NN Inc (NNBR) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the NN Incorporated second quarter 2010 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open to question. (Operator Instructions) This conference is being recorded today, Wednesday, August 11, 2010.

I would now like to turn the conference over to Marilyn Meek of the Financial Relations Board. Please go ahead.

Thank you. Good morning. Welcome to NN's 2010 second 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 today's press release. The same language applies to the comments made on today's conference call and live web cast available at www.earnings.com.

With us this morning is Rock Baty, Chairman and Chief Executive Officer, and members of the NN's management team. First management will give an update and 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.

Marilyn, thank you.

Good morning, everybody, and thanks for joining the call. With me in Johnson City this morning, I have Jim Dorton, our Chief Financial Officer and VP of Business Development; Will Kelly, our Chief Administrative Officer; and Tom Burwell, our Corporate Controller. Today, Jim will offer an analysis and commentary on the second quarter and year-to-date results through June 30, 2010. I will conclude the call with additional comments regarding the second quarter performance as well as our revenue outlook for the second half of the year.

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

Thanks, Rock. Good morning, everyone.

As pointed out in the press release, sales for the quarter were $92.7 million, up 62.3% versus the second quarter of last year. Adjusting for currency changes, sales were actually up 68%. Our dramatic recovery is continuing from the first quarter, and we continue to see positive sales momentum in all sectors of the business. And Rock will speak more to this in a minute.

Boy, what a difference a year makes. Net income for the second quarter was $5.1 million or $0.31 per share, which contrasts sharply with a loss of $13.5 million or $0.83 per share last year. The major factor in the higher earnings was the increased volume, combined with a lower cost base. This is a record earnings pace, but on much lower revenue, which reflects our lower cost base and leaner operations coming out of the recession. For the first -- for the first quarter of this year, we removed a mandatory salary cut that we had implemented during the recession and during the second quarter, we accrued our normal incentive bonus. So salary costs are now back to normal in the second quarter, but our employment remains -- employment levels remain about 15% below the pre-recession level. The point is that our costs per employee was at normal levels in the second quarter, but as a leaner Company, we have fewer employees.

Taking out the unusual, or non-operating items, we had net income of $4.4 million or $0.27 per share during the quarter. The items we excluded from normal operations are the foreign exchange gains on inter-company loans of $1.4 million or $0.8 per share -- $0.08 per share, and restructuring charges of $0.7 million or $0.04 per share, related to the closure of the Tempe plant. And these items are laid out in a table on the back of the press release.

Regarding the Tempe restructuring costs, we told you in the Q1 conference call that we would be taking about $1 million of accelerated depreciation on those assets in the second quarter and third quarter. But due to an improvement in the used equipment market, we changed our estimates of residual value and we did not book any accelerated -- accelerated depreciation in the second quarter, nor do we expect any more accelerated depreciation from that facility in 2010. However, we are considering several options for the most optimal way to close down the business in Tempe, and we won't have the final outcome on that until later in the second half.

EBITDA for normal operations was $12.2 million for the quarter, and $21.2 million year-to-date. Based on improvements in earnings and associated levels of EBITDA, we expect that by year-end our funded debt-to-EBITDA ratio will return to historic levels of less than two times. For the last several quarters, we have reviewed our gross margin -- gross margin trend starting with the first quarter of 2009, which was the first quarter of the really serious recession hit for us. So starting with that quarter, our GP margins have gone from 3% to 5% to 11% to 15% to 19% in the first quarter of this year, and now in the second quarter, to 21%. In the second half of this year, we expect margins to be slightly lower than in the first half due to product mix, fewer work days in Europe and currency impacts.

The tax rate was 22.9% during the second quarter. At the first quarter conference call we guided you to a 15% tax rate based on our forecast at the time. And I will remind you that, for GAAP purposes, we are only accruing taxes at two of our European locations and none in the US or Asia, so the average rate can vary widely based on the location of our earnings. Again for cap -- for GAAP purposes, we need a three-year profitable look-back to start taking tax benefits or charges again in the US. So, given all of that, we would now estimate about a 20% tax rate for the third quarter and fourth quarter at this point, but it remains a moving target.

Now I'll talk a minute about the impacts of currency. The Euro weakened against the dollar again in the second quarter. And this has three distinct impacts on NN. The first is that a weaker Euro creates paper gains on inter-company loans between the US and European subsidiaries. The gain we took this quarter totaled $1.4 million after tax. And this is the only one of the three foreign exchange impacts that we are excluding from normal operations. The second impact is a gain on the translation of customer accounts receivable balances, which totaled $0.4 million after tax in Q2. The third impact is on the translation of Euro sales and earnings into dollars. This impact partially offsets the first two. During second quarter, we lost $3.4 million in sales and $0.4 million in net income due to translation. So on net, the weaker Euro benefited net income by $1.4 million or $0.08 per share, but from normal operations, the impact was minimal since we are eliminating the largest positive effect, and the other impacts offset each other. As you probably know, since June 30, the Euro has begun to reverse course, and to strengthen. If it remains at the current level of $1.30, we will have net losses -- net FX losses in Q3.

