NN Inc (NNBR) 2013 Q4 法說會逐字稿

Welcome to the NN fourth-quarter 2013 conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, March 11, 2014.

I will now turn the conference over to Ms. Marilynn Meek. Please go ahead.

Thank you and good morning. Welcome to NN's conference call. If anyone needs a copy of the press release, please call my office at 212-837-3746, and we would be happy to send you a copy.

Before we begin, we ask you to 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 Richard Holder, President 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 questions.

With that said, Rich, I will turn the call over to you.

Thanks, Marilynn.

Good morning, and thanks for joining us on this call. As has been the case the last three quarters, we here at NN have continued, I think, the positive momentum in revenue growth and more importantly, growth in margin expansion.

As a Company as a whole, we are laser focused on maximizing our incremental profitability. I think we're seeing that bear out on a continuous basis across the numbers.

Overall in Q4, from an economic front, the North American automotive market continued its growth over the prior year. The European automotive market continued momentum in terms of recovery and the European heavy duty market remained very strong. Our quarter-over-quarter sales growth in Europe outpaced the end markets by better than 2 points, which we were very pleased with.

And we attributed that incremental market share gain to better penetration with many of our existing customers. We did win back some market share and some of our products went into expanded and adjacent areas. So you put all those things together, European market grew 3 or 4 points and we grew about 5 points in the same time period.

I'll tell you that, while the positive sales momentum in Europe during the last three quarters is encouraging, our overall sales level continued to be impacted by what we feel is still historically low demand in the European auto market. And generally, we continue to see weak NAFTA and European industrial markets performance as well.

So while we sort of developed a pulse in those markets, those markets are still not performing anywhere near what they should and will be. With that said, that allows us to be very bullish, because when these markets return to normalized levels we are very bullish about our incremental or our ability to perform incrementally in those markets. And I think the last quarter has shown that.

As I pointed out in prior meetings, our sales comparison to 2012 continues to be impacted by de-emphasizing certain non-strategic products or programs, principally this last quarter in our Precisions Metal Components and Plastic & Rubber Group. We've shed some products and we've done some rationalization with some products and so that impacted the top line just a bit. Nonetheless, we have experienced good growth and we're pretty pleased with the growth that we have and these actions continue to help us with our margin expansion and improve profitability.

In summary, Q4 sales, we were up $9.9 million, or 12.4%, over Q4 2012, from $80.2 million to $90.1 million. Operating profit from normalized operations was up $3.5 million, or 230% over Q4 2012, from $3 million to $6.5 million. And operating profit margin from normalized operations was 7.2% in Q4 2013 versus 3.7% in Q4 2012.

So I think you're seeing the fruits of the tightening of the operations. Pre-tax income from normalized operations was $3.5 million, or 140% better than Q4 2012, which was at $2.5 million, with $2.5 million to $6 million movement.

I think with that, I'll turn it over to Jim to dig a little deeper into the numbers and then I'll come back and make a few comments about the economic outlook and Company performance in general.

Thanks, Rich. Hello, everyone. I am connecting remotely, so if I should become disconnected, someone there in Johnson City will take over for me.

For a number of quarters in a row, our profitability performance has improved over the same period of the previous year, both in terms of quantity and quality of earnings.

In fact, we had the highest fourth-quarter gross margin and operating margin since 2006 in this past quarter, which, as Rich said, is indicative of our lower cost base and new focus on incremental profitability. Rich mentioned that we had sales of $90.1 million, or a $9.9 million increase over the fourth quarter of last year.

Regarding the incremental profitability, we brought 45.8% of the sales increase down to operating profit and this illustrates the kind of earnings leverage we have as sales continue to recover. The increased sales will be, as Rich said, to improve demand in European auto markets and good automotive demand in Asia and North America. We also benefited from the heavy truck demand in Europe.

We earned $0.25 per share in the fourth quarter, versus $0.16 per share from normal operations in the fourth quarter of last year. We did not make any adjustment to normal operations this quarter, because the few unusual items we had tended to offset one another.

