NN, Inc. (NASDAQ:NNBR) Q1 2024 Earnings Call Transcript

NN, Inc. (NASDAQ:NNBR) Q1 2024 Earnings Call Transcript May 7, 2024

NN, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the NN, Incorporated. First Quarter 2024 Earnings Call [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Stephen Poe, Investor Relations. Please go ahead, sir.

Stephen Poe: Thank you, operator. Good morning, everyone, and thanks for joining us. I’m Stephen Poe, Investor Relations contact for NN, Inc. and I’d like to thank you for attending today’s business update. Last evening, we issued a press release announcing our financial results for the first quarter ended March 31, 2024, as well as a supplemental presentation, which has been posted on the Investor Relations section of our website. If anyone needs a copy of the press release or the supplemental presentation, you may contact Alpha IR Group at nnbr@alpha-ir.com. Our presenters on the call will be Harold Bevis, President and Chief Executive Officer; and Mike Felcher, Senior Vice President and Chief Financial Officer. Tim French, our Senior Vice President and Chief Operating Officer will also join us for the Q&A portion of the call.

Please turn to Slide 2, where you’ll find our forward-looking statements and disclosure information. Before we begin, I’d ask that you take note of the cautionary language regarding forward-looking statements contained in today’s press release, supplemental presentation and when filed the Risk Factors section in the company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024. The same language applies to comments made on today’s conference call, including the Q&A session as well as the live webcast. Our presentation today will contain forward-looking statements regarding sales, margins, inflation, supply chain constraints, foreign exchange rates, cash flow, tax rates, acquisitions and divestitures, synergies, cash and cost savings, future operating results, performance of our worldwide markets, general economic conditions and economic conditions in the industrial sector, the impacts of the pandemics and other public health crises and military conflicts on the company’s financial condition 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. The presentation also includes certain non-GAAP measures as defined by SEC rules. The reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation. Please turn to Slide 3 and I will now turn the call over to our CEO, Harold Bevis.

Harold Bevis: Thank you, Stephen. And good morning, everyone. Please turn to Page 4 in our earnings deck. NN had a successful first quarter, highlighted by growth in our core plants, continued execution of our business transformation strategy, which was underlined by a number of observable operational improvements at our underperforming locations. We also continued our commercial momentum winning new business in the quarter at a very strong pace, capturing more of the $17 million of new awards, which we estimate to be about three times market growth rates. Our transformation is fully underway and we’re now entering our second year. And I can say for the team its here time flies when you’re having this much funds. And we are indeed pleased with our results over the last year and we’re looking forward to highlighting some of them today and then taking questions at the end.

First, I’m happy to report that Q1 2024 was the third consecutive quarter of exceeding our upward goals and expectations for adjusted EBITDA, free cash flow and new business wins. We have been driving our trailing 12 month EBITDA up. We believe this is a function of natural company strengths, a stronger team made up of both homegrown leaders and outside professionals, a strong set of improvement initiatives and being accountable to outcomes to each other. First and foremost, we’ve been delivering strong operational improvements. Some of you might wonder what does that mean, operational improvements are a pretty, pretty big term. But for us it means rightsizing our headcount, negotiating with non-direct suppliers, leveraging our global procurement power, upgrading plant managers where needed, combining SG&A roles where possible and having an organized plan at every plant to take out costs.

Additionally, in certain areas, we’ve had to negotiate, engage with customers on basic economics. Another term for this is Continuous Improvement or CI. And we are committed to increasing our margins and profit rates on an ongoing basis and it’s working. To be sure it is sustainable and becomes a layer of goodness that we build upon, we have to change our culture in many areas and that’s working also. Sometimes winning and becoming successful is just plain hard work and we’re all about that. As we have noted in the past a year ago, the Company had seven unprofitable plants that were causing a big impact to our bottom line in our cash flows. Our aggressive actions over the last year, at these plants has shown clear and immediate results, with three plants returning to profitability already and the remaining four are making dramatic improvements.

The goal is for this group, to become profitable by year end 2024, this year. The commercial team has also been very successful over the last year, and we have secured growth at three times the market growth rates, by our estimations. This will enable us to layer in new growth and contribute to our adjusted EBITDA totals in future quarters. Before turning to our first quarter financial results, I’m happy to announce that we are reaffirming our free cash flow and new business win outlooks for the year, while also tightening our outlooks for net sales and adjusted EBITDA. We expect to deliver full year bottom line growth, along with continued strong growth in new business wins, and Mike will cover this in more detail in his section. Please turn to Page 5, in your deck.

