NN Inc (NNBR) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you so much for standing by and welcome to the NN Inc. Q1 2009 earnings 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). As a reminder, this conference is being recorded today on Wednesday, the 6th of May, 2009.

I'll now turn the conference over to Ms. Marilynn Meek of the Financial Relations Board. Please go ahead.

Thank you, good morning. Welcome to NN's 2009 first 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 the 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, an overview of the quarter and afterwards, we'll open up the lines for questions.

With that said, I'd like to turn the call over to Rock. Rock, please go ahead.

Thank you, Marilynn. Good morning, everybody. Thanks for joining the call this morning. I have with me this morning Jim Dorton, our CFO, and Tom Burwell, our Corporate Controller. Jim is going to provide an analysis opening here with comments on the first quarter results through March 31 and then provide an update on our liquidity status. And I'm going to conclude the call with comments regarding the overall business conditions we face, the level of demand we are experiencing most recently, probably in the second quarter here with respect to serving customers in end markets, and our ongoing actions to manage through the current crisis.

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

Thanks, Rock, and good morning, everyone. As was clear from the press release, our sales were down 52% versus last year. Approximately 3.6% of the reduction was due to currency, but the other 49% decline was due to reduced demand and a destocking effect. As we mentioned in our last conference call and in the press release, we are experiencing a significant destocking within our customer supply chain, plus competing internal production from our customers which is adding to our revenue shortfall. The shutdowns of U.S. auto plants are not helping either.

Nevertheless, our large bearing customers are experiencing sales declines in the 25 to 30% range, so our bearing components business should eventually track to that kind of decline, instead of the rate we are currently seeing.

Geographically, in the first quarter, sales declines averaged 41% in the U.S. and just over 60% in Europe, where the destocking effect is more pronounced.

Except in those countries where it isn't practically possible, we have taken out variable costs matching our revenue declines. Company-wide, we have taken out over 25% of our employees permanently, in addition to reducing hours and salaries across the board and closing two plants and cutting all discretionary spending. On average, we have taken out about 60% of costs for every lost dollar in sales.

In addition, below the manufacturing cost line, we have removed SG&A costs at an annual rate of $11 million, excluding currency impacts, or about a 30% reduction from the 2008 levels.

Even with these dramatic reductions in costs, with the 50%-plus drop in revenue, we cannot overcome the remaining fixed costs, so we had a net loss of 9.5 million for the quarter. And this equates to a loss of $0.59 per share versus income of $0.32 per share last year.

As Rock mentioned in the press release, we are planning to run the business, assuming the worst-case scenario, with the current low level of sales for the rest of the year, although we do expect that the destocking effect will ease in the second half. We will continue to run lean, so that when things begin to improve, we can capture the full benefits.

The Euro exchange rate averaged $1.31 during the first quarter versus $1.51 in the first quarter of last year. This had the effect of reducing reported sales by 4.4 million. And because we are operating at a loss, the exchange effect reduced our net loss by about $1 million or $0.06 per share. Whereas normally, a stronger dollar hurts our earnings, the impact is positive when we are in a loss position. So this is just a tiny silver lining to a big black cloud.

Looking at the balance sheet, you can see that we have reduced inventory and receivables, although an increase in payables is offsetting some of the positive impact. We expect working capital to continue shrinking during the year to help us maintain near cash flow-neutral status.

In the first quarter, we were cash flow negative by $7 million, which was funded with a $3 million reduction in cash and a $4 million draw on our credit lines.

Looking at the components of cash flow, before working capital, we were negative 4.2 million in cash from operations. Our net reductions in working capital added 1.8 million in cash, though we paid 2.2 million in cash for the amendment to our credit facilities for bank fees and legal costs. Then we had capital spending of 2.7 million and we do expect less than 4 million in capital spending all year long, so we don't have much more cap ex to go in the remaining three quarters. We had upfront commitments on one particular project that we had to pay for. Other than that, we won't be spending much capital this year.

And finally, in the cash flow, we sold a building for net proceeds of $500,000, which brought our total free cash flow to a negative 7 million for the second quarter -- for the first quarter.

We expect the remainder of the year to be relatively cash flow-neutral, plus or minus about $5 million, depending on the second half sales level and the resulting impact on working capital.

