Good day, ladies and gentlemen, thank you for standing by. Welcome to the NN Inc. Fourth Quarter 2011 Conference Call. [Operator Instructions] This conference is being recorded today, Monday, March 12 of 2012. I would now like to turn the conference over to Ms. Marilyn Meek. Please go ahead.

Thank you, and good morning. Welcome to NN's conference call today. If anyone needs a copy of the press release, please call my office at (212) 837-3746, and we will be happy to send you a copy. Before we begin, we ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release. The same language applies to the comments made on today's conference call and live webcast available at www.earnings.com. With us this morning is Rock Baty, Chairman and Chief Executive Officer; and members of the NN's management team. First, management will give an update and an overview of the quarter, and then afterwards, we'll open up the line for questions. Rock, would you like to begin?

Sure. Thank you, Marilyn. Good morning, everybody, and thanks for joining the call. With me here in Johnson City this morning, I have Jim Dorton, our Senior VP and CFO; Will Kelly, our VP and Chief Administrative Officer; and Tom Burwell, our VP and Chief Accounting Officer. Today, Jim's going to offer an analysis and commentary on the fourth quarter and full year results through December 31, 2011, and then I'm going to conclude the call with additional comments regarding our 2011 performance, as well as provide our revenue outlook for 2012. With that, I'll turn the call over to Jim.

Thanks, Rock, and good morning, everyone. Revenue-wise, the fourth quarter of 2011 was essentially flat with the fourth quarter of 2010 at $96.3 million, but the mix was quite different. Europe was $9 million lower in revenue. Asia was $2 million higher, and Whirlaway was nearly $7 million higher. We are into $2.8 million or $0.17 per share more than last year, and that's $0.03 per share more from normal operations. The cause of the -- the profit turnaround at Whirlaway was more -- more than offset the lower European revenue. Now a portion of the European revenue drop was due to the bankruptcy of our German subsidiary and the loss of some of that business, but the majority of the drop in European revenue was due to lower demand in balls and rollers. The fourth quarter revenue was also lower than the third quarter, which was very unusual. This is again due to the weakness in Europe. Normally, we see a seasonal rebound in the fourth quarter, but due to inventory adjustments and some demand weakness arising from what was at that time in the fourth quarter, a great uncertainty over the 2012 European economic outlook, we actually had a decline in revenue. If we had had a normal seasonal rebound, our Q4 revenue would have been about $106 million instead of $96 million. As of today, we are seeing a more optimistic outlook from our customers in Europe, but order levels remain a little lower than planned for balls and on plan for rollers in Europe. Europe is still somewhat of a question mark for 2012, but the outlook seems more positive than a few months ago. We are in $4.9 million or $0.29 per share in the fourth quarter. We had an intercompany FX gain of $0.05…

Let me begin my comments regarding 2011 by stating that during 2011, our revenue, earnings and EPS all represented record results for NN as a company and a continued turnaround, which began in 2010 from the depths of the global recession results of 2009. For the full year, on an increase in volume-related revenue of $35 million from 2010, the net adjusted for currency and material pass-through, revenues were up approximately 10%. We improved earnings from normal operations by 68% from $11.1 million in net income in 2010 to $18.6 million in 2011. That represents an increase in profitability of $7.5 million for the year, 21% of every incremental revenue dollar dropped to the net income line in 2011. Our EPS from normalized operations also grew from $0.67 a share to $1.10 a share, up 64%. From an operating perspective, the good news is our core Metal Bearing Components division, which represents 73% of our total business, delivered record earnings. This division's restructured, leaner global footprint, along with good operational performance, combined to achieve the excellent results for the year. In the negative category, 3 issues impacted our profitability for the year. First, the rubber and plastics business unit, notably Industrial Molding in Lubbock, Texas, and the Precision Metal Components business, Whirlaway, were disappointing. While IMC remained profitable during the year, they did struggle with manufacturing efficiencies for much of the year. Like Whirlaway, they have good momentum based upon recent improved manufacturing results heading into 2012. While Whirlaway was clearly the biggest issue with a significant loss for the year, as we mentioned in the release they experienced a turnaround to profitability in the final 5 months of 2011, they also have good momentum moving into 2012. Finally, European negative economic factors impacted our fourth quarter revenue incrementally from…

[Operator Instructions] Our first question comes from the line of Steve Barger with Keybanc Capital Markets.

