NN Inc (NNBR) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the NN Inc. fourth-quarter 2011 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, Monday, March 12 of 2012. I would now like to turn the conference over to Ms. Marilynn Meek. Please go ahead.

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 212-837-3746, 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, would you like to begin?

Sure. Thank you, Marilynn. Good morning, everybody, and thanks for joining the call. With me here in Johnson City this morning I have Jim Dorton, our Senior VP and CFO; Will Kelly, our VP and Chief Administrative Officer; and Tom Burwell, our VP and Chief Accounting Officer. Today, Jim's going to offer an analysis and commentary on the fourth-quarter and full-year results through December 31 of 2011, and then I'm going to conclude the call with additional comments regarding our 2011 performance, as well as provide our revenue outlook for 2012.

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

Thanks, Rock, and good morning, everyone. Revenue-wise, the fourth quarter of 2011 was essentially flat with the fourth quarter of 2010 at $96.3 million, but the mix was quite different. Europe was $9 million lower in revenue, Asia was $2 million higher, and Whirlaway was nearly $7 million higher. We earned $2.8 million or $0.17 per share more than last year, and that's $0.03 per share more from normal operations because of the profit turnaround at Whirlaway more than offset the lower European revenue. Now, a portion of the European revenue drop was due to the bankruptcy of our German subsidiary and the loss of some of that business, but the majority of the drop in European revenue was due to lower demand in Balls and Rollers.

The fourth-quarter revenue was also lower than the third quarter, which was very unusual. This is, again, due to the weakness in Europe. Normally we see a seasonal rebound in the fourth quarter. But due to inventory adjustment and some demand weakness arising from what was at the time in the fourth quarter a great uncertainty over the 2012 European economic outlook, we actually had a decline in revenue. If we had a normal seasonal rebound, our Q4 revenue would have been about $106 million instead of $96 million.

As of today, we are seeing a more optimistic outlook from our customers in Europe, but order levels remain a little lower than planned for Balls, and on-plan for Rollers in Europe. Europe is still somewhat of a question mark for 2012, but the outlook seems more positive than a few months ago.

We earned $4.9 million or $0.29 per share in the fourth quarter. We had an intercompany FX gain of $0.05 per share, and tax and other nonoperating adjustments of $0.04 that we are excluding from normal operations. So, our earnings from normal operations were $3.5 million or $0.21 per share. This was slightly below the consensus estimate, and the difference can be attributed mostly to the shortfall in European revenue.

For the full year, we had revenue of $424.7 million, a 16% increase over 2010. We earned $20.9 million or $1.24 per share. Removing those nonoperating gains through the year, we earned a record $18.6 million in net income or $1.10 per share. And there's a reconciliation of the nonoperating adjustments at the end of the press release. And also, Rock will discuss some of the fundamental business factors for the year in a moment.

Compared to 2010, we were more profitable due to our higher revenue on top of our streamlined manufacturing footprint. However, our cost of sales as a percentage of revenue was higher as we caught up on maintenance and supply spending that had been cut to the bone in the recession year of 2009, and also 2010. But we can already see that this impact of higher spending has run its course by the fourth quarter, and we're spending more in line with our lean footprint in 2012.

For the fourth quarter, SG&A was $7.5 million or 7.8% of revenue. Had european revenues been in line with our normal seasonal pattern, the percentage would have been 7.1% for the quarter and for the year, down from 8.3% last year. So you can see the continued earnings leverage we have as our revenue grows.

Depreciation was $4.4 million in the quarter, which is up from $4.0 million last year and in line with guidance that we had given. The increase is due to the new capital that we put in place this year. Interest expense was $1.1 million, down from $1.6 million last year. The reduction is almost all related to the lower rates in our revised credit agreements. We had $1.1 million of other income during the quarter, the majority of which I've already mentioned is the nonoperating foreign exchange gains on intercompany loans.

Regarding taxes and the tax rate, we're still not accruing taxes on US operations, so our blended rate is a mix of international rates, which usually comes out between 20% and 25%. The rate was unusually low in the fourth quarter at only 5.4%, but this was because of a nonoperating adjustment to the deferred tax asset in Slovakia, which we did exclude from normal operations. And if you add that back in, the fourth-quarter rate would have been about 21%.

We spent $4.6 million in capital during the quarter, bringing the total for the year to $20.3 million, which is in line with our budget for the year. During the year, we caught up on items we delayed on spending -- capital spending items we delayed in 2009 and 2010, plus we invested heavily in our new programs at Whirlaway and for our tapered Roller expansion in the US. And we will see higher revenue in 2012 based on these strategic investments.

