NN Inc (NNBR) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to NN Inc. fourth quarter results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Tuesday, March 31, 2009. I would now like to turn the conference over to Marilynn Meek with Financial Relations Board. Please go ahead.

Thank you. Good morning. Welcome to NN's 2008 fourth quarter results conference call. If anyone needs a copy of the press release please call my office at 212-827-3777 and we will be happy to 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.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 overview of the quarter and afterwards we will open up the lines for questions. With that said, I'd like to turn the call over to Rock Baty. Rock, please go ahead.

Marilynn, thank you. Good morning, everybody, and thanks for joining the call. This morning in Johnson City I have with me Jim Dorton, our Chief Financial Officer and VP of Business Development; Will Kelly, our Chief Administrative Officer; and Tom Burwell, our Corporate Controller.

Today Jim is going to offer an analysis and commentary on the fourth quarter results and full-year through December 31, 2008 and provide an update on our liquidity status. I will conclude the call with comments regarding NN's immediate response and actions to deal with the current global economic crisis, and then review for you the current demand that we are seeing in the first quarter from our served customers and end markets. With that, I'd like turn the call over to Jim.

Thanks, Rock, and good morning, everyone. First, I would like to comment on our delay in reporting and in filing the 10-K. Like many other companies, we had to spend a lot of time reviewing our goodwill and intangible values given the dramatic change in business conditions, the current weak economic environment in global industrial markets, the deterioration in the credit and capital markets and NN's market cap decline.

As we stated in our 12b-25 filing delaying the 10-K we realized that we needed extra time to do further testing as our auditors were completing their audit in early March. We have completed all of the testing as of last week and as we reported in the press release, we have written off $30 million of goodwill under FAS 142, goodwill and other intangible assets, and also $8.3 million of tangible and intangible assets under FAS 144, accounting for the impairment for disposal of long-lived assets.

In addition to these impairments, we booked restructuring charges for the closing of our plant in Ireland, we took accelerated depreciation on some assets that were no longer in service, and we had a charge to our deferred tax assets. In all, we had non-operating charges of $45.6 million pre-tax, $32.2 million after-tax or $1.98 per share. We have now written off all of our goodwill except for approximately $9 million of goodwill remaining in our Italian facility.

All of these charges are spelled out in the press release and you will get a lot of detail, more detail in the 10-K which we will file later today by the close of business. So I won't spend anymore time on the non-operating charges.

Other than cleaning up the balance sheet, the major story for the quarter was, of course, the dramatic drop in revenue and our response. Rock will cover that. In summary though, sales were down 29% from the prior year and although we adjusted our cost level as quickly as we could, we still lost $2.6 million, or $0.16 per share, in the quarter from operations.

During the fourth quarter, the Euro versus the U.S. dollar was down for much of the quarter in the $1.30 range, although it ended the quarter at about $1.40. This caused our reported sales to be down about $2.2 million versus our business plan, and about $5 million in the quarter versus the Q3 run rate. While this was a significant change, it was really dwarfed by the overall business decline.

For 2008 in total, the stronger Euro added about $16 million in sales versus our business plan. Sales for all of 2008 totaled $425 million, up less than 1% from 2007. But had we continued at the run rate of the first three quarters, sales would have ended up about 11%. For the full year, we made net income from operations of $10.5 million, or $0.66 per share. Including all of the non-operating items, though, we lost $17.6 million, or $1.11 per share.

Cash flow was positive during the fourth quarter despite the large net loss. As mentioned in the press release, almost all of the impairment charges and the other non-operating items were non-cash items. So, there wasn't any cash, much cash impact from the charges.

Despite the economic weakness, we had a good quarter in accounts receivable collections and we were able to reduce inventories. This trend has continued into the weak first quarter as well.

Capital spending totaled $4.8 million during the fourth quarter, and that came to a total of $18.5 million for the full year of 2008, which was exactly on our business plan. We have cut back on all non-essential capital plans for 2009, and we expect to spend less $4 million for the full year of 2009. Rock will talk about this and other actions we have taken to conserve cash and to cut expenses.

Despite the negative conditions in the fourth quarter, we were able to repay just over $13 million in debt during the quarter. In the first quarter of this year, we continue to operate at or near cash flow break even levels. We announced on March 16th that we had successfully renegotiated our credit agreements.