As you know, we announced our amended credit facilities on March 16, which included revised covenant levels and as of March 31, and also as of today, we are in full compliance with all the new covenants and we believe that we should be in good shape in the coming months as well, unless we see a further decline in business levels, which of course, we hope will not be the case.

There are some positive bits of news in the economy beginning to circulate and now, we need for some of this to begin to positively impact our business.

That completes my comments, and now back to Rock.

Thank you, Jim. Let me close today's call, if I could, by commenting briefly on the current business conditions that we are seeing, the level of demand that we are experiencing in the first part of the second quarter here and comment again -- reconfirm our ongoing management actions to preserve liquidity on our balance sheet positions, as well as to continue to manage our way through this current crisis.

I'll begin by commenting on the first quarter revenue results and the business conditions that Jim just mentioned. Stating the obvious here, business conditions are the worst that any of us have ever experienced during our lifetimes. As we mentioned in the release, eliminating the results of currency, as Jim mentioned, sales were down 49%. This reflects pretty dramatic reductions in both automotive and industrial end markets in the 30 to 40% range, coupled with significant inventory destocking reductions accounting for the balance of around 10 to 20% for the first quarter.

Like NN where, as Jim mentioned, we reduced inventories 9.4 million or 19% from year-end levels, everyone in the entire supply chain, including our customers, our major customers, are reducing inventories and managing the current recession by protecting liquidity and maximizing cash flow.

The destocking effect mentioned in the release had a clear and significant impact on the first quarter results, especially when compared to the fourth quarter, when inventory reductions had barely begun to impact overall levels of demand.

While the industrial end markets during the fourth quarter of 2009 -- 2008, excuse me -- did not experience the kind of reductions that impacted global automotive during that same time period, during the first quarter of this year, and particularly toward the middle and end of the first quarter, the overall levels of demand for the broad category of industrial end markets declined sharply and quickly caught up with the dismal results in automotive.

Of note during the first quarter, our monthly revenue experienced a peak in the quarter in January, followed by a reduction in February, with a slight improvement in March from February levels -- in other words, somewhat inconsistent monthly revenues in terms of analyzing the results for determining any trends that might exist for the quarter and more importantly, the implications for the upcoming second quarter and beyond.

This provides a good lead-in to my second overall comment with respect to demand outlook for the second quarter. Conservatively speaking, at NN we have probably mentioned this no fewer than 50 times in our year-end release and during our recent conference calls, and forgive me for mentioning it again, but there is simply no short-term visibility in the future. When I say short-term, I mean more than 30 days out.

And this lack of visibility is not limited to NN and relative to our position in the supply chain as a component supplier. Our customers, their customers, and their customers' customers simply have no visibility or ability to predict demand moving forward.

Having said that, it is clear, as Jim mentioned, that at current levels of demand, meaning first quarter of 2009, most of our major customers are predicting that the rate of destocking on inventories will decline beginning in the third quarter of 2009 and perhaps abate almost totally by the fourth quarter. Should that occur, this would provide some welcome relief on the revenue side for us at NN in the last half of the year.

In terms of the near term outlook, and again, speaking to the issue of immediate results, certainly not establishing any kind of trend here in this environment, we have seen a slight improvement in demand in Europe, particularly in the automotive arena beginning in early May. Unfortunately, the recent news of plant shutdowns at both Chrysler and GM in North America are having an immediate impact on our U.S.-based operations in varying components, rubber and plastics, in our precision metal businesses.

The net result of these latest developments in Europe and North America is unfortunately more of the same for us at NN, namely, no real immediate improvement in overall global demand and no real change for us at NN with respect to the short-term outlook.

Finally, I'd like to conclude the call today by restating the management actions we have taken historically beginning in the fourth quarter, early fourth quarter of '08, and on into the first quarter of '09, and also the ongoing actions we will continue to take to (inaudible) deal with the current business conditions and the crisis as it exists.

Again, as we mentioned in the release, we are managing through this crisis at NN by assuming for 2009 a worst-case scenario, namely that no real demand improvement will exist for the balance of 2009. That implies that we continue to focus our efforts on the acceleration of cost reductions and taking the necessary steps to improve our overall cash flow results. In this brutal economic environment, it is important that we continue to focus on our [dual] cost efforts and cash flow improvement.

