NN Inc (NNBR) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the NN, Inc. first-quarter 2012 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, May 7, 2012.

I would now like to turn the conference over to 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 NN's management team. First management will give an update and an overview of the quarter and then afterwards, we will open up the line for your questions.

Rock, would you like to go ahead?

Thank you, Marilynn. Good morning, everybody. Thanks for joining the call. With me this morning I have Jim Dorton, our Senior VP and CFO; Will Kelly, our Vice President and Chief Administrative Officer; and Tom Burwell, Vice President and Chief Accounting Officer. Today Jim will offer an analysis and commentary on our Q1 results and I will conclude the call with additional comments regarding the quarter as well as providing updated guidance on our revenue outlook for 2012 and the outlook for the second quarter.

With that, I will turn the call over to Jim.

Thanks, Rock. This quarter was fairly straightforward. The story for the quarter was lower European demand offset by strong growth and profit recovery at Whirlaway and global -- good global cost control.

We had revenues of $104.5 million and a record net income from normal operations of $6.6 million or $0.39 per share. European revenue was down due to automotive demand and destocking by our major customers. However, Whirlaway revenue was up $4.9 million and the profit turnaround was dramatic as we explained in the press release.

We know from our customers' press releases and from their disclosures to us that many of them have been reducing inventory. We believe that this impact was fairly substantial for NN in Europe and Asia in the quarter, but like we saw in the 2009 timeframe, it's difficult to separate the demand impact from the destocking.

We remain optimistic about a second half demand recovery in Europe and we know that the destocking will end, hopefully soon, and Rock will talk more about this in a moment.

In total we earned $5.9 million or $0.35 per share in the first quarter but we had an inter-company FX loss of $0.04 per share that we are excluding from normal operations. So our earnings from normal operations were, as I mentioned, $6.6 million or $0.39 per share.

Cost of goods sold as a percentage of revenue dropped during the first quarter to 79.4% from 81.1% last year. And this turnaround in gross margin was primarily a result of the profitability improvement at Whirlaway. In addition, though, whereas the lower revenue in Europe negatively impacted gross margins at those operations, our cost reduction and restructuring over the past two years allowed us to remain profitable at these lower sales levels. And so we can look forward to margin expansion as volume recovers in Europe.

SG&A was flat with the prior year at $8.1 million but was higher as a percentage of sales due to the lower sales level. SG&A was up compared with the fourth quarter due to higher compensation accruals during this quarter.

Depreciation was $4.5 million in the quarter and interest expense was $1.2 million, which are both consistent with the prior quarter level.

We had other expense of $0.4 million during the quarter, which was made up of the previously mentioned nonoperating foreign exchange loss of $0.7 million offset by miscellaneous gains of $0.3 million.

The tax rate was 20% during the quarter, which was at the low end of the forecast because we earned more of our income than we thought in the US where we are not currently accruing taxes which brought down the overall average rate. As mentioned in the last couple of quarters, we are still not accruing taxes on US operations so our blended rate is just a mix of the international rates that we pay which is usually between 20% and 25%.

We spent $4.1 million in capital during the quarter, which was in line with our announced goal of $15 million to $20 million for the year.

In 2012, we will complete the first phase of our 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, new Whirlaway sales programs, and cost reductions in the US and in the Netherlands.

We had negative cash flow of $1.9 million during the fourth quarter -- during the first quarter -- as we experienced working capital growth due to the seasonally higher sales versus the fourth-quarter level. We are still planning on a net debt reduction of approximately $20 million this year. This will put us in a good position to fund growth going into next year.

That concludes my comments. Now Rock will give you some comments on the quarter and outlook for the remainder of the year.

Thanks, Jim. Let me begin with general comments on the first quarter, if I could here.

Revenue and earnings for the first quarter were in line with our internal business plan, which anticipated soft demand in Europe. As expected, we experienced sequential growth from the fourth quarter of 2011 in each of our businesses based upon seasonality. However, consolidated sales revenues of $104.5 million during the quarter were down 6% in comparison to the first quarter of 2011.