In 2012, we will complete the first phase of the expansion of our Ball plant in China, which will ultimately allow a doubling of capacity at that plant. We will also continue to invest in tapered Roller expansion, and in tapered Roller cost reduction in the US and in the Netherlands. We should spend between $15 million and $20 million in 2012, over 0.5 of which is growth investment that will bring higher revenues later in '12 and in 2013.

We had $4.7 million of positive free cash flow during the fourth quarter on a reduction of working capital due to the lower sales rates. For the full year, we had a negative free cash flow of $5.8 million due to the working capital build on the 16% sales increase. We had underestimated the working capital build in 2011, so we weren't able to repay debt during the year as we had forecasted. However, we do have an aggressive goal of debt repayment in 2012 of between $15 million and $20 million, which we think should be achievable based on earnings projections and relatively flat revenue.

That concludes my comments, and now Rock will talk to you more about 2011 and 2012.

Let me begin my comments regarding 2011 by stating that during 2011 our revenue, earnings, and EPS all represented record results for NN as a Company, and it continued a turnaround which began in 2010 from the depths of the global recession results of 2009. For the full year, on an increase in volume-related revenue of $35 million from 2010, and that's adjusted for currency and material pass-through, revenues were up approximately 10%. We improved earnings from normal operations by 68% from $11.1 million in net income in 2010, to $18.6 million in 2011. That represents an increase in profitability of $7.5 million for the year; 21% of every incremental revenue dollar dropped to the net income line in 2011. Our EPS from normalized operations also grew from $0.67 a share to $1.10 a share, up 64%.

From an operating perspective, the good news is our core Metal Bearing Components division, which represents 73% of our total business, delivered record earnings. The Division's restructured, leaner global footprint, along with good operational performance, combined to achieve the excellent results for the year.

In the negative category, three issues impacted our profitability for the year. First, the Roller and Plastics business unit, notably Industrial Molding in Lubbock, Texas, and the Precision Metal Components business, Whirlaway, were disappointing. While IMC remained profitable during the year, they did struggle with manufacturing efficiencies for much of the year. Like Whirlaway, they have good momentum based upon recent improved manufacturing results heading into 2012.

While Whirlaway was clearly the biggest issue with a significant loss for the year, as we mentioned in the release, they experienced a turnaround to profitability in the final five months of 2011. They also have good momentum moving into 2012.

Finally, European negative economic factors impacted our fourth-quarter revenue incrementally from Q3 '11. For the first time in recent memory, as Jim mentioned, we were down at NN in the fourth quarter versus the historically seasonally low third quarter by 5%. This 5% reduction was driven all by the European downturn.

So, the message for 2011 is this -- it was a record year in revenue, earnings, and EPS, but the year had significantly higher earnings potential than we realized on the basis of the three issues I just mentioned -- IMC, Whirlaway, and Q4 European revenue softness.

I would like to conclude my comments today by commenting specifically on our 2012 outlook. We mentioned in our press release this morning that we are forecasting full-year revenues for 2012 to be in the range of $415 million to $425 million. The midpoint of the range, $420 million, if achieved, would represent essentially the same revenue as 2011 after adjusting for currencies and material pass-throughs. At that level of demand, we anticipate good capacity utilization rates in our global plants with enough spare capacity to capitalize on any incremental improvements in demand should they occur.

We also mentioned in the release that our revenue forecast for the year includes good organic and economic growth in North America and Asia, both in the automotive and industrial end markets, offset by a forecast of mild recessionary reduction in demand. And we forecasted 5% continuing for all of 2012. During the first quarter of 2012 to-date, we have witnessed improvements in Europe from the Q4 '11 levels I mentioned earlier, but still revenues in Europe for Q1 '12 are running at lower levels then we experienced a year ago in the first quarter.

Although we do not provide annual or quarterly earnings guidance at NN, we did mention in the press release that our 2012 earnings forecast reflects good improvement in operating margins, net income, and EPS for the upcoming year. Our belief is based on several factors. First, a significant swing in profitability at Whirlaway. Our 2012 first-quarter trends in that business so far are headed in a very positive direction.

Second, improvement at IMC for the full year based upon good revenue growth combined with operational improvement. And finally, improvements from our Metal Bearing Components business where the leaner, restructured global business is able to withstand a forecasted 5% European reduction in demand, and still maintain good levels of profitability during the upcoming year. Of course, the big variable is what will happen in Europe for the year, as well as the rest of the world from an economic perspective. Based upon that uncertainty as that currently exists in our served end markets, particularly Europe, we believe our 2012 revenue and earnings forecasts are realistic and achievable.

