NN Inc (NNBR) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NN, Incorporated, first-quarter 2015 conference call. (Operator Instructions) This conference is being recorded today May 7, 2015.

I would now like to turn the conference over to your host, Mr. Robbie Atkinson. Please go ahead, sir.

Thank you, operator. Good morning, everyone and thanks for joining us. I am Robbie Atkinson, Corporate Treasurer and Investor Relations Manager; and on behalf of our team, I would like to welcome you to NN's first-quarter 2015 earnings conference call.

Our presenters this morning are President and Chief Executive Officer Richard Holder, and VP and Chief Financial Officer James Dorton. Also here is Tom Burwell, VP and Chief Accounting Officer. If anyone needs a copy of the press release or the supplemental presentation, please call the Financial Relations Board at 212-827-3746 and they will be happy to send you a copy.

Before we begin I would ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation, and in the Risk Factors section of the Company's 10-K for the year ended December 31, 2014. The same language applies to the comments made on today's conference call, including the Q&A session as well as the live webcast available at www.earnings.com.

Our presentation today will contain forward-looking statements regarding sales, margins, foreign exchange rates, cash flow, tax rate, acquisition synergies, future operating results, performance of our worldwide markets, and other topics. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside of the Company's control.

This presentation also includes certain non-GAAP measures as defined by SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation.

First, we 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, Robbie and good morning, everyone. We are pleased with the solid start to the year, so let me offer a few highlights and then I'll turn it over to Jim to walk through the financials.

Our net sales for the first quarter were in line with our expectations as we continue to gain share and expand into our adjacent markets. We saw our legacy businesses grow at a rate of 7.6% during the quarter. Acquisitions contributed $62 million of net sales, and our team continues to execute ahead of acquisition integration schedules.

Our North American and Asian operations produced steady results, and we were encouraged by our European businesses as they appeared to pick up steam economically. Our gains in Europe helped offset the slowing economic conditions that exist in our Brazilian business.

The currency translation headwinds during the quarter impacted our earnings per share to the tune of $0.04.

We continue to drive the implementation of the NN Operating System across our businesses. With this focus on disciplined execution and operational excellence, we were able to improve our adjusted operating margins 140 basis points compared to Q4 and position ourselves to take advantage of new business wins as well as continuing to drive progress on our new platforms towards their expected operating performance targets.

Now, moving into the business groups, the Autocam integration is ahead of plan as expected, and we remain focused on achieving our stated synergy goal of $15 million for this year. Our North American, European, and Asian operations within the APC group are operating largely in line with our expectations.

However as stated before, Brazil is presenting a temporary challenge given their current economic conditions. With that in mind we already taken appropriate actions and have been able to manage our costs effectively in the region. We continue to believe and invest in Brazil; and to that end we have secured several new program wins in the geography.

Lastly, our Chinese joint venture continues to deliver the expected net income to our bottom line, and we maintain a very positive view on its growth.

Turning to the Metal Bearing Components group, we are seeing increased market windows of opportunity as we expand our focus into new end markets and grow our shares with existing customers. We've made new entries into the rail market as well as linear systems, and expect growth outperformance in our enhanced paper roller platform. The acquisition integration of RFK remains on track and is laying in a better-than-expected foundation for growth.

Finally, our Plastics and Rubber Components group is simply continuing the overall repositioning as we execute the plan for that business during this year.

With that I'll turn it over to Jim to walk to the financials, and then I'll return with some final commentary and we can take questions. Jim?

Okay. Thanks, Rich; and good morning and welcome, everyone. As Rich said, the first quarter of 2015 results were consistent with our strategic plan.

As we have discussed before, 2015 has a ramp-up in new business programs throughout the year; this is both in terms of volume and profitability. And Q1 was really right on track, even with the weakness in Brazil that Rich mentioned.

We had adjusted earnings per share of $0.36 in the quarter, with net sales of $164 million. This was very consistent with our plan for the year.

Weakness in Brazil was offset by strength in Europe; and North America and Asia were on plan. As mentioned in the press release and as Rich mentioned, we had core growth of 7.6% year-over-year, which is trending well toward our annual 8% organic and adjacent market growth goal from the strategic plan.