The results on the revenue front were mixed. We experienced good growth in North America, as Jim mentioned, particularly at Whirlaway and in Asia revenues were up slightly but the rate of growth slowed. In Europe, we were down from a year ago based upon recession conditions in much of the region.

Our revenues in Europe were down in comparison to the first quarter of 2011, which we believe, as Jim mentioned, reflected not only lower demand but also large destocking of inventory in Europe throughout the supply chain during the quarter.

From a profitability perspective, the first-quarter EPS of $0.39 from normal operations was not only a historical record for a first quarter but for any quarter of any fiscal year. The results were very encouraging and in line with our beginning of the year objective with respect to margin improvement, cost performance, and EPS growth. Total gross profit margins improved or 1.7% from the first quarter of the year ago.

All three of our business units contributed to the solid improvement. Our metal bearing components businesses in Europe overcame a significant reduction in revenue and our operations in the US and China combined to achieve really good levels of profitability during the quarter.

The Plastics and Rubber business reported good levels of profit improvement during the quarter, led by improvement at both IMC and Delta Rubber.

Finally, at the Precision Metal Components business, Whirlaway continued a trend which began in the third and fourth quarters of last year and was profitable in the first quarter versus a loss from one year ago. Whirlaway's turnaround represented a swing in profitability of $3.8 million for NN in the first quarter versus a year ago and as evidence of the kind of earnings growth and leverage that can occur in our business when contributions from Whirlaway are accretive to the results of our base earnings.

I will conclude today's call by commenting on our 2012 full-year revenue guidance and an outlook for the second quarter.

Based upon our first-quarter results, which were in line with our internal 2012 business plan projection, at this point we are reconfirming our 2012 revenue guidance in the range of $415 million to $425 million. The midpoint of the range, $420 million, is consistent with our 2011 revenues of $424 million currency adjusted.

This guidance reflects for Q2 at least more of the same as the first quarter from a global economic outlook point of view.

Although Europe is still the big unknown, we expect revenues in the second quarter to be very close to the revenues we experienced in Q1. As of now we think that the worst of the reductions in Europe have occurred. The second quarter beginning in May appears to be showing a recovery off the low but we certainly are not willing to point to the forecast for the next 60 days or so as any improving trend.

Most economic forecasts and some of our customers are predicting a gradually improving economic environment in the last half of 2012 but in the final analysis, no one really knows. The economic uncertainty in Europe for us remains. We do not expect -- we do expect that the revenues and demand at our North American operations and China will continue at very healthy levels in the second quarter.

With all the discussion on the revenues and the double dip recession that is occurring in Europe, it is important to focus on and is improving earnings outlook for the balance of the year. While the turnaround at Whirlaway has been a big part of the improvement story, our restructured European operations are much better prepared to withstand any reductions in demand that occur and they are in much better shape than the recession of 2008 and 2009.

With respect to Whirlaway, the revenue and earnings improvement momentum is continuing on into the second quarter. As we mentioned in the release and our first-quarter results confirm, we do forecast continuing improvement in margins, net income, and EPS for 2012 in comparison to 2011 for the total Company.

Finally, we remain focused on reductions in our net debt by the end of the year, to position our balance sheet to continue an execution of our strategic growth plans for 2013 and beyond. As we have said earlier, our target net debt reduction by year-end is $20 million, which should supply us with plenty of capacity to continue to fund our organic and acquisition growth plan.

With those concluding comments, I would like to now open up the call to answer any questions that you may have.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Steve Barger, KeyBanc Capital Markets.

Good morning. This is actually Alex Walsh sitting in for Steve. Firstly just want to touch on profitability at Whirlaway. I know you guys have talked about getting margins there potentially above the corporate average. And if I do my math correctly, it seems like you did a mid to upper single-digit net income margin in the segment.

I was wondering if that math sounded like it made sense and what your expectations were for profitability for the rest of the year? I know you talked about it being up from last year but just on the margin front, are we expected to get much better than we saw in this quarter?

We are expecting margin improvement throughout from quarter to quarter throughout the year from Whirlaway. And you touched on it, Alex, in terms of the margin for the first quarter calculate -- what did you say -- midteen to upper teen? Is that what you said?

