NN Inc (NNBR) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. And welcome to the NN Incorporated Second Quarter 2009 Earnings Release Conference Call. At this time, all participants are in a listen-only mode; and following the formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions). And as a reminder, this conference is being recorded today, August 5, 2009.

At this time I would now like to turn the conference over to our host, Ms. Marilynn Meek, with the Financial Relations Board. Ma'am, you may now begin the call.

Thank you, good morning. Welcome to NN's 2009 Second 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 the 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, everyone and thanks for joining the call. With me this morning in Johnson City I have Jim Dorton, our Chief Financial Officer; Will Kelly, our Chief Administrative Officer; and Tom Burwell, our Corporate Controller.

Today Jim will provide our analysis and comments on the second quarter and year-to-date results through June 30, 2009. In addition, he will conclude his comments by providing an update on our liquidity status, including a discussion regarding the rationale for classifying all of our debt as a current liability, as well as an update on the charge we took in the second quarter with respect to deferred taxes. I will conclude the call with comments regarding the latest information we have with respect to business conditions, current demand levels, and provide an update on management actions associated with cost reductions and cash preservation.

I would now like to turn the call over to Jim.

Thanks, Rock. Good morning, everyone. Regarding the results for the quarter, you can see that in the press release, like Q1 sales were down 53% versus last year, and it's a 50% reduction if you removed the currency effect.

We continued to see a strong de-stocking effect during the quarter, but auto-related demand did strengthen in Europe toward the end of the quarter. Offsetting this was weakness in industrial demand in both the U.S. and Europe, so revenue results overall did not see any pickup. And Rock will comment more on the demand outlook after my comments.

While sales were down in the 50% range, our cost of sales and SG&A costs have dropped 44% and 36%, respectively. With such a large revenue reduction in such a short period of time, we are generating large net losses from operations, although our continuing efforts at reducing costs are being effective.

Looking at income from operations before interest, taxes and other income items; in the second quarter we lost $8.7 million, compared with $11 million in the first quarter, at about the same revenue level. And we continue to look for additional ways to bring our costs down.

During the second quarter, we determined that we should place a 100% reserve against our deferred tax assets from U.S. operations. And this resulted in a $5.5 million charge showing up in the provision for tax line in the income statement; and this was a $0.34 per share hit.

Whereas we can carry our NOLs forward for up to 20 years for tax purposes, the accounting rules are much more restricting and require us to, for book purposes, to look more closely at recent financial performance. So using this method and ignoring the recovery that we expect to occur over the next several years, we concluded that we should reserve the full amount of U.S. deferred taxes and not book anymore tax benefit on U.S. operations until things turn around.

Management believes that we will utilize the NOLs over the next few years, but that isn't the criteria for booking deferred tax assets.

Including this tax adjustment, during the second quarter we had a net loss of $13.5 million or $0.83 per share. Excluding the tax charge, and assuming the Q1 tax rate, we would have had a loss of $8.0 million or $0.49 a share, versus $9.5 million or $0.59 per share in the first quarter. Again, you can see that our cost-reduction efforts are having an effect, although we are still losing a lot of money at this run rate.

But we are continuing to study [and process] structural changes that can help adjust our cost levels to current revenue levels, and of course we believe that demand in the market will begin to recover at some point; however, our visibility remains low.

Looking at the balance sheet; one of the first things that you'll notice is that we have temporarily re-classed all of our long-term debt as current. We have a $90 million revolving credit arrangement with four banks expiring in 2011 and a fixed-rate note agreement with Prudential Capital with a final maturity in 2014. There are about $70 million outstanding and revolving credit loans and a balance of $28 million with Prudential.

When we amended both of these credit agreements in March, to reflect the tremendous drop in revenue and profitability; the lenders set new financial covenant levels reflecting the business reality. Certain of the covenants were set for only one year at that time, so after March 31, 2010, the covenant levels are to be determined by the lenders with consultation with the Company.