Compared with Q1 of last year, adjusted EPS were up 16% from $0.31 to $0.36. But on a currency-adjusted basis, the comparison is $0.31 to $0.40, or a 29% increase. And of this increase, we calculate that our acquisitions were -- added 6% -- or $0.06 -- or they were $0.06 accretive, and the remainder of the increase is from growth in the legacy businesses.

Regarding the impact of foreign exchange, you will all recall, I think, that we revised the euro exchange rate used in our 2015 guidance during last quarter. So currency was not a significant factor in our results versus expectation. However, it was significant in the prior-year comparison. The lower euro rate reduced sales by $8.3 million and EPS by $0.04 a share, as Rich mentioned.

Gross margins were slightly lower in Q1 compared with Q1 of last year and the fourth quarter, primarily because of the startup costs associated with the ramp-up of new sales programs. SG&A totaled $12 million for the year; this was up 20% from the first quarter of last year, due primarily to the acquisitions. We did adjust spending to match the ramp-up in our new program, so going forward you should expect to see SG&A at or a little above the $13 million rate per quarter.

Adjusted operating margins were 8.5% during the quarter, which was in line with our expectations. This was a 1.4% improvement versus Q4 and about flat with Q1 of last year. We do expect the margins will improve as the year progresses, based on the ramp-up of our new programs.

Our tax rate for the quarter on unadjusted income was 22%; however, the tax rate on adjusted income, which is really a better measure here, is 24.5%. Our effective tax rate for the quarter is always a result of the average of our tax rates around the world, and this quarter there were no adjustments to income taxes within the quarter.

Our tax rate through the year can be lumpy depending on where we're making money during the quarter. This quarter we had lower pretax earnings in the high tax rate countries, including the intercompany losses on foreign exchange that occur in the US, and then we had higher earnings in the lower tax rate countries. We do still expect the tax rate for the full year to be in the 26% to 28% range that we previously mentioned.

In going from GAAP earnings to adjusted earnings, the only adjustment item was the exclusion of the net impact of foreign exchange losses on intercompany loans. Given the intercompany nature of this item, we always exclude this impact from normal earnings during the quarter.

As Rich mentioned, synergies from our acquisition of Autocam are running very well toward our target, and we feel very comfortable about where we are on achieving those synergies.

Moving on to cash flow, for the quarter we had negative free cash flow of $27 million. This is a large number, but this is a normal seasonal pattern for us, with strong cash flow in Q4 followed by a working capital build and lower cash flow in Q1.

Capital spending totaled $8.3 million during the quarter, which was in line with our plan. This is a similar phasing of our capital plan that we saw last year. The plan for 2015 remains unchanged -- capital spending plan remains unchanged at $45 million to $55 million in total capital spending, well over half of which is for growth projects on new business that we have already secured.

In the supplemental slide presentation posted on our website we have shown the sales and operating profit margins of each of our business segments. In the Autocam Precision Components segment, sales were up 249% due to the two acquisitions that occurred in 2014.

Operating margins were slightly below last year as we have had a lot of new programs ramping up. And you should note that for this analysis we added in the income from our JV in China, which is shown on the income statement below the tax line but is actually part of the Autocam Precision Components group result.

For the Metal Bearing Components segment, sales were up $73.2 million from last year -- no, sales were $73.2 million, which was up slightly from last year. However, if you add back the impact on currency, sales were actually up over 15% due to the core growth and the acquisitions. Operating margins were flat with the previous year but are expected to improve in the remaining quarters of 2015.

In the much smaller Plastic and Rubber segment, revenue was flat with the previous year and operating margins were down slightly, 0.3%.

So to summarize, our first quarter was in line with our expectations. We had core growth in the business, which was somewhat hidden by the currency impacts.

New programs ramping are expected to improve margins and profitability through the remainder of the year. The Metal Bearing Components group has a great growth opportunities that we are pursuing; and Autocam is growing, with synergies being achieved ahead of our target.

That concludes my comments. Now, back to Rich.

Thanks, Jim. To wrap it up, we think the first quarter represents a solid start to 2015, and we feel pretty strongly that our results are in line with our expectations.

Our organic and adjacent market expansion is on track, and several of our key platforms are approaching targeted performance levels in the second and third quarters. Three of our four geographies are performing at or above expectation and are offsetting the weakness that we are seeing in Brazil.

Moving forward, the team's continued implementation and execution of the NN Operating System along with our focus on expanding into new end markets will drive our outperformance and enhance competitive position. We remain confident that our focus on diversification, portfolio, and seizing adjacent market growth opportunities will allow us to build a balanced and sustainable business.

