NN Inc (NNBR) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the NN second quarter 2011 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today Friday, August 5, 2011.

I would now like to turn the conference over to Ms. Marilynn Meek. Please go ahead, ma'am.

Thank you. Good morning. Welcome to NN's 2011 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 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 an overview of the quarter, and afterwards we'll open up the line for questions.

Rock, would you like to go ahead?

Thank you, Marilynn. Good morning, everyone. I've got with me in Johnson City this morning Jim Dorton, our Senior VP and CFO; Will Kelly, our VP of Administration; and Tom Burwell, our Corporate Controller. Today Jim is going to offer an analysis and commentary on our second quarter and year-to-fate results through June 30, 2011, and I'll conclude the call with additional comments regarding the quarter and year-to-date results, as well as providing some updated guidance on our revenue outlook for the second quarter of 2011.

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

Thanks, Rock, and good morning, everyone. NN had a record quarter again from normal operations during the second quarter, which continues our solid recovery. We earned $0.36 per share from normal operations on sales of $115.9 million. The only item we excluded from normal operations in the second quarter of this year was the foreign exchange loss on intercompany loans of $604,000 or $0.02 per share. Including the non-operating item, we had -- we made $0.34 per share. EPS from normal operations in the same quarter of last year was $0.27 per share and this excluded non-operating gains of $712,000 or $0.04 per share, including a non-operating gain we made $0.31 per share the same quarter of last year.

Sales were up 25% over the second quarter of last year. Operating profit rose $2.6 million or 40% year-over-year, and this reflects more sales in -- higher sales and better leverage of our fixed cost base. However, average gross margins, excluding depreciation, dropped from 20.8% to 18.3%, and there are several reasons for the drop in average gross margins.

First, a little over half of the sales increase was due to increasing demand and targeted price increases, which is great. But the other large portion was due to foreign currency translation and raw material inflation pass-through without any additional gross margin. And in addition to that, about 7 million of the sales increase over the last year was for new sales programs at Whirlaway that aren't providing any profit due to startup and learning curve costs. The Whirlaway impact alone cost us 2.4 margin points. And as we get the Whirlaway new programs past the learning curve we should call back the gross margin points.

Starting with the first quarter of this year we are no longer excluding the Whirlaway startup costs from normal operations as the processes are mostly underway and profitability is slowly improving. We reported that the Whirlaway losses were $1.1 million in the second quarter compared to $2.2 million in the first quarter of this year. So you can see the improvement, although we've got a long way to go, and Rock will talk more about this.

Overall, cost of products sold increased as a percent of revenue to 81.7% from 81.1% in Q1 and from 79.2% in the same quarter of last year. The reasons for the increase in cost of products sold are those that I just described, the dilution due to foreign currency translation and price pass-through and the Whirlaway costs.

We are also being negatively impacted by the reinstitution of bonus accruals and higher spending on tools, supplies, repairs and maintenance coming off of a low investment period during the recession.

Regarding SG&A expense, despite a dollar increase due to staffing for higher sales levels and bonus accruals and currency translation, you can still see clearly the earnings leverage. As pointed out in the press release, SG&A as a percent of sales was 6.7% in the second quarter of this year versus 7.7% last year.

Interest expense was 551,000 below the second quarter of last year even though debt was slightly higher. And the reason for this is reduced -- the reduced interest spread on our revised credit agreement, and also having more low rate floating debt in the mix.

Depreciation was $4.3 million, which is up from $4.0 million in the first quarter, but down $0.6 million from the same quarter last year. The reduction of depreciation from last year occurred in Europe due to assets we acquired there becoming fully depreciated, and this was offset somewhat by depreciation on new property, plant and equipment that we've put into service over the past months of this year.

The average tax rate was 26% during the quarter, which was inline with the guidance of 25% we gave you last quarter. As you recall, we are not looking at tax benefit for losses in the US until we have a positive look back on income and this will likely not occur until 2012. We are also booking tax charges for income in foreign locations initially in Europe and now in China. So when we have income taxed overseas at rates varying from 12% to 36% and no tax benefit on losses in the US related to Whirlaway, the average rate can vary widely depending on where our income occurs. But with all these moving pieces, we still would say our best guidance for the third quarter is a tax rate of about 25%.