So just, I've got several questions in no particular order. But I guess, first, can you talk about demand for balls and rollers in Europe now that we're almost a quarter into '12 and maybe talk about how that's tracking relative to that 5% down expectation for the year?

It's essentially right on the 5% expectation, Steve. The experience [ph] in the first quarter thus far is about 5% down.

Okay. And as you talk to your sales guys on the ground over there, is that kind of how you expect 2Q to trend? Do you think there's any variance in here? And where's the risk, to the upside or the downside?

As we said, it's certainly unpredictable at this point in terms of the uncertainty over there. But we -- everything that we heard from our customers, as well as -- especially when we were developing our business plan, we had thought 5% was the number that kept coming back. In terms of out into Q2, as we've mentioned before, we don't give a lot of visibility in our business, no more than 30 days. So there's really no -- I can't split and tell you that Q2 looks much different than Q1 at this point. And I would also -- you asked the question, and it's a good one, is there upside or downside, I would say neither.

Got it. Okay, did you -- net margin for Whirlaway in the quarter, can we have that yet? Or is that -- do we have to wait?

Yes. No, we need to wait on that. But I think we had mentioned, maybe in the last call, that they did -- I think approximately the 2, they were profitable for the last 5 months, and that certainly continued, minimally profitable, but that has really improved going into this year.

That's great. So as you -- I know you don't give guidance, but just trying to get a sense for where this can go in 2012. First question, do you expect it to sequentially increase as we go through the year, or is it kind of stepped up to a sustainable run rate? How do you think about that, the cadence?

On Whirlaway, Steve?

Yes. It's Whirlaway specifically, right?

They have some seasonality in their business relative to the HVAC European market. But as we look at the first quarter and on into the second quarter specifically, the cadence is definitely accelerated in terms of what we see in their contribution versus even when they became marginally profitable last quarter. But we're seeing improved margins and improved earnings from Whirlaway in the first quarter. And we expect that to continue to accelerate on into the second.

Great. And for the -- sorry...

No, I was done, that was it.

Okay. For the full year, should we be thinking like very low single-digit or could that be mid-single-digit on a run rate as you exit? Or any color that we could have?

Single-digit after-tax returns, or what are you asking here?

Yes, net margin. Right, net margin.

Well, we really probably shouldn't respond to that in any meaningful way and it's relative to -- but I would say that in terms of our expectations for them in '12 and what we're seeing in the first quarter is that their returns are approaching, on an after-tax basis, our corporate averages. I mean, they're still slightly lower, but they're getting up close to our corporate averages.

That's great. And I'll try this one other way from a consolidated standpoint. You said 21% incrementals on the net income. Is that a sustainable kind of run rate as you go forward on flat revenue?

Yes, actually, of course if our revenue guidance proves to occur for '12, we wouldn't have any incremental revenue in the upcoming year. But the 21% is, as I mentioned, a little lower than what we would have expected on the basis of the 3 issues that I mentioned for '11. I mean, honestly, we would have expected 4%, 5% more than that 21% in a normal year from our operations, both Whirlaway and IMC we're thinking [ph], as well as the drop in European revenue, of course.

And just to clarify, I said that we're going to have incremental revenue based on the capital investments that we made. And that would be true in those organizations at Whirlaway, at IMC and in China. And that would be -- we get the flat year because of the down in Europe.

And Steve, one other comment, and I'm not sure that we totally pointed it out in the press release, but we have really good growth organically and economically. It's more organic than economic, both honestly, in Asia, specifically China, in North America. So it's -- versus 2009, it's a tale of 3 regions. And 2 of our 3 global regions are doing very, very well. Europe is not right now.

Our next question comes from the line of Holden Lewis with BB&T Capital Markets.

One is to ask you a little bit about kind of the below the line sort of sales numbers. Usually, you break it into sort of organic pricing mix, acquired and currency. And this time, I think, you sort of intermingled the pricing mix and currency bits. And I kind of wanted to get a sense of sort of what was the pricing mix piece and the currency piece in Q4, and what are you kind of thinking about as you go into 2012 for those pieces?

All right. Let's see. [indiscernible] Sorry, we're consulting on the -- Yes, okay, the -- why don't you go on that?

All right, in general, as was mentioned in the press release, we had good volume at Whirlaway in China, but had down volume in Europe, so that was almost virtually flat. But the rest of it was we had raw material pass-through of almost $2 million, and that was offset by some unfavorable mix. Price was about $800,000. So it -- basically, most of it was raw material pass-through. There's little bit of price.