That concludes my comments and now we can open the line up.

(Operator Instructions) Daniel Moore, CJS Securities.

Did I hear correct, Jim, MBC -- the Metal Bearings -- adjusting for currency revenue would have been up about 15%?

That's right, part of which is fundamental core growth and part of which came from the acquisitions of RFK and Chelsea.

Got it. We talk a lot about APC, but maybe focused on the Metal Bearings for a moment, just update us on the pipeline of new business opportunities, both with existing customers, increasing outsourcing, as well as new customers and maybe new adjacent markets and new verticals.

Okay. Yes, there's a number of things. I could probably speak all morning on that particular topic.

But we have maybe, call it, down to three things around Metal Bearings. Number one, we've increased the portfolio, especially with the acquisitions and some recent product development activities that we have in the business. So we are playing in a wider range of product, which is allowing us to go into some new end-markets.

So on the far side of rollers we are entering into the rail market, which is a completely new and adjacent business for us. We've made tapered rollers in the past, but never in the rail space.

We are also playing in what we call the small ball arena. We've never had -- I won't go into dimensions, but we've never had a ball before that was, let's call it a micro ball. So we are able to get into that business, and that plays in a number of different end-markets. So that's the new entries.

When you think about the RFK acquisition, that really gave us the appropriate capacity and put us in line to work with one of the larger bearing manufacturers. In fact, they are the largest paper roller bearing manufacturers in the world. They have recently gone through a bit of a breakup and they are reevaluating their business, which has put us in a great place to help them disaggregate and take over some of their processes, and we are in the midst of doing that.

We are actually making product for them already, and we have actually hired a resident person to be in their facility to manage and coordinate the outsourcing activity. So we're pretty excited about that.

It's not an expeditious process. It takes quite some time to move these products. There's [P-tapping] and homologation and lots of things that have to happen. But the exciting part is we've started the process, and we're seeing gains on both sides and looking forward to later in the year as that continues to ramp.

And maybe number three, we are just playing in completely different arenas today. Many people have heard me talk about the fluid power space, that we used the acquisition of Chelsea to move us into the fluid power space, and we continue to expand that space, which is very exciting for us. Albeit that market is a little depressed right now, it is the perfect time for us to position ourselves to be ready for, let's call it the bounce in that market.

Very helpful.

I think it's fair to say, Dan, maybe let me embellish a little bit. We had a business that I think for many, many years our market window was a bit narrow. Now that we've expanded that to more of a panoramic view, I would argue that our market window is probably more than tripled and we are playing in spaces that heretofore we didn't even think about.

Very helpful. Just maybe switching gears a little bit, Plastics and Rubber, you've said at times if you couldn't gain scale in that business you'd consider divesting. What are your thoughts at this point? And what is the roadmap, if there is one, to getting to significant scale and double-digit target margins?

Yes, and that's a correct statement. I think we said in the original strat plan if we didn't see a way clear to get this business to circa $100 million, it would be a distraction and we'd have to do something with it.

I think where we've landed is something sort of in the middle. I think we are pretty convinced that we can grow a very robust plastics business. We have some very definitive moves that we are working through in that business.

I think it's fair to say that substantive change is probably near in that business, and so we're pretty excited about it. I'm not sure I can get any further into that.

Understood. And one more, perhaps jump back in queue. Just, EBIT margin of 8.5%; you obviously have that 10% EBIT goal out there for the full year.

I know you don't get into quarterly guidance, but just give us a sense. Q2, how should we think about that ramping toward that full-year margin goal as you see the world right now?

Yes, I think we're feeling very comfortable with our numbers and our margin target for the year. I think we will start to circle the wagons pretty closely. I wouldn't be surprised if we are -- we will probably be within less than a point of the goal we're ramping to.

We have a number of projects in Q2 and Q3 that are coming online at the appropriate performance levels and volumetric targets that are going to push us, I would think. And I'm not giving guidance, but I would certainly expect it to push us 9% or above, and that is how we expected things to go.

So I think it -- sure, we feel pretty comfortable about our target for this year, and getting there toward the middle of the year and sustaining.

Okay. Appreciate the color.

(Operator Instructions) Steve Barger, KeyBanc Capital Markets.

First question is on Autocam. Did it specifically hit your revenue margin target in the quarter? And how should we think about sequential revenue and growth there?