EBITDA was $13.4 million or 11.5% of sales in the second quarter, and this is up from $12.2 million or 11% of sales during the first quarter of this year. Looking at the balance sheet, you can see that we had a net reduction in working capital during the second quarter, which is following our normal seasonal growth in the first -- that we have in the first quarter.

Our net debt decreased by $10.8 million during the second quarter. DSO improved by a couple of days and inventories were actually down sequentially if you adjust for currency. We spent $6.4 million on capital projects during the second quarter, which puts us at $10.2 million year-to-date and 44% -- at about 44% of our total spending plan for the year. And we would expect to generate cash in the third quarter as we do normally due to the seasonality because business slows in Europe during August.

Our rolling four quarter debt to EBITDA ratio was just over two times as of the second quarter, but if you annualize the Q2 run rate we would be at about 1.7 times debt to EBITDA. So our credit profile remains good and will continue to improve throughout the year. We do expect to repay debt during the remainder of the year, but the growth for the year is stronger than we had planned and this may require somewhat of a larger investment in working capital, but despite that we do expect to repay debt. We haven't released the new number yet.

So that concludes my financial comments. I'll turn the floor back to Rock.

Thank you, Jim. I'm going to begin my general comments on the second quarter and year-to-date results. As Jim mentioned, once again sales and earnings for the second quarter exceeded our internal 2011 business plan. However, unlike previous quarters, excluding the new businesses at Whirlaway and the impact of currency and material inflation pass-through, sales were relatively flat with the first quarter of 2011.

The sales results were mixed by region of the world, Asia and North America were up sequentially from the first quarter and Europe was down, principally because of the loss of business associated with the Eltmann bankruptcy. The net result, however, was essentially flat revenues for our base business for Q2 in comparison to Q1. Sales for the second quarter and year-to-date were up 25% and 27% respectively from the same periods in 2010. Overall, good levels of demand continued into the second quarter.

Net income from normal operations was up 40% and 200% respectively from the same periods in 2010. Year-to-date through June 30, 2011 we more than doubled our net income from normal operations from $5.7 million in 2010 to $11.6 million in 2011.

Excluding the diluted affect on revenues and gross profit dollars from the Whirlaway losses and material pass-through, incremental revenues actually dropped to the gross profit line at a rate of approximately 30% for the first six months of the year. A little bit lower than we expect but still a good performance.

From a margin perspective, as Jim just mentioned and as we mentioned in the release, the losses at Whirlaway coupled with the material pass-through negatively impacted gross profit margin percentages for the six months ending June 30 by about 3%. Without these factors our base business showed solid gross profit improvement -- gross profit margin improvement from 20% in 2010 to 21.9% this year.

Whirlaway accounted for around 75% of the margin drop from 2010. Stating the obvious, when we get the operations turned around and profitable at Whirlaway our future margins, net earnings and EPS should exhibit real improvement. Even with the drag on earnings in our first six months from the Whirlaway losses, we experienced record net income in EPS for the first six months. The second quarter also was a record in terms of a historical single quarter for us at NN.

I'm going to conclude today's call by commenting just briefly, if I could, on 2011 and revised revenue guidance. Based upon what everybody's been hearing and the overall 500 point drop in the Dow yesterday and the overall market and press's reaction to the slowing global GDP numbers, it's more than just a little challenging to provide revenue guidance for the last half of the year.

The amazing thing is, from our perspective, is that the more the press hammers home on how bad things are the more of the ultimate consumer, whether it's corporations or individuals, react with spending reductions. An editorial comment here, the negative press coverage is tiresome and we believe doesn't necessarily reflect what is happening in the real world, surprise, surprise.

