NN Inc (NNBR) 2011 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the NN, Inc. 2011 third-quarter results conference call on the 1st of November, 2011. Throughout today's presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions). I will now hand the conference over to Miss Marilynn Meek. Please go ahead, madam.

Thank you and good morning. Welcome to NN's conference call today. 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 the NN management team. First management will give an update and an overview of the quarter and then afterwards we'll open up the line for questions. Rock, which you like to go ahead?

Thank you, Marilynn, good morning, everybody, and thanks for joining the call this morning. With me in Johnson City I have Jim Dorton, our Senior VP and Chief Financial Officer; Will Kelly, our Vice President and Chief Administrative Officer; and Tom Burwell, our VP and Chief Accounting Officer.

Today Jim will offer an analysis and commentary on the third-quarter and year-to-date results through September 30, 2011, and I will conclude the call with additional comments regarding the third-quarter performance [itself], as well as our revenue outlook for the remainder of the year. I'd like to turn the call over to Jim now.

Thanks, Rock; good morning, everyone. NN reported a record third quarter in terms of earnings this quarter, revenue was up 11% compared with last year and up 22% for the first nine months, and Rock will provide more color on the revenue in a moment.

We earned $4.7 million or $0.28 per share on sales of $101 million for the quarter including non-operating foreign exchange gain. This compares with a loss of $0.06 per share last year. If we exclude non-operating items we made $0.20 per share compared with $0.17 per share last year.

We have included Whirlaway start-up costs in normal operations for both quarters to have a better comparison now that Whirlaway has reached breakeven. We had previously excluded such Whirlaway start-up costs in the calculation of earnings from normal operation.

Revenue was up nicely versus last year, but it was about 5% lower -- $5 million lower than expected when we gave the full-year revenue guidance on last quarter's conference call due to slower orders from auto and truck market in Europe.

We experienced our normal third-quarter seasonality which made the comparison to last year more difficult because we didn't have as pronounced of a seasonal slowdown last year due to the strength of the recession recovery.

In any case, despite the shortfall in revenue in the quarter we were -- still above our original business plans and 11% above last year. We just didn't match the pace of the first half. As mentioned, Rock will talk more about revenue and the outlook at Whirlaway in a moment.

In addition to the revenue shortfall, we continue to have some pressure on gross margins due to the continuing start-up costs at Whirlaway and spending on labor and manufacturing supplies at several operations which didn't match up with the actual revenue level.

Cost of goods sold as a percent of revenue was 82.6%, about flat with last year, but up from 81.7% in the second quarter. The cost revenue mismatch during the quarter hurt earnings by about $0.05 per share. We believe that the Whirlaway costs and the excess manufacturing costs at other locations will improve over the coming quarters.

SG&A and depreciation were both up slightly due to currency translation, but generally were in line with our expectations at 7.4% and 4.2% of revenue respectively. Other income contained $1.4 million of foreign exchange gains on intercompany loans. Most of this is booked in the US so there is currently little tax impact so the gain was $0.08 per share.

The average tax rate was 22.8%, fairly close to our guidance of 25%. We still are not taking a tax expense or benefit in the US for book purposes so the average tax rate is based on what we are currently paying in Europe and in China. 25% remains a good estimate for the fourth quarter.

Looking at the balance sheet, you can see that we had a net increase in working capital of $3 million versus the second quarter. Reductions in current assets due to the seasonal slowdown in Europe were more than offset by reductions in current liability, specifically accounts payable.

Net debt increased by $1.4 million to $78.3 million. We spent $4.7 million in CapEx during the quarter bringing the total to $14.8 million for the year. We have initiated capital projects totaling approximately $24 million this year, so we could have heavy CapEx in the fourth quarter. Although we are monitoring business levels and may make changes in spending plans accordingly.

On September 30 we amended our credit agreements to modify the fixed charge coverage ratio to a level of 1.0 for the next 12 months to accommodate our capital spending plans this year and into 2012. Our debt to EBITDA ratio is just below 2.0 times. That concludes my financial comments, so I'll turn the floor back over to Rock.

Thank you, Jim. I'd like to conclude with my remarks with respect to general comments on the third quarter. Revenues for the third quarter, as Jim mentioned, were $101.1 million and they were up 11% from the 2010 third quarter. However, if you eliminate the impact of current fee and material pass-through results in a pure volume -- the pure volume increase was 4% from 2010 Q3.

Our base business was actually down slightly 2% from the prior year quarter and Whirlaway was up 6%. The third quarter was down sequentially from the second quarter by $14.7 million or approximately 13%. As we have indicated before, historically we expect a reduction from Q2 to Q3 based upon normal European seasonality in the 8% to 10% range.

So we were down 3% to 5% more than we would have normally expected during the third quarter. As Jim mentioned, slowing demand in Europe, specifically automotive and truck demand, was the primary driver for the revenue reduction we experienced.

With respect to our margins and profitability, although our margins were relatively flat with the third quarter of 2010, we experienced a very positive trend at Whirlaway in terms of profitability improvement where we've operated slightly above breakeven for the month of August and September during the quarter.

We are encouraged that our leadership team at Whirlaway continues to make measurable progress there. As we move forward into the fourth quarter of 2011 and on into the first half of 2012, we expect those improving trends to continue at Whirlaway.