To summarize, actions consistent with this dual cost (inaudible) cash approach to date and ongoing include two plant closings, the elimination of dividends, the freezing of capital expenditures, the elimination of discretionary expenses, a reduction in work schedules at our global manufacturing facilities, a reduction in total employment of 25% to date, a Company-wide salary and director's fee cut amounting to 10 to 20%, a weekly focus on business processes associated with the elements, both working capital reductions, namely accounts receivable, inventory and accounts payable, and leveraging our more than 135 level-three managers to accelerate our continuous cost and quality improvement initiatives during 2009.

If current conditions persist for the entire year, our goal for 2009 remains to perform from a liquidity perspective in a cash flow-neutral environment, meaning little additional borrowing on our current credit facility, but realistically, no debt retirement for the year either.

With that, we'd be glad to answer any questions you may have.

All right. Thank you. Ladies and gentlemen, at this time, we will begin our question-and-answer session. (Operator Instructions). And our first question is from the line of Mark Parr with KeyBanc Capital Markets. Please go ahead.

Thanks very much. Hey, Rock.

Morning, Mark.

Just a couple of quick questions. The second quarter, did you get any additional help from raw material relief or do you have any sense of what purchased goods, whether it's raw materials or just other stuff that you have to go out and buy? Do you know whether that's coming down? How much cost relief do you think you could get 2Q versus 1Q?

Yes, material is coming down, Mark, of course, but with our -- virtually all of our business, we pass that along when the reductions occur to our customers contractually, so not a lot of help there. On the other purchase-type cost items, no real significant movement one way or the other. We certainly aren't seeing any inflation there on most of these items, but not -- no reductions either.

Okay. So essentially, at this point, the best thing that we could do is just expect second quarter to be pretty much in line with the first quarter?

Yes. I mean, I think right now, we don't see anything -- and again, the lack of visibility here, we aren't even certain on what May and June look like, but, yes, I think that's probably a pretty decent assumption.

The one difference being cash flow -- we will have a more positive cash flow outlook because we won't have to pay the fees we paid to redo our bank deal, nor will we have cap ex at this -- very much at all.

Okay. Okey-doke. That's helpful. All right. And good luck, man. This economy is pretty rough.

Thanks, Mark.

Thank you. Our next question is from the line of Holden Lewis with BB&T. Please go ahead.

Thanks, good morning.

Good morning, Holden.

Good morning, Holden.

Just looking at a couple of lines here that you've reported, can you first address tax rate? I assumed it's sort of jurisdictional why it dropped down to 23.5, but can you talk about -- as long as we're kind of in a loss position here, is that sort of the level going forward or how can we sort of look at tax rates?

Well, you're absolutely correct that it's mostly jurisdictional where we're having the losses. Well, we're having losses everywhere, but the magnitude of the losses at locations where we don't get -- we either have a very low tax rate or we get no tax benefit. And so I think that if you continue thinking about 20 to 25% sort of effective tax rate, that's probably a good mix for the second (inaudible).

And as long as we have losses, that would be sort of the expectation (inaudible) that we can do, okay.

That's right. Unless we have a -- the best case is we have a recovery beginning in those areas where we don't pay much tax and then we would get some improvement on the effective tax rate.

And by those areas we don't pay much tax, I'm assuming we're talking more about Europe and China, Eastern Europe, China, than U.S.?

That's correct.

So the losses are sort of greater in the U.S. plants than they are elsewhere?

True. And now, as you know, the U.S. has the highest -- I think among our countries, the U.S. has the highest marginal income tax rate, higher than Italy, the Netherlands or Germany.

(Inaudible) be paying taxes on that income overseas.

Well, Obama's got a fix for that.

Can you talk also, I guess, about the SG&A levels? I think in Q4, you were running in terms of dollars, at around 6.1 million, excluding the D&A. Again, I think in Q1, excluding the D&A, you were running around 6.9, so I was kind of surprised to sort of see that number move up. Can you give me a little bit of maybe history as to what happened in Q4 or why we moved up in terms of dollar levels on SG&A?

Yes. And we saw that in your forecast, that you had us coming down from the Q4 level, but actually, the Q4 level had quite a bit of accrual reduction. Things like the bonus reduction for the full year was all reduced out in the fourth quarter, so the 6.1 million level was not sustainable. Where we are now at the 6.8 million level per quarter is more sustainable, and as I mentioned, that's a 30% -- if you take currency out, that's a 30% drop from last year's run rate. And I think that's where we are unless we -- well, unless we make some other major changes in our fixed cost base.

