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.

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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.

But overall it’s accretive. We’ve — we’re being pretty disciplined about that. We use Salesforce.com and Tableau. So we have contemporary tools to house all of our pipeline activity as well as our one business. And then it goes out by quarter on the use of cash for both capital and working capital. So we can see what we’re obligating the company to and for periods. We being capital efficient so the show is still going here, filling in the future periods and I’m not ready yet to discuss exactly how accretive it is but I’ll take that as an action item and for the next call.

Rob Brown: Okay, great. Thanks for all the color there on. And then he went through several categories of the new business activity but grid in electrical activities was one of the areas you highlighted. What do you sort of seeing there in terms of activity and how do you see the growth looking in that area.

Harold Bevis: So we have two main product lines there. One is you know your old fashioned circuit breakers and distribution box electrical distribution and control, any others grid edge devices for control of the grid. In the case of grid — grid edge devices or smart meters and that sort of thing. They’re actually used in electrical and water. And so if you look at the public filings by our customers there, they’re growing in both water, utility control and electrical utility to control. Their customers are utilities and cities and municipalities and water districts and so on the grid edge devices, which were associated with they’re seeing steady growth. Then we have a good mix there. On electrical distribution and control a little different because we’re tied in mainly again to residential and that’s tied into the same dynamic as I mentioned earlier for us on shafts in our machine business.

That one though we’ve had some decent amount of new wins. And so we’re not turning down in that area due to share gain. But the base business is a little softness. I think contactors, connectors, grounding on an all types of electrical distribution across points. So we’re able to make that with powdered metal. We have powdered metal products as well as assembled copper bar and bus bar. So overall, it’s growing a little bit and has sizable backlogs, sizable backlogs. So in that arena, our customers talk about book-to-bill, and there’s a couple-year backlogs. The backlogs go over a couple of years.

Rob Brown: Okay. Great. Thanks for the color. I’ll turn it over.

Harold Bevis: Thank you, Rob.

Operator: The next question will come from Mike Crawford with B. Reilly. Please go ahead.

Mike Crawford: Thank you. You’ve given some prior pipeline information, like you had a $500 million pipeline a year end. Did you state what the pipeline is currently?

Harold Bevis: It’s grown a little bit. It’s closing in on around $550 million, Mike.

Mike Crawford: Okay. And then I was hoping you could maybe elucidate on how these new program wins layer in to your existing base of business. So NN Inc. had, what, $489 million of revenue last year, but, is there like a related metric of how much of that is somewhat recurring or somewhat bleeding off?

Harold Bevis: Yes. So there’s a few important metrics. One is that the average time from securing an award nomination, which is the industry angle, to hitting peak annual sales or run rate sales is about 18 months. Generally speaking, we’re a Tier 2 provider to a Tier 1 making a subsystem that’s going through their internal development in the case of vehicles, vehicle crash testing and vehicle certification, and PPAPing, which is a quality term used in the industry. So a vast majority of our new wind profile is at 18 months from award to peak annual sales. On the second point you touched on, which was comparing last year to this year, I think the inferred question is why isn’t it going up more now? That gets into the lack of winning that was going on in 2022 and early 2023 that would have manifested itself around now.

So there will be an inflection on the contribution of new business onto our base business. What’s the takeaway? Business that’s going through end-of-life production, EOP, end-of-production and we have looked forward, and we kind of know what that is, and we know what the look of it is. And our goal is to do much higher growth than market growth. And so the business we’re securing, if you do the math on it, you know, we’re $165 million on $500 million. So that’s way above our market growth. Our market’s growing 3% to 5%. You know, we’re winning around 13% to 15%. The takeaway is in the production, which is just a — gets into single digits takeaway. So the game plan here is to create a growth portfolio that layers in, gives us the confidence to say no to continuation of underperforming business and walk away.

And we’re just starting. So we’re right at four quarters here since Tim and I have been here. And the commercial team, which is led by a gentleman named Verlin Bush, Verlin was new in the job after I got here. I promoted him into that position. And he’s been winning — his team has been winning at a much higher rate than the company ever has. And it’s not slowing down. So the net amount is coming to us in future quarters. Sometimes we’ll get dropped in business, Mike, like in the first quarter. We did have a decent amount of immediate startup wins. Immediate startup usually means it’ll start in two or three quarters versus five or six. And right now inside the company, we’re launching close to 40 programs, which is a very high level of new product launching than the company’s ever been associated with.