NN delivered solid first quarter results, with net sales of $121.2 million and adjusted EBITDA of 11.3. Year-over-year, net sales volumes were mostly flat after some onetime movements, but adjusted EBITDA grew strongly through the actions that I just walked through. It was our third quarter of year-over-year growth in adjusted EBITDA, and our trailing 12 month adjusted EBITDA of $46.3 million, is up 20% of the trailing 12 month adjusted EBITDA of a year ago, or about $7.7 million improvement. Our adjusted EBITDA margin is now 9.3% and is up significantly compared to last year as the turnaround of troubled plants and broader operating cost reductions continue to improve our bottom line. Before turning the call over to Mike, I’d like to recognize our global NN team.

In a period of significant change for the company, a lot of it instigated by me, our employees and colleagues are performing in an outstanding basis, on-time delivery quality and safety. We’re reorienting and injecting best practices in our company as we go along and changing our culture. NN sales pipeline is as large and as healthy as it’s ever been. And we continue to aim to continue winning new business, with both new and existing customers globally. With that, I’ll turn the conversation over to Mike, who will walk through our financial performance in a more detailed manner. Mike?

Mike Felcher: Thanks, Harold and good morning, everyone. I’ll start on Slide 6, where we will detail our results for the first quarter. Net sales for the quarter of $121.2 million were down 4.6% compared to last year’s first quarter. For the period, we had roughly flat sales volumes due to a rationalization of volume of approximately $4 million underperforming plants, mostly offset by $3 million of sales growth at healthy plants. From a pricing standpoint, our prior year results included $3 million of end-of-life premium pricing associated with the closure of the Irvine plant. Looking at profitability, our operating loss of $4.8 million improved by $2.3 million compared to the $7.1 million operating loss in last year’s first quarter.

On an adjusted basis, our first quarter adjusted operating loss was $0.7 million, which was slightly higher than the adjusted operating loss of $0.4 million seen in the prior year. As Harold referenced earlier, adjusted EBITDA results of $11.3 million by $3.2 million or 39% versus last year’s $8.1 million result. Our consolidated adjusted EBITDA margin results expanded by 290 basis points to 9.3% versus last year’s first quarter. This improvement on our profitability on a lower revenue base relative to last year speaks to our early success in improving our base business performance. As we continue through 2024, our focus on attacking any and all underperforming areas of the business will continue to anchor our priorities, as part of our multiyear transformation efforts.

In particular, we expect to see a more pronounced pull through of the impacts from our operational improvement initiatives and total cost productivity programs, with those results accreting more thoroughly to our profitability figures, as many of these only began benefiting us in the second half of 2023. As we have stated in the past, we remain committed to capturing an additional $10 million in adjusted EBITDA improvement, once our actions are completed. Turning to our segment results. Starting on Slide 7. In our Power Solutions segment, where our business is largely standard products, our sales decreased 1.7% year-over-year to $48.2 million down $0.9 million from the $49.1 million of sales in last year’s first quarter. While we are experiencing strong demand in our business from US customers focused on electrical grid, this demand strength was partially offset by volume rationalization as part of the Taunton and Irvine facility closures from last year.

Despite the lower sales volume, the positive impacts from facility closures and cost reduction actions have driven solid results as seen through our improved adjusted EBITDA. Our quarterly adjusted EBITDA of $7.8 million improved by $1 million compared to the $6.8 million delivered in last year’s first quarter. We believe it is a testament to our refocused efforts and commitment to our strategic transformation plans, both operationally and commercially, that the business delivered higher adjusted EBITDA and expanded margins by 290 basis points year-over-year. As we begin to layer in stronger sales figures from new business wins, we expect to continue expanding our profitability as we capture improved fixed cost absorption through operating leverage, combined with the commitment to our costs and productivity programs that Harold walked through earlier on the call.