Okay. And that was in the next question, for on that, do you kind of feel like all the things that you've done, the cutting of overtime, the reduction of staff, the pay cuts, all that stuff, that's kind of now reflected in the numbers. At this point, you're kind of captive to what happens on volume and on the cost side. There's not a lot more sort of big chunks you can take. Is that kind of where we're at or --

Holden, it is. Jim touched on it in -- unfortunately, we're hoping for more flexibility on the labor front, the employment side of things in Europe. Some of the European countries have come front and center with new labor law -- not proposals, but instituted new policies that have been very helpful in the first quarter. Germany is an example of that. They instituted some new laws or short-term help for companies effective January 1 and so that's been very helpful.

But we need help from the Netherlands, which is where one of our biggest operations is, the cage and roller operation. There, companies are appealing to the government for changes in labor laws that would allow for additional flexibility, but as of yet, we don't have a whole lot of flexibility there. But Slovakia, Germany, good flexibility in the ability to take out employment down to the levels of business reductions. Italy is somewhere between Slovakia, Germany and the Netherlands.

But you've already sort of taken advantage of that or is that --

We (inaudible) out and the first quarter would reflect everything that I just mentioned. Of course, if the Netherlands does anything relative to assisting companies with new policies, then we would see some benefit moving forward, but as of yet, nothing has happened there.

And Holden, I'll also mention one other thing and that is, as you know, we took down inventories about 9 million and in doing so, we had the labor and burdens hit that occurs with that, roughly 2.5 million pretax. So our goal is to continue to shrink working capital, but to the extent that we don't take the same level of inventory out, then we'll absorb our fixed costs a bit better in the second quarter.

Okay. So you had -- your gross margins or, I guess, your gross margin basically would have been -- your gross profit would have been 2.5 million higher if inventories had been flat?

Yes, that's correct.

That's correct.

Okay. And so if destocking is anticipated to run through Q2, because you're destocking through Q2, but you get to Q3 and Q4, some of that effect probably goes away.

That's correct.

That's right.

Okay.

And of course, for us, managing the Company, it's a balance. We want to maintain cash flow-neutrality, which means we need to keep working capital low, but from the earnings point of view, we'd be better off making product.

Okay, sure. But that would have left you with something like a 7% type gross margin if it hadn't been for that effect?

That sounds right.

Interest expense, obviously, you have a new facility on hand. Debt went up a little bit in the quarter. I know LIBOR came down quite a bit, but is this kind of -- this is the right interest expense type of level for the current level of debt, given your new facility?

No, not actually, because we -- in putting in the few facility, we had to -- in following the accounting rules, we wrote off a significant part of the capitalized costs of the old facility; 604,000 pretax, we wrote off. But you can basically model our interest by -- our weighted average rate right now is just under 6%. So if you take our total debt level times 6%, you're going to come very close to what our interest expense should be.

Moving forward?

Yes, moving forward.

The other way to answer that, Holden, is that the first quarter doesn't -- the first quarter interest expense line doesn't reflect the new credit facility at all. There was 18 days, but it was a pretty small impact.

All right, fair enough. And I guess the -- you mentioned in your commentary about competing production internally. Can you talk about -- is that sort of what that is -- what that's involving?

Well, it's hard to get our arms around that, but as you know, many of our major customers produce components internally. And in this environment, where we're all attempting to protect employment and reduce the impact to our employees, some of our customers have kept their internal production certainly not at levels before we entered the recession, but reduced levels that would be lower than what would be warranted based on the pure economics.

And until that impacts us, we really don't -- we don't have a good fix on what that number has really meant, but it certainly has impacted the numbers in Europe. And Jim mentioned that the numbers in Europe, relative to destocking and this issue, are much bigger in terms of reduction, overall reductions, than we're experiencing in the U.S.

Okay. And the pickup in European automotive that you referenced, I guess, for April or I guess early May, is that a cash for clunkers sort of effect? And how long does it last?

Yes, well, the cash for clunkers has been in place literally for the entire first quarter, for most of the first quarter. So who knows whether it's that or just a return a little bit more towards normal levels based on the destocking of finished cars on the lots and so forth? But May, in particular, based on the orders that we see on the books in Europe, it specifically does show a pretty nice improvement, but it's -- again, it's 30 days out.

Right.

And so who knows?