The lenders did this to give us both flexibility to deal with what we knew would be a fast-changing market; however, it leaves us in a situation where we don't know with certainty what the requirements will be for us to stay in compliance with covenants at June 30, 2010. Thus we have to consider that the Company could be in a situation where we are not in compliance with the as-yet unknown covenants a year from now, which led us to conclude that we should show the debt as current.

Also, when the lenders set the new covenants in March, they were set very tightly to our forecast, with little room to miss. If our financial performance falls below our forecast, we'll have to go back seeking an amendment. And while we think the lenders will work with us, in this market you can't really count on anything like that. So the tight covenant levels are another reason why showing the debt as current, is prudent.

Despite our losses from operations and the $3.2 million cash cost we incurred to put the new credit agreements in place; NN has remained nearly cash flow neutral this year. Debt is up $1.8 million from year end, but is down $2.1 million from March 31. Q2 was cash flow positive by about $1 million.

We have held capital spending to $3.8 million year to date, versus $8.9 million in the first half of last year. And we will spend very little capital in the second half of this year.

Inventory is down $17 million and our customer collections have stayed generally current. And we believe that we will end the year virtually cash flow neutral based on managing our working capital.

Those are my financial comments; and now back to Rock.

Jim, thank you. Let me begin my comments by commenting on the second quarter and year-to-date revenue results and the underlying business conditions that we've experienced for the first half.

The second quarter can be categorized as more of the same, as it relates to revenues we experienced in the first quarter. We shipped $57.9 million in the first quarter and $57.1 million in the second quarter, essentially flat results through the first two quarters; and as Jim mentioned 53% down from the corresponding periods from 2008.

More than two thirds of the 53% reduction or around 35% relates to reductions in underlying demand in both automotive and industrial end markets associated with the global recession; while the remaining one third or about 18% relates to the de-stocking in both end markets.

As we mentioned in the release, eliminating the results of the deferred tax charge, our net loss for the quarter was $8 million, a $1.5 million improvement from the first quarter loss of $9.5 million. As Jim mentioned, this improvement is a reflection of achieving the full impact of our cost-reduction efforts taken during the fourth quarter of '08 and the first quarter of this year.

The de-stocking effect we continue to mention is both real and very significant in terms of magnitude. Although it is difficult to know the exact impact of the de-stocking, we estimate that around one third of the revenue reductions we've experienced, or 18% of our 53% reduction, are associated with this issue alone. Like NN, virtually everyone in our supply chain is also reducing inventory significantly, including all of our major customers which exasperates the volume problems we face and have faced in the first half.

The inventory reduction at NN has been significant during the first half, $17 million or 32% from year end results and has been a key reason for our good cash flow performance, given the current conditions.

With respect to our two served macro end markets, automotive and industrial, it's honestly very difficult to distinguish which end market has been worse. We estimate that both are down around equivalent percentages from the same period of 2008, approximately 35% in North America, Europe and Asia.

Of note during the second quarter, our monthly revenue experienced a low point for the first six months during the month of April, with sequential improvement in May versus April; and June a sequential improvement versus May. May and June represent the first two months of improvement, from prior month's revenue, since we entered the global recession during the fourth quarter of 2008.

This provides a segue to my overall comments with respect to the most recent demand outlook we are seeing in the third quarter. Although we still lack any significant visibility; and I've mentioned before no more than about 30 days out; we are seeing signs of improvement in our business both in North America, Europe and Asia. It does appear to us that April results represented a bottom with the improvement we experienced during the months of May and June I just mentioned.

We believe this is a result of both the de-stocking effect abating somewhat, particularly in automotive; and general demand level improvements in both automotive and industrial end markets in all three regions of the world.

At NN, since more than 50% of our revenues reside in Europe, the seasonal shutdown period experienced there during the first two months of the third quarter, namely July and August, have historically represented a reduction in comparison to the first and second quarter run rate. While those shutdowns are still occurring as of today, we would say that the revenue improvements we experienced in the latter part of the second quarter are holding up into the third quarter, which is encouraging. Virtually all of the key economic indicators associated with global and regional manufacturing activities are mirroring the gradual demand and revenue improvements we have experienced at NN.