Going back to our financial position, as we mentioned, we had debt of $87.8 million at quarter end, which is flat with the first quarter. We are in compliance with all inter-covenants. Positive cash flow from earnings of $10.9 million was offset by a networking capital increase due to our sales growth and capital spending of $2.9 million. Year-to-date we have spent $4.4 million on our announced $16.7 million capital program so that implies that spending will pick up in the second half on capital. Customer receivables are rising with sales, but date of inventory are at record low levels as we continue apply the lean lessons we learned during the recession. We should be cash flow positive in the second half, even with a heavier capital spending, if current business trends continue, and we expect net debt to be flat or slightly down from year-end 2009 levels.

And with regard to our credit facility, we, as I mentioned, we are in compliance with all covenants at quarter end, and in fact with our improving trends, we expect to be in a position to entertain proposals for renewal, or an extension, of the revolving credit facility later this year or early in 2011. The current revolving credit facility -- facility does expire in September 2011. So in the third quarter, that means in the third quarter, we may be required to reclassify all of our debt as short-term. And this depend on several things, but one of which is how much progress we have made in extending the maturity by quarter end. But we feel that, whether we show the debt as short-term or long-term, we believe that we will be in a position to successfully extend, or replace, the facility well before expiration. Our lenders supported us when the situation was really difficult last year, and now that things are getting back to normal, we think that they will be even more willing to work with us.

That concludes my comments. Now Rock will discuss more about the quarter -- recovery and our business prospect.

Thank you, Jim. Now, let me begin my comment with general comments on the second quarter.

For the fourth consecutive quarter, we at NN again experienced a very encouraging increase in demand in corresponding revenue. As Jim already mentioned, revenues were up 50% for the quarter and 55% for the first half in comparison to the same period of 2009. Equally encouraging is the sequential improvement we have experienced beginning in the third quarter of 2009. We have now seen four quarters of revenue increases, up 15%, 18%, 13%, and 9% respectively. Both of our served end markets, namely, automotive and industrial, are showing good signs of improving demand and rates of recovery.

Just as the recession was global in nature, so is the recovery. Good levels of improvement have occurred in North America, Europe, and Asia. Although our current revenue run rate in the first six months of 2010 is still some 15% down from pre-global recession levels, the pace of our recovery has been really robust.

With respect to our margins and profitability, we performed very well during the second quarter and the first six months of the year. As we have said in previous quarters, the cost reduction and restructuring actions taken during 2008 and 2009 dramatically lowered our cash flow and break-even -- net income break-even point. We estimate now that our break-even point has been reduced by approximately $60 million in annual revenue to a level of $320 million as a result of permanent annual fixed cost savings in the range of $20 million to $25 million. This break-even reduction does not include savings associated with any additional restructuring actions we may take for the remainder of 2010. Obviously the good news is that we are now operating substantially above our break-even point. As a result, as Jim pointed out, our gross profit margin and operating margins have improved to pre-recession historical levels, even though total Company revenues are still 15% below normal.

Year-to-date incremental sales dollars are dropping to the gross profit line at a 49% rate. Our profitability turnaround reflects three important operating realities for us at NN. First, we are leaner, more cost-efficient Company today than we were eighteen months ago. Second, our businesses continue to avoid adding fixed and variable cost additions as volume improves. And third, our level three program continues to deliver significant global cost, quality, and cash flow improvement results. For the first six months of this year, we are well ahead of plan regarding beginning of the year objectives established in the program. In summary, each of our three business units -- bearing components, rubber and plastics, and precision metal components -- are delivering very good operating results.

I'd like to conclude today's call, if I could, by commenting on the third quarter outlook as well as discuss the full-year outlook. In my earlier comments, I discussed the fact that we've experienced four consecutive quarters of incremental sales growth. We mentioned in our press release this morning that, while we don't anticipate a sequential improvement in the third quarter versus the second quarter of this year, the fact that we are forecasting flat to slightly lower, and the lower would be in the 2% to 3% range, revenue in the upcoming quarter in comparison to Q2 is further evident from our perspective that the recovery is continuing.

