NN Inc (NNBR) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the NN Inc. third quarter 2009 conference call. (Operator instructions.) This conference is being recorded today, Thursday, November 5th of 2009. At this time, I'd like to turn the conference over to Marilyn Meek with Financial Relations Board. Please go ahead, ma'am.

Thank you. Thank you and good morning. Welcome to NN's 2009 third quarter results conference call. If anyone needs a copy of the press release, please call my office at 212-827-3746 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. This same language applies to the 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'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, Marilyn. Good morning, everybody, and thanks for joining the call. In Johnson City with me this morning, I have Jim Dorton, our Chief Financial Officer, Will Kelly, our Chief Administrative Officer, and Tom Burwell, our Corporate Controller.

Jim is going to supply in his opening comments an analysis and comments on the third quarter and year-to-date results through September 30th. And then, he will conclude his comments by providing an update on our liquidity status, including a discussion regarding our current financial performance in relation to our credit facility covenants, and the status regarding our efforts to work with our bank group to extend our covenants beyond March 31st of 2010.

I'll conclude the call with comments regarding our current revenue and demand outlook, and provide an update with respect to our ongoing efforts to further reduce our operating costs and enhance our cash flows.

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

Thanks, Rock, and good morning, everyone, again. As we look back at the lowest point earlier this year when we were trying to find the bottom of this market, we laid out a modest month by month recovery plan in which the destocking effect would begin to fade in the third quarter, and auto and industrial demand would begin to firm.

And although visibility was low and still is, we actually did a pretty amazing job of forecasting, and our performance over the last few months has been even better than we expected. Fundamentally, we have seen destocking ease and we've seen auto demand up both due to programs like the Cash for Clunkers program and a stabilization of underlying demand.

This has resulted in our sales picking up 13% compared to the third quarter. We have not yet seen any uptick in the industrial demand. But, as I mentioned, we are still steadily improving and staying ahead of our recovery forecast.

Probably just as good news as this is that we have continued to manage our expenses well, and our cash flow has been better than we forecasted. We hoped to be cash flow neutral at best, but we have actually been able to repay debt. We paid down about $5 million of debt during the third quarter, and we expect to be able to pay down a few million more before year-end. We have managed to the aggressive working capital goals that we set, which has put us in a good position going into 2010.

Of course, the comparisons to 2008 are still pretty grim. Sales in the quarter were 37% below the third quarter of last year. But, during the first half of 2009, we were down 53%. So, while sales are still low, you can see the improving trend.

If you strip out the restructuring charge, which I'll discuss in a minute, we have a net loss of $59 million -- or $5.9 million or $0.37 per share, which compares with a net income of $2.9 million, or $0.18 per share, in the third quarter of last year.

If we look at the gross profit progression during the year excluding depreciation, Q1 had a gross profit of $1.9 million, Q2 $2.9 million, and Q3 was $7.1 million. And relatedly, the gross profit margins have gone from 3% to 5% to 11%. So, we still have a long way to go to get back to the 20% plus range where we normally operate, but you can see the positive trend.

Another milestone in our road to recovery is that if you exclude the restructuring charges, we were EBITDA positive for the first time this year. So, from here on out, we won't be dependent solely on working capital reduction to generate cash.

During the third quarter, we reached agreement to downsize our roller plant in the Netherlands. We took a restructuring charge of $3.9 million, or $2.9 million after tax, for severance and related charges. This is something that we had needed to do for some time, and it has a payback of less than one year.

Last quarter, we put a reserve against our US deferred tax assets and stopped taking a current tax benefit for losses at US operations. This situation continued into the third quarter and will remain that way until we see enough profitability recovery to be able to forecast using the accumulated NOLs. This resulted in our effective tax rate being 14% during the quarter.

Including the restructuring charge, we had a net loss of $9 million during the third quarter, or $0.55 per share, compared with net income of $2.9 million, or $0.18 per share, during the same quarter last year. Year-to-date, we have reduced working capital by $23.3 million, and this is led by a $20 million reduction in inventory that Rock will discuss more in a minute. We have already spent most of the CapEx that we intend to spend this year, or about $4 million.

Looking toward the fourth quarter and next year, we see a continuing recovery trend, although it's very difficult to project absolute levels. It is particularly hard to get a handle on the level of destocking still going on within our supply chain. We know that some of our customers are now ordering to production levels. But, overall the increase doesn't seem to support the idea that destocking is over, particularly in the industrial segments where our orders are still very low.