Finally, during 2012 we are focused on debt reduction and the further strengthening of our balance sheet by the end of the year. With improvements in earnings, working capital requirements, and a slight reduction in capital spending, we anticipate year-end debt levels to be much lower, with corresponding improvements in leverage ratios. Our resulting debt levels and balance sheet should position our business for continuing growth in 2013 and beyond.

With that, we would like to open the call to any questions that you may have.

Thank you, sir.

(Operator Instructions)

Steve Barger, KeyBanc Capital Markets.

I've got several questions in no particular order, but first can you talk about for demand for Balls and Rollers in Europe now that we're almost a quarter into '12, can maybe you talk about how that's tracking relative to that 5% down expectation for the year?

It's essentially right on the 5% expectation, Steve.

Got it.

Brakes in the first quarter thus far is about 5% down.

Okay. And as you talk to your sales guys on the ground over there, is that how you expect Q2 to trend? Do you think there's any variance in here? Where is the risk, to the upside or the downside?

As we said, it's certainly unpredictable at this point in terms of the uncertainty over there. We -- everything that we've heard from our customers as well as -- essentially when we were developing our business plan, we just thought 5% was the number that kept coming back. In terms of on out into Q2, as we've mentioned before we don't get a lot of visibility in our business, no more than 30 days.

Right.

So there's really -- I can't sit and tell you that Q2 looks much different than Q1 at this point. And I would also, you asked the question and it's a good one, is there upside or downside, I would say neither.

Got it. Okay.

All right?

Net margin for Whirlaway in the quarter, can we have that yet or do we have to wait?

We need to wait on that.

Okay.

I think we had mentioned maybe in the last call that they did -- I think Rock said it too, they were profitable for the last five months and that's certainly continued -- minimally profitable but that has really improved going into this year.

That's great. And I know you don't give guidance but just trying to get a sense for where this can go in 2012. First question, do you expect it to sequentially increase as we go through the year, or is it stepped up to a sustainable run rate? How do you think about that? The cadence?

On Whirlaway Steve?

Yes, just Whirlaway simply, right.

They have some seasonality in their business, relative to the HVAC-served end markets. But as we look at the first quarter and on into the second quarter specifically, the cadence is definitely accelerated, in terms of what we see the contribution versus even when they became marginally profitable over the last quarter. So, we were seeing improved margins and improved earnings from Whirlaway in the first quarter. And we expect that to continue to accelerate on into the second.

Great. And for that -- for the full year, should we be thinking very low-single digit or could that be mid-single digit on a run rate as you exit, or any color that we could have?

Single digit after-tax returns or what are you --

Right. Net margins.

Well, we really probably shouldn't respond to that, in any meaningful way and relative to -- but I would say that in terms of our expectations for them in '12, and what we're seeing in the first quarter is that they're returns are approaching, on an after-tax basis, our corporate averages. They're still slightly lower, but their getting up close to our corporate averages.

That's great. And I'll try this one other way from a consolidated standpoint, you said 21% incrementals on the net income. Is that a sustainable run rate as you go forward on flat revenue?

Yes. Actually, of course if we -- if our revenue guidance proves to occur for '12 we wouldn't have any incremental revenue in the upcoming year. The 21% is, as I mentioned, a little lower than what we would have expected on the basis of the three issues that I mentioned.

Right.

For '11. Honestly we would have expected 4%, 5% more of the net 21% in a normal year for NN operations, both Whirlaway and IMC were cranking, as well as the drop in European revenue in the fourth.

Just to clarify, I said that we're going to have incremental revenue based on the capital investments that we made, and that would be true in those organizations at Whirlaway, at IMC, and in China. And that would be -- we get the flat year because of the down in Europe.

I'm with you.

Steve, one other comment -- I'm not sure that we totally pointed out in the press release, but we have really good growth organically and economically. More organic than economic, but both, honestly, in Asia, specifically China, and North America. So, versus 2009, it's a tale of three regions. And two of our three global regions are doing very, very well. Europe is not right now.

Right. All right. I'll hop off and see if anybody else has any questions. If there is nobody then I have a couple more.

Thank you. Holden Lewis, BB&T Capital Markets.