I said in the first quarter call that the net results of the first quarter and second quarter outlook in Europe, North America and Asia was unfortunately more of the same; namely no real immediate improvement in overall global demand was foreseen and no real change for us at NN with respect to the short-term outlook. That appears, going into the third quarter, to have changed ever so slightly and a word like "encouraging" is actually, believe it or not, creeping back into our vocabulary.

Finally, I would like to conclude today's call by providing an update regarding the management actions that we've taken associated with cost reductions and cash preservation in the current environment. Although I just mentioned the incremental improvement we are experiencing, virtually everyone worldwide agrees that any recovery, when it does occur, will be gradual in nature.

As a result, we continue to manage with the basic assumption that we need to identify further opportunities for cost reductions, cash preservation and associated reductions in both our cash flow and net income breakeven point. With respect to cost reductions, to date we have removed a total of $52 million in annual expenses from broad the categories of employment, purchase costs, restructuring, SG&A and other fixed costs. This has served to lower our breakeven point, though clearly as Jim mentioned, not to a point of current volumes based upon our results for the first half; and enhanced our cash flow position as well.

In addition to the $52 million in annual expense reductions, we have taken annual cash preservation actions to date totaling $18 million associated with suspension of our dividend and reducing the levels of capital expenditures. These actions, coupled with the $10.9 million in working capital reductions that we achieved during the first six months of '09, have allowed us to remain very close to cash flow neutral.

The net result, from a liquidity perspective, is that we were cash flow positive during the second quarter, while year-to-date operating cash flow which excludes the $3.2 million of new credit facility issuance costs, have been a negative $2.9 million. Our total debt has increased from the beginning of the year by $1.8 million.

We remain actively engaged in the Company in identifying further cost reduction initiatives through our Level 3 program, as well as further restructuring actions that will enhance our cost and cash position once the recovery occurs.

Our focus continues to be upon the dual objective of cost reduction and cash flow maximization as we continue to manage through the current environment. We look forward to a future recovery and then as emerging as a leaner and more globally competitive company as a result.

With that, we would be glad to open up the call for any questions that you may have.

Thank you. (Operator Instructions). And our first question does come from the line of Mark Parr with KeyBanc Capital Markets. Please go ahead.

Hey, good morning, Rock.

Good morning, Mark.

How are you doing?

Good; how are you?

I'm hanging in there. Actually I was down in Alabama yesterday. It was a lot hotter than it is up here in Cleveland, but--

I see. No global warning happening in Cleveland?

No, it was 64 degrees this morning. It actually got down to 62 on the way-- anyway, I don't need to--

Hey, one thing I was curious about-- you talked a little bit about the pickup in the macro environment. And I may have missed some of your comments, but did you give some color on whether you're seeing more pickup in Europe than in the U.S. or did you talk about the magnitude, let's say relative to the second quarter levels and what the potential impact on revenues might be for the third quarter?

Yes. I didn't quantify it but I'm okay with quantifying by saying that we've seen around a low single digit improvement, Mark in revenue-- in demand versus the second quarter on into the third quarter. Of course I would tell you that we don't have visibility into the month of September yet-- the final month of the quarter.

But as of right now, if we had to give you a forecast for the third quarter, we'd say that it's low single digits -- excuse me--high single digit improvement over the first half run rate.

And normally--hey Mark, this is Jim. Normally we have a 10% to 15% reduction in the third quarter due to the summer shutdowns in Europe. So to be flat to us is an improvement in itself.

And then the other part of your question, Mark, was-- are we seeing, by region, differences? And we are. Asia in particular, as everybody knows, is coming back very strong and the demand for our facility in Kunshan, China looks to be very good for the last half versus the first half.

And I think that initially we saw improvement first from automotive in Europe. But that's been followed by some automotive improvement in terms of just the month of August, as an example, in our U.S. operations as well.