Now, I'll spend a minute to talk about where we are with our lenders and our debt covenants. We were in compliance with all lender covenants during the third quarter. And as we mentioned last quarter, our covenants only extend through the first quarter of 2010. So, before the end of the first quarter of next year, we will be working with our lenders to set new covenant levels. Since we are doing better than forecasted and actually paying down debt, we believe that the lenders will work in a spirit of partnership with us to set reasonable covenant levels that provide the operational flexibility we need to continue to grow out of this recession.

We are assuming at this point that we will have new covenant levels before we report the fourth quarter results early next year. And this could allow us to report our debt as long-term again rather than as a current liability, assuming that we get covenant levels that extend for 12 -- at least 12 months after the time that we file the fourth quarter report. However, this is a fluid process depending on a lot of factors. But, we remain confident that we will have a positive outcome.

That's all I had on the financials. And now, Rock will talk more about the quarter and the outlook.

Jim, thank you. I'd like to close today's call by commenting briefly on the current business conditions we see specifically in the fourth quarter and the continuing management actions we are taking in order to further lower costs and preserve our liquidity.

I'll begin by commenting specifically on the third quarter and year-to-date revenue results, and then the underlying economic conditions that we currently are experiencing. During the third quarter, we experienced what we think is the early stages of a global economic recovery. Excluding currency, as Jim mentioned, our revenue of $66.1 million was up $7.5 million or 13.1% from the second quarter.

The revenue trend within the quarter was also encouraging based upon the sequential improvement on a month-to-month basis within the quarter. As we mentioned in the release, during the latter part of the third quarter, namely the month of September, our sales were up 28% in comparison to the average monthly revenue we experienced during the first half of this year.

As Jim also mentioned in his comments, we experienced solid margin improvement in the third quarter versus the second quarter of the year. The additional revenue, cost reduction efforts, and the reduction in the rate of decline in our inventories all contributed to good margin improvement. Gross profit margins improved from 5.2% to 10.8%, and our operating loss, excluding restructuring, was cut 47% from an $8.6 million loss in Q2 to a $4.6 million loss in Q3.

Jim has touched on the working capital improvements that NN has achieved through the first nine months of the year. Of significance is the reduction of $20.2 million in inventory, a 38% reduction from the beginning of the year levels. The $20 million reduction was, in fact, our beginning of the year target based upon our desire to remain cash flow neutral during 2009. The fact that we are slightly cash flow positive represents outstanding operating performance, given the magnitude of our revenue decline.

We continue to believe that the dramatic decline we have experienced is more than just a drop in pure demand relative to our served automotive and industrial end markets. The affect of supply chain destocking is and has been significant and accounts for more than one-third of the reductions we've experienced. Our third quarter results reflect the fact that the majority of the destocking in automotive end markets appears to be abating.

The destocking impact, coupled with the government sponsored automotive incentive programs in Europe and the US, resulted in real demand improvement from our customers on the automotive front. Demand in China automotive was also robust during the third quarter. However, as Jim also mentioned, our global industrial end market, while stable, has shown no real sign of recovery, nor have we seen the destocking reductions reverse.

I would like to transition to comments regarding our most recent demand and revenue outlook, and specifically what we are seeing in this current fourth quarter. Lack of visibility beyond 30 days remains the norm in the current environment. However, the third quarter improvements we experienced are carrying forward into the fourth quarter.

We see real evidence of global improvement in our overall businesses in North America, Europe, and Asia. As we mentioned before, this improvement relates specifically to the automotive business at this point.

While there is debate regarding the pace of the recovery and the overall impact of the cash incentives on true automotive demand, at NN we are seeing positive effects of both a slight uptick in demand and, more significantly, the overall impact of the rate of destocking declining. The most recent auto sales and the key economic indicators associated with global and regional manufacturing activities are encouraging and seem to be pointing to a recovery in automotive as well as industrial end markets.

Based upon our revenue -- current revenue view for the first two months of the fourth quarter, we expect that the fourth quarter will be higher sequentially than the third quarter, an additional positive sign in terms of the overall trend. I first mentioned during the second quarter earnings call that -- the fact that we had actually allowed the adjective encouraging to enter our vocabulary at NN. We have now transitioned to the noun optimistic to better describe what we feel our current feelings are with respect to the business outlook and trend.

Finally, I would like to conclude today's call by providing an update regarding the management actions associated with cost reductions and cash preservation that we continue to take in the current environment, and comment briefly on the transitional year of 2010.

Although we are actually optimistic in the short term, the overall economic data seems to support that the rate of recovery will be gradual. Because we believe that will be the case, we are operating and managing at NN with the assumption that it is necessary to continue to work on further cost reductions and cash conservation actions.

Our goal is to reduce our overall net income and cash flow breakeven levels to ensure that when a sustained recovery does occur, the resulting earnings and cash flows from our business will be at healthy levels. Our third quarter results give an indication of how nicely our profitability improves when revenue improves incrementally. In the third quarter, our contribution margin on the additional sales volume was 46%.