No, I said mid to upper single-digit. For net income margin.

Oh, net income, that is correct. That is correct. And as we have mentioned of the capabilities on the integration of the new business continues to improve, we expect to see margin improvement, gradual margin improvement between now and year end.

Okay, just given the highly engineered nature of those products, what's your expectation as to once you kind of get everything sorted out and get all the costs cut, where eventually do you expect margins can go?

At least to the corporate averages and we are hopeful for improvements versus our base business.

Okay, then just around the capacity standpoint there, are we pretty close to capacity or is there still room to put more revenue through the system?

At Whirlaway or the rest of the Company?

At Whirlaway.

Okay, at Whirlaway it depends on the specific product and the customers and programs. We do have capacity in certain areas with respect to some products, some customers, and some programs. In other areas, we are pretty much at capacity. So I'm not sure I am totally answering the question. It is a mixed bag, but call it on 30% to 40% of the business, maybe half the business we've got some capacity; on the other half, we are pretty much operating at capacity.

Okay. So from a quarterly run rate, do you expect revenue to --? There's room for it to tick up then or we could pretty much kind of -- going to run out here of that $21 million?

Yes, but there is seasonality in their business of course based upon the HVAC piece as well. And so that's an important consideration in terms of the second and third quarter in particular. The second in particular is a quarter moving into HVAC that tends to be higher than the first. But not significantly higher on the basis that the new programs weren't in the HVAC business.

Okay, that's helpful.

This is Jim Dorton. I just wanted to -- I'm sorry, Alex -- in terms of the overall capacity at the plant, though, now looking at the existing programs we have, we could add more new programs into the plant probably about 30% additional over where we are now roughly speaking to capacity on the existing programs. So we can put more into that facility, but --

Okay, then just one more before I jump back in line. I know you talked about Europe being down due to not only auto production being down but also some destocking. I know it's tough to kind of break out one of them versus the other but are you expecting that destocking to be recovered by the end of the year? I guess that's just my question.

Well before the end of the year, Steve. As I mentioned in my comments on the call here, we see -- of course we don't know for sure but we see an uptick for the end of the second quarter here in terms of our ordering patterns from our customers. And we attribute a lot of that to just the fact that the destocking has somewhat run its course.

Okay, I'll jump back in line. Thank you.

Holden Lewis, BB&T.

Thank you, good morning. The revenue guidance that you are providing, if you're at about 105 for Q1 and about 105 for Q2, that would sort of suggest I guess or imply that you are looking at I think similar types of levels in Q3 and Q4 to sort of get to the low to mid point of your range I think. And does that -- I think seasonally -- correct me if I'm wrong but isn't Q3 at the least usually a seasonally weaker quarter and then Q4 I think is no stranger to being below Q1 and Q2 either.

So does the revenue guidance kind of embed an expectation of better and maybe unseasonably strong revenues in the back half or did the first quarter come in lower than expected?

It does, it does. Honestly the beginning of the year -- our beginning of the year forecast did, too, Holden. And you mentioned Q3 being seasonally the lowest and Q4 -- Q4 in normal circumstances tends to rebound closer to one and two averages than we witnessed last year. So yes, it does imply that we see an improvement.

I think it is important, though, to make the statement that in -- embedded in the revenue guidance is not only the European situation which we may have mentioned before, but we've built in about a 5% GDP economic growth reduction or recession like number in our original business planning process. But you've got the improvements in the US, particularly Whirlaway, and Asia offsetting that for the total Company.

Okay, so in terms of other programs, how meaningful is additional capacity in China? Do you expect that to be sort of a kicker in the second half or it's really on the margin ? I guess same thing with Whirlaway. You mentioned 30% more capacity if there's new projects but it sounds like there's probably no new projects to anticipate this year and the existing projects are probably sort of running at stable levels.

How do you view those two factors as

Both of them getting lined up our ducks in a row for 2013.

