NN Inc (NNBR) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the NN Incorporated fourth quarter 2009 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions.) This conference is being recorded today, Wednesday, March 31, 2010.

I would now like to turn the conference over to Marilynn Meek from Financial Relations Board. Please go ahead, ma'am.

Thank you and good morning. Welcome to NN's 2009 fourth 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, Marilynn. Good morning, everybody, and thanks for joining the call. With me from Johnson City this morning, I have Jim Dorton, our CFO and VP of Business Development; Will Kelly, our Chief Administrative Officer; and Tom Burwell, our Corporate Controller.

Today Jim, once again, will offer an analysis and commentary on the fourth quarter and full-year results through December 31 of 2009. He'll also provide us an update on the status of our credit facility and liquidity, and finally comment briefly on revenue and earnings. I will conclude the call with overall comments regarding 2009 and review the most recent revenue and demand trends we see in the first quarter of '10, and close by commenting on an overall outlook for 2010.

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

Thanks, Rock, and good morning, everyone. Well, it was clear in the fourth quarter that demand continued to recover from the low point that we reached in April of 2009. Sales in the fourth quarter of 2009 were slightly better than in the fourth quarter of 2008. Overall sales were $2.1 million better, but if you remove positive currency impact and mix changes, the raw materials price pass-through, then our sales volume was up about $1.5 million, or 2%.

But this itself is kind of misleading, because business was declining at an accelerated rate in the fourth quarter of 2008, and in 2009 it was just beginning to recover. I'll remind you that the fourth quarter of 2008, sales were down 29% from the previous year.

So to put our recovery in perspective, in order to recover to a more normal time--I would say Q4 2007, where we had a sales level of $107 million--we would need a 37% improvement over the Q4 of 2009 sales level, and Rock will speak more to this in a moment.

And so still focusing on the fourth quarter sales levels, rather than looking at the results versus historical numbers, a better comparison and indicator of our momentum is if we compare the fourth quarter results to the business plan that we put in place early in 2009. This makes it easier to see the trends versus our expectations.

So whereas the fourth quarter was still a very difficult quarter for the Company, we were encouraged that sales were $10.3 million, or 15% higher than our business plan. It's even more encouraging to note that during the early part of 2010, we continued to see improved sales trends, and Rock will also speak about this.

Looking at our net loss for the quarter, we saw a real improvement versus the third quarter and our expectations. Our reported net loss was $3.4 million. Backing out the unusual or one-time items, the net loss from normal operations was $1.9 million, or $0.12 per share. This is a sequential improvement over the adjusted results from normal operations of the third quarter when we lost $5.9 million, or $0.37 per share.

And the results for the quarter were also above our business plan by over $2 million in net income and $5 million in EBITDA.

In the third quarter call, I reviewed our gross profit recovery trends, and I'll do that again today. If we look at the gross profit progression during the year--and this is excluding depreciation--Q1 had gross profit of $1.9 million; Q2, $2.9 million; Q3, $7.1 million; and Q4, $12 million. But the gross profit margins have gone from 3% to 5% to 11% to 15%. So the positive trend is clear. We're working our way back to our historic profit margin, and with the permanent cost reductions that we have made, we should eventually see those historic profitability margins.

In addition to the positive momentum of our recovery, we continued to have an excellent control over discretionary spending and strong working capital management. We told you in the third quarter conference call that we hoped to pay down a few million of debt in the fourth quarter, but we were actually able to repay about $7 million, bringing our total debt reduction in 2009 to $10.1 million.

We generated positive net cash flow despite having a loss of $35 million for the year by shrinking our working capital needs, and that's primarily bringing down inventory, by reducing capital spending to the bare minimum, and of course, by forgoing paying of our historic dividends.

If you look at the year, it was certainly a low point for NN. However, in the midst of the dire financial performance, we moved the Company forward in a positive way. We exceeded our debt paydown goals for the year and achieved all of our tight bank covenants. Through permanent cost reduction efforts, we've significantly lowered the Company's breakeven point. And on top of all this, our Whirlaway division won several large new contracts that will provide significant growth in 2011 and beyond, and Rock will talk about this.