On a segment basis, our Precision Metal Components Group is now hitting full stride, with gross margins of 23.2% and operating margins of 14.1%, both of which now exceed the corporate average. With Precision Metal Components now realizing a promise that we expected when we purchased Whirlaway, and to begin this product segment in 2006, the timing was very good for our first acquisition in eight years, which was the purchase of the assets of V-S industries, announced at the end of January.

V-S brings us much needed capacity, skilled workforce and a manufacturing presence in the fast-growing auto production area of Mexico. We are well into the integration process with V-S and things are going well. And we believe that the acquisition will be slightly accretive to earnings by the second half of this year and continue to improve from there. And we'll discuss this, our progress more fully when we announce the first quarter earnings in May.

Compared with the fourth quarter of last year, we had a much higher tax rate on normal operating earnings, because, starting in the first quarter, we had been accruing taxes on US earnings for book purposes. However, we still have a tax NOL that should allow us to pay no US cash taxes, at least through 2014.

We paid down $33 million of debt during the year, $17 million was from cash flow and the remainder from the permanent drawdown of European cash, which we were able to do due to a tax efficient return of basis transaction late in 2012. Our debt to EBITDA ratio at year end was 0.8 times, the lowest level in a very long time. As mentioned last quarter, we have plenty of available debt capacity to fund our aggressive growth plans.

Capital spending totaled $5.9 million for the quarter and $15.2 million for the year, which was on target with the level I mentioned last quarter. Working capital net of cash and debt was up approximately $10 million versus last year, due to the sales increase and an increase in inventory, which was required by our customers.

Because of the inventory increase, our cash collection cycle was up about 5 days to 76 days. Our goal for 2014 is to decrease the cash collection cycle to a level of about 70 days.

We paid three quarterly dividends of $0.06 per share in 2013, and the first announced dividend for 2014 was increased to $0.07 per share, reflecting our improving outlook. So the total dividends paid in 2013 was $3.1 million. Due to the increase in our stock price and the reinstatement of the dividend, our total shareholder return was 121% in 2013, versus 31% for the S&P 500.

So I think you will agree with me that NN had a very good year and we have aggressive plans for more growth and improved earnings from here.

That concludes my comments and now back to Rich.

Thanks, Jim.

Regarding the 2014 outlook, we expect the positive revenue momentum of the last three or so quarters to carry into 2014. We continue to be mindful of this prolonged sort of general economic uncertainty that's hanging over many of our markets, in particular the sort of global industrial market, as well as the European automotive market.

Given the strategic initiatives we've already undertaken, which includes, as Jim mentioned earlier, our acquisition of V-S Industries, we expect 2014 revenues to be somewhere in the range of $400 million to $415 million, which means sales growth of about 3% to 7% over 2013. And of course, this excludes the $15 million or so incremental revenue we expect from V-S. So we think we have a --started a path to some good growth, 2014 over 2013.

Some of the significant drivers in this growth will be, we're seeing stronger demand than we've modeled in China, maybe not as strong as some of the pundits has put out there but certainly stronger than we've modeled. We continue to see a relatively strong North American automotive market and the European recovery, while slow, continues to occur.

So we think it's -- we think 2014 is a pretty good year as we see it right now. Our latest addition of -- to the portfolio of V-S will greatly assist us in the penetration of some adjacent markets. We talked about that in great deal during the conference in New York.

V-S gives us a wonderful addition to the portfolio in terms of a low volume, high mix model, in terms of another low cost country location, and maybe most importantly, in terms of increased capacity for our low mix, high volume model, which formerly was in the Whirlaway business. Additionally, the acquisition gives us a nice addition to our global footprint, allowing us to better serve existing customers, but maybe more importantly, we've added about seven or eight new substantive customers to the portfolio globally by doing this acquisition.

So you put all these things together and we think 2014 is a good growth year. Naturally, all these things are net of any acquisitions we may make during 2014.

We have a number of deals in the hopper and quite a few of them are probably on the -- sort of the north side of 70%. So we think we'll probably be closing a few deals sometime this year. But we think the growth picture as well as the margin expansion picture is a good one for 2014.

Just to sort of recap, for those of you who didn't know, we held an Investor Day in New York in January and we unveiled our new website, we unveiled our new strategy. And so I would encourage anyone who hasn't seen that and wants to get to know more about the Company to take a look at that, the replay of that webcast and take a look at our new strategic vision.

