Good day, and welcome to the NN, Inc. Third Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Robbie Atkinson. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us. I'm Robbie Atkinson, Vice President of Strategy. And on behalf of our team, I'd like to welcome you to NN's Third Quarter 2017 Earnings Conference Call. Our presenters this morning are President and Chief Executive Officer, Rich Holder; and Senior Vice President and Chief Financial Officer, Tom Burwell. If anyone needs a copy of the press release or the supplemental presentation, please contact Abernathy MacGregor at 212-371-5999, and they'll be happy to send you a copy. 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 in the Risk Factors section in the company's 10-K for the year ended December 31, 2016. The 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, acquisitions, 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 the supplemental presentation. First, we'll give an update and overview of the quarter, then afterwards, we'll open up the line for questions. With that said, Rich, I'll turn the call over to you.

Thanks, Robbie. Good morning, everyone, and thank you for joining us on our Q3 conference call. As usual, we'll walk through the enterprise highlights followed by Tom discussing in a little bit more detail the individual business results, and then we'll move to summary and Q&A. Before I jump into the highlights, let me spend a minute sort of framing the quarter. This quarter, I would describe as a bit of a mixed quarter. First and foremost, I guess, we completed the divestiture of the PBC Group. And just let me remind you what we told you at the conference and in general about this divestiture. Number one, we let you know that we would keep the cash on the balance sheet in reserve and in anticipation of further strategic deployment, most notably, our acquisition strategy. And I think you've already seen that we've begun the action that we purchased DRT Medical a few weeks ago, and again, that was kind of the first action within the acquisition strategy and the redeployment of cash. The second thing we told you about the cash around the divestiture was, we would carry an extra roughly 1.5 points of SG&A in anticipation of the immediate service of any of the acquisitions that we made. So once again, DRT is a great example of that. We bought DRT without any of their corporate SG&A. So in other words, nothing above the plant manager role relative to SG&A was included in the deal, and we just simply hung them on our platform. So if you want to turn that into numbers, they absorbed roughly $0.5 million in that excess SG&A, what I should say is, they will absorb in the upcoming year about $0.5 million of that extra SG&A that we would carry. So once…

Thank you, Rich. We'll be starting with our Autocam Precision Components Group on page 6. We continue to see growth in our CAFE automotive and our industrial businesses, as we had all quarter. But more importantly, within Q3, we won several large multi-year contracts in every global market in which we do business within this segment. And a few of these required, as Rich mentioned, us to begin a rapid ramp up within Q3. The full production levels that we will begin to see sales late in Q4 and early Q1 of 2018. So the impact -- turning to the adjusted operating margin. Given the rapid ramp up in the investments that we had to make in both manufacturing cost to get ready for production and in the fixed asset to have them in place, so we could begin production when the sales are needed, we saw a reduction in our operating margin of approximately 2% within the quarter. Now start-up costs are certainly a normal part of this company, and we've talked about them before -- or this segment, we've talked about them before, and they were very good at starting up programs and it's a part of our normal business model. But to see rapid ramp ups with such a short time frame, it required us to do so much investments ahead of the sales was -- is truly abnormal for this segment. Turning to the Precision Engineered Products Group on page 7. Again, as Rich mentioned, within the segment, we were negatively impacted by the inability to ship certain medical product to several of our large medical customers. And again, our medical product is our most profitable product that we sell. It has the highest margin and is the best mix. Had we've been able to ship these sales, we would have seen a 5% increase in sales within this segment, which is consistent with our expectations within the quarter. Now we do continue to win as we've mentioned in the prior quarters and rapidly ramp up for our new aerospace product sales programs that continued within the quarter and will continue within Q4, with most of these sales expected to start within Q1 of 2018. Turning to the adjusted operating margin. The lost volume that we mentioned from the storms and the inability to ship to certain of our customers, processed 2.5% on the margin line, just from the lost volume. Now we did have a resulting mix impact, because not having those very profitable medical sales within the mix of our sales -- that we did within the quarter impacted us, and we had a resulting increase in electrical product and a resulting commodity pass-through. Now that impacted us by a 0.5%. So all told, between the weather at 2.5% and the electrical impact at a 0.5%, that accounts for the variance in the margin within the quarter. With that, I'll turn it back over to Rich.