We have spoken in the past about emerging from the recession as a better Company, and this is indeed happening.

We approached our lenders in December with a proposal to reset covenant levels to match our expected financial performance through 2011. We also asked them to fund growth initiatives totaling over $12 million. In other words, we asked the banks to put new money into the Company in the middle of the worst recession in our lifetimes. But the lenders stepped up to this challenge and indicated their faith in the management team and employees of NN. On March 9, we announced that we had amended our credit agreements through the expiration of the existing revolving credit agreement in 2011. This has allowed us to reclassify most of our debt as long-term debt at year end.

The banks agreed to fund our new investments, as I said. The covenant levels are set tightly against our business plan, so we obviously have to perform. And also, we reduced the revolving credit committed amount from $90 million to $85 million, with further small reductions starting at the end of this year. But we believe that we have sufficient room in the covenant levels and the borrowing limits to make it successfully through the expiration of the agreement. Other details have been filed with the SEC, and you can also read them in the 10-K that will be filed later today.

To speak about our tax situation for a minute, as of last quarter, we did not book any tax benefits against losses in most of our operating jurisdictions around the world. In the second quarter, we took a reserve against all of our US deferred tax assets and stopped taking the current tax benefits. The situation continued in the fourth 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 18.4% during the quarter and 6.1% for the full year. Looking forward to 2010, the tax rate for income statement purposes should be less than 10%, although it will vary significantly, depending on the recovery rate at the operations where we are still accruing taxes.

Another important factor is our depreciation and amortization charges. They have been declining due to the write-down of tangible and intangible assets, our plant closures, and our low capital spending. The depreciation charge for all of 2009 was $22.2 million, down from $28 million in 2008. Now, I will point out that in 2008, we had $3.5 million of accelerated depreciation, which bumped up that number. The forecast for 2010 is to have depreciation and amortization of approximately $20 million.

During the fourth quarter, we had $0.2 million in restructuring charges related to the write-down of real estate from our closed Ireland plants. For the full year, we had restructuring charges of $5 million, and that breaks down as $1 million total for the closure of Ireland; $0.1 million for the closure of the Hamilton, Ohio plant; and $3.9 million for the downsizing of our plant in The Netherlands.

On January 7, 2010, we announced that we would be closing our Tempe plant and that we would be taking $2.5 million in severance-related charges. These charges are not booked. We will take them during the year as they are incurred. In addition, we likely will be accelerating depreciation on up to $3 million of assets related to the plant closing as a noncash charge.

If you summarize all of our restructuring and impairment charges, starting with the fourth quarter of 2008 through the planned actions in 2010, we will have written off $36 million of goodwill and intangible assets, and we will have taken up to $7.4 million of impairment charges of fixed assets. We have very little intangible left, and all of our fixed assets will be conservatively valued. I think it's fair to say that we will be coming out of this recession with a very clean balance sheet in addition to our lower level of depreciation and amortization.

Now, briefly looking at the cash flow statement, we spent only $287,000 in CapEx for the fourth quarter and a total of $4.3 million for the year. About $1 million of this CapEx was funded by customers, and you'll see in the press release that it says we spent $3.3 million,which is the net number. But the cash flow statement will show $4.3 million of spending.

For the full year, inventory declined $20.3 million, which was the primary driver in our positive cash flow that allowed for our debt reduction during the year.

Our capital spending plan for 2010 is approximately $17 million, $12 million of which is for growth projects.

And that concludes my comments. Now Rock will talk more about the quarter, our recovery, and our new business prospects for 2010 and '11.

Thank you, Jim. I'd like to close the call with overall comments regarding 2009, and then get into an outlook for 2010. I'll begin by commenting on 2009.

Like many industrial companies worldwide, a year ago today NN was in the middle of an operating environment brought on by unprecedented global recession and a corresponding demand in revenue reductions of 50-plus percent in comparison to prior periods, especially 2008. Obviously, a reduction in overall demand and revenue of this magnitude was an experience we hope we never have to repeat in the future.