With respect to cost reductions and restructuring actions, to date we have removed a total of $73 million in annual expenses and cash costs from the broad categories of employment, purchase costs, restructuring, SG&A, fixed costs, capital expenditures, and dividends. These actions, combined with our $23 million of working capital reductions, have allowed us to achieve year-to-date cash flow positive results, give a 48% or $168 million revenue decline year-to-date. The net result from a liquidity perspective is that we have lowered our debt and improved our relative position with respect to our credit facility and availability of credit.

With respect to 2010, we are currently in the final stages of developing our business plan. With the lack of visibility still an issue, and having said that, forecasting is difficult -- forecasting is as difficult as it's been all year.

With that said, however, we are forecasting a recovery with corresponding improvements in earnings and operating cash flows for the upcoming year. We anticipate a return to managing our business with a focus on profitable organic growth in our metal bearing, rubber and plastics, and precision metal components businesses.

Of note, our precision metal components business at Whirlaway has recently been awarded significant new business programs that will greatly enhance the future revenues and profitability of our newest acquisition and business platform.

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

Thank you, sir. (Operator instructions.) We do have a question from the line of Mark Parr with KeyBanc Capital Markets.

Hey, guys. Good morning.

Morning, Mark.

Hey, Mark.

Hey, you got the A team today.

Yes, that's nice. Thank you.

Hey, good job on the recovery. I guess I had two questions, Rock. One, you talked about a -- what was it? About a -- I saw about a 45% marginal contribution on the incremental sales in the third quarter.

Yes.

Is that something that you see has potential to increase going forward? Or, were there any inventory mismatches or other things that held that back in the third quarter? And can you talk about what it was on a pure operational basis, X any working capital issues?

Yes. I think it's a good question, Mark. And honestly, the 46% is slightly higher than what we would normally see, given working capital neutrality. As I mentioned, the inventory reductions in terms of the slope of the decline really leveled out in the third quarter. And so, that 46%, in normal times without working capital, with working capital neutrality we would think would be around 40%.

So, there's six -- there's 600 basis pointed or 6% that probably was attributable to the inventory. But, 40%, given our current -- the reductions in our current cost structure and fixed costs, is about what we would expect on the upside.

Okay. One other question. Can you just give us an update on what you're looking -- expecting as far as steel prices are concerned in the first half of next year?

Yes. It's a mixed bag, Mark. We're expecting a slight increase in Europe from the European producers. And we're expecting firm and no real change in prices from our Japanese suppliers where we actually import into the US.

So, stable on the US front, but exported from -- or imported in from Japan, principally. And in Europe, it's just a very small increase.

Okay. So, that -- Timken on their call announced this relationship with Daido to support their Chinese growth initiatives.

Yes.

And I'm just -- I think Daido is your supplier in Japan, if I'm not mistaken. But, does that -- the appearance of an increase in relations between those two companies, does that have any potential implication for the supply dynamic for your domestic operations?

Not that we're aware of. Of course, it could have a dynamic change in our supply in Asia, potentially, moving forward for our Chinese facility. But, in terms of the relationship, and they are the predominant supplier of our product coming into the US. But, it has potential, honestly, for Asia.

Okay. All right. Well, look, congratulations on the progress. And I guess -- you want to venture a guess in terms of when you might get into the black?

No. Honestly --.

I'll bet you a martini. Come on.

You'll bet me a martini? Okay. We're -- the numbers are trending toward net income breakeven, and they're above cash flow breakeven already. And so, we're encouraged by that.

But, it's -- the lack of visibility still is a big deal. And of course, the impact on the destocking is a big deal and it can change our revenue pretty dramatically.

Okay. Well, look, I just wanted to give you an opportunity just in case. Anyway, good luck on working on the plan. You're clearly making progress. And in the last several months, the stock price is showing that, too. So, congratulations and hopefully the market will continue to recognize all the good work you guys are doing.

Thanks, Mark.

(Operator instructions.) Gentlemen, there are no further questions at this time. I'll turn the conference back over to you for any closing remarks.

Okay. Let me summarize and conclude today's call by restating that the third quarter results represent what we hope is the beginning of a gradual global economic recovery and a corresponding improvement, of course, in our financial results at NN.

We look forward to the improvements that will result from the global recession ending and NN emerging from this recession as a stronger and more competitive Company in the future.

Thank you again for listening in on today's call.

Thank you, sir. Ladies and gentlemen, if you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 using the access code of 4179487 followed by the pound key.

This does conclude the NN Inc. third quarter 2009 conference call. Thank you very much for your participation. You may now disconnect.