Thanks, Tom. So as we move to the third quarter summary, definitely a positive. We are at our fourth consecutive quarter with organic growth across the business. Again, I can't stress enough, had we have been able to ship this product, but for weather, we would be at about a 3% growth in the quarter. Let me also pick the opportunity to point out, for those of you who were at the Investor Conference, you know we spent a little bit of time in the back of the room talking about our -- one of our latest OEM products. It's called the PatNew. And we launched that product during the quarter. A substantive part of the shipments of that quarter was supposed to go into Puerto Rico, and unfortunately, didn't do that. Nonetheless, it's a successful launch. It's a wonderful product and it seems to be gaining really good market strength. And so I bring that up, because really that is our -- that's our first sort of total end-to-end NN design from the bottom-up product, and it's an OEM product. So really, really excited about that. As we continued on, again, we won a number of multi-year programs within the Autocam group as well as within the aerospace group. It's geographically dispersed. We've got -- we have some contract win Brazil. We've entered into the aerospace business supporting a customer in Brazil. We've got a big program we're ramping up for in China. We've got another big program we're ramping up out of a combination of our French and Polish facility. So definitely, a good-looking future as we look at some of these programs. Again, onetime effects impact the profitability. As you look at -- as we talk to guidance, you'll see all this is coming back to us.…

[Operator Instructions]. We'll take our first question from Justin Long from Stephens.

Thanks and good morning. So you talked about adjusted operating margins this quarter being 13.4%, if you exclude weather and the start-up costs. But if I look at the guidance for the fourth quarter, you're pointing towards adjusted operating margins around 11% or maybe a little bit below. Maybe some of that is just a lingering impact from the start-up costs, but can you just help me think through the sequential progression of adjusted operating margins in 4Q and some of the moving pieces there?

Yes. I think the -- maybe the major moving piece that we have at least planned in is an inability to fully recover on -- or I should say for our customers to fully recover for these medical products, right? So think about that, there's roughly $2.5 million, $3 million that is a little bit of dwell. If you look at the pipeline right now, we think we'll be able to certainly move at least half of that product. But if you look at the efficiency of what's going on at the customer right now, I don't know that we have full confidence that we'll be able to move it all and make our normal fourth quarter shipments within that. So there's a certain amount of derating that's in these numbers that's associated with that. That's probably the biggest component. And then, again, we still have a little bit of investments that we have to make, most notably, in Europe, to spin up for some of these programs. And so that's really the effect that you're seeing.

And Justin, you can't disregard the impact of those lost production days, because we just -- we won't absorb the fixed cost as efficiently in the fourth quarter as we normally do in any other quarter, just because of those production days that were down.

This is a fairly common thing in the fourth quarter, because we do have 10 less production days. I had to take the cost seasonality, it's just less manufacturing days in the quarter.

That makes sense. That's -- that detail is all really helpful. So maybe, as we get into next year, I know you're not giving specifics on 2018 guidance today, but can you help us think about the ramp in margins, at least in the early part of 2018? And how quickly you can kind of get things firing on all cylinders and get back to more of a normalized margin level?

Yes. So I think the way to think about it is, earlier in the year, we bounced right back to 13%, 13.1% kind of range. Again, I'm not giving guidance, but I think it's fair to assume that we'll get back to our normal level. We'll have the production days, we'll have all those things. And certainly, we anticipate to have some of these natural disasters in the rearview mirror, so we think we bounce back to 13%. Recognize that we'll be laying in a business during that time, DRT. So we'll be working on that. And so we'll probably carry through 13% towards the middle of the year and then potentially stop to see another ramp as we get some of this work done in DRT.