Yes, I think the answer to the first part is yes and no. Ex-Brazil, Autocam was in line.

So our wild card was Brazil. The economic conditions there are certainly not what we had expected them to be. So fundamentally Autocam was really only off by Brazil.

Right? I'm sorry, and there was a little bit of FX also really associated partly with Brazil, a little bit with Poland, to the tune of a little over $1 million.

So how big (multiple speakers)? I was just going to say, how big is Brazil from a dollar standpoint for you?

Overall for the year, Brazil is about a $40 million business for the year. We are still circling the wagons on what we think the miss is.

We're a little bit more bullish about second half than first half, so we think we'll probably have, I would guess, similar top-line misses in second quarter as we did in first quarter, we think. The second half of the year will be a little bit more robust, simply because we've won a number of programs down there, one of which will be coming online in the third quarter that may offset the first two-quarter depression.

So we think we can Brazil in sort of even to the end of the year, but it will be pushed towards the second half of the year. And again, of course that's depending on the current economic conditions. We don't think they are going to get worse, but I think if you look at the data it is all over the place right now.

Right. And same question I guess on the margin side. You were in line with your expectation on the quarter for Autocam?

Yes. Yes. Autocam margins were definitely in line. You've heard me mention a couple times, number of programs ramping up in second and third quarter. That was basically -- that's our profile.

There's a number of programs that will hit the appropriate volume as well as margin targets in late second and be coming along in third quarter. So by all accounts, everything is as it should be right now.

Okay. More broadly on Autocam -- and I know there is no perfect answer to this -- but trying to think about your capacity as you're currently configured. Could you sustainably run at $100 million per quarter without a significant investment there, if the work comes in to you?

Well, as the entire Autocam group we run it (multiple speakers).

Yes.

Absolutely. Absolutely. I mean, I say that -- let's be careful. We can volumetrically handle that if the mix is maintained.

If mix changes -- for instance, if we win a new program, there's always capital associated with that. So if we just simply see volume, yes, absolutely we can do that. If it's a new program win, it comes with -- it will come with a capital investment somewhere in the 50% to 70% of peak-year revenue range.

Right. Well, it's a good segue to the next question. Given your ability to hold tight tolerances at production volumes, it seems like the big challenge is getting in front of the customers that are going to appropriately value your engineering and your manufacturing skill set. So what are you doing to make sure you're maximizing the value of that sales effort, so you can optimize mix from a profitability standpoint?

We have been building -- Autocam came with a very proficient sales organization. We are continuing to build that sales organization.

It is -- we are becoming more application-specific. We are in the process of bringing on an application salesperson specific to the industrial market and a few other end-markets that we are driving into.

These kinds of sales is more of a spec sale, right? You walk in and you've got to sell that value to the customer around getting specced into the product.

And that requires, again, application-specific knowledge. The individual that we are bringing on has the industry knowledge, they have the engineering knowledge, and it's an engineer kind of sell.

So if there is a limitation, or as you think about the gating factors to winning more business for Autocam, is it on the sales side? Or is it on engineering capacity to be able to ramp up for a program once you get it in the door?

Yes, I think candidly our limitation right now would be more on how we allocate and manage our capital spending for the year than our potential wins. We are seeing -- and we are viewed as a class organization. To some degree we have some customers knocking on the door.

Our issue continues to be managing capital spend, again, because every time we win something new we see revenue 12 to 18 months out. So we'll have to make a significant investment today and not see the profitability for some 12 to 18 months.

So managing how we work our capital is our biggest challenge. I mean, I guess I've said it a number of times: we've got to be careful not to grow our way into trouble.

Right. On the last call you talked about working on organizational systems to give you better forecasting and current information. Can you talk a little about what you've put in place, if you have the data analytic support that you need internally, how long it will be to have the system that you envision in place?

Yes, I think we will have the bulk of the system I would say toward the end of this year and probably no later than Q1 of next year. What that system really will entail is an SAP financial overlay that will get down into every one of the businesses so we can compile the information we need in three minutes rather than three days, which is where we started.

We've done a number of Kaizens in the process. We've implemented SharePoint, and we are using SharePoint as our knowledge transfer system so we can move information quickly and have greater ease of access.