At NN, like most industrial companies, our business has been good the first six months. We mentioned that currently we saw no -- we see no impact on orders or demands on into the third quarter. We did comment that sequential growth, as I just mentioned, Q2 versus Q1 slowed and was essentially flat for our business, again excluding the Whirlaway startup program, but flat at very healthy levels for us from a production and sales perspective.

We also mentioned that the last half of the year would be down slightly versus the first half based upon seasonality of the third quarter, particularly in Europe which currently represents 50% of our total revenue. This seasonality, pre the global recession and the immediate recovery, is also very normal for us at NN from a historical perspective.

The midpoint of our new revenue guidance that was outlined in our press release, a range from $435 million to $440 million, is $437 million, which if achieved would represent a 20% increase over 2010 revenue levels. Approximately 60% of this increase, however, is associated with translation exchange rate, material pass-through, and the Whirlaway new business program growth resulting in a still healthy $30 million overall volume improvement or around 8% for our base business in comparison to 2010.

At the beginning of my comments I mentioned all the negative economic news, which seemingly is coming all at once and with great intensity, so it's difficult to color my comments with an overall level of a cautionary tone with respect to some negative forecasts that are out there. I will say this, as a company we are much better prepared to withstand reductions in revenue if they occur.

In hindsight going into the global recession of 2000 and 2009, we took several actions, as all of you know. We closed or restructured four global manufacturing operations, we removed in excess of $25 million in fixed costs from our global cost structure, and our current earnings records reflect these cost reductions coupled with the good economic recovery I just mentioned.

From an earnings perspective, we did provide EPS from normal operations guidance of $0.40 for the second quarter. Our $0.36 share actual result, which is an improvement versus the $0.33 from Q1, differs from our guidance primarily associated with the volume reduction we experienced in Europe that I also mentioned.

As I also mentioned earlier in my comments, Whirlaway continues to represent both great disappointment and great opportunities from an earnings and margin leverage point of view. We have invested heavily in their growth, both capital and human, and still believe the business will provide good returns to our shareholders over the long-term.

With that, I'd like to open up the call to answer any questions that we might be able to answer for you.

(Operator Instructions). Our first question is from the line of Mark Parr with KeyBanc Capital Markets. Please go ahead.

Thanks. Hey, Rock.

Morning, Mark.

How are you?

Good. How are you?

We've had better earnings seasons I'll just put it that way. But no, we're doing okay, doing alright. I had a couple of questions. If you look at the -- Jim's comments related to the 2.4% reduction in margins were due to Whirlaway, is that different than what you had expected on the first quarter call?

No. Actually, Mark, we anticipated $1 million improvement, if you will, in the level of their losses and they actually achieved that. They lost $2.3 million in the first quarter and actually a little bit better than that $1.1 million in the second. So we were basically outlining over $1 million of improvement in the level of their losses and that actually occurred in the second quarter.

Okay. So that's really not a change. I mean, is there any change from where you were in the first quarter now here at the middle of the year as far as the profit recovery outlook for Whirlaway you're expecting?

No. I would say that over the third and fourth quarter, as we mentioned in the release, that we expect them to be just marginally above breakeven. And that's no big change versus what we were expecting in the first quarter. We obviously see, based upon the learning curve that Jim mentioned, that the margins on all this new business really start to get healthy but later in the fourth quarter, mid to late fourth quarter. They're continuing to improve but in terms of contributing good solid profitability it's on into the fourth quarter before we see anything with respect to profitability on those programs.

Okay. And one last question, if I could, just more of a general question on Whirlaway. What would you expect normalized EBIT margins for Whirlaway to be? And based on the trajectory you're seeing right now, how long would it take for Whirlaway to get there?

Well, we expect them to be at our corporate averages, Mark. You said EBIT, but I had talked to gross profit margins. I mean, the other thing that I would mention is that even our corporate averages reflect -- everything we talked about our corporate averages reflect them in terms of the dilution of our gross profit margins at break -- our comments are associated with getting them to breakeven. So the 2.4% that Jim mentioned is essentially getting that back to breakeven with no contribution on profitably at all, but we expect that to be around our corporate averages of 21% or 22%. That average is going to go up as they become profitable, though.

