Good day, ladies and gentlemen. Thank you for standing by. Welcome to the NN Incorporated Third Quarter 2015 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened to questions. [Operator Instructions] This conference is being recorded today, November 05, 2015. I would now like to turn the conference over to Mr. Robbie Atkinson. Please go ahead, Mr. Atkinson.

Thank you, operator. Good morning, everyone, and thanks for joining us. I am Robbie Atkinson, Corporate Treasurer and Investor Relations Manager. On behalf of our team, I would like to welcome you to NN third quarter 2015 earnings conference call. Our presenters this morning are President and Chief Executive Officer, Richard Holder, and Senior Vice President and Chief Financial Officer, James Dorton. Also here is Tom Burwell, Vice President and Chief Accounting Officer. If anyone needs a copy of the press release or the supplemental presentation and our reconciliation deck those can be access on our website or by calling the financial relations Board at 212-827-3746 and they will be happy to send you a copy. Before we begin, I would ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation and in the risk factor section of the Company's 10-K for the year ended December 31, 2014. This same language applies to the 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, foreign exchange rates, cash flow, tax rate, acquisition synergies, future operating results, performance of our worldwide markets and other topics. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside of the Company's control. The presentation also includes certain non-GAAP measures as defined by SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and in the reconciliation presentation. First, we will give an update and overview of the quarter. Then afterwards, we will open up the line for questions. With that said, Rich, I will turn the call over to you.

Thanks, Robbie. Good morning, everyone. The third quarter was yet another exciting quarter in the Company's history. In July, we successfully completed $182 million equity raise in preparation for future acquisition and subsequently announcement completed to transformative acquisition of Precision engineering products. Among the many positive attributes of PEP, one of the most exciting is the end market diversification it creates and the wonderful alignment with our strategic plan. The strategic fit of PEP into our portfolio is as precise as we could have hoped. PEP diversifies our end markets, it expands our margin profile and provides product offerings into strategic important late and mid-cycle end markets, including electrical and medical. Those of you who are familiar with our strategic plan understand how important that was to us. The acquisition gives us a clear path to achieving our strategic targets, including $1 billion in revenue and 14% operating margins by 2018. Given all the moving parts, and as we think about the reminder of the year and looking in the 2016, we have decided to take a slightly different approach to this call. I will walk you through our supplemental deck in some detail and then we will open up the line for questions and any one in the room can comment. As previously committed and we had this discussion about this time last year, beginning with this call, we will initiate a more comprehensive set of financial guidance, designed to help our shareholders have the appropriate information to accurately evaluate our performance. This will includes sales, adjusted EBITDA, adjusted operating margins and adjusted earnings per share. With the completion on the PEP acquisition, we will also begin excluding non-cash amortization charges from our adjusted earnings per share. We believe removing these charges provides the shareholder with the best evaluation…

[Operator Instructions] Our first question is from Daniel Moore. Your line is open.

Good morning.

Good morning, Dan.

Rich, I want to focus a little on the attrition, $40 million certainly a little bit higher than we had expected. Is that a level that we should think about as sort of normal on a go-forward basis beyond '16 or was there an unusual number of platforms that are coming sort of out of the business, I believe, legacy businesses?

I think it is probably a little higher than normal. When you think about the Autocam business, just shortly before we bought the business that was enormous investment in new platforms and those platforms are now beginning to displace in a larger way the older multi-port fuel injection and the older steering system. I think the way to think about it, it is lumpy. It is probably $40 million this year. It is probably much less than that the next two years and then the year after that it is probably again much higher. You can almost correlate it back to your product launches, right, so it is kind of three years cycle, you get a big number like this.

Okay. Then you gave a lot of detail, but maybe just drill down a little further on sort of the organic growth drivers for Q3 and your guidance for Q4. How much of the declines in organic growth would you attribute to inventory management and the supply chain versus just sort of lower end market demand if you can delineate it all?

Yes. I think it is about half and half candidly. When you look at Q3, what you saw was a little bit of an overreaction, so when you looked at the European supplier swing, but the European customers rather, they went into the shutdown assuming they were going to do the normal longer shutdown. When the export markets started going bump, everyone started extending their shutdown and then pushing the orders for that extension into the fourth quarter. What ended up happening is because Asia deteriorated so much, the push into the fourth quarter was swallowed up our inventory, right, and so it ended up kind of - if you think about the third quarter, fourth quarter it is about the 50-50 deterioration. For us on an organic perspective, especially the MBC business, in the fourth quarter, we are going to have a quarter that kind of looks a lot like last year, so for the year we still have the growth but of the quarter we are essentially flat from a growth perspective within the MBC business.

Okay. Then maybe APC as well, organic revenue growth declined 4% or so. I guess what organic growth expectations in APC are embedded in your Q4 guide and what gives you confidence that we will return to the organic growth in '16?