Yes. And if you think about what Tom specifically talked about at the Investor Day, Justin. I mean, what -- you know the new sort of operating targets, but to Rich's point, until we redeploy the capital that we got from the divestiture of PBC. We're going to have that overhang from SG&A. Now we'll cover that more efficiently with higher sales and the likes in the first and second quarter. But until we redeploy capital, that sort of 13% range is probably, as we had in the beginning of this year, a good number to kind of think about.

Okay, great. And then lastly, Rich, I think you mentioned you won three nice contracts in the quarter. Any more color you can provide on the magnitude of those contracts? And anything on the timing of when they'll start to kick in?

Yes. I think we'll go into sort of what we recall preproduction, fairly early in the year. Again, this is why we have to spin the investments a lot faster. Normally, our contracts take somewhere between six to 12 months before we get to production phase. All of these contracts are asking for that to be sort of pulled to the left between three and as much as nine months. And so we expect to start seeing some sales towards the middle of next year. We're potentially getting the full production ramp up the end of -- towards the end of next year, so Q3, Q4 of 2018. We have not completely quantified the impact on 2018, but certainly, when we give you the guidance, that will be there.

Okay. Fair enough. I appreciate the time today.

Thank you.

Our next question comes from Daniel Moore from CJS Securities.

Good morning. Maybe just following up there. Can you quantify the impact in Q4 of the -- any lingering start-up costs related to those new platforms?

Yes. I think we're probably somewhere around 0.5% to 0.75%.

Got it. And maybe switching gears, Rich. It just -- any update and progress on the M&A front? Has there been any changes to the acquisition pipeline? Any opportunities that maybe have fallen out? Or any color on your confidence in redeploying capital if not the remainder of this year, then certainly, in early 2018?

Yes. I would just tell you, obviously, we closed DRT. We were pushing at that pretty hard. From the Investor Conference, we've had, I would say, no change in working our pipeline. We continue to work it. Our confidence level continues to be as -- in every one of the pieces in the pipeline continues to be as high as it was. And certainly, we're expecting, well, things to fall out as we have planned.

And lastly, maybe just a housekeeping or two. How much DRT revenue is embedded in your guide for Q4 and just tax rate, Robbie or Tom?

Yes. Well, DRT is about $6.5 million in sales in Q4. Then the tax rate will be relatively consistent, it's been in the mid-20s. That will continue.

Got it. Thank you.

Our next question comes from Rob Brown from Lake Street Capital.

Good morning. Thanks for taking my call. Just wanted to get a little bit more color on the new contract wins you announced, as sort of what led to these contract wins? And do you see this pattern sort of developing of winning business and kind of accelerating that side of the growth?

Yes. So the sort of the catalyst behind one of these was directly related to one of our competitors in Europe stumbling. And so the -- and this is part of why the sense of urgency around, specifically this one, because the customer came to us and say, look the -- these guys are stumbling badly, they're impacting our line, we need to move this product very quickly. And I think as it turns out, there is -- there are financial issues with our competitor, which caused an even greater sense of urgency. And so that's really the European contract. In both -- well, specifically in China, this is really around the Chinese government has become a lot more aggressive in -- of late in driving greater regulation around the various CapEx standards. And so with that, not only have they launched a new-generation DTI, they're pushing heavily into driving ATV and full EV in a much bigger way. And if you know anything about the Chinese markets, unlike us, they can make things sort of happen on a dime. And so there is push over the next 18 months to sort of shift the market a little bit greater towards EV and ATV, which -- of course, we play on both sides of that platform, and increase the level of CAFE product in the production engines that are pushing out right now in a lot faster fashion. And so everyone is spinning up as fast as they can. And Brazil, Brazil is a little twofold. Brazil is just a straight win, candidly, with our big partner down there and the market has come back. A number of folks have announced substantive investment down I think to the tune of about $19.5 billion. And so we're right in the thick of those investments, and we've won a number of contracts out there, candidly. And we've also entered into touching the aerospace business down there. And so there's an investment associated with that.