And then if I could just -- looking at the overall revenue guidance and we saw the pass-throughs look like they might have been a little more than what you thought and the foreign currency might have been a little more than what you thought. And if you look at the whole year, is your organic revenue guidance -- do you improve it or keep it the same or bring it down somewhat?

You know, Mark, we didn't go through the -- I tried to, in my comments just now, go through with you or go through with everybody that's listening this issue of currency and the material pass-through because they're really important. And to answer your question, it's a great one, the material inflation is higher than we were expecting, it's especially much harder in the second quarter. I think the exchange rate is clearly higher than we were expecting.

And so we've tried to sort through for you those two factors plus the growth at Whirlaway on the new programs that's contributing nothing in terms of margin and profitability so you get a sense for what the base business is truly doing. And the base business is doing just around 8%, which is what I said, versus 10%. And is that 8% higher or lower than were expecting that we were talking about in the first quarter? It might be just slightly lower but not much. I mean, we've been talking about from a range of 8% to 10% all along.

So I mean there's no -- there was just a slight downtick in Europe, other than our business loss that I mentioned on Eltmann, but other than that we still see good sequential improvement.

Okay. I appreciate all that color and thanks and good luck on the third quarter.

Thank you.

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

Great, thank you. Good morning.

Good morning, Holden.

Good morning, Holden.

Your comment that sort of the expectations of a low $0.40 versus the $0.36 that you kind of wound up doing, you kind of indicated that you felt like it was the downtick in Europe that caused that. Does that seem to be the different delta?

That is it. In a nutshell, we hit the million improvement. Well, we didn't guide in low 40 you guided in low 40 we guided at $0.40, Holden. I mean, 40 is the lowest that you can get in 40, but your guidance was higher than ours. But the principal difference is the volume reduction in Europe. As I mentioned with my comments to Mark, we had two principal things in the second quarter versus the first. One was the improvement at Whirlaway, which occurred, but the revenue drop in Europe was slightly higher than we were anticipating. Most of it was associated with the loss of the Eltmann bankruptcy, but there was a slight downtick in demand in Europe as well.

And have you seen that continue at this point in August?

Honestly, here's the thing. I mean, based upon the guidance of a midpoint of $437 million for the full year, Holden, if you do the math for the second half that implies around a 6% or 7% reduction for the second half for us. And seasonality for us pre-recession has been higher than that it's been about 10% to 12%. So the answer is no, we're really not seeing any big change in demand overall in Europe. I mean, I know everybody is concerned about it, but our current orders from our customers don't reflect it. Don't reflect any big demand reduction, other than the seasonality that I just mentioned.

Okay. And the fact that a modest sort of downtick in demand in Europe -- I mean, you knew that Eltmann was going away, you sort of called that out, so the real delta would be the slight downtick and that cost you about four pennies. But I mean overall volumes I think were reasonably solid and you're raising guidance and the demand is good. Is this just a mix issue where Europe is overwhelmingly more profitable than every place else so a slight downtick there as a --

No, it's really not. It's not related to that, Holden. I mean, in fact their margins are similar to our margins in the US and Asia. So no, it's not really a mix issue. But I do think that we tried to do a better job of explaining the pure revenue increases from 2010 on the call this morning because I think in the first quarter we weren't -- there wasn't a lot of clarity surrounding that. We tried to give you more clarity on it.

Okay. So it's not actually Europe ticked down as much as it was that the -- I mean, that's what I'm trying to get at. So if Europe ticked down but really only a little bit but total revenues were -- seeming to be performing at least as well if not better than expected --

It wasn't better but -- it wasn't better. They were pretty much what we anticipated in the first quarter.

Okay. So they performed inline and it's not a mix issue because Europe and US and Asia all have comparable margins, I guess. How is a downtick in volume in Europe then that caused the $0.04?