With sales being down so dramatically our covenants were no longer appropriate, so we renegotiated before we had a problem. We were not in violation of any covenant at year end, nor were we in violation at the time that we signed the new agreements. But when with you redo credit agreements in this market you must expect that your rates will go to market rates, and that is what happened to us.

We went from LIBOR, on a revolving credit, from LIBOR plus 0.75% to LIBOR plus 4%. On our fixed rate notes we went from 4.89% to 8.5%. For our new blended interest rate is currently at 5.9%. The new covenant levels match up with a fairly negative forecast, which does not count on much improvement in the first half of the year and only modest improvement thereafter.

As part of the renegotiation we had a reduction in the total amount available in our revolving credit facility from $135 million to $90 million. We had increased the size of the facility from $90 million up to $135 million in May of '07 to give us more room for acquisitions. But since we likely won't be doing any acquisitions in this market, we believe we have plenty of credit available.

We currently have about $66 million drawn out of the $90 million facility. If current conditions persist, we have plans in place to significantly reduce working capital, in particular to reduce inventory by about $10 million. This, combined with the other actions that Rock will discuss, should allow us to be cash flow neutral in 2009.

As Rock will also discuss, we intend to weather this severe recession by managing cash flow. We have cut expenses and cash spending and we have taken a lot of plant down time. However, we are keeping our scale back operations in good condition so that we can come out of this downturn on a growth path. That completes the financial comments, now back to Rock.

Jim, thank you. I'd like to close the call with overall comments regarding the current global recession and the management actions we are taking and will continue to take to enhance our liquidity position. And then close by commenting on what we are seeing specifically in the first quarter of '09 as we expect overall levels of demand.

Let me begin my comments by commenting specifically on the actions we have taken to enhance our liquidity. As we mentioned in the release and Jim just mentioned, sales were down an abrupt 29% during the fourth quarter of '08 in comparison to the corresponding period in '07.

While it was somewhat unexpected that the magnitude of the reduction we immediately took steps to focus the Company on maximization of cash flow and to reserve our liquidity position. Our actions to date have included the following. First, we suspended our quarterly dividend; second, we accelerated the plant closings of two plants, Kilkenny, Ireland and Hamilton, Ohio. Third, we froze capital expenditures for all noncommitted projects; and, fourth, we've eliminated virtually all discretionary spending globally.

With respect to our employees at NN the global recession has impacted them significantly based upon the following necessary actions we have taken. First, we reduced salaries and fees in the amount of 10% to 20% for all directors, officers and salaried employees, Company-wide. Second, we suspended indefinitely the payment of bonuses earned in 2008 that have traditionally been paid in the first quarter of the following year, meaning 2009.

Third, we have eliminated all wage increases and bonus potential for 2009. Fourth, we have reduced our employment by more than 500 employees which represents about 25% of NN's total global employment. For our remaining employees, they are sharing pain and suffering as well.

We have implemented reduced work schedules and as a result, reduced wages from them by eliminating work days or entire work weeks from planned production schedules. Finally, as Jim already mentioned in his comments, we restructured our current credit facility and announced that new facility in a press release dated March 16, 2009.

The 10 actions I just reviewed with you, mentioned, did in fact serve to improve our cash flow generation both in the fourth quarter and on into the first quarter of 2009. During the fourth quarter of 2008, as Jim mentioned we were able to reduce debt by $13.7 million, and for the full year, $13.2 million occurred in the fourth quarter.

The annual cost reduction and cash flow impact of these actions [followed] $32 million and $50 million respectively, and serve to dramatically lower our required net income and cash flow break even sales levels dramatically. As Jim did state in his comments, if current levels of demand continue at the same rate that we are experiencing in the first quarter, we are managing for our cash flow neutral year in 2009.

Finally, I would like to conclude today's call by commenting on the levels of demand we are experiencing in the first quarter of 2009. As we mentioned in the press release, we literally have no visibility to our end market demand given the current crisis. Because of this lack of clarity, it is imperative that we not provide guidance for 2009 for either revenue or earnings.

Our customers and their customers have little or no visibility as well. It is safe to say that given the current environment, no one in the supply chain from basic raw material suppliers to the ultimate consumer can predict the short-term future with any degree of confidence. However, we can comment that the sudden and dramatic reductions in volume that we experienced of 29% in the fourth quarter of 2008 have continued into the first quarter of 2009 and accelerated dramatically from 2008 fourth quarter levels.