Operationally, our focus remains on expanding our connect and protect business, improving underperforming plants, continuing to right-size the cost structure, contemporizing our engineering and processes, and ultimately executing on a healthy and strong growth pipeline across growing key end markets. Turning to slide 8, in our mobile solution segment, which covers our machine products business, sales decreased 6.4% versus the prior year’s first quarter, declining by $4.9 million to $73.1 million for the period. The decrease was primarily driven by rationalization of underperforming business and the impact of some mixed shifts in our retained business. In line with the trend we have seen across the company, our profitability in the mobile solution segment grew versus last year’s first quarter, as the segment adjusted EBITDA results of $ 8.6 million increased by $3 million, compared to the $5.6 million in the first quarter of 2023.

This markedly improved adjusted EBITDA performance was driven in part by stronger profits from our China joint venture, which continues to show market strength and attractive growth. Additionally, operating performance improvements within our underperforming plants reflect the early impact of our cost and productivity programs, which continue to gain momentum. Now turning to slide 9, you can see a summary of our free cash flow, capital expenditures, and net debt and resulting leverage. We are committed to maintaining positive free cash flow and will therefore take a measured approach on capital investments required for our new business wins. This includes utilizing equipment financing opportunities, as we did in the first quarter where we executed a $4.9 million equipment sale-leaseback transaction.

With that, I will turn the call back to Harold to discuss some of our additional developments before wrapping our prepared remarks. Harold?

Harold Bevis: Thank you. Please turn to slide 10. Our structural and process improvements have been accretive to our bottom line since the initiation of our global continuous improvement program last year. And our trailing 12-month EBITDA is now up to $46 million, and it’s up, almost 20%, as I mentioned, since the first quarter last year. And it’s improved for four quarters in a row. And additionally, as a result of targeted cost reductions, better operational planning, and headcount rationalization, our EBITDA for headcount is up 42%, and I just wanted to share a look into the operational improvement program that we have underway, led by our Chief Operating Officer, Tim French, who is on the phone later for questions. But we’ve progressively been working down our headcount over time, and this chart shows you what our headcount is outside of our JV because we have another 700 people inside of the JV.

But these are on our non-JV headcounts. And you can see that we’ve been taking down our headcount while taking up our EBITDA, therefore driving up our productivity. So we’re going to continue this balanced focus on growing earnings through growth as well as cost-out initiatives. And it’s helping us make improvements in our free cash flow generation also by having quite a bit of people off the payroll. And this remains an important focus going forward. This story is not over. We’re underway with optimizing here. A lot of it’s focused on our underperforming plants. And it will lead to an improvement in our overall capital structure also. We believe that we’ll be able to put the periods of financial stress behind us, if we haven’t already, as we evolve our capital structure to be more reflective of our current performance continued impact on implementing our transition strategy.

This is one quarter at a time, one improvement at a time, sequential improvement, staying with counting, taking forward actions, and improving based productivity. Highlighted on page 11, if you just turn the page, and I’d like to flip and turn about our commercial program. Our organic growth program has been performing very well. And we’re encouraged by our early success and ongoing success. Accelerating the growth of new business wins is another key to our transformation plan. And after having won a record $63 million of new business awards during calendar year 2023, we delivered another $17 million of new awards in the first quarter this year making a total of $80 million in a short amount of time. We’re on pace to deliver the similar amount this year $55 million to $70 million.

We put in a range there because it’s really hard to tell, when you’re going to close on things in your pipeline. But we’re on pace now, with the middle point of our guidance range here as you can see from the results which would mean, $120 million to $135 million of new business won over eight quarters. Our key growth areas continue to be the China automotive markets which are just flourishing with indigenous and export opportunities. The U.S. Electrification and Grid Technologies, where we specifically are on the grid edge and selective vehicle programs in the markets of North America, South America and Europe. We’re continuing to be selective in the medical markets. We’re mindful of our — of the amount of CapEx. We’ve attached to growth plans.

Tim French is the minder of our CapEx budget. And we’ve walked away from some opportunities that were just too CapEx intense for us. So we continue to leverage our installed base, on an ongoing basis. And this batch of growth is much more capital effective and capital efficient and prior experiences about a company. And we’re leveraging our installed capacity very well. If you turn to page 12, we’d like to reaffirm our free cash flow and new business line outlooks while slightly tightening our net sales and adjusted EBITDA guidance ranges. And for the full year just to repeat it here, we’re expecting net sales in the range of $485 million to $505 million up slightly from prior year. The midpoint adjusted EBITDA in the range of $48 million to $54 million up over 20% at the midpoint.

