release you stated for the last -- kind of flat economic conditions in the U.S. as being maybe -- and Europe -- as being maybe a reason you want to be conservative. I guess I’m just -- so far, what do you look at specifically for the U.S. to determining that?

We look at automotive -- kind of the projections for automotive build rate, and the broad categories in end market -- in industrial end markets. Having said that, though, Shaun, the one thing that’s kind of -- even our North American businesses continue, especially our U.S. Ball and Roller business, continues to do a lot of exporting of product around the world.

And so the economics of just North America for our North American operations or just Europe for European operations aren’t an absolute true barometer. Because as I mentioned, we do export into Asia, for example, out of both North America and Europe. But the key drivers are -- what we look at is the automotive build rate and kind of the end general industrial classifications that have been very good and continue to be.

Okay. And as far as the -- I think you guys are the sole supplier to I guess the number one bearing distributor in Korea. Is that correct?

Not bearing distributor. And we are not the sole supplier. We have a large customer in Korea.

Okay.

But we are not the sole supplier.

And that market on the automotive side is supposed to -- from what I read, I guess, it seems it’s picking up strength quickly.

It’s very good. Yes. It is. They are gaining share globally. But I’m not sure kind of where you got the sole supplier, but we’re a major supplier to that customer.

Okay.

Shaun, you may have gotten that from me, and I might have overstated it when we talked a while back.

Right. Right. That’s fine. And on the acquisitions, just to hit on that. What geographic -- geographically, where would you -- is there a preference? I know that in maybe lower kind of production cost countries, but is there any thoughts on where you guys would want to --?

Yes. It’s a good question. Certainly India is a possibility. South America. Brazil is a possibility. And in terms of acquisitions themselves, any company where -- that’s obviously consistent with our current competencies and core business. But that has gone down the path of globalizing -- globalization of their business.

Okay.

That’s important, because the shift in refining to where your customers are headed is an important element in remaining competitive long-term. And so I think it’s got to be global.

Right. Okay. Well, great, guys. Great quarter again.

Thank you.

[Operator Instructions] Our next question is a follow-up from Mark Parr with Keybanc Capital Markets. Please go ahead.

Okay. Thanks. I hear the weather’s nicer in Brazil. Just wondered if you could give us an update on China and what’s going on there?

Sure. I’m not sure if I mentioned -- I didn’t mention in this call, but we did kind of have our grand opening ceremony of the facility in the first quarter. In February. And we have -- we’re spending a significant amount of capital to kind of conclude the first phase of that facility, and intend to have the first phase of the facility in place by the end of the year. That first phase will include all the operations necessary from start to finish to manufacture a variety of product mix on our precision ball business.

And it’s an absolutely beautiful plant. With our landlord, we constructed it, designed it. Have the ability -- it’s approximately a 100,000 square foot facility, but we’d have the ability, both from a land perspective and the way we constructed the facility, to rapidly expand it to around double the size that it currently is, moving forward.

Okay.

And the --

Is the rod supply for that facility local, or is it imported from Japan or [inaudible]?

Really a good question, Mark. And right now -- of course, we’re trying to develop China sources for the wire rod, but as of today, none of our global customers have approved sources in China. So we’re working diligently to approve suppliers in China. But as of today, the product, the wire rod, comes from either Europe or Japan.

How big a piece of the cap X number for the $16 million is earmarked for China this year?

About $3 million, Mark.

And is there anything you can tell us about anticipated revenues or contribution from the operation in ’06 and ’07?

Well, the contribution in ’06 is negative. We’re starting the plant up, and it won’t be making an earnings contribution in ’06. We do anticipate a contribution in ’07, and we would like to see the revenue out of the facility on an annualized run rate coming out of the first quarter of ’07 in the $8 million to $10 million range. Something along those lines.

Okay. All right. Okay. Thanks again.

Thank you.

At this time, there are no further questions. I’ll go ahead and turn the call back over to management for any closing comments.

Thank you again for joining on today’s call.

Ladies and gentlemen, this concludes the NN Inc. first quarter results conference call. We thank you again for your participation.