With that, I'll conclude my prepared statements and I'll take any questions anyone has.

(Operator Instructions)

And your first question will come from the line of Steve Barger from KeyBanc Capital Markets. Please go ahead.

Hi, good morning, guys.

Good morning, Steve. How are you?

I'm good. How are you?

Pretty good. Can't complain. It's finally stopped snowing, so --

Here too. That's a good thing. First question's on the revenue guidance. 7% to 11% looks good, especially relative to the last couple of years. But it is below the 21% sales CAGR you have on your walk to $800 million. Just given the deals that you see that could be close, do you expect to close some of that gap as the year progresses?

We do. Actually, maybe just one of the deals which we think are pretty close to the finish line will close and exceed that gap.

Okay. Wow. Exceed the gap. That's great. And for margin profile, whether it's that deal or any of the others that could be close, are they generally accretive to the corporate margin? Ex purchase cost accounting and all the other one-time charges that might be there?

Yes, depending on how the deals fall. Some of these smaller deals are definitely almost immediately accretive to corporate margin. Some of the larger ones will require -- so they come to pass, will require some work but should be at least marginally accretive by year end.

Got it. And if one of the bigger deals happens to fall first, do you have the bench strength to go after that or is there some more infrastructure you have to put in place? And I know the Company's run lean in a lot of areas for a long time. Just how are you thinking about that?

Yes, I think we're ready for that. We've brought on at least one new general manager. We have another new one starting at the end of this month. We're hiring a number of people. So if one of the bigger deals came first, we would still have enough bandwidth to complete probably all of the smaller deals we have circulating. So right now, we're feeling pretty good about no matter how they land, we can pull it off.

Great. Two more and I'll get back in line. Are there more product lines you expect to divest or walk away from in 2014 and are all those potential changes built into the existing guidance that you've given for revenue?

We're always studying the viability of all the product lines and so that exercise will continue certainly in 2014. At least one of the product lines, I talked about it fairly openly in New York, we are restructuring and we'll continue to take a look at that. We haven't made a decision on it just yet for 2014.

Got it. Okay. And then just based on the mix of organic growth and contribution that may occur from V-S as you go through the year, how are you thinking about incremental contribution margin for the consolidated business in 2014?

The consolidated PMC business or the consolidate --

No, consolidated -- yes, if I look at the consolidated income statement and you come in at the midpoint of the high end of your revenue guidance, are you thinking 20%, 25%, 30% consolidated incremental contribution margin? Just trying to get a sense of how you see the year unfolding.

I think we're thinking about this somewhere in the high-20%s, low-30%s. So 31%, 32%-ish is how we're looking at this.

Right, and obviously that can be skewed by acquisitions or anything else. But as you see it right now, assuming nothing else drops, that would be your take.

Yes.

Got it. That's a great answer. Thanks. I'll get back in line.

Your next question will come from the line of Keith Maher from Singular Research. Please go ahead.

Good morning. Question about the European market. You mentioned growing a bit better than the market. You didn't mention inventory levels and potential restocking, just if we could get your thoughts in that area?

Yes. Well, I think Jim talked about that just a little bit. Our inventories grew slightly because one of our customers has rekindled their inventory plan and we think at this point, they're at an optimal level, we're at an optimal level. So I don't think there will be any more inventory building.

I think everyone is running a lot -- their models are a lot leaner than they were prior to this slowdown. And I think that will probably remain that way for the next year or so, which actually is good for us. It's putting a little bit more pressure on us to increase velocity. That actually works well for us, especially in our European factories.

Okay. Thanks. A question just on the V-S acquisition, and maybe acquisitions in general. V-S isn't that large. It's a $16 million run rate. I was just thinking, what are the opportunities to grow that revenue, given now that they're going to be part of the Company with much stronger financial and operational resources? Can you go out and really accelerate growth in these smaller acquisitions after you make them?

I think the way to think about V-S is while they're at a $16 million run rate, they're more along the lines of about a $50 million business, right? When you think about their total capacity, equipment, factories, workforce and the like. So it's a business that can scale to something around $50 million or so on the top line. That's one piece.