Historically, based upon seasonality factors particularly in our European operations, our third quarter has been down sequentially in the range of 8% to 10%. Based upon what our customers are now saying and forecasting, we do not see that kind of reduction occurring in 2010. Visibility has improved in the entire supply chain in terms of the demand outlook. As of now, our customers globally are forecasting that, that the higher levels demand and associate revenues are expected to remain in place through the end of the year. Contrary to what we keep hearing regarding the pace of the recovery in the press, our customers in North America, Europe, and Asia, continue to forecast a relatively strong second half of 2010. For that reason, we are increasing our full-year revenue guidance from the previous range $315 million to $335 million, to a range of $350 million to $360 million. The midpoint of our revenue guidance range, $355 million, if achieved, would represent revenue in the second half equivalent to first-half revenue. Again, based upon seasonality, this would be a first for us at NN. [FH2] revenues are typically down for us at the same percentage as that of the third quarter drop, mainly around 8% to 10%.

As we mentioned in the press release, we expect to spend approximately 70% of our planned 2010 capital expenditures, approximately $12.3 million, in the second half of the year. Based upon good management on the working capital side, the second half of the year cash flow results should fully support these higher levels of capital spending without any significant increase in our debt -- net debt position at year-end. As a reminder, the majority of the new capital will fund new business at Whirlaway. These new business programs at Whirlaway remain on track to deliver excellent organic growth beginning in 2011.

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

Ladies and gentlemen, we will begin the question and answer session. (Operator Instructions) Our first question comes from the line of Mark Parr with KeyBanc Capital Markets. Please go ahead.

Hi, hanks. Hi, Rock.

Hi, Mark.

Congratulations.

Thank you.

You're like the only green thing on my screen with the Dow down 235 points today, but--.

Yes, I have seen that.

I was curious about -- the revenue, the sources of revenue growth -- the automotive is -- has been a little better than normal from a seasonal standpoint. I was wondering if you could talk a little bit about the relative recovery of what you're seeing in the US versus Europe? And also if there -- if you could talk a little bit about markets, or in-demand buckets automotive, industrial, aftermarket, et cetera?

The pace of recovery, Mark, has been pretty consistent between North America and Europe. I would say Asia has been a little more robust than North America and Europe percentage-wise. But we have seen good recovery in automotive in both North America and Europe. And the second quarter revenues certainly reflected improvement on the industrial side that were pretty consistent, again, between what we have seen in North America and Europe. Europe may be just a little stronger in terms of the recovery and the pace of the recovery on industrial. But by and large, the industrial markets came back pretty significantly in the second quarter. In both regions of the world, North America and Europe.

All right.

We -- there are spots, there are certain spotty places within the industrial end markets that have not come back. Those tend to relate to what we would call industrial end markets, but that are tied to construction either on the commercial side or new home construction. Both have not come back. HVAC is an example. But everything else that we see, has been, has been good.

Okay. And in terms of new product introductions or new customer relationships, I mean, I know that -- I'm not sure if it was the last call, maybe it was two calls ago -- you had talked about Whirlaway had derived some new opportunities, or brought some new things in-house. I s that a significant piece of the better-than-normal second half revenue outlook?

No. None of that is considered. The 2000 -- I think we mentioned before, Mark, that the real contribution for the Whirlaway new programs will begin in earnest in the first quarter of 2011.

Yes, I was checking to see if that had been pulled in at all.

I mean, there's a little bit that's pulled in the fourth quarter but it's, it's negligible.

Okay. Any, anything that you can give us as far as an update on your raw material cost position and how that's unfolding in the second half relative to the first half?

It's up. Raw materials are up globally for us. And they're up pretty consistently between our European suppliers and our Asian suppliers. But we are -- we're in the process, unfortunately, of passing that along to our customers. And -- but the last half of 2010 is markedly up versus the first half.

That's interesting. All right.

Mark -- it is, we have said many, many times that we're -- we buy a unique product for both balls and rollers. And the uniqueness of that product and the fact that there's so little capacity in the world with respect to the production side of this wire rod in the form that we buy it.

Right.

The price points and the pricing trends tend not to be in sync in a lot of instances with what is happening in the rest of the word. It's not unique for us to be seeing things that aren't happening in the rest of the world with respect to field.

Okay, but that -- but that pass-through is a process is that, at this point, how much of your -- how much of your second-half revenue do you think would be potentially not subject to effective cost pass-through?

Not subject? Very little.

Okay. So I mean, the marginal contribution, the second quarter, was pretty nice to see. Wish you could do that all the time, right?

Yes, that 49% number was a good number.

Not bad, not bad at all. Congratulations on a great result and thanks for all the color on the end markets on the raw materials. Really appreciate it. Thanks.

Great. Thank you, Mark.

(Operator Instructions) Management, there are no question in the queue at this time. Please proceed.

Okay. Let me conclude today's call by restating that we are very encouraged by our second quarter and first-half results at NN. We have returned to solid levels of profitability and we remain well positioned in this environment to serve our customers' increasing demand requirements and to regain healthy levels of profitability moving forward. Thanks again for joining today's call.

Ladies and gentlemen, this concludes the NN Inc. second quarter 2010 conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 with the access code 4336032.

ACT would like to thank you for your participation. You may now disconnect.