And Tim’s put in place a phase gate program, phase zero program, and PPAPing discipline. And he’s bolstered his ops team with professional managers who’ve done this at a high level — a mass quantity. So if the numbers and then it’s do it properly so you don’t stumble. And right now, we’re operating near our capacity for our ability to quote much and we have space on CapEx to do more, but these programs need to be implemented. So we’re kind of comfortable with where we are right now Mike, not ready to take that aspiration part of our go-forward plan up. We’re really committing to do that amount. And when we — proven we can launch programs and they are accretive, and we do post-mortem and we get it right, and its muscle now, we will look at taking up the dollars of growth that we intend to get, the markets there.

We’re seeing opportunities. We’re just kind of cherry picking right now. Tim, anything else? Any other modifiers on that?

Tim French: No, again, Harold, I think you nailed it. I wouldn’t have anything to add to that. Thank you.

Harold Bevis: Thanks, Mike.

Mike Crawford: Okay. Thank you. Just one follow-up to that question. So when you have your 18 months on average from award to peak revenue? And then what on average is the ELP tail after that.

Harold Bevis: Are you asking, how long do we generally retain a program?

Mike Crawford: Yes.

Harold Bevis: Its around eight years. So they’re like annuity strips. If you look at the amount of business per year, numerically that the company has, it’s not all eight year business. We have some PO business too, but it times out. And then needs to be replaced. So let’s say, the net amount, the net amount probably half of the win rate we’ll get smarter on that for the next call, Mike.

Mike Crawford: Okay. And then just a final question for me. So you’re right now thinking you can capture another $10 million of EBITDA once your restructuring actions are completed, particularly at these — maybe four other plants that remain on — the low profitability arm. What is the anticipated span that you need to invest to achieve this goal? And maybe, if you could frame that in the context of EBIT versus adjusted EBITDA that would be very helpful for us. Thank you.

Harold Bevis: Okay. Look, I’m going to talk a little Tim and Mike on the adjusted EBIT – EBITDA. The business that we spoke about, that loses money in 2023, we had about $100 million of business that lost a little more than $10 million at the plant level. We articulated a goal to rationalize that business, trying to retain business trips that were good, but to increase in 2024 versus 2023 about $10 million of EBITDA. So if you do that math, that gets about — back to about break even on an annualized basis. But that’s not the end point for those assets, the goal really is to get to plus $5 million. So then, you say, how much capital is needed to get from minus 10 to zero? Basically, nothing not much de minimus. The second part of your question is, so how much capital would be needed to get from zero to plus 5.

Okay. Different — that’s a different question. So right now Tim and I foresee some capacity rationalization, which will take some money, plant closures, plant consolidations or whatever color you want to put on. It will also take us going in first — a couple of hard talks with a few customers not a lot but few, and then in the case of assets that become idled through that process, do you move them or do you modify them? Right now Tim and I think a conservative assumption is that we’re going to have to modify some of the equipment to be able to compete and be repurposed into our growth program. So that has a use of capital. And that’s one reason Tim’s looking for 12 quarters here, against our current capital market constraints. And right now it all works, so we’re going to be probably 60-40 CapEx on growth versus cost.

We haven’t spent a lot of capital on cost since we’ve been here. We’ve been using it mainly on growth and maintenance of business, but we’re going to need to spend some money on making that capacity profitable on a go-forward basis, either through facility rationalization or investment in equipment so it can be repurposed to do something else. I’ll hand it to Tim, and then Tim, if you’ll hand it to Mike on the financial question.

Tim French: Sure. And we’re putting that analysis together now, so I wouldn’t want to quote a number as far as what the capital required for that is because we’re just finalizing that, and we can take that as an action item for future calls, but Harold is completely correct. It was virtually no capital to — or will be virtually no capital to get that group facilities to break even. But there will be some form of capacity rationalization, and it will require capital, but at this point I couldn’t quote a number.

Harold Bevis: We’re working within our overall idea of spending around $20 million, Mike, on CapEx, so right now we’re not letting go of that constraint self-imposed on ourself. And then on the third point, on EBITDA, Mike, would you handle that one?

Mike Felcher: Yeah. I think you covered it in the sense of the $10 million is embedded in our 2024 outlook relative to 2023, and then going forward, as Tim said, if we spend some CapEx for facility rationalization, that wouldn’t impact EBITDA, and if we had any costs incurred for plant consolidation, we would typically exclude those from our adjusted EBITDA, but yeah, it would be defined in terms of capital and expense for future footprint decisions at this point.