We mentioned in the press release the actions that our Board and management collectively took, beginning as early as the fourth quarter of 2008 and during 2009 to focus the Company and our global organization on the maximization of cash flow and preservation of liquidity.

Stated simply, in the absence of these actions, NN's long-term viability was definitely in question. The actions included, and were not limited totally to these actions, but mostly they included the following. Suspending our quarterly dividend payments to shareholders, we renegotiated our credit agreements with our lenders, KeyBank, BB&T, Regions Bank, Wells Fargo, and Prudential, in early 2009 and again in early 2009.

We accelerated the closing of three plants--Kilkenny, Ireland; Hamilton, Ohio; and in early 2010, Tempe, Arizona. We pulled capital expenditures for all uncommitted projects. We eliminated all discretionary spending. And we committed, at the beginning of the year, to an inventory reduction goal of $20 million. This was fully accomplished by year end. We did reduce inventories by more than $20 million, and it represented a 38% reduction of total Companywide inventory and preserved liquidity in a big way.

With respect to our employees who willingly sacrificed so much to ensure we survived the downturn during the year, they were impacted significantly based on the following actions. We reduced salaries and fees ranging from 10% to 20% for all directors, officers, and salaried employees. We eliminated all wage increases and bonus potential for 2009. We, unfortunately, had to reduce our total employment by 640 employees, or approximately 28% of NN's total global employment. And for our remaining employees, we implemented reduced work schedules and reduced wages by eliminating workdays or entire work weeks from planned production schedules.

As a result of the 10 primary actions I just mentioned, coupled with outstanding performance achieved in our Bearing Components, Rubber and Plastic Components, and Precision Metal Components business units, we were able to pay down, as Jim mentioned, $10.1 million of debt during 2009, which far exceeded our beginning-of-the-year stated objectives of cash flow neutrality for the year.

Of course, the ravages of the actual recession were reflected in our revenue and earnings results for the full year, as Jim mentioned. Our revenue for the year of $259 million was down a whopping a $165 million from 2008, which resulted in a loss from normal operations of $23 million. Honestly, at NN in the 30-year history of the Company, we have never experienced a year, an individual calendar year, that we were not profitable--that is, until 2009.

Given a $10 million profit from ongoing operations in 2008, the loss of $23 million from operations in 2009 meant that we experienced a negative swing of $33 million in after-tax profits in a single year. It's really difficult to discuss exceptional performance within your business given the magnitude of our losses during the year, but the reality is that our losses would have been more than double what was incurred had we not experienced extraordinary performance throughout the Company.

It's not an exaggeration to say that collectively, the sacrifices from our shareholders, employees, directors, and the continuing support from our customers--all of whom, by the way, were dealing with the crisis themselves--and lenders allowed us to survive the crisis. I'm personally grateful to each of our stakeholders for the support and contributions they made during a very difficult year.

Finally, I would like to conclude today's call by commenting on the levels of demand we are experiencing in the first quarter of '10 and provide a revenue outlook for the full year. As we mentioned in the press release, we began experiencing improvement sequentially in our revenue numbers as early as the third quarter of 2009. That improvement continued in the fourth quarter and has continued on into the first quarter of 2010. Visibility from our customers has improved versus our experience in 2009, when we basically had no visibility beyond the current month of operations.

Based upon our revenue run rates in the first quarter and our close-in forecast for the second quarter, we are providing revenue guidance for the full year in the range of $315 million to $335 million. The midpoint of this guidance--$325 million--would represent a 25% improvement over 2009 business levels. We believe our current improvement in revenue is a result of (technical difficulty) first, the underlying demand globally in automotive and industrial end markets is improving; and second, the impact of inventory restocking from our customers.

Although it is very difficult to provide a truly accurate number in terms of the relative impact of both, as of the first quarter, we believe that approximately 50% of the improvement is associated with the improvement in underlying demand, and the remaining 50% of the improvement is associated with restocking of inventories within the supply chain.