Well, we mentioned in the first quarter that we didn't know the absolute loss of business associated with the Eltmann bankruptcy. But what we said at the time I believe was $7 million or $8 million in loss and that was essentially what happened in the second quarter. I think it was a loss of around 2.5 or 2, let's call it 2. And then add to that just a slight reduction in the demand issue on automotive in particular, you're down more than $3 million in Europe.

Right. But your total volumes were inline with expectation and there is no margin detrimental --

But wait a minute, Holden. You got higher FX and higher material pass-through in the second quarter.

Okay.

A lot higher, Holden. I mean, the material pass-through really hit hard in the second quarter versus the first, and FX really was much higher.

That's what I was saying. It looks like your material pass -- your pricing mix was 5 in Q1 and 5.8 in Q2 so that wasn't too bad, but the forex got a lot bigger. So when you look into Q3 and Q4, is the pricing mix still on sort of an upward trajectory? I ask mostly because if you go back to last year, the pricing and mix was sort of a negative 4.1, a negative 1, and then a positive 3.2, positive 3.2. So if the pricing mix thing has stabilized with raw materials, does that mean that the overall contribution from pricing mix now sort of comes down relative to volume in the second half?

I'm somewhat at a loss on your question, Holden, to be totally honest. I mean, I --

Are you saying that if the mix -- if FX rates stay where they are and pass-through stays at the level it is now, with that mix of business are the profit margins going to be the same in third and fourth quarter? Is that what you're saying, than they were in the --

The comps, obviously, get harder for pricing mix, as well as for currency, which means that the annual dollar increase may not be as great in Q3 and Q4 as they were in Q2, right? And, therefore, maybe the contribution in sort of volume becomes a greater portion or a greater portion of the overall mix and does that wind up improving those gross margins?

Well, we --

Basically if --

You've got improvement in the third and fourth quarter from Whirlaway, okay, and that should drive margin improvement. And if exchange rate stays where it is today and we have no further increase in raw material in the third and fourth quarter, which right now if we had to forecast we'd probably say that we won't they raised the prices sufficiently high in the first and second, we should see margin improvement. We're going to see a little bit lower volume, as I mentioned, in the second -- the third and fourth. But if the volume that we're projecting at 437 for the full year occurs, we'd see slight margin improvement.

Right, in terms of the gross margin overall.

In terms of the gross margin overall.

Okay. Now when you say that Whirlaway cost 240 [bips] that's compared to Q2 last year, right, because $1.1 million --

For year-to-date.

Okay. So in the second half your expectation for Whirlaway is to breakeven maybe a slight better. So essentially relative to Q2 you should pick up about 120 basis points in Q3, Q4?

Well, you've got a little bit lower volume hitting margin in the second half and the third quarter in particular with Europe. And so it books at 120, I would call it more like 100.

So Whirlaway also has a lot of European volume that --

No European volume at all, I'm saying the seasonality of Europe in the third quarter versus the first two quarters is down -- will be down.

Okay. I'm just sort of asking about Whirlaway, right, if you were at --

I'm sorry. Yes, there is some seasonality in their business, particularly in the fourth quarter, on the revenue side with HBAC in particular.

Okay. So when you say kind of that 18.3 gross margin you did in Q2, you can probably add about 100 basis points to that over the back half just because Whirlaway gets to breakeven, if you will.

We would hope that's the case, yes.

Okay. And then you can put a little it on top provided you don't see more increases in raw material and provided the euro kind of stays where it is. But you're probably talking about kind of an 18.5% -- I'm sorry, a 19.5% to 20% type gross margin. Does that seem kind of reasonable when you look at those pieces that way? How are you thinking about it?

Yes, you're close.

Okay. All right, cool. Thanks, guys.

You bet.

Our next question is from the line of Brandon Osten with Venator. Please go ahead.

Hey, guys.

Good morning.

That last line of questioning just confused the hell out of me. Can I ask some similar questions in different ways?

Sure.

Okay. So if I back out the forex changes and the pass-throughs of raw material cost, you're basically saying that your growth rate, your organic growth rate is sort of trending in the 10% to 12% range, is that fair?