Free cash flow in the range of $10 million to $15 million up again slightly at the midpoint compared to the improved free cash flow generation of last year and new business wins in the range of $55 million to $70 million. Our guidance continues to reflect steady end market demand, despite some observed weakness in North American industrial markets relative to 2023. Specific to NN, we expect to continue executing our aggressive growth program, ultimately driving free cash flow and profitability across several new markets and customer platforms. With that, I’d like to thank you for listening. And I’ll turn the call back over to the operator, for questions.

See also 25 Best Conservative Email Newsletters to Subscribe to and Hidden Gems: Unveiling the 10 Stocks on Hedge Funds’ Radar.

Q&A Session

Operator: Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Joe Gomes with Noble Capital. Please go ahead.

Joe Gomes: Good morning. Thanks for taking my questions and nice quarter.

Harold Bevis: Thank you, Joe.

Joe Gomes: So just you mentioned under the seven facilities, three are back to profitability now and you’re hoping to get the other four by year end. And I think previously you talked about there’s $100 million of revenue associated with them that was unprofitable. How much of that $100 million of revenue would you say is now returning to profitability?

Harold Bevis: Yeah. It’s about half of it, Joe. And we’re underway with the goal by the end of the year for that group to cross the line and make money for us on the way to making 5%. So we’re going to go from losing over 10% to making plus 5%, which is slightly below our average. But those plants specifically have some of our older assets and then some special purpose assets that we’ve set realistic goals for now. But right now we’re kind of clearing waivers on about half of the revenue. Joe.

Joe Gomes: Excellent. And then, you kind of touched on it a little bit as well and maybe give us a little more color on — on some of the medical efforts in the Connect and Protect you know is there anything specific you can point out maybe contract wins our size and some of the stuff that you’re bidding on in that type in those markets?

Harold Bevis: Yes, there’s a couple of constraints that we look at with regards to saying yes to some of the growth for us when we get down to the final line we’ve walked away from a couple big opportunities to be honest that we’re extremely capital intense. And when we say capital intense for us it means it’s more than $1 of capital for $1 of sales, we’re way below that right now because we’ve been careful about leveraging the company’s assets and adding to into adjacent markets where if you say you needed four machine centers to complete a product, we have a capacity on two and need to de-bottleneck two. Some of the opportunities in medical because we weren’t in it for three years. As you say there four machine centers needed, we don’t have any of them.

So, we’ve been careful about those opportunities whether they’re in medical or other adjacent markets. We’re stretching our growth CapEx. So, I would say the overriding metric for us is largely financial. And we’ve been we’ve been stretching the CapEx across some of these. We’ll get eventually get to the point where we have a little more firepower. But with the capital structure we have at the moment on and required a step down in covenants and be compliant. We need to be frugal on capital spending and we are. Tim French is on the phone. Tim’s look forward 12 quarters into our cash CapEx requirements. And Tim I know you’ve looked at the details more than me here. Do you want to have anything you want to add?

Tim French: I would you say Harold that are we’re being very efficient in how we’re spending capital on new business wins. And as you as you suggested it’s significantly below $1 for $1 of revenue. So where we’re really focusing on utilizing idle assets are on our underutilized assets today and it’s and it’s proving to be very effective on our gaining new business.

Joe Gomes: Okay, great. Then and that leaves to the next question I had you talked about you know open capacity are under-utilized assets. How much — if you were to utilize them at normal utilization rate, what kind of revenue — additional revenue could you generate just from the existing assets and open capacity?

Harold Bevis: Yes, it’s a good question. A lot of the assets that we have are older vintage and capable of making certain products but not able to handle tolerance on certain others. For instance we have a decent amount of equipment in our automotive engine parts areas. We make a lot of parts for high end engines, especially diesel and on a piece of paper, it looks like they ought to be able to make medical products. But when you get down to the tolerance needed, they can’t hold us back. So, they become what we call special purpose assets. So, we have a decent amount of that. If you look at our balance sheet, we have over $400 million worth of the machines. And generally speaking, we’re one running one shift. And if you say that the growth programs are running $0.5 to $1 of growth, and that’s some sort of potentially financially speaking, a lot of open capacity.