Our Q3 net income from normal operations of $3.3 million or $0.20 a share, as Jim mentioned, was a record at NN for us. And year to date our net income from normal operations of $50 million or $0.88 a share also represents a record through three quarters of the year.

Now I'd like to shift and conclude my comments today by commenting on the fourth-quarter outlook in terms of revenue as well as discuss the full-year outlook.

We mentioned in our press release this morning that we are revising our revenue guidance down from the $435 million to $440 million range to $425 million to $430 million. This reduction is based upon the slowing demand we've experienced in Europe in both automotive and truck end markets during the third quarter. We expect that trend to continue through year end.

The midpoint of our new revenue guidance implies a slight sequential reduction in Q4 over Q3 revenues. While the economic uncertainty continues to be a concern, presently we see this as a European issue only. The balance of our business in North America and Asia, as we mentioned in the release, remains at good levels of demand.

From a total NN exposure perspective European business represents approximately 45% of our total business. Of that 45% an estimated 75% is automotive and truck end-market demand-related. Therefore in the short-term approximately 35% of our total business is currently in a state of flux based upon the economic outlook for Europe. The remaining 65% of our business is presently stable.

We currently are in the process of developing our 2012 business plan, the lack of visibility would affect the lead times and visibility throughout the entire global supply chain coupled with the European uncertainty combined to make the forecasting for the upcoming year a very difficult task.

As of now we see slow growth in North America, good but lower than recent historical growth in Asia and overall flat economics in Europe. As a result of our cost reduction and cash conservation actions that were born during the global recession, our global structure at NN is much better positioned to not only withstand a potential reduction but deliver good returns.

Our leaner more cost efficient structure coupled with improving profitability at Whirlaway should combine to provide earnings momentum and improvement for 2012 versus 2011. We would like to now open up the call to any questions you may have.

(Operator Instructions). Holden Lewis, BB&T Capital Markets.

This is [John Cooglin] on for Holden. When I look at -- you guys had mentioned the gross margin, the cost/revenue mismatch. How much of a drag do you think that was margin wise?

A little bit less than a point.

All right, a little bit less than -- so it was about 100 basis points or --?

Yes, $0.05 a share.

$0.05 a share, a little bit less than a point. Yes, just slightly less than a point, John.

Okay. So looking quarter to quarter, so Q2 to Q3, gross margin kind of excluding this one little thing would have been largely flat then?

They were flat. Q3 to Q3 -- Q2 to Q3 --

-- was mostly down due to volume, but it had also the cost -- some of the cost impact in there.

Okay. And then just as we think about gross margin moving forward, it seems as though you basically had $10 million less on the top-line last year in Q3, but it was really driven much more by volumes. As we look at this quarter -- it seemed this quarter got much more of a benefit from the price mix in foreign currency.

And as we go forward I guess we would assume that ForEx is probably down next year, less of a contributor, which leads the way for volumes to contribute more. Does this provide for a little bit of a boost to the gross margin from this if ForEx is a negative?

Yes, not only that, but we expect improvement -- continuing improvement at Whirlaway, John. And with the ForEx exactly like you've outlined, that's true. We expect some margin improvement in our business moving forward.

Right, okay.

Total Company I'm talking.

Right, okay. Do you have any just outlook on what's going on in the pricing environment as you go through this -- I guess what would have been -- I guess to the first point, are you seeing the tip of the bullwhip here do you think for the European auto stuff or how do you think that's flowing through?

It's a good question. Obviously comparing it to a year-ago third quarter we -- the demand was much stronger on the basis of not only underlying market demand, but the inventory restocking, if you will, that was going on still by the third quarter of last year. So the restocking is gone, but the actual outlook in Europe, as we've mentioned and of course our customers and their releases have mentioned too, it's uncertain and the visibility is pretty short in terms of time.

And so, it's difficult for us to say -- other than obviously we're a month into the fourth quarter here and we see the level of reduction continuing not at any more dramatic rate. But we see that level of demand of burn reduction in the third quarter kind of continuing into the fourth. It's just -- all the uncertainty there is a very difficult for anybody to project what's going to happen beyond the fourth quarter here (multiple speakers).

You know, I also mentioned in our comments and we mentioned in the release, that the irony here is that the rest of the world economically looks pretty stable to us right now.

Right. And so what does this do then for the 35% of your total business (inaudible)? What does this do in terms of I guess the pricing mix for you guys going forward? Does it make it a little less certain?

Well, you mean the price mix equation?

Right.

Yes. No, not really.

Okay. All right, thanks, I'll get back in queue.

(Operator Instructions). There appear to be no further questions. Please continue with any other points you wish to raise.

Okay, thank you. I'd like to conclude today's call with summary comments regarding 2011. While the last half of the year has shown softness versus our beginning of the year forecast, the magnitude of the sequential reductions is certainly smaller in comparison to what we experienced during the global recession of 2008 and 2009.

And our current second half '11 demand and revenue run rate, what we've seen in the third and fourth quarter here, we remain solidly profitable and cash flow positive as well. Thank you again for listening to today's call.

This concludes the NN, Inc. 2011 third-quarter results conference call. Thank you for participating. You may now disconnect.