It's trending around 8% to 10%, but that does not include the new startup programs at Whirlaway.

Right, okay.

We carved those out because they aren't contributing anything right now and so if you're looking at sequential sales growth '10 versus '11, we think you really got to carve that out.

Right. Okay, that's a fair point. So ex Whirlaway then 8% to 10%.

And what we said is that 60% -- what I said in my comments is that those three things, FX, pass-through and Whirlaway, amount to 60% of the overall full year revenue increase of guidance we just gave '10 versus '11.

Okay, that's fine. I mean look, Whirlaway is on you guys because that's your project. In my mind that's organic growth.

Okay. That's fine.

So when you guys are pricing those -- so it sounds, from the way you guys are talking about it, that so forex you're more or less matching revenues with expenses. But on the pass-through it sounds like you guys pass through those costs fairly instantly, is that a fair statement?

It is a fair statement, but of course it has an impact on margin because customers expect us to pass through purely the dollar or euro impact of the increase.

Right, okay. And so now the Q3 -- I mean, I know you guys didn't specifically guide to a Q3, but you were suggesting that normally your European revenue, which is roughly a third of overall revenues, would drop about 10%.

European revenue is 50%.

So European revenues would drop -- sorry, 15?

No. European revenue is not 30% of our total revenue, it's 50%.

Sorry.

And so it's 50% and what we've said, and we won't comment by quarter because we never do, but we said that our guidance implies a 7% last half of the year reduction versus first half of the year revenue sales.

In Europe or overall?

Overall company 7% down for the last half of the year versus the first half.

Okay. So if I'm looking at the Whirlaway -- I guess I'm kind of confused because you guys in the past have stated that Q3 the Whirlaway revenues were really going to ramp and I have a note that I may have wrote down improperly. But at some point between Q3 and Q4 there's $10 million of quarterly Whirlaway revenues that should be hitting at some point in the back half of the year. Is that still the case? Is that getting pushed out? Is that more Q4 than Q3? Did I just write it down wrong?

I'm not sure we can answer that specifically for you, I'm sorry.

Okay.

I mean, I'd answer it for you I'm just not sure we have the numbers in front of us right now.

Okay. If I'm trying to back out the whole sort of gross margin questioning, you're suggesting that, let's say Whirlaway, if Whirlaway was breaking even at this point your gross margins would be closer to 20%?

Exactly right.

Okay. And if Whirlaway was doing better than breakeven if it was operating along the lines of the rest of business, your gross margins would be closer to 22%?

I mean, they would be better.

Okay. I guess my last line of questioning was more on the economic front. And I hear what you guys are saying we're not necessarily seeing the weakness yet, but we know that the press is a little panicky. With regards to the automotive side of business, which is a fairly significant part of the business, on the whole supply chain front because if there's anything I hear from automotive parts guys or trucking parts guys they do talk about commodity costs, which you guys seem to be better at passing through than others. But the other thing they talk about is on the supply chain side, there [tends] to be a bit of a mess due to possibly what happened in Japan, and I know your customers aren't really with Japanese guys but seem to be affecting all around, even on the trucking guys. So if something is off somewhere then orders get held back elsewhere, are you guys seeing any of that supply chain mess in your business?

Not really. Of course, we're on the very tail end of the whip, but not really.

Okay. Thanks, guys.

Thank you.

(Operator Instructions). Our next question is from the line of Mark Parr with KeyBanc Capital Markets. Please go ahead.

Thanks very much. Hey, Rock, I'm must rewinding a little bit and looking at the first quarter transcript and you had made some comments about what you thought the bottom line outcome would be for the back half of the year, in addition to talking about, call it, a $0.40 opportunity for the second quarter. And I'm just wondering if there's been any change in that commentary that you shared at the -- on the first quarter call or if you can give us an update on that.

Well, I don't think we commented specifically on the last half in any meaningful way with numbers, Mark, in terms of earning. I mean, what I did say is that we expected acceleration in earnings associated with -- on the Whirlaway improvement, but we also have the seasonality issue in our business that is real. I mean, it wasn't real in 2010 based on the strength of the recovery and we didn't see it then.