And with that, we are getting -- I won't say smarter, but we are getting smarter faster is probably the best way to put it. Middle of last year, to compile the data we needed for our [Workbase 7] deep dive was a three- to five-day all hands on deck kind of exercise. Today it's more of a one to two days, and we need this thing to be a couple of hours in order to function with the ease of access and the speed that we desire.

So I'm looking forward to it. We're getting there every day.

We just laid in a new system this week. It's been tested, it's working. It's still a little klugey, but it's significantly better than what we had, and we continue to take these steps.

We think middle of next year we will have a world-class system that is comprised of four ERP systems and/or instances with one financial overlay and a single knowledge transfer system. And that will allow us to literally access information in minutes to hours rather than days to weeks.

Understood. Thanks. I'll pop back in line and see if anybody else has (technical difficulty)

(Operator Instructions) Larry Pfeffer, Avondale Partners.

Good morning, gentlemen. Nice quarter. Just to give you a quick opportunity, didn't see it in the press release: I assume the revenue guidance range for the full year remains unchanged.

Correct. Correct.

Then just for a housekeeping item there, what's your assumption for the euro for the full year?

I think we're built in right now at about $1.08.

Okay. Yes, just wanted to make sure on that one.

Then looking at the Autocam piece, looking at the sequential ramp in revenues, should we be looking for a low $90 million number in the second quarter, and then mid to high $90 million in the third and fourth? I guess depending on where Brazil shakes out in the back half.

Yes, Brazil continues to be the wild card. I would say certainly circling the wagons, I think, on those numbers. Pretty close.

Okay. Then just something on the first quarter. I know there are some product startup costs going on at Autocam. Do you have a ballpark for what you think the gross margin number would have been without those startup costs?

Yes, I think the gross margin would have been in line with what we saw last year. I think if you look at the loss, if you will, at the gross margin line it's almost entirely startup costs.

And by the way, just to be clear and in the interest of transparency, the bulk of it was in Autocam, but we did have a little on new program wins in Metal Bearing as well.

Okay. Then just again sticking with Autocam on the integration process there, what inning would you guys say you're in on the IT integration?

On the IT integration? Wow. Well, specific to Autocam, Autocam today has the most mature IT system of all of our businesses. So Autocam has -- the bulk of Autocam, the legacy Autocam business, is probably in the sixth, seventh inning.

The pieces that we added to it -- so the V-S business we literally just implemented the MFG/PRO instance this week, and we're going through beta testing to make sure the system works. Right after that, in two or three weeks we're implementing Wellington.

So by the close of the end of the quarter, middle of next quarter, we'll have the entire Autocam business on a single instance of MFG/PRO. So that business will be a singular business, if you will, by end of fourth quarter.

So I would say sixth inning. I'm not a baseball guy.

I appreciate the color. And Jim, just a quick housekeeping question. Where would you expect the midpoint of the full-year tax rate to land?

I know it will move around with where you see revenues coming from. But just what's a ballpark number to use for modeling?

Well, I guess I would go with the midpoint of our guidance, which is 26% to 28%; so 27%. We're comfortable anywhere in that range.

Okay. Thank you, gentlemen.

Daniel Moore.

Thank you, again. Just on the synergies, you mentioned you're running ahead of the $15 million. Is it enough to get within shouting distance of $20 million, do you think, over the next year or two?

And I guess more critically, where are we in Q1 and how much of those synergies on an annualized basis were in the numbers in Q1?

Well, I would say that we have a larger internal target than the $15 million. So -- which is one of the reasons why I said fundamentally we're ahead of target, as expected. We're driving a bigger number internally.

There is certainly a certain amount of those synergies that have showed up in Q1. Unfortunately, to some respects it was offset by Brazil. I'm not sure we're prepared to give that level of detail, but certainly it has worked to our benefit to be ahead of plan.

The reason we won't stand up and raise the external plan is because something always goes bump in the night -- just like we didn't expect Brazil to be doing what it's doing. We think fundamentally things will balance out, and the $15 million is a good number, and so we're sticking with that target.

Fair enough. Thank you.

Thank you. Gentlemen, it does look like we have no further questions at this time. I'll turn it back over to management for any additional or closing remarks.

Okay. Well, we would just close by saying I think it's a solid start to our year, in line with our expectations and appreciate everyone's time on the call this morning. Look forward to catching up with you soon. Thank you.

Ladies and gentlemen, but does conclude today's conference. We thank you for your participation.