Yes. The movement in APC is all around one major customer. There was an engineering change that we actually assisted them with. The changeover has taken in place in the fourth quarter, so we will back to normal levels in Q1 through the next year. It is a move from; let us call it an old style motor products to a high efficiency motor products, so the changeover was taking place this quarter.

Okay. Lastly, the balance sheet you mentioned that financing opportunities. What would you consider either the biggest one mostly near-term is the term loan. What would you consider more rational terms for the term loan assuming at the five and three quarters that is out there and it is concurrently irrational?

I will let Robbie talk to that.

Hi, Dan. I think when we think about the debt market, what we mean by that really is, we do not need the debt markets to improve. We just need to be normal and when you look at when we executed both of our transaction in the debt markets, we were looking at some historically unusual behavior more than the high yields and that impacted the pricing as well in our Term Loan B. As we move down the road, we would expect a normal or some normalcy to return. Again we do not need improvement even in the raising interest rates environment, with that normalcy; we would expect we are able to remove cost for both facilities.

Okay. Thank you.

Our next question is from Justin Long. Your line is open.

Thanks and good morning.

Good morning.

Since this is the first time that you have given this level of detail and in terms of your guidance. I wanted to ask how you built out this forecast. Are your assumptions for 2016 based more on growth projection for the industries you serve did you get down to customers-specific projections and I guess I am just trying to gauge your overall comfort and visibility in the guidance for next year?

Yes. This is a bottom-up bill and it is done by customer. In some cases depending on the business by customer by, part number that we build it that way. Then sort of on the side of it, if you will, we look at how rational that looks given what we think the economics will be. Then we understand our growth programs in detail we know at least the quarter that they are going to hit. We understand our launch costs. We understand our project cost, so this as bottoms up and is granular of forecast I think as one can get.

Okay. That is really helpful. You have recently talked about a couple of outsourcing opportunities on the horizon. Rich, you mentioned that maybe some of that is float, but as we look into next year and then guidance for 2016, what is the revenue contribution that you are assuming from outsourcing projects?

That would be probably somewhere around I am going to say $30million-ish when we think about the entire contribution. To address the earlier point, as those markets slow, it is sort of a normal reaction if you will for the outsourcing to slow, because now everyone is trying to kind of reclaim the cost within the factory and overhead charges and so on. We have that flowing built in 2016, but we think the contribution somewhere around $30 million, $35 million.

Okay. Great. Last question I had, what is the synergy assumption that you are assuming from PEP in 2016 and the guidance you gave?

$6.5 million.

$6.5 million. Great. I will leave with that. Thanks so much for the time.

Okay.

Our next question is from Steve Barger. Your line is open.

Hi. Good morning, guys.

Good morning, Steve.

Hi, Steve.

First question on CapEx, it is dropping to 5% of revenue from about 6.3% at the mid-point in 2015. Can you talk to any changes you are making on the MBC or the APC side, specifically are the CapEx levels changing there or do you feel like you needed the foregoing investment to help drive free cash or de-lever or is this all including a robust spending plan?

This is actually it is all including in the robust spending plan. Again, there is a couple of things there, we are not seeing the ability to expand or grow at an 8% level. We are talking about the 4% to 5% level, so that takes away a little bit of CapEx. Then when you think about the organization overall, the CapEx requirements for PEP is a lot less to the CapEx requirement for either APC or MBC. We think this is a great level. It also provides quite a bit of CapEx for growth inside the PEP.

The addition of PEP is actually accretive to free cash flow beyond just the margin expansion that you see from the product side?

That is correct. Because their capital models of 2% requirement versus 6% requirement let us call in the pre-PEP acquisition business.

Got it. Okay. Are you able to quantify how much of the adjusted operating margin improvement in the quarter was related to NN operating system? Then similar question for 2016, how much of the operating margins expansion you are planning on is really in your control?

Well, I think from our perspective, we would tell you that the majority of it in our control. You cannot control the maximum of top-line, but running the business better, driving the more efficient process is taking the cost out. We think the majority of the expansion is a result of continuing to drive the NN operating system and processes around flex productivity. It is a really good process that we are using and it is something that we look across the organization every Friday. It 3 to 7 - if you want the number.

Yes. Okay. Perfect. Last question, I know it is early, but can you talk about customer conversation you had in the medical or electrical and just about how the go-to-market strategy you are putting together is evolving? Where are you in the process?

Yes. Well, the go-to-market strategy we are in the infancy of putting that together. However, we have had multiple customers reach out to us, so we have a gap, if you will, a gap process in place that we are using our new Chief Commercial Officer to sort of lead of the charge into these customers, because many of them want to have conversation on the medical front and the electrical front now and we start to still putting some of our literature and so on together, but we can do it manually, right, we just do not have an elegant way to do it. We have had our largest medical customer reach out to us. I am personally taking a trip up there in about a week-and-a-half. We have had an electrical customer that we actually do not do a lot of business with, but they immediately recognized the upside of having a supplier that can provide offing switching, which we are the only one that can do that. We have the entire portfolio offing [ph] switching, so they can eliminate about six other suppliers if we can make this work and we have actually already had two meeting with them and we are working our way through the process. Again it is not elegant, but we will get it done.