And in the U.S. in terms of dollars -- so you did about 58 million in revenues in dollars in Q1. You've got April on hand in the U.S. Do the dollars that you saw in April look similar to sort of the rate that you've been running in Q1? And I guess the question then is, as the GM and Chrysler issues bite, is there risk that in the U.S., the unit volumes wind up being lower and the dollars in the quarter wind up being lower? Can you sort of handicap that?

Yes, well, I tried to speak to that based on what we're seeing in April and we haven't -- we don't have our April financial results in yet, but I tried to speak to it by saying that at least for right now, we would categorize it as the improvement in Europe, offset by the reduction, the pretty dramatic reductions, on the automotive front over the May-June timeframe with respect to GM and Chrysler shutdowns. And so probably a push is how I'd categorize it, if I had to right today. The improvement in Europe is being offset by what the forecast for these reductions, plant shutdowns for GM and Chrysler, are impacting the U.S. operations.

Okay. All right. Thank you.

You're welcome, Holden.

Thank you. (Operator Instructions). A follow-up from Holden Lewis; please go ahead.

Thanks. Can you comment sort of bigger picture, what do think now the break-even point is? I mean, understanding that some of the cuts you've made obviously unwind as volumes begin to get better -- not all of them, obviously, but what level of revenue do you think this business breaks even out at this point?

There's two levels of revenue that we're focused on in this environment, Holden. One is cash flow and as I mentioned, that's the immediate focus. And we've lowered our breakevens dramatically both for that and from a cash flow perspective, but our cash flow breakeven is in a range of around 20 million. This assumes working capital neutrality, by the way, Holden.

Um-hum.

But it's somewhere in the 20 to 60 million a quarter revenue range for cash flow-neutrality and that's our focus, our immediate focus, right now. Obviously, the net was much higher than that, 320 to 330 annually.

Okay. You think breakeven is 330 to -- 320 to 330 of revenues annually?

Yes.

And your best guess -- obviously, things are pretty brutal right now, but I guess two parts -- first, the destocking process. Do you think the destocking goes too far and therefore, it's followed up pretty quickly with restocking, or do you think the destocking is just getting down to levels to justify current demand? So it's nice to get rid of it, but it's not necessarily a plus on the other side.

If the destocking with coupled with just minor positive growth in the third and fourth quarter, then in part, the Chairman of the Federal Reserve said that's what we're going to have in the third and fourth quarter. It'll be less at least. Then I think we'll be in a position of seeing some real improvement in the third and fourth quarter.

Okay.

But as I mentioned in my comments when I was talking about it, 15% -- take the midpoint of what we think destocking is impacting, let's take the midpoint of that, a 15% improvement right now would be very helpful.

Yes, okay, great. And then can you just go over what the covenants are for the new facility?

They're in the 10Q -- I mean the 10K. We've laid them out in there, but basically, they moved to kind of a minimum EBITDA level on a rolling basis and then some other ones.

Okay. All right. Thank you, guys.

Thank you, Holden.

All right. Thank you. (Operator Instructions). And gentlemen, there are no further questions at this time. Please continue with any closing comments.

Okay. Now, let me summarize and conclude today's call, if I could, by restating the obvious here, and that is that the first quarter results were unprecedented in terms of the magnitude of revenue reductions for us and the resulting losses that we incurred at NN.

We do believe, based upon the fact that the short and medium-term outlook is unknown and unpredictable, that it is wise to continue to manage with a total and complete focus on acceleration of cost reductions and cash flow maximization.

With that in mind, we intend to preserve cash flow and manage toward a goal of cash flow neutrality for 2009. We believe this will allow us to weather the current downturn from a liquidity perspective, and emerge on the other end a much healthier Company in the future.

In the meantime, we are grateful for the resilience and the sacrifices that all of our stakeholders at NN are enduring, specifically, the local communities where we operate, our customers, suppliers, lenders, employees and shareholders. For that, we're grateful, and thank you again for listening in on today's call.

All right. Thank you. Ladies and gentlemen, this does conclude the NN Inc. Q1 '09 conference call. If you would like to listen to a replay of today's conference, you can do so by dialing 1-800-406-7325 or 303-590-3030 and put the access code 4067077. Those numbers again are 800-406-7325 or 303-590-3030 and put the access code 4067077.

AT&T would like to thank you very much for your participation today. You may now disconnect. Have a very pleasant rest of your day.