But it’s not it’s kind of fake news because the capacity is only capable of certain type of — supporting certain type of growth initiatives. And then on a growth basis we’re really focused on accretive growth versus just filling up stuff. And so a lot of it remains idle Joe. And to be honest, we’re thinking through what our rooftop footprint should look like. And especially it turns back to the underperforming plant areas where they’re mainly light on volume and they’re mainly light on volume because they can mainly make commodity products. So, you look at do you want to invest in those machines to be able to do other things or you want to call it a day? So, we’re getting progressively machine-by-machine smart about that. If I had to just give you a number though, Joe, I would say the numbers between $50 million and $100 million is what’s realistic on paper.

You could come up in a lot higher number by going through the math, I just led out there but it’s around $50 million to $100 million.

Joe Gomes: Thanks for that, Harold. And then one last one for me, and I’ll get back in queue. Last quarter you had talked about potential more equipment sale leaseback transactions. Just wondering kind of what the status of those are?

Harold Bevis: Yes. Mike, you want to take that one?

Mike Felcher: Sure. Yes we did, as I noted on my comments, $4.9 million in Q1. We’re evaluating doing a little bit more this year. It’s going to tie into our CapEx projections. So we’re — our viewpoint is we want to maintain positive free cash flow in the range we provided and we’ll look to supplement CapEx spend with either equipment sale leasebacks or financing.

Joe Gomes: Great. Thanks for taking my questions. I’ll get back in queue.

Harold Bevis: Thank you, Joe.

Operator: The next question will come from John Franzreb with Sidoti & Company. Please go ahead.

John Franzreb: Good morning, everyone, and thanks for taking the questions.

Harold Bevis: Hi, John.

John Franzreb: Again, I want to start with the changes you made to your guidance wasn’t much, but I’m curious as to what were any underlying assumptions you might have changed either positive or negative to maybe your revenue assumption in the year ahead?

Harold Bevis: Yes. Mike you want to take that one?

Mike Felcher: Sure. It wasn’t a big change. We pulled down the top line on revenue a little bit of the high end of the range at the bottom the same and that’s what form for over four months into the year. We just had a better feel for where we see the year coming in from a revenue standpoint. I don’t think anything overall changed in viewpoint other than just where we’ve been seeing the volume and how we see the rest of the year shaping up. And then on the EBITDA side, really we just pull both the bottom ends up a little bit and tighten that. And again that’s based on — it’s been a third of the way through the year and having a little bit more confidence and where we see that coming into the — for the full year.

John Franzreb: So, there’s no specific end market that you think is growing more solid than previously?

Harold Bevis: On one — our exposure to the US residential construction market, John. We have been specific mix exposure. We make shafts for age fact compressors and we’re — because of our machinery and the heritage of that business, we’re really — our mix is towards the low end side of those products and with the high interest rates and what’s happening with housing starts, we expected it to be soft but just a little softer than we thought. We haven’t lost position and if you look at housing from then NAHB or any of the housing product — the forecasters, there’s expected to be relief from when the fun — when the Fed gets after rates. But right now, it’s — rates are higher for longer. And so we’re saying software for longer. Our customers continue in that area continue to give us flat and then it’s going to turn off flat then it’s going to turn up but it is keeps being flat. So we’re calling it flat for right now John.

John Franzreb: Makes sense. Thanks Harold. And as far as rationalized volume is concerned, I assume that means that you were exiting the businesses. Where do you stand in that process and how much additionally will be rationalized and how does it flow through the year?

Harold Bevis: Yes. So, if you look at kind of right now, — I think you’re talking about right now for John the outlook.

John Franzreb: Yes.

Harold Bevis: Yes. So we’re still staring at customer economics at one of our main underperforming plants, this whereas, we have — we are evaluating a potential consolidation of rooftops which when you do that it automatically make some — you look at the specific strips of business and should you spend money to move them or should you attempt to end of life program. So we don’t have a concrete plan today. We’re just doing evaluation on what’s next for the facilities. We’ve taken out, we think a lot of the excess headcount or the that was standing around in those operations and we’re going to get them to slightly profitable with no closures needed and no attacking customer contracts needed, but that’s not good enough. So we’re already laddering our improvement program into 2025 at this point.

And our goal is to continue sequential improvement in our trailing 12-month EBITDA. And if we’re looking forward we know we’re going to have to attack. All I’m going to say $20 million to $30 million of this is shown on that debt. It doesn’t make sense yet in terms of the cost to make the products and what we get for a price. So we’ve 80, 20 but we have probably $20 million ago. Tim French, would you modify my answer in any manner.