For that reason, we are cautious regarding the last half of 2010. Continuing good news on the economic front will be required to sustain the rate of increase in the last half of 2010. Obviously, a $66 million or 25% improvement in revenue for 2010 will greatly improve our operating results should we achieve this growth.

As Jim mentioned in his comments, if we achieve our 2010 revenue guidance, we are approximately 40% of the way back from the pre-recessionary levels of business. We still need an additional recovery of approximately 37% from 2010 estimated revenues, or $120 million in annual business, to fully recover to the pre-recession level.

Given our current level of forecasted business for 2010, we are continuing to manage the Company with a focus on cash flows and strict expense controls. We are obviously not out of the woods yet in terms of returning the Company to a level of profitability and cash flow that will sustain our business long term. For that reason, as revenues improve, we will continue to manage in a crisis mode during 2010 by closely monitoring working capital and avoiding permanent increases to our cost structure moving forward.

Regarding the longer-term outlook, we anticipate spending $16.7 million in CapEx for 2010, 65% of which is funding the exciting new business at Whirlaway. When we acquired Whirlaway in late 2006, we believed their core competencies represented an ideal first acquisition to build a new product platform in the Company, namely, precision metal components. During 2009, they were awarded five new programs, two with new customers and three with existing customers, that will deliver approximately $20 million of new revenue in 2011 and up to $30 million of new revenue by 2012. We continue to see excellent mid- to long-term organic growth opportunities for our newest business.

Although our capital spending is high in 2010 based upon funding the Whirlaway growth I just mentioned, as we look to the time period of 2011 and on into 2012, we intend to support our Bearing Components, Rubber and Plastic, and Precision Metal business units with both organic growth and maintenance capital needs.

However, we also intend to focus on significantly reducing debt during this same time period. A real lesson learned for us as a Company from this global economic crisis is this--we entered the recession thinking we had a "conservative" balance sheet in place, and by most leverage measures, we did. But to ensure our capital structure is healthy moving forward, our intention is to reduce our debt levels to lower levels in relation to our cash flows than what we had targeted in the years before the global recession occurred.

With that, I'd like to open the call up for questions and answer any questions that you might have.

Thank you, sir. (Operator Instructions.) And our first question comes from the line of Mark Parr with KeyBanc Capital Markets. Go ahead, please.

Hey, Rocky, Jim.

Good morning, Mark.

Hey, thanks for the color and all the commentary and the detail. It was very thoughtful, and it seems like you've done a great job of setting yourself up for the recovery. Could you give us a little more color on the growth projects for Whirlaway? And also, could you talk a little bit about the source of the revenue improvement overall from an end market perspective?

Sure, Mark. As we mentioned, there's five major programs in terms of the new business at Whirlaway, two new customers out of those five programs, as well as new and significant new programs from three of our existing customers there. The programs themselves center, in three of the five cases, in automotive. But they tend to be automotive-related new technologies in either fuel economy or steering systems or a variety of other new technologies that we're really excited about.

The programs themselves tend to go out five to six years, so there's a long-term commitment from these new programs with our customers. The two industrial programs are similar in length relative to overall commitments from the customer. And we've just outlined the '11 and '12 revenue. None of them will impact, to any magnitude, 2010 revenues, although we will start shipping just small amounts in '10. But we expect to be up, not fully running to the levels that will be achieved in '12 and '13, but very significant revenue for '11 and on into '12.

So we're excited about that. And I think that I touched on the core competency issue of Whirlaway and what we thought we were acquiring when we acquired them. And in fact, I think, customers are validating that on the basis of the awards of new business. And I would also say that we have in the pipeline exciting other opportunities that are not booked yet, but we hope will be in the next 12 months.

So to work this, if I could, the Whirlaway new business opportunities or the new programs, does it revolve around the Company's existing core competency in precision-engineered shafts?

Some of it does, but it's precision-engineered metal components, Mark, and assembled components into what we would consider a finished product, but to our customers and these programs, obviously, it's a component that goes into a finished product. We've mentioned many times that they have excellent manufacturing and engineering capabilities on designing and collaborative design work with customers and assembly, and assembly of multiple components. And all of these programs are right in the sweet spot of those competencies and are obviously very exciting.