But we definitely see this seasonality in Europe impacting our last half of the year, and I think that your guidance reflects that, Mark. I mean, your revenue and EPS guidance already reflects it, the third quarter in particular. And I think the whole issue of what we've done -- I also mentioned that the seasonality last half versus first half has historically been greater than 10%, in our guidance we're saying it's only going to be about 7%.

Even in the face of tougher than usual comparisons because the back half of '10 was stronger than it normally would have been.

That's correct. But having said that, of course, I also said that most of the economic naysayers are saying that it's Europe, it's Europe, it's Europe and not necessarily North America and Asia this time. I mean, if you talk to everybody and it's the whole debt thing in Greece and Italy and whatever they're saying it's Europe, obviously if that happened 50% of our business is in Europe. But again, we don't see it right now and I would say that most of our major customers' press releases, while they release much earlier than we do a couple of weeks earlier, weren't outlining any real -- I mean our largest customer, SKF for example, they said flattish for Europe in the second half versus the first half. And so we don't -- that's all that we got to go on at this point.

Okay. Another way we might want to think about this, Rock, and if you look at the inclusion of Whirlaway in the numbers your European sensitivity is perhaps a bit less than it has been previous.

That's very true.

And then on top of that you've got these -- you got what, is it the new revenue programs or what they were $7 million in the second quarter and then those are going to ramp more in the second half, aren't they?

They ramp up. They got seasonality between the other businesses so we don't see it, but I think the guidance that we gave you -- and it's a little bit hidden because we were talking then about ramp up in the new program. The new programs ramped up significantly in the second quarter, not profitably, but they ramped up sales wise and they'll stay up for the rest of the year. So that $10 million in the kind of a high run rate in the second half is there for the new business, but then they have seasonality in the HBAC business and some seasonality in the auto -- some of their standard auto businesses. So it's not a clear story from that point of view.

But we do expect that the revenue side on these new programs will be very close to what we've always been suggesting.

Yes, you were talking about, what, 40 --

I'm sorry. Go ahead, Mark.

There was a $40 million annualized rate on the new programs.

No, it wasn't that big. I think we took that down to something like 30 to 35 for the full year of 2011.

Okay. And so if you've got -- you said you had 7 in the second quarter, I think I heard that. Is that right?

That's right, yes.

All right. And then they've ramped up and then the $10 million, Jim, that you were talking about would be a quarterly run rate expected for the new Whirlaway programs in the second half?

In general, that's what I was saying. I don't know if we're sticking right with the $10 million number. If there's some flux in it that could go either way on that.

I'm just trying to get kind of the round number order of magnitude. I'm not going to hold you to it, but if you were ramped up here at June at a $10 million rate you'd have some seasonal pullback perhaps in the second half so maybe it's -- but that would -- those are the kind of things if you had $20 million in the second half from the new programs at Whirlaway plus 7 in the second quarter that's 27, plus what you did in the first quarter I mean that would seem like that would get you to that $30 million to $35 million run rate.

That is correct.

That's right.

So I was just trying to back into that. And then looking at '12 then the number -- if that $10 million then moves forward into '12 it's in that $40 million range and kind of that's where I was coming from on 40.

And that's an excellent point. We do expect the programs to grow in '12 versus '11, not big growth, but they will be higher -- certainly higher than '11 based upon the fact that we'll have full year volumes beginning in January.

From what you're seeing, is there opportunity to ramp off of that $10 million rate or would you look at that as kind of the steady state opportunity for those new programs?

Well, being totally honest here we have additional business opportunities there for '12 but we're a little gun shy, frankly, in terms of what to do about those, Mark. We'd like to get the new programs that we currently have stable and profitable and deal with the additional programs, there's a couple, potentially at a later date.

A quid pro quo is always that thing called CapEx, right?

Exactly right.

And hiring.