Tim French: No, Harold, I think you’ve hit the number. We are looking at them in detail and I think there is some more to go. And I think you’ve captured the quantity perfectly.

John Franzreb: And just for me, that $20 million to $30 million is not part of the $100 million you expect actually turnaround in profitability?

Harold Bevis: No it is.

John Franzreb: It isn’t embedded in that number? Okay, so the number…

Harold Bevis: Yes.

John Franzreb: Okay. One last question. In the fourth quarter you had a slide that talked about where you were in the process, now you used the process because it’s basket ball playoff season. You had 30% as of the end of the last quarter. Can you give us an update of where you stand in that process and down and your thoughts about where you expect to be at year end?

Harold Bevis: Yes, sure. The last year had been characterized by Tim and I coming in and working with the team that was here. Dealing, embracing our realities, decisioning upon items and just being firm fair and friendly and moving out and making decisions and moving. Then I’d say we’re through that. Phase 2 is supplementing our in-place homegrown management with professional management, professional leaders, who can take us to the next level. We’re starting that now. And then secondarily for the plants, where we’ve tried to improve them as much as we could in place we’re sheltered them in place and they’re still the dilutive addressing that from a rationalization standpoint either with a customer or for going to retain it with our own actions.

We spent almost – we spent no money in rationalization, Tim and I haven’t, since we’ve been here, so that’s next. So I’d say we’re 30% to 40% a long-term and the next phase we will be addressing our footprint and bringing in a little bit more outside management to steer our actions that have been through these things before. So we’re building upon the great work that we’ve done in the last year but we’re climbing the ladder here and we’re looking forward on people and actions and laddering into 2025. Tim, as the cat on a hot tin roof here managing the CapEx, because at the same time we want to generate free cash flow and pay down debt as we go. So the things that you said want to spend more. They want to consume more CapEx. So we’re picking and choosing carefully.

We don’t have a 2025 plan yet. We’re not ready to give 2025 guidance but obviously, we know we’re going to increase so that we’re putting in place a set of actions to do that. Tim, Tim although, operations report to you, how would you answer this question of what percentage along the way are you?

Tim French: I think we’re right in that 40% range. As you mentioned, we’re looking at bringing in professional managers to help with the next phase. And the next phase tends to be a little more difficult than what we’ve done so far when you look at footprint rationalization and that type of thing consolidations. So 40% is a good percent for me, as far as where we are today versus where and where we hope to be.

John Franzreb: Excellent. And one last question, I’ll get back into queue. Can you just update me on the interest expense costs? What was the cost of debt during the end of the first quarter? I haven’t seen it at 10-Q filing yet, so I’m just curious what would that look like?

Harold Bevis: Mike?

Mike Felcher: Yes. Just give me one sec to get you there. The actual P&L expense. We did file our 10-Q. John I know I know that you have a lot of things you read up once here but our Q is on file. I’m going to blame FactSet. Our interest expense for Q1 was $5.4 million.

John Franzreb: And what was the rate on that?

Mike Felcher: The majority of that would be the term loan which is currently up 14.3%.

John Franzreb : Okay. Thank you, Mike. Thank you guys. I’ll get back into queue.

Mike Felcher: Thank you, John.

Operator: The next question will come from Rob Brown with Lake Street Capital Markets. Please go ahead

Rob Brown: Hi, Harold and Mike.

Harold Bevis: Hi.

Rob Brown: Just following up on kind of the new business award activity, how would you characterize the margin profile of that? I assume it’s profitable but how does that sort of fit into where you’re trying to get to?

Harold Bevis: Yes, it’s a good question and there are some prisms onto that answer. And largely we’re trying to leverage the capacity we have in place and the capacity we have in place except for the plants that are just a few plants that are negative have their have their costs covered and generating margin at the plant level. So then you get into how do you treat the use of an existing asset the risk spread across new business or do you look at it totally on a variable basis if all your costs already covered. I can tell you that we set IRR goals on the new business and they’re reviewed by Tim and I, and it’s accretive as a group. And how much do you keep to the bottom-line also enter weaves into what optionality do you have over the existing capacity because in some cases we’re getting awards for which if you look at your existing capacity you’re constrained, but if you look at swapping out and keeping the existing and reusing repurposing the capacity for the new business, it’s just a net margin improvement of several points.