Harold Bevis: Mike Crawford, on plant consolidations, as you know, no one likes adjusted EBITDA, us included, but there’s some gap accounting to follow if you’re going to consolidate a facility. And so I would say we’re not going to do anything other than follow gap accounting on rationalization that we’re going to do. And it’s not a big thing. It’s a minor thing. It’s not going to be a big use of capital, but it’ll be a use of capital, and at Tim’s point, we’ll get our arms around it and be able to give numerical information next time.

Mike Crawford: All right. Well, thank you very much.

Harold Bevis: Thank you, Mike.

Operator: [Operator Instructions] Our next question will come from Tom Kerr with Zacks Investment Research. Please go ahead.

Tom Kerr: Good morning, guys. Most of my questions have been answered, just curious about the China business and what’s driving that sort of growth improvements there. Is it product-specific or more background-type issues?

Harold Bevis: Yeah. I’d say it’s mostly self-caused, so a year ago when Tim and I came in and we kind of challenged the global commercial teams to grow in adjacent areas that make sense for us and don’t pursue any kind of silly moonshots. The China team had a lot of opportunities in front of them with the top 50 OEs in China and has been very successful, the team there, led by Rex Huang. And it’s very heavy, Tom, into steering, electric power steering, EPS, we call it. We’ve steered away from engine components in that market. Obviously, there’s government mandates to switch to fully electric vehicles, new generation vehicles they call them. And so we haven’t pursued engine parts in that market. We’re primarily after vehicle control sensors, steering, braking, seat controls, window controls, anything that has a worm gear.

So, if you looked at our machine business, our machine businesses primarily turned parts, turn to parts, there’s a lot of different types of machining in the world. We’re an expert in turn to parts. I’m down to the nano level. So that’s a smaller group of people that can do what we do with that level of precision. And so, we’re fundamentally in China looking at where are turned machine parts on vehicles and getting after them. And obviously, there’s a tremendous amount of steering and if you look at self-op — self-driving vehicles and automated vehicles that the precision steering and braking is dramatically increased and so there’s a higher need for precision parts. So, we saw the opportunity to grow in adjacent markets are basically low risk for us and basically leveraging existing capital.

Some cases with new customers, some cases with existing customers and in our company that’s the only facility that’s nearing capacity, 24/7. So they’ve done a great job there. And if you look at the vehicle production inside of China, in China there’s an ability for the industry to produce two times the amount of vehicles consumed indigenously. So I know you follow the market, but last year or recently, China passed Japan on the global, the number one global vehicle exporter. And that’s getting a lot of press in the Wall Street Journal, President Biden and Trump and premier energy is in Europe right now with Micron and meeting with European leaders. And top conversation is, hey, you guys are coming in hard with your automotive products here and so they’ve really aggressive about exporting in this industry and the biggest export market for China right now Russia, Australia and Mexico and we’re participating in it.

So we’re participating in the Chinese government’s strong export behavior on vehicles made in China. And we’re participating in China, China for China program of electric autonomous self-driving vehicles. And additionally, China is one of our lowest cost plants that in our Brazil plant. And these customers are global and we become globally approved as a supplier when we when we win these positions. So it’s actually opening up opportunities for us in the United States. You’d normally think a US-based company like us with leverages relationships into China. This is the reverse. We’re leveraging our successful business model in China and becoming approved in the US and in Europe and in Brazil. So, it’s really key to our future. If you look at our growth strategy Tom, it was a big pie chart.

Growing in China is about a third of that. So we’re going to we’re going to continue doing that in China. It’s very important to us.

Tom Kerr: Thanks for the color and how the growth at times. We’ll take the rest of questions offline. Thanks.

Harold Bevis: Well, thank you everyone for joining us today and for the excellent questions Tim and I and Mike got some action items here and we’ll be responsive to them that next time. Our transformation continues to take shape operationally, commercially and culturally. And while there’s more to be done, we believe that we’re going to continue to execute and deliver profitable growth for all of you shareholders on the phone. And we’re committed global team and excited about this year, really excited about share and we’re getting excited about ’25 also and we look forward to sharing our successes with you in future quarters. And with that, I appreciate it and everyone have a good day or in the call now.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.