Well, CapEx and hiring and, frankly, until we start delivering returns to our shareholders on the CapEx that we've spent already it's a little difficult to say we're going to invest in a couple new additional programs for '12. But by and large the organic growth -- what we thought we were buying in that business and the ability to grow it organically is there. I mean, it is absolutely there and the kind of organic growth that we've seen and we -- obviously we've been focused on new program development and processes surrounding all this and getting the people in place to make that happen so that when we incrementally grow it organically we don't face what we did the last 18 months.

Okay. And if I could just get one more nuance in here, Rock, I just want to make sure I got this right. The $1.1 million in losses that you talked about related to Whirlaway in the second quarter, is that just associated with the new business at Whirlaway or does that -- is that excluded --

That's the total net income loss.

For Whirlaway.

For Whirlaway.

Okay. So in addition to the $7 million in new programs there's also a base business that theoretically is contributing. Is that fair to say?

That's right. That's absolutely right.

That's exactly right.

Okay. So then --

I mean, the business op was up in the absence of those bit four programs, as we were referring to them, but three but with one transfer is profitable.

Okay. Is it fair to think of Whirlaway as -- ex those four new programs is profitability inline with NN?

Yes.

Okay. All right, terrific. Thanks very much.

Thank you.

Our next question is a follow-up from the line of Holden Lewis. Please go ahead.

Okay, thanks. I think most of this has been covered, but the Q1 Whirlaway revenues, what did you say those were, for the new projects? Was that like a $3 million number at that sort of level?

If I had to guess from looking at the -- I don't have the breakout like that here with us like we did in the second quarter, but I would guess it's more like 2 looking at total revenue.

Okay. So at that level you're up 2.2 at 7 million you lost 1.1 on that and then you feel a 10 million is kind of a breakeven. When you go into -- what do you have to do in 2012 assuming that that 10 million maybe grows a little bit but is kind of around that 10 million, 12 million per quarter maybe because you're sort of at the run rate. What do you need to do to get that slightly larger revenue number up more for breakeven to corporate average?

Yes, but Holden, you're -- the breakeven that you're mentioning associated with revenue our cost are way out of line. And so the run rates in the third and fourth quarter should be very sufficient to deliver a nice return and are at breakeven level. I mean, we've got issues -- as we've mentioned many, many times, we've got issues on startup that are progressing. I mean, the costs are coming down and so the breakeven is also coming down on the revenue -- from a revenue perspective.

Just to give you an example, in one of the programs we've got a -- because of the startup issues that we've had where we had some quality issues, now we're paying a couple dozen people to stand around and look at ever part. That's very expensive and as soon as we get out of that kind of containment and we get in a normal flow those costs will come way down. And there's dozens of things like that that we're improving as we go.

Okay. So when do you expect to start unwinding these sort of redundancies in extra expenses then since you'll still have them in second half, obviously?

Continuously in the second half, but by the -- I think I mentioned by mid fourth quarter we really expect the new programs to start contributing in a meaningful way.

So you do think that those costs will be mostly out for the bulk of 2012 is a way to look at that.

Yes.

Okay. All right, thank you.

Thank you.

And there are no further questions at this time. I would now like to turn the call back over to Mr. Baty for closing remarks.

Thank you very much. We'd like to conclude today's call with summary comments regarding the current year. I'm going to use or overuse a phrase coming from our recession experience and an experience I might say that was incredibly difficult on us, like all companies most industrial companies. But it did harden our resolve at NN to further strengthen our cost competitiveness by substantially lowering our net income breakeven and cash flow breakeven points and we are both cautious and optimistic regarding the second half. And when you combine those two words you have the overused phrase I mentioned, cautiously optimistic.

We believe that 2011 will represent a record earnings year for us at NN and so with the global uncertainty set aside for a minute we look forward to the last half of the year and the continuous improvement that all of our global businesses are continuing to exhibit moving forward. Thank you again for joining us on today's call.

Ladies and gentlemen, this concludes the NN second quarter 2011 conference call. If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 with the access code of 4459498. ACT would like to thank you for your participation. You may now disconnect.