Okay, great. And then on the DRT acquisition. Could you just give us a little more color about sort of the multiple you paid there and in your integration plans?

Yes. So we paid about 6.5x after tax on DRT, and the integration plan there really follows sort of our standard integration plan. As Rich mentioned at the beginning of the call, when he was talking about DRT, we actually only bought at the plant level, we didn't buy anything above that. And so we'll be integrating that into our shared service center from a overhead perspective. And then, obviously, folding that into the PEP umbrella on a go-forward basis as with all the rest of our medically related plans. And so really it's moving just as we expected. There's a lot of positives coming from it. We picked up some very nice facilities and customer relationships, expanded some product portfolio for us, specifically in the implant space for us. And so we're are encouraged about what we've done so far and really everything is on track there.

All right. Thank you. I will turn it over.

Our next question comes from Charlie Brady with SunTrust Robin.

Hey, thanks guys. Just quick clarification on the selling days in Q4, the 10 days you mentioned. Is this -- if I compare it to Q4, are you saying that every year we got about 10 days, and you're going to probably work three or four of these, because of what's happened with weather? Or are we seeing -- are there additional days in this quarter that makes it a bit of a difficult comp year-on-year?

No, no. It's -- I mean, this is a normal thing in the fourth quarter, right? I mean, because of holidays and alike, there's just less manufacturing days in the quarter. Typically, as we're doing today, if there is an issue of greater demand or market upswings or something like that, you work -- you will work some of those holidays. The issue with that is it's a less efficient workdays, because it's generally holiday pay or something like that associated with it. So as you think through the planning of that, you also have to think through sort of the margin impact specific to direct labor around those. And so far us, right now, if you -- if we suspect that even half of that medical business comes back, there will be a need to work some of those days to get that product out. We're just sort of making sure we work as efficiently as possible. But this is a normal thing in the fourth quarter. And generally -- and it depends on when and where holidays fall, right? It could be anywhere from 5 to as many as 10 days less manufacturing days, depending on your holiday schedule and alike.

Okay. I mean, just for comparison purpose, you don't have -- it's a 5 to 10 kind of variable, you don't have what it was Q4 of 2016, do you?

It was consistent with that.

Well, okay. And you touched a little bit about logistics cost shipping in the PR, given that that's still a disaster down there. Can you quantify, maybe, a little bit more what you're seeing on logistics cost? And is that going to carry through pretty much the entire fourth quarter? And do you think it carries into 2018? I know it's a variable that depends on how quickly they can get back on their feet, which doesn't seem like a fast time line. But can you just help us understand a little bit really the margin impact that we kind of are going to see in Q4 from this continuing and slip into 2018 at all?

Yes. So the margin impact that we are feeling is directly related to our inability to ship the product, not to logistics cost. We don't bear the -- we don't bear the cost of the logistics. So our customers in this space tell us they handle all logistics. They generally run a 3PL strategy, and so they let us know, Hey, build the product, put it on the dock, we will come and get it. And so part of what's going on now is they've shipped product in the Puerto Rico, very little and that product is being distributed there in a very, very inefficient way, because they're not completely up and running in Puerto Rico and even the facilities that have full power, well, full genset power, and so on, don't have full employee power. So there's a lot of inefficiencies going on there. So consequently, a part of what's happening is there is a diversion to other facilities within the contiguous U.S., which comes with its own set of challenges as you restructure the logistics' flow, and whether or not those facilities can even accept full production, because they're busy as well. There is a little bit of upside. We actually have had the opportunity to go to some of the customers and say, hey, let us handle this thing wound to tongue, and let us take it into the market on your behalf. And so there's some discussions with that. Whether or not that proves fruitful, we'll see, but it's the first time we've been able to entertain that discussion.

Got it. So just to sum it, it's really I think a volume shipping issue on your end that's the impact on margin?

Yes.

Got it. Okay. Thanks.

And we'll take our next question from Imran Bora from Citizens Bank.

Hi, good morning. So my question is about DRT. How much have you -- or what was the acquired revenues in EBITDA from the acquisition?