Wanted to ask you a little bit about the below the lines of sales numbers. Usually you break it into organic, pricing, mix, acquired, and currency, and this time I think you intermingled the pricing, mix, and currency bits, and I want to get a sense of what was the pricing, mix piece, and the currency piece in Q4. And what are you thinking about as you go into 2012 for those pieces?

All right. Let's see. We're consulting on it.

Okay. All right. In general, as was mentioned in the press release, we had good volume at Whirlaway in China, but had down volume in Europe. So, that was almost virtually flat. But the rest of it was, we had raw material pass-through of almost $2 million, and that was offset by some unfavorable mix. Price was about $800,000. So basically, most of it was raw material pass-through.

A little bit of price.

So, the raw material pass-through was a positive $2 million?

Yes.

And then the mix was a negative $0.8 million?

No. The price was a positive [$8] million and the mix was a negative $2 million.

Price was positive [$8] million. The mix was a negative $2 million. Okay. What? So, that price mix piece was basically a negative $1.2 million then? Is that right?

Basically it was -- it was a push. Well, it was a positive $0.9 million, for the price. Raw material pass-through and the mix pretty much offset, price was the differential.

I got it. That price mix piece that's been running north of $4 million for the balance of the year, that was basically $0.9 million -- you're talking percentage terms? Basically --

No, I'm talking in millions. $878,000.

Okay. So that piece -- running north of $4 million, that came in at about $0.9 million in Q4?

Yes.

Okay. And then organic growth was flattish to slightly negative and then the balance then comes down to currency? Got it. How are you looking at that price mix piece going into 2012? Do conditions look such at this point that that looks reasonably flattish?

Yes.

Okay. And then obviously trying to get a sense of what the organic looks like. What are you expecting out of foreign exchange then, as you go into -- in terms of its impact next year?

The average rate for this year is $1.39, and we expect approximately about $1.30 next year. That's what we built the plan on. So on 40% of our revenue --

Okay. All right. So $1.39 down to $1.30? You said?

Yes.

Okay. And then can you give us at 2012 where did the revenues at Whirlaway finish up for 2011? And what are you expecting the increment to be in 2012? I'm curious, I think that right now, you've been wrestling with two or three contracts, but you originally had won five. Does this, given where we are with Whirlaway, do we now move forward with the other contracts or are have they gone away as we move through this? How has all that played out?

Well, we're essentially, Holden -- the startup phases of all of the programs we talk to you about in '11 are done. And I would say that we're operating -- not I would say -- I would say that we're operating all of the new programs at good levels of manufacturing efficiency and quality and delivery. And so, many of the issues we talked about in the first two quarters in particular of '11 are behind us.

And we're capturing pretty much the full revenue expectations out of the programs toward the end of '11 and on into '12, although the '12 revenue is up over '11 on the basis of more normalized run rates in those two programs. And so, we're actually forecasting just the total increase is -- 5%. Almost 6% for them in terms of just pure organic growth on the basis of more units in '12 than '11.

In terms of the pipeline for new business, there are opportunities there that could change things, and those are decisions that aren't locked in yet, by any means.

Originally I think the contracts you were looking to capture, it was $20 million to $30 million in annualized revenues? Is that the right number? Speak --

Yes.

So, how much of that revenue run rate did we actually capture in 2011? Where do you think you're going to come out on 2012? Do you just assume that you're at $25 million run rate in '12?

Yes. It's a mixed bag a little bit, Holden, because we had the Tempe, Arizona, facility that as you know we sold at the beginning of the year. So I would tell you that we captured about $25 million of the expected $30 million in 2011. And then we expect another $5 million to $6 million in '12. But again, having said that, we have opportunities out there that could impact '12 revenue positively that we haven't weighed in on relative to investments moving forward. But as of right now, and what we've mentioned in our earnings forecast is $6 million out there.

Okay. And when you talk about expecting earnings to be up in 2012 over 2011, obviously your message there is don't sweat the revenue so much because of all these other profit drivers internally and I get that. But what is the base number that you're talking about when you referenced that? Are you talking about the $1.24 that you put up all in in 2011, as being the baseline that we should compare that comment to or some other measure?

Well, we're talking about the EPS from normal operations. So $1.10 is the base. You've got all the foreign currency -- most of the foreign currency gains that you really have to peel the onion back and take that out, Holden.

Right. Okay. But the $1.10 is what you're talking about?

Yes. The $18.6 million in earnings and the $1.10 is what we're speaking to when we say we see improvement.

Okay. And that $1.10 that does include all the responses expenses related to Whirlaway, correct?

Sure. Okay. That's a good question because we did pull up out some of that in 2010.