Okay, so marginal impact from those matters --

There might be a little impact on our Chinese -- our China operation in Kunshan on the basis of we do have the building expanded and we are getting equipment in, but most of the new business there is associated with 2013. So no real impact in Q3 and Q4 there and that's true of Whirlaway as well.

Holden, this is Jim. I would just add that with regard to the European recovery, of course nobody knows what is going to happen, but the forecasting services we look at are still projecting that kind of second-half rebound. So I don't think those things have changed yet. So we are banking on that a little bit. Of course the news from Europe is up and down a lot.

Okay, and then comment on China, you had sort of made mention that it's still growing but the growth rate has slowed. Are you seeing any tangible effect of a weaker China there that would be worrisome or just kind of comps on all that?

I think it's just -- their growth has slowed, as we mentioned, but it slowed from a low teens growth down to 7% or 8% maybe.

Is that kind of what you expect in your guidance or is that worse than expected?

The 7% to 8% is essentially what we had in the original guidance. We didn't use '13 or '14 to guide on Asia -- for the guidance.

Fair enough. Are you surprised that it has come down to that level at this point, setting aside --?

Not really. I think as I mentioned, it has slowed but I don't think it's alarming and I think the other issue of course is that we made a big investment over the last three quarters to double the size of the facility and almost double the capacity from a revenue perspective. And so -- and our customers are rewarding us with business awards for '13.

Okay, great. Thanks. I will jump back in.

Michael Corelli, Barry Vogel & Associates.

Good morning. Just a question. Rock, you said something about Europe. In May you were starting to see some signs. Could you elaborate what you were talking about?

Just if you look at what happened to us in the first quarter and actually going back to the fourth quarter of 2011 when we really started -- really experienced the downturn in a meaningful way. As we look at the monthly trend and the incremental down or up the last month of the first quarter, March, and the first month of the second quarter, April, appear to have been a trough, a bottom on the basis of what we see for May and June from our customers.

So are you saying you actually -- it appeared that March was a trough or you are saying you think -- (multiple speakers)

March and April both represented troughs if you look at it month to month. And then we see an improving trend, a slight improving trend in May and June. We can only see out about [60] days in our business.

Okay.

But those two months show improving trends.

Okay, thank you. And at Whirlaway, did you say that -- I understand you mentioned seasonality on the revenue basis but it sounded like you were saying that you expect margins to improve moving forward on a quarterly basis?

That's correct.

Okay. All right, that's great. Thanks a lot.

A follow-up from Steve Barger, KeyBanc Capital Markets.

It's Alex again. Just one quick housekeeping item. I was wondering on the tax rate until what point do you -- until what point are you not paying taxes on North American revenue?

When we started this I guess a year and a half ago, we -- the accounting rules aren't hard and fast on that but the guidance that we're working under basically had you take a three-year look back for profitability and so now that we are profitable in the US again, we've got to get a three-year look back. Then at that time, we will reverse the reserve we have against our deferred tax asset and we will begin accruing taxes in the US. That could occur later this year possibly early next year.

But it is I would say it's just an accounting rule that we're following here. We are of course able to utilize the NOLs in the US as we make money here on a cash basis. That's not a problem. It's just when the accounting profession allows you to safely begin accruing taxes again.

Okay, that's all I had. Thanks, guys.

Holden Lewis, BB&T.

Thanks, I wanted to get a little bit of perspective about I guess how Europe is performing from a margin standpoint and the reason I'm kind of asking is obviously the swing factor, Q1 to Q1, the swing factor from precision metal I think was $0.22. The lower tax rate was in the $0.05. That's a $0.27 positive swing but you sort of beat the quarter by $0.07.

So it obviously implies that you must -- if you strip out those items you are obviously getting bit pretty good by Europe as a trough. Can you talk a little bit about -- is that perspective correct and what kind of decremental margins do you see in that region at this point?

Well, let's see. I am going to answer a little bit here and then Tom Burwell, our Corporate Controller, will answer a bit more. But we missed our margins. We had planned for Europe to be down and for margins to be down. We were a little bit worse than we expected by about 1% on gross margin. If we were to get back to more normal levels, what sort of percentage increase would you say, Tom?