Okay. Were these highly competitive situations that could be subject to competition over the next several years, or is this pretty much a sole-source situation?

It's interesting. On some of them, it's a sole-source situation, and on others, we're the predominant supplier of these products over the five-year program life. On the individual products themselves, we're the sole supplier, but there are other related programs where we'd be, in terms of the total opportunity, we'd be the major supplier.

And I think I would say the other thing that's important here is based on the technology and the new technologies in automotive. The customers that we're partnering with are very successful, they're very profitable, and we expect good levels of profitability on the business that we've been awarded as a result of that.

Okay. What color can you provide as far as end market recovery momentum? I know automotive is a big piece for you, and so is Europe, the European economy. Could you comment on those two segments, and then anything else that you're seeing that might have some better than trend line recovery opportunities over the first half?

Sure. Of course, the US--or excuse, the North American recovery in automotive--is at a much greater rate than what's happening in Western and Eastern Europe year over year in terms of incremental change, and that recovery's well documented in North America. And also Asia--not necessarily China, everybody knows the explosive growth that is occurring there. But on the automotive front, in selected Asian markets, nice growth is occurring sequentially as well there for our Chinese operation.

And so for our US operations and China, the growth in terms of percentage-wise in our Bearing Components business, and specifically the ball business, is ahead of Europe at this point. Having said that, the growth in Europe, based upon a number of factors, including restocking of inventories that were very depleted versus other parts of the world, has been good. And so the industrial side of our business, Mark, which is 35% to 40%, lagged the recovery in automotive. But within the first quarter on the industrial side, in all the industrial metrics that we measure and the products that we sell into the industrial end markets via our customers, has come back nicely as well.

In that, there's not much of a difference versus what I was just describing in automotive for the regions of the world. The industrial markets in Asia and Europe and North America have come back in the first quarter at about the same rate.

Okay. Did you have any weather-related issues from a shipment standpoint in the first quarter?

Not really.

Okay. All right, I'll pass it on. I've got a couple of other follow-up questions, but I'll be back in queue. Thanks.

Okay, Mark.

Thank you. And our next question comes from the line of Holden Lewis with BB&T. Go ahead, please.

Thank you. Holden Lewis, BB&T. I just wanted to get a better, you guided, given the odd numbers in SG&A and D&A in the quarter, I think you guided the D&A down to that $20 million number, which is great, gives us a sense of the baseline. But SG&A, you've been running sort of that $6.5 million to $7 million type range for the balance of the year. Q4's obviously higher. I assume that there's some stuff in there, even taking out the restructuring. Can you just talk about fourth quarter and then talk about maybe what the trend line SG&A levels are looking like as you go into 2010?

Hey, Holden. This is Jim. There were a few items that were accelerated into the fourth quarter that made the SG&A a little bit higher than it would have been. We, as you know from what we've said, though, we didn't accrue for, because we canceled any bonuses, because we canceled those, so that would have been an offset to that. So I'm not sure that I really have a good analysis of anything unusual in the fourth quarter.

I can tell you going forward, though, and this is interesting, our SG&A has gone down considerably from the run rate we had before. And in 2010, we're showing only a modest increase there. And that's because some of the things that we, a lot of the changes that we made are permanent changes, like the plant closures. So we don't have it coming back up in dollar terms, although it will probably remain high as a percent of sales.

So I'm sorry I don't have any real numbers to give you. I can only give you just those general comments.

Okay, that's fine. But you're looking at SG&A to be flat to slightly up sort of year-over-year basis, so yes, that's really compressing that. I guess then, also, looking as much as possible in terms of leverage, just cuing off your better revenue trends, setting fourth quarter aside because the revenue increase is so small that it results in big numbers, from a gross margin standpoint or a gross income standpoint, for every dollar increase or decrease over the past five or six quarters, you've dropped 35% to 40% of that down to the gross profit line. Is that the right number? Should it be greater as we come out because of the cost savings? And what are you anticipating dropping through to that gross profit line as your revenues increase? Any insights into that?