So the raw material pass-through stayed positive, too?

Yes.

And then the mix was a negative 0.8?

No, the price was a positive 8. The mix was a negative 2.

Price was a positive 8. The mix was a negative 2. Okay, so I think -- go ahead. So that price mix piece was basically a negative 1.2 then? Is that right?

No, basically, it was a push. It was a positive $0.9 million because of the price. The raw material pass-through and the mix pretty much offset. Price was the differential.

I got it. So that price mix piece that's been running north of $4 million for the balance of the year, that was basically 0.9. I guess, you're talking in percentage terms, but basically...

No, I'm talking in million, $878,000.

Okay. So that piece that's been running north of $4 million, that came in at about $0.9 million in Q4?

Yes.

Okay. And then organic growth was kind of flattish to slightly negative and then the balance, I guess, that comes down to currency. Okay, got it. How are you looking at sort of that price mix piece going into 2012? I mean, do conditions look such at this point that that looks reasonably flattish?

Yes.

Okay. And then, obviously, I'm trying to get a sense of what the organic looks like. I mean, what are you expecting out of foreign exchange then as you go into -- in terms of its impact next year?

The average rate for this year is the $1.39, and we expect approximately about $1.30 next year. And that's what we built the plan on, so on 40% of our revenue.

All right. So $1.39 down to $1.30, you said?

Yes.

Okay. And then can you give us that -- 2012, where did the revenues at Whirlaway kind of finish up for 2011? And what are you expecting the increment to be in 2012? And I'm kind of curious, I think that right now, you've been sort of wrestling with, I think, 2 or 3 contracts, but you originally had 1.5. Is this -- given where we are with Whirlaway, do we now move forward with the other contracts or have they kind of gone away as we sort of move through this? How has all that played out?

Well, we're essentially -- Holden, the start-up phases of all the programs we talked to you about in '11 are done. And I would say that we're operating -- not I would say, I would say that we're operating all of the new programs at good levels of manufacturing efficiency and quality and delivery. And so many of the issues that we talked about the first 2 quarters, in particular, of '11 are behind us. And we're capturing pretty much the full revenue expectations out of the programs toward the end of '11 and on into '12, although the '12 revenue is up over '11 on the basis of more normalized run rate in those new programs. And so we're actually forecasting just -- the total increase is how much?

5%

5%, almost 6% for them in terms of just pure organic growth on the basis of more units in '12 than '11.

Yes, I was just going to say in terms of the pipeline for new business, there are opportunities there that could change things, and that those are decisions that aren't locked in yet by any means.

Recently, I think the contracts you were looking to capture, it was $20 million to $30 million in annualized revenues. Was that the right number?

Yes.

And so how much of that revenue run rate did we actually capture in 2011? And where do you think you're going to come out in 2012? Do we just assume that you're kind of that $25 million run rate in '12?

Yes. It's a mixed bag a little bit, Holden, because we have the Tempe, Arizona, facility that as you know we sold at the beginning of the year. So I would tell you that we captured about $25 million of the expected $30 million in 2011. And then we expect another $5 million to $6 million in '12. And but again, having said that, we have opportunities out there that could impact '12 revenue positively that we haven't laid in on relative to investments or moving forward. So but as of right now, and what we've mentioned in our earnings forecast is $6 million out there.

Okay. And when you talk about expecting earnings to be up in 2012 over 2011, obviously, your message there is don't trust the revenue so much, get volumes and the profit drivers internally, and I get that. But what is the base numbers that you're talking about the when you reference that? Are you talking about $1.24 that you put up all-in, in 2011 as kind of being the baseline that we should compare that comment to or some other measure?

Well, we're talking about the EPS from normal operations. So $1.10 is the base. And you've got all the foreign currency -- most of the foreign currency gains that you really have to peel the onion back and take that out, Holden.

Right, okay. So $1.10 is kind of what you're talking about?

Yes, the $18.6 million in earnings and the $1.10 is what we're speaking to when we say we see improvement.

Okay. And that $1.10, does that include all the expenses related to Whirlaway, correct?

Yes, sure. That's a good question because we did flow out some of that in 2010.

Right. So that $1.10 number is just outside the losses for Whirlaway. And it's just out those foreign exchange, it had a little bit of restructuring, that's how we should look at that?

No, the $18.6 million includes the full operating losses that we will report for Whirlaway for 2011.