Well, we haven't fully disclosed revenue, I mean, we don't do that around EBITDA for a planned acquisition, which is what this is. But revenue of that business is about $25 million. And you should expect that over time, it will perform in line with the rest of our medical businesses.

Okay. And do you expect synergies? Are you quantifying that?

Yes, we expect synergies. We, again, haven't said publicly, but certainly, when you look at how we operate in an operating system, we would certainly expect to take some cost out in terms of how the manufacturing footprint -- or how they operate within their footprint, and then looking to streamline. And then, obviously, our ability to drive new sales wins to get a better utilization within our plants is going to certainly lead to improved efficiency.

And how much do you plan to spend on integration cost?

Not a whole lot.

Okay. So just to compare 2016 numbers, do you have your EBITDA, excluding PBC, for 2016 entire year?

Well, we can probably give you those numbers off-line, and I don't know that we want to have that discussion here. I mean, if you want to walk through a model or something, give us a call, and we'll walk through it.

Okay. Sounds good. Thank you.

[Operator Instructions]. We'll take our next question from Stan Elliott from Stifel.

Hey guys. Good morning. Thank you for taking the question. With this disruption in Puerto Rico, what's the likelihood or chance that you use that as a mechanism or a vehicle to get kind of more share of some of your customers' wallets, given that your capacity and your capabilities have expanded?

As I said earlier, we've certainly dropped in on them, and we have -- it's fair to say, we have quoted a fair amount of products out of our facilities to solve this issue for one or two of our customers. The timing on that will be interesting, right? Because this is not something anyone had on their radar, and everyone is in contingency mode, so I'm not sure if they're spending enough time looking at this or how this factors in. But I certainly think it's a door that has been opened for us, that we are spending a lot of time talking about. So I'm hopeful, we could turn this into a positive and move ourselves up the value stream a little bit.

And so if DRT is $26 million, is the likelihood or is the thought process that you guys could get kind of that remaining chunk within the next 12 months to kind of bridge this medical business kind of back up to what you talked about at prior Analyst Days?

Look, I would just tell you that we feel pretty confident that our acquisition pipeline and our -- and in combination with our organic plan, we'll get this business to where we think it should be over the course of the next 12 to 18 months. We have a very high-level of confidence around that. DRT was just the first action within said plan.

And you guys talked about kind of the leverage post-DRT, either kind of pro forma or maybe can help us with expectations where you'd like to be by the end of the year?

You want to take this?

Yes, so post-DRT, by the end of the year, we should be between 4.5 to 4 in the quarter turn on the net leverage.

Perfect. And I may have been misreading it, it looked like the CapEx piece might have come down a little bit. The full year guide, which I could very well be wrong, is that correct? And I guess if I -- if that is the case, I was a little bit surprised given the comments on a lot of the growth initiatives. And then I guess the follow-on is, does that become a catch-up into 2018, especially with the new headquarters?

Now if you remember the time we talked about -- when we did the divestiture, we talked about keeping about $10 million in there for acquisition-related CapEx. So essentially what we've done is, we've kind of taken that out and allowed for the additional ramp up. So I think that CapEx number is a pure existing business CapEx number and it reflects the ramp up in Q3.

It also reflects the capacity that we just purchased with DRT.

Yeah perfect. Thanks guys. Best luck

Thanks.

[Operator Instructions].

Okay. With that, let me bring this to a close. Again, I know a lot of complicated ins and outs, but let me assure you that we are on our plan and we are -- business -- the business is moving and growing as expected, and we are feeling fairly confident in where this business is going. Again, we certainly plan on replacing the EBITDA that we carved out of the business in the next 12 to 18 months, and we think we're going to do that on about $100 million less in sales. So translated, that is a much more efficient organization over the course of the next 12 to 18 months. We are knee deep in working on that and pretty excited about the ability to action those things. With that, I want to thank you for joining us today, and we'll bring this to a close.

Thank you. Once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.