Industrial is a little bit harder to track. We have a couple of barometers in the Company that we look closely toward, namely our cylindrical roller business in our U.S. ball roller operation. And that operation is trending up as well; not as much percentage-wise as the automotive we've seen, but it's trending up. And in fact, that operation is working a full schedule-- our Erwin roller plant is working a full schedule, meaning five-day weeks for the month of August for the first time in-- essentially in 2009.

So those are all what we call encouraging signs.

What's driving that roller business?

They serve a broad range of industrial end markets, Mark. And there's not one specific end market that's better than the others. But it's just a very broad range in terms of the construction equipment-- off high-way stuff-- not off-highway stuff in terms of motor vehicle but there's just a number of segments that are all trending up.

Okay. So I mean it does seem as if the first half probably represents the bottom as far as your shipment activity is concerned, at least over the near term?

Yes, I mean it does. And I'm really hesitant to say that there's a trend here, but everything that we're seeing at least in the last three months, namely May, June, July; is quite different than what we experienced in the first four months of the year or so. And it mirrors what you're hearing just most recently in the last week or two, with respect to GDP data, all the manufacturing-- global and North American manufacturing index activity. Indexes are up sequentially versus the first and second quarter. Then of course the automotive is well-documented.

Yes, no that's true. Alright, in terms of your cost-- your fixed cost momentum, clearly you were incrementally focused on that or got additional reductions as the second quarter progressed and probably had-- could you quantify a little bit incremental reductions that you've taken in July and kind of what the third quarter fixed cost number might look like relative to the second quarter?

I think that the second quarter was a pretty good reflection of what we anticipate for the third and fourth, in the absence of any additional actions that both Jim and I indicated we are constantly looking at in our business. As we mentioned, both the fourth quarter and the first quarter-- the full value of the reductions did not really start to occur until the second quarter.

So I wouldn't say that there's-- we have momentum for sure. We're continuing to look at other things, other structure potential issues-- restructuring potentially, as well as additional cost reductions which we always do. But to quantify what the third and fourth quarter might look like with respect to any of those things that we don't know as of yet, we probably don't have anything to comment on that.

Okay. Any-- can you give us an update on steel costs?

They've come down pretty substantially, as I think we mentioned in the first quarter. And they-- of course we have in place in some parts of the world, pricing that is effective January 1st through a full year of 2009 and then other pricing that's just six months in nature. But all of it's come down pretty substantially percentage-wise. And of course that's good. It's good for us and it's good for our customers from the perspective of--

(Inaudible) percent of those changes are getting passed through?

For all of our major customers that we have contractual agreements with or in some cases we don't have renewed contracts because of the current economic environment, but we honor what we had in the previous written contracts; we pass it through dollar for dollar or euro for euro. And so that is the majority of our business.

Okay. Alright, thanks for all that color and good luck showing some improvement to the bottom line in the third quarter relative to the second.

Thanks, Mark.

(Operator Instructions). And gentlemen, at this time there do not appear to be any further questions in the queue. Please continue with any closing comments that you may have.

Thank you. Let me summarize and conclude today's call by restating that the second quarter and our year-to-date results were of course dismal in terms of the magnitude of the revenue reduction and the resulting loss that we incurred at NN. With the collective actions we have taken to date on cost reduction on the cash side, a moderate improvement in demand and revenue will produce acceleration in our rate of improvement for both earnings and cash flow moving forward.

With that, I'll conclude the call and again, thanks for joining.

Thank you. Ladies and gentlemen, this does conclude the NN Incorporated Second Quarter 2009 Earnings Release Conference Call. If you would like to listen to a replay of today's conference, you may do so by dialing either 1-800-406-7325 or for international participants 303-590-3030. You will need to enter the access code of 4128602. Those telephone numbers once again are 1-800-406-7325 or 303-590-3030 with the access code of 4128602. With this, we do thank you for your participation. You may now disconnect your lines.