[Operator Instructions] Our next question comes from the line of Richard Johnson with RBC.

I have just one question. On the costs of sales, I understand the explanation for the slight production issue in 2011. But do you have a target or guideline you're looking for in the 2012, like 20%? Or is there something that you're working toward in your...

Yes, it's a very good question. And, yes, we absolutely have a target of margin improvement in our -- baked into our business planning process. I'm not sure that we want to go public with what that margin improvement is, so I apologize. But I mean, we do have good margin improvement baked in. And as I mentioned, relative to lower earnings leverage, if you will, a big piece of that margin improvement is the Whirlaway improvement, but also IMC, those 2.

And we have a follow-up question from the line of Steve Barger with Keybanc Capital Markets.

Did you say working capital is going to decrease this year? Or how should I think about that?

You should think about working capital being relatively flat this year because on relatively flat revenue. And then, that happened to EBITDA, pretty much dropped down to the free cash flow line.

We ate up all of our EBITDA last year in working capital increase.

Right. But we're normalizing -- but that was just based on rising revenue, right? So there's nothing -- was there an abnormal build that you get back? Or are you just kind of at the right run rate for $420 million revenue?

We're now at the right run rate. There was some -- a little bit of unusual activity in the way accounts payable played out that we didn't forecast properly. But that's normal, that's at a normal run rate now. We also had a little bit of shift in our shipment mix to countries where because of long delivery times, we had longer -- we had to increase our day sales outstanding slightly just because of structural issues. But that's stable now, too. So we think we should be flat on working capital.

Okay. Modeling question, tax rate, how should we thinking about that for '12, statutory?

I keep telling -- I keep using this 25% number. It's going to be a blend. Of course, the U.S. marginal rate is higher than that, but we have all of the corporation's corporate expenses in the U.S. that tend to moderate the U.S. income. So I've-- my best guess is 25%. Well, let me say 25% to 28% when the rate comes back, when the U.S. comes back. Now, and at the time when that does come back, we'll book a huge, which we'll account as non-operating gain as we take the reserve off of our U.S. DTA. But that will be a big number, but it'll be non-operating.

Yes. And I know there was some maintenance spending in 2011. Is that mostly behind us? Are there any unusual gross margin pressures that we look at 2012?

No. No, as long as we continue to execute like we have in the last few months at Whirlaway and we'll see some margin improvement at IMC, a smaller operation as well, and higher volume in some of these programs will be good, too.

And our next question is a follow-up question from the line of Holden Lewis with BB&T Capital Markets.

Yes, I know there's the modeling questions of the seemingly unpredictable line item. That other line, the degree to which it kind of swings around as it relates -- or as a result of the ForEx down on debt. What should we kind of be thinking about for next year? I mean, now that you're looking at the euro or sort of the foreign exchange rate being down a fair bit, I mean, what does that translate into in terms of other, and what do you kind of modeling and/or building in on that line?

Well, everybody here is saying that's going to be a loss. But I mean, that's a question that if we built the plan at $1.30 and it stays $1.30, it would be nothing. So why would you -- why are you...

On the basis of euro, on a regular...

Yes, so if euro goes back to $1.35, for instance, that will be a loss. If the euro stays at $1.30, we should be relatively no gain, no loss.

Okay. So if the average is north of $1.35, then there's a loss. If it's $1.30, you're good and say if the average is less than $1.25, then you probably have a gain. Is that the way to look at it?

No, the $1.30 is the base mark. We ended the year with $1.30. And so to the extent that as at any period in time, any measurement period, a month or quarter or the year, it's the average rate is -- the ending rate is higher than the $1.30, then we'll have a loss. If it's lower than $1.30, we'll have a gain.

And there are no further questions in the queue. I'd now to like to turn the conference back over to management for any closing remarks.

Thank you. I'd like to conclude today's call with a general comment that even with the uncertainty in our economic outlook I mentioned previously, we are well-positioned to deliver good earnings improvement for the upcoming year. We are encouraged regarding the earnings leverage we see in our business for the upcoming year and look forward to the execution of our operational business plans for 2012. Thanks again for listening in on today's call.

Ladies and gentlemen, this concludes the NN Inc. Fourth Quarter 2011 Conference Call. If you'd like to listen to a replay of today's conference, please dial (303) 590-3030 or (800) 406-7325, followed by the access code 5420733. ATT would like to thank you for your participation. You may now disconnect.