Very good. Thanks.

Our next question is from David Jarinko. Your line is open.

Hey, guys. Just looking at your 2016 adjusted EBITDA guidance, do you have a green 2016 sort of pro forma number that you would have compared that to adjusting for all the acquisition as such?

Hi. This is James Dorton. The number for this year is in $100 million to $110 million range compared to you get point at the range on 160 170.

Then you add just sort of to 10 month of PEP to that based on the LTM number?

It will be in '16. Yes.

Yes. Sort of…

Two months in the fourth quarter and you add 10 months of PEP on top of that. That is the buildup. I think you get by the - that is in the back on from....

Okay. That is good. Thanks.

Yes. You see Page 17, you will also see on Page 15 -

Well, Page 15 will give you a fairly detailed breakout as well. You see '15 adjusted EBITDA, 104 to 109.

Great.

'16 right and that would so two months of PEP, inside of the '15 and 10 months incrementally inside of '16.

Okay. It looks like a low 160 number then. Perfect 10. Okay. I guess. Thanks.

Okay.

[Operator Instructions] Our next question is from Stanley Elliott from Stifel. Your line is open.

Hey, guys. Good morning. Thanks so much for that extra information in the forecast, very, very helpful. You talked about how we could built up the forecast, because you also talked about the visibility into the business and how we should think about cadence into next year with 2Q being seasonally stronger, may be 4Q a little bit softer. Are we thinking that the organic growth that we are looking at for the MBC and APC is that we are ramping in the back half of the year or is it kind of - any color on how we should think about that would be great?

Yes. I think generally we see seasonality in our business, so of still being there. We have the normal 30% Europe business, so we get to shutdown in Europe. It is tough to kind of take out of the seasonality profile, but we do think the addition of these business in our organic growth starts to kick in more in late second, third quarter, so the seasonality I think in the middle the year would not be quite as pronounced as it has been in the legacy, business and we think the fourth quarter won't be quite as pronounced, but seasonally low volumes next year as we are used, so said in other way I think we are still seasonal as we once were since I think the peaks and value there are a lot more muted.

Yes. Got it. I agree with that. Robbie, you mentioned kind of being able our price 64% of the debt. What sort of interest rates saving best case scenario or talk about the normal sort of environment that you would expect to take up on that?

Well, Stanley, I have got a nice crystal ball out here and I think. No.

We are waiting for the number too.

Then I think that is a hard number to peg at the best case scenario. I mean obviously we would be optimistic we hit the best performance out of market we can get. Certainly once we hit six months in one day, we can be patient if we see an improving market we do not have to do it on the six months anniversary; again it is open ended winter for there. I think we will be looking to get as close to the market as we saw when we started the transaction as we could, so you kind of look at what we said our expected cost of capital was on the PEP announcement call, we have beat [ph] or move that portion of the debt back into that range.

Great. I appreciate it. Best of luck.

Thank you.

Next, we have a follow-up question from Daniel Moore. Your line is open.

Thank you again. I am just wondering how much end of life attrition did you experience in Q3 and if it is embedded in Q4 guide?

Very little, I would have to get back to you with that. That exact number. I do not have that in front of me.

But that Q4 is not up platform changeover. That is more just the…

No. Other than the shaft that I talked about earlier that is creating the slight dip for the Autocam group, because of the engineering changeover. That is the only real attrition that we see and that is accounted for in the fourth quarter mostly attrition will take place over time in '16.

Okay. Lastly, the 2018 you started the call by saying the goals are still intact. If we start fit let say 12% operating margin, is maybe just walk us through how we get to the 14% goal. Is it purely incremental, are they are cost savings, is there other acquisitions that we need to get there? Just kind of help us recalibrate those expectations?

I think it is a little bit all of the above, but fundamentally it really is getting the business fully reoriented into the competitive market segment. Candidly, we have some footprint rationalization both from the perspective of shutting down a couple of facilities in next year as well as some product movement that needs to be in the right place. We have our normal activity in removing cost out, which we have accounted for in our CapEx plan, so really it is more dependent on the operation. I keep using the term turning ourselves into a well oiled machine. We have some shared services activities that we have to do. I do not think acquisition is a substantive part of it. Again, acquisitions will be around selling out of portfolio and that will really be for a competitive set, not for the margin play, if you will.

Very helpful. Thank you.

We have no additional questions at this time.

Okay. Great. Well, thank you all for joining us this morning. I am hopeful that we were clear in kind of who we are today, where we are going and what '16 looks like. We will continue with this level of granularity and to ensure the shareholders understand the performance of the organization how to evaluate us and thanks for your time. With that, we will end the call.

This does conclude today's program. You may now disconnect at anytime.