Within that business, the low cost country model allows us to move business from what was our Whirlaway business to the Mexico operation at a lower cost, later in the life cycle of the part. And prior to this, we didn't have a model that allowed us to hold onto that business. So now, we can control the entire lifecycle of many of the products that we have and we don't have to divest when they go into aftermarket. So it's an increase in margin.

And maybe the third thing to think about is, with the acquisition of those assets came some really good application engineering talent and some really good sales talent. And that may be proving to be the most exciting part of the acquisition to date. Really good sales talent. They're out there.

They're bringing to the corporation opportunities that we hadn't seen before, customers that we haven't seen before, and so we're feeling pretty confident, pretty bullish about this acquisition. So it looks small on the outside, but we think in a year from now, we'll be looking at this, saying -- those guys made about a $50 million, $60 million acquisition, it just seems like it was a $10 million, $15 million acquisition.

Great. That was really helpful. Sorry.

This is Jim. I just wanted to add one thing to that. In that business, the bids that we get or the business we go after usually has a five- to seven-year life and usually is in $5 million to $10 million annual revenue range. So the business comes in good size chunks when you win it.

Okay. And I did have a couple more questions, I think probably for Jim. One the anticipated CapEx and depreciation targets for 2014, if you could share that?

We didn't put those out there. I'll tell you that normally, we have a target in the general range of half of the [allowed] depreciation or maintenance. And then in the last couple years, we've also had about an equal amount for growth CapEx. So I'm not sure if we're going to release the number this year later, but that's a general model.

Okay. And then just a final question on the tax rate. You mentioned no US taxes through 2014. So what should we think about the tax rate for this year? And then beyond this year, when you start paying US taxes, what's that going to look like?

Well, the tax rate, we're accruing taxes at the normal rate in US. My comment was that because we have a net operating loss, we won't pay any cash taxes in the US. So that's a cash flow item.

But our tax rate is a weighted average, basically, a weighted average of our rates around the world and where in Europe, we pay about 25%; China, about 25%; US, 35%, plus some local. So it depends on where the profit is. We tend to have a blend of about in the low-30%s -- 31%, 32%, 33%, something like that. It just depends on where we earn the money proportionally.

All right. That's all I had. Thanks.

(Operator Instructions)

Your next question will come from the line of Matthew Dodson from JWest LLC. Please go ahead.

We have seen the Europe car registration getting incrementally better the past six months. Can you help us understand what you're seeing from your customers and when will they need to restock their inventory if this demand is actually getting better?

I think what we're seeing is, I'll characterize it as a slow and methodic recovery. We're not seeing any indications of a big bubble, because we think what's happened is there's been substantive capacity shedding.

I think some of the mid-level brands are still pulling down some capacity, and so there's still some manufacturing rationalization taking place. With that said, we think demand is creeping along, climbing about a 3%-ish or so. And we don't think there's any restocking to do this year.

We think that in part in the fourth quarter and what's going on in the first quarter, they will have returned to the stocking levels that most of them are going to want to run at for the balance of 2014, unless there is some significant movement, which we don't anticipate. We don't think second half of the year, we're going to see a doubling or -- we just don't see that. We think it's going to be a relatively smooth curve.

Are you saying that the inventory's still very lean and they're still doing hand to mouth and we need to -- for them to change that and add more inventory, we'll need a significant ramp-up in demand. Is that what you're trying to --?

No, I'm not saying that at all. I don't think our inventory right now in the system for many of those guys, I don't think they're hand to mouth. I think they're probably not running at 20 end days or 30 calendar days. They're probably more along the lines of 15 or so end days and I think that's where they're going to stay.

I think that's the model that, at least as we understand it, that will be the model for Europe, I think for the balance of the year. And should they see demand outside of that model, they're just going to push the pressure backwards to increase the velocity. I don't think anyone's going to add much more to their existing inventory for 2014 based on the numbers that are out there today.

Perfect. Thank you very much.

There are no further questions at this time. I'd like to turn the call back to management for closing remarks.

Okay. Again, thank you for joining us. Let me reiterate, we think 2014 is going to be a pretty good year. It's certainly going to be a continued year of growth, and we're all pretty excited. So we're looking forward to chatting with you again on our first quarter conference call and with that, I'll sign off. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.