Well, what happened year-over-year is Europe went to 20% GP to 18.7% GP. A lot of that was driven by European volumes. We lost about 32% of that volume but we did have improvement for the remainder Level 3 programs and just improvement over operations from last time. So the net reduction if you look at just the sales reduction, the gross profit was down 26% on the sales reduction. But we lost 32% on volumes.

So there was about a 5 percentage point improvement just from operations within Europe. So as that volume recovers, there is a big $3 million recovery we could see within the quarter just from European volume.

So if Europe gets better, it went from 20% down to 18.7% so there's about 500 basis points of just sort of cost and fundamental improvement that you would -- that you could (inaudible) be back at 23% to 25% in Europe when volumes are back? Is that the way to look at that?

We'd expect to maybe be -- we were at 20% and maybe expect to be at 21%, 21.5%, something like that.

Okay, great. Can you just provide maybe a little bit of an update how to think about some of these items that are somewhat more difficult to predict? Within the other line, that foreign exchange item, tell us -- the tax rate at 20%, it looks like the jurisdiction stuff won't be a lot different, so should we be thinking about a tax rate like that? And then sort of the pricing and mix bit and sort of what you are thinking about those three items as the year progresses.

With regard to the foreign exchange, that's just strictly a function of the euro versus the dollar and it's going to go up and down and we -- I think right now we would be at a solid again if we closed out now. So maybe we'll recover a little bit of that on other income in the quarter, but it really depends on how we end up. That's why we exclude it from normal operations. It's non-cash and it doesn't really have any meaning, but just for GAAP rules, you are required to run it through your income statement. Our guess is for the year that's going to be neutral when you add all the ups and downs.

Okay.

Let's see, what were your other two questions?

Just sort of the tax rate 20% in the quarter doesn't sound like the jurisdictional stuff is going to change that much or so -- your tax treatment is going to change that much, so should we be thinking about that low 20% range now for taxes and then sort of the pricing mix expectations as the year progresses?

Yes, I guess I would have to agree with you that we would tend more toward the low-end of the tax range we gave you 20% to 25% for the year and if the second quarter looks quite a bit like the first, it ought to be similar, so down there in the -- closer to 20% than 25%. The price mix the rest of the year --

It was -- the total impact for price mix was approximately excluding raw material pass-through was approximately $500,000 to $600,000 in the quarter, so it just can -- (multiple speakers)

There's honestly a lot of moving parts there, some plus and minus. We have a good mix in small operations like Delta Rubber, where we are getting some more oil and gas kind of business that has positive margin impact and we are negative on a mix in Europe on [changes] and other things, so that will probably flip around and so it's hard to say, but I would say the bias will be on you the improvement side.

Okay, because I am thinking in terms of price mix contributed about 160 basis points to gross in Q1. Is that kind of -- how do we sort of expect that contribution to play out the balance of the year?

I don't know if you have perspective on it just because again, it's a very difficult one to -- for us to have any visibility into.

Yes, I don't think it was quite 150 basis points. I guess if you were including the material pass through, it would be.

Right. Correct, so it's double pieces there. I am wondering how you are looking -- it sounds like mix you kind of feel the push. So then I guess I'm quite curious about sort of the raw material pass through. Do we still have a lot of that? Have things stabilized or have they come -- those can come off or how do we look at that?

That is stabilized, Holden.

Okay, so in all likelihood it sounds like that price mix piece barring any major changes anywhere probably moderates as the year goes on in terms of a contributor?

I think that's fair.

All right, great. Thank you.

(Operator Instructions). We have no further questions at this time. I will turn it back to management.

Let me conclude today's call with a summary comment regarding our current view and outlook for '12. Although the economic outlook as we mentioned many times in Europe is uncertain, our profitability outlook remains very positive. We look forward to the remainder of the year and a continuing positive trend in our net debt reduction, growth in earnings, net income, and corresponding earnings per share. Thanks again for listening to today's call.

Ladies and gentlemen, this concludes the NN, Inc. first-quarter 2012 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 453-4929.

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