Right. So that $1.10 number it adjusts out the losses for Whirlaway, it adjusts out those foreign exchange, and so had a little bit of restructuring, that's how we should look at that?

No. The $18.6 million includes the full operating losses that we will report for Whirlaway for 2011.

Okay. Got it. Okay. Excellent. I guess that is what I needed. Thank you.

(Operator Instructions)

Richard Johnson, RBC.

I have just one question. On the cost of sales, I understand the explanation for the slight reduction this year in 2011. But do you have a target or a guideline that you're looking for in 2012 like 20%, or is there something you're working toward that you'd be willing on the long-term --

Yes. That's a very good question. Yes, we absolutely have a target of margin improvement baked into our business planning process. I'm not sure that we want to go public with what that margin improvement is, so I apologize. But we do have good margin improvement baked in.

As I mentioned, relative to the earnings leverage if you will, a big piece of that margin improvement is the Whirlaway improvement. But also IMC. Those two.

Okay. Thank you.

Thank you. Steve Barger, KeyBanc Capital Markets.

Did you say working capital is going to decrease this year? Or how should I think about that?

You should think about working capital being relatively flat this year, because of relatively flat revenue. And having the EBITDA pretty much drop-down to the free cash flow line.

Okay.

We ate up all of our EBITDA last year in working capital increase.

Right. But we're normalizing -- that was just based on rising revenue, right? So, there's nothing -- was there an abnormal build that you get back or are you just at the right run rate for $420 million of revenue?

We're now at the right run rate. There was some -- a little bit of unusual activity in the way accounts payable played out that we didn't forecast properly. But that's normal. That's at a normal run rate now.

We also had a little bit of shift in our shipment mix to countries where because of long delivery times we had longer -- we had to increase our days sales outstanding slightly just because of structural issues. But that's stable now too, so we think we should be flat on working capital.

Okay. Modeling question. Tax rate I should be thinking about for '12 statutory?

I keep using this 25% number. It's going to be a blend. Of course the US marginal rate is higher than that, but we have all of the Corporation's corporate expenses in the US that tend to moderate that US income. So, my best guess is 25% -- well let me say 25% to 28% when the rate comes back. When the US comes back.

Got it.

And at a time when that does come back we will book a huge, which we'll count as not operating, gain as we take the reserve off of our US DTA.

Right.

But that will be a big number but it will be nonoperating.

Yes. I know there was some maintenance spending in 2011. Is that mostly behind us, and are there any unusual gross margin pressures as we look at 2012?

No. As long as we continue to execute like we have in the last few months at Whirlaway and we'll see some margin improvement at IMC, a smaller operation as well, and higher volume in some of these programs will be good to.

Right. All right, gentlemen, that's great. That's all I've got.

Thank you. Holden Lewis, BB&T Capital Markets.

Another of the modeling questions of the seemingly unpredictable line items. That other line, the degree to which it swings around as a result of the 4x on debt, what should we be thinking about for next year? Now that you're looking at the euro -- the foreign exchange rates being down a fair bit? What does that translate into in terms of Other? And what are you modeling in, or building in on that line?

Everybody here is saying that it's going to be a loss. It's a good question. If we built the plan at $1.30 and it stays at $1.30, it would be nothing. So, why are you saying it won't be -- on the basis --

If the euro goes back to $1.35 for instance, that will be a loss. If the euro stays at $1.30, we should be relatively no gain, no loss.

Okay. So if it averages north of $1.35 then there's a loss. If it's $1.30, you're good. And if it averages less than $1.25 then you probably have a gain, that's the way to look at it?

No. The $1.30 is the base mark. We ended the year with $1.30. And so, to the extent that at any period in time, any measurement period, the month or the quarter or the year, the average rate, the ending rate is higher than the $1.30, then we will have a loss. If it's lower than $1.30, we will have a gain.

Okay. Great. I think that should do it for me.

Thank you. They're are no further questions in the queue. I'd now like to turn the conference back over to Management for any closing remarks.

Thank you. I'd like to conclude today's call with a general comment that, even with the uncertainty in our economic outlook I mentioned previously, we are well-positioned to deliver good earnings improvement for the upcoming year. We are encouraged regarding the earnings leverage we see in our Business for the upcoming year and look forward to the execution of our operational business plan for 2012. Thanks again for listening in on today's call.

Ladies and gentlemen, this concludes the NN Inc fourth-quarter 2011 conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 followed by the access code 5420733. We would like to thank you for your participation. You may now disconnect.