Yes, if you had to pick a number, 40% would be the good modeling number. We already have cost savings that we're carrying through there, so that's really just a look at, or an estimation of how much variable cost comes in every time you sell a new product or produce a new product.

Or incremental dollar of revenue. Which I think is, did you ask on the incremental side?

Yes, exactly. On the incremental side. Okay, fair enough. And then you talked a little bit about your production footprint. Obviously, you've shut down a number of these facilities. You've shifted some of that capacity elsewhere. Relative to where you were before the downturn, what percentage of your production now is out of sort of low-cost facilities like China and Slovakia versus high-cost facilities in Europe and North America? Did that change meaningfully, and what's the cost disparity between the two?

I would say it has--the reduction, or the closures so far, particularly Kilkenny, production shifted to, for that particular facility, to our Pinerolo, Italy, facility, as well as our Slovakian facilities. And some indirectly through mix and shift changes to China. So there was a shift there. I wouldn't say a substantial shift, but a shift.

And then I guess the second part of the question was what?

I just looked at, I guess I was assuming that there would have been a noticeable shift in where production was, and I was wondering what the relative cost structure was between the Slovakia-China versus US-Europe.

Yes. You have that shift, of course, but then in the Hamilton, Ohio, and Tempe, Arizona, closings, that shift is within North America and within the United States, specifically from Arizona and the plant in Ohio to our two remaining large facilities that comprise Whirlaway in Wellington, Ohio. But not a big shift in terms of overall cost structure there. But obviously, a significant reduction in fixed costs in every instance that we've mentioned in terms of the plant closures themselves.

Okay. And I think the subject of--one more thing and I'll jump in the queue--the subject of fixed versus variable costs coming back in. I'm not sure you have a great breakdown of how that plays out, but do you at least have a sense of how much fixed costs you've taken out of the model? Without trying to figure out what the rest of it is, do you know how much of the fixed piece has been taken out over time? Just related to plants and things like that, I guess.

Holden, we have some estimates on that, but we're not ready to go public with them for a number of reasons, mostly because we need to see how the growth comes back and to see how the plant structure fills out over the next year or two. So we're not ready to give you those numbers.

Okay.

We're not sure we have actual--we don't have final numbers, because we don't know how the plants are going to fill back up.

Okay. But in terms of total costs that you took out, I think you were at $55 million at the last call. Is that a different number now?

Around $60 million--$63 million to $64 million. And the big question that we can't really answer, and we're not going to try to speculate on is how much of that is a permanent reduction and how much is going to come back with volume.

Right. Yes, I didn't know if you had some order-of-magnitude number, nothing precise, but to give us a sense. Okay. All right. Thanks, guys.

Thank you.

Thank you. (Operator Instructions.) And our next question is a follow-up from Mark Parr. Go ahead, please.

Thanks very much. Hey, Rock, I usually ask you this. Would you comment on steel price momentum, how often the pricing is set now and what sort of price changes you're looking for for 2010?

Yes. Momentum in steel prices is a good term, Mark, because we're anticipating--it varies by where we are in the world, but, or whether we have a year agreement in place or six months. But generally speaking, it's six months. And we are anticipating increases beginning midyear. When I say midyear, beginning in the third quarter of the year, pretty significant increases percentage-wise, and getting back much of what, the reductions that we received over the last 12 to 18 months, getting back to probably where we were pre-recessionary level in terms of pricing.

And that's true, really, in every region of the world. And, of course, we're going to pass that along as they occur, when they occur. But it's definitely coming. Price increases are definitely coming.

Any idea--I guess it's premature to ask you what sort of upside you would expect for the second half--but can you talk about the change in steel prices for the first half of 2010? Stuff that you've already locked in?

Yes, there was really no significant change, Mark, for the first six months of the year. Everything that I'm suggesting in terms of what we've been told is for the last half.

Okay. Terrific. Thanks very much.

You're welcome.

Thank you. (Operator Instructions.) And our next question is a follow-up from Holden Lewis. Go ahead, please.