Although we are not providing specific guidance, it is important to understand that even with all the actions I previously outlined and mentioned our earnings turned negative in the fourth quarter of 2008 and are expected to remain negative until demand and corresponding revenues do improve. For the current quarter, with respect to specific demand in our served automotive and industrial end markets we are experiencing reductions of approximately 45% and 25% respectively from 2008 levels.

Given our current 65% automotive and 35% industrial revenue split, this equates to an overall reduction of approximately 40% in the first quarter. In addition to this 40% reduction, our first quarter revenues are also being negatively impacted by significant inventory destocking in the entire supply chain.

Like NN, our customers and everyone in the supply chain are focused on liquidity and cash flow enhancement in this environment which is contributing to the overall level of demand reduction we are experiencing at NN. Since the U.S. automotive industry is currently in the news it is important to restate that NN's U.S. auto exposure is approximately 20% of our total global revenues, while European automotive represents 45%.

The most recent forecast that we have seen for automotive year-over-year comparisons call for a 35% reduction in '09 in North America, and an approximate 25% reduction in Europe. Let me conclude today's call by restating that we are managing through the current environment by maximizing cash flow and taking the necessary actions to protect our liquidity situation.

We are also managing and planning for the worst case scenario, mainly the level of demand we are experiencing in the first quarter will continue for the remainder of 2009. We have not seen or experienced anything in our current served end markets that would allow for any measure of optimism moving forward into the second quarter with the possible exception of the destocking of inventory coming to a conclusion during the last half of 2009.

In the interim, we will continue to do everything possible to protect our liquidity, to ensure that NN emerges as a stronger and more resilient Company when the global recession ends. With that, we'd be glad to answer any questions you may have.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Mark Parr with KeyBanc Capital Markets. Please go ahead.

Thanks very much. Hey, good morning, guys.

Morning, Mark.

Rock, could you repeat the numbers that you gave related to the magnitude of the fixed cost reduction and the cash flow enhancement? One was 50 and I think one was what, 52, one was 35?

Yes, $32 million on the expense side, cost reduction side, and $50 million on the cash side.

All right. $30 million on costs. And you get that full impact, that's an annualized basis, right?

That's an annualized basis, that's correct.

So you get that full impact in the first quarter or is it going to take a little --

First quarter and moving forward, yes.

All right. And what can you say about your raw material input position? We know you have some longer term contracts there, I know scrap prices have definitely come in, but could you talk a little bit about how that is going to be impacting you or helping you as the year progresses?

Really, no. It is neutral to us, Mark. I mean like you said raw material prices are coming down. On the way up last year, we passed it on to our customers and on the way down we'll also pass it along, so really the impact of that is neutral to us.

Okay. And I guess one last question, did you mention, you said you're managing for a cash neutral position. Does that include any additional debt pay down over the course of the year, or are you planning on ending the year with about $65 million drawn?

Well, about $65 million drawn is our goal for the year with the current revenue.

Okay. So you're looking for basically debt to remain flat over the course of the year.

Yes.

To preserve the balance sheet, and you've curtailed capital spending and all of that kind of stuff, right?

Yes. We have really, we had a few projects that we were committed on, that the commitments occurred actually back in the second and third quarter, but we expect to keep capital under, as Jim mentioned, under $4 million, I think the number is really under $3.5 million. Is that correct, Jim?

That's right. What we have bought were, not that projects we wanted to go ahead and complete, it was equipment that has already been ordered and either on the ship or in the crate in our facility so we had to buy it.

All right. That's $4 million of CapEx. Okay. I'll pass it on, man, tough market out there.

Indeed.

All right. Anyway, congratulations on the results in the fourth quarter though. Given the sudden decline in your revenue, I think that the results were not too bad -- it looks okay. So, good work, I guess. It is not a happy outcome, but it is good work. There's no doubt about it.

Thank you.

Thank you, sir. (Operator Instructions). One moment, please. (Operator Instructions). I have no further questions in the queue. I'd like to turn the call back over to Management for any closing remarks.

Thank you, again, for listening in on today's call. Thanks so much, bye-bye.

Ladies and gentlemen, this concludes the NN Inc. fourth quarter results conference call. This conference will be available for replay after 1:00 Eastern Standard Time today through Tuesday, April 7 at Midnight. You may access the replay system at any time by dialing 303-590-3000, or toll free 800-405-2236 and entering the access code number of 11123919. We thank you for your participation, and you may now disconnect.