Thanks. The price mix component of the revenues, as you noted, I think, in the release, is down $3.5 million. That definitely widened. It looks like it was more on the mix side. Can you just give us a little bit of color of what's going on in there and how that line should react, particularly once you get into the second half of 2010 and you're seeing higher raw materials?

It was all mix. We didn't have any cases where we were lowering prices in this environment. And going forward, it can vary depending on how demand comes through, but we have some really good prospects for growth in our higher-margin products that would tend to think that we might have a positive there. We're also having some tremendous demands from customers on some of the lower, just the commodity, more commodity like lower price, so it's really hard to predict. But I think, in general, we would be fairly optimistic that mix is going to be a neutral to a positive.

And mix is just which division that growth comes in, whether it be Delta Rubber or anything like that or--?

Really, no product growth. I mean, there is some of that, but within each plant, we have some products that are higher margin than others and that's where the mix is.

But you report that mix from a revenue standpoint, so you're just looking at it in terms of ASPs of one unit versus another in terms of that impact? How does that mix result in $3 million down revenues? Or a $3 million drag in revenues?

It's really unit prices within products themselves and individual facilities and business units, mostly.

Okay. And then you alluded to lowering your breakeven point. I won't ask you where that is, but I will ask, if given what you're seeing in terms of revenues in Q1 and going into Q2, are revenue levels now at a point where you can close the gap between this $0.12 loss in Q4 and actually making money in Q1, Q2 at these revenue levels? Or are you able to opine on that?

I know you want us to opine on Q1, Holden, but we really, really can't. It's fair to say that we're doing better than the fourth quarter, for sure, based upon the revenue improvement.

And every dollar of revenue closes the gap.

And it does seem like you're assuming that sequential revenue levels in Q3 and Q4 are lower than Q1 and Q2. And that's just a cautionary tale regarding the stocking process being done, or is that the traditional seasonality, or how should we interpret that?

Both. But I also said in my comments that everybody, relative to this restocking and the demand associated with replenishing the supply chain--not for the first half of 2010 because I mentioned that we have improved visibility. And honestly, based upon that improved visibility, the guidance we've given relative to the percentage improvements is real. The issue and concern that we have is the last half, and whether the economics will improve, or continue to improve, as they are trending improvement now, the last half of the year that would support when the restocking starts reducing in terms of magnitude and the impact of the restocking itself.

I wanted to give you just a little color on that as to why it's so hard to figure out what's going on with the destocking. We took a look at the automotive markets that we serve, now that the year's done, and we see that on the markets that we really sell into, heavily Europe and the US and certain Asian markets, that was down, production was down 22% in 2009. But we were down, depending on the segment, closer to 40%. So we know that there's that destocking, unaccounted-for 20% loss in business that's destocking.

Now, as demand starts coming back up, it's virtually impossible for even our customers to tell us how much they're buying to put into production and how much they're buying to fill inventory back. So we just have to see how it plays out, and that's why we're cautious on the second half, because we don't know how much of that demand is for production and how much is for restocking the supply chain.

Okay. All right, great. Thanks.

Thank you. We have no further audio questions at this time. I'd like to turn the conference back over to management for any closing statements.

Let me conclude today's call by restating that we are grateful to have successfully weathered the economic--the worst of the economic storms, anyway, associated with the global recession. Although many of the decisions made during 2009 were extremely difficult based upon the impact on many of our stakeholders, they were in fact necessary to ensure NN's long-term viability.

Moving forward, we are a leaner and more cost-efficient company. As incremental revenue growth occurs, we anticipate an acceleration of our earnings improvement as a result of the permanent improvements to our cost structure that we've made. We look forward to fully capturing these improvements during the upcoming year and beyond and returning NN to a level of healthy profitability in the years ahead. Thank you again for listening to today's call.

Ladies and gentlemen, this concludes the NN Incorporated fourth quarter 2009 conference call. If you'd like to listen to a replay of today's conference, please dial 800-406-7325 or 303-590-3030 with the passcode 4257620. ACT would like to thank you for your participation, and you may now disconnect.