Good day and welcome to the NN Incorporated Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Paul Taylor, Vice President of Marketing and Investor Relations. Please go ahead.

Thank you, Jonathan. Good morning everyone, and thanks for joining us for our Q3 conference call. I'd like to welcome you to NN's third quarter conference call and talk about our presenters this morning. Rich Holder, President and Chief Executive Officer will be speaking as well as our 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 McGregor at 212 - 371-5999, and they'll be happy to send you a copy. Before we begin, I'd like to ask you to take note of the cautionary language regarding the 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, 2017. 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, foreign exchange rates, cash flow, tax rate, acquisitions, synergies, future operating results, performance of our worldwide market 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 contains 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, as usual Rich will provide commentary on the business and we will have Tom take you through the numbers and Rich will return with the Q4 outlook, guidance and summary. Then afterwards, we'll open up the line for questions. With that said, Rich, I'll turn it over to you.

Thanks, Paul, and good morning. Welcome to our Q3 call. On balance, I would describe the quarter as mixed and challenging. On sort of the negative side, we were impacted by higher taxes due to increased foreign earnings as a result of the Paragon acquisition to the tune of about $0.04 on the EPS line. We were negatively impacted by foreign exchange rates on the top line to the tune of about $2.5 million on the top and right towards -- just towards the end of the quarter, we were impacted by a significant Lake demand push-out in China, that's directly related to the trade, tariff and entire market upheaval issue that the region is going through. This also drove some inefficiencies into our product launches in the area. I'm going to talk a little bit more about that as we go into the deck. On the positive side of the equation, you'll hear that the business continues to grow organically, is exhibiting the expected operational -- operating profit and we are performing strategically as expected. That is to say, we've always said that we're building a business that is counter cyclical in nature. And at some point in time, our early cycle -- early-to-mid cycle businesses, which is our CAFE business, was expected to begin to go into the trough. And when that happen, if we were appropriately balance our late cycle businesses, i.e., our Life Sciences business, would begin to grow and over the long-term largely offset the dip in the early cycle and still increase the cooperation and therefore the corporate seems to grow. That thesis is exactly what's taking place today. Timing is a little unfortunate, but nonetheless the thesis is proving true and having the diversification within the enterprises is proving to be positive. As…

Thank you, Rich. We're on Slide 7 looking at the financial summary. We'll start with the adjusted diluted earnings per share, which did grow $0.07 over the Q3 '17 prior quarter. These earnings were primarily driven by increased sales volumes, both organically and from the acquisitions that we made and also, it's important to note that the Q3, 2018 EPS was impacted by a higher tax rate to the tune of about $0.04 from a larger portion of our earnings being taxed at a higher rate than the US statutory rate. And additionally, Rich, just mentioned, the impact of the China slowdown hitting us late in the quarter, which was another $0.04 of impact to EPS in Q3 of '17. Turning to net sales. Sales grew $57.5 million or 39% from Q3 2017. Organic sales growth was $5.1 million or 3.5%. And this excludes the $2 million foreign exchange impact, primarily due to the U.S. dollar appreciating against the Chinese yuan and Brazilian real. We did have the acquisitive sales growth as we mentioned and that added over $57.4 million to sales. Turning to Slide 8. We'll start with the gross margin. The 2018 Q3 gross margin was impacted about 100 basis points from costs associated with completing the investment for the new multiyear sales programs that we've been discussing the last couple of quarters. Really these are beginning to come to a close. We're completing them within Q3. There will be a little bit of impact in Q4, but for the most part, we've gotten and made the investment in these programs. Additionally, during Q3, we have been incurring startup costs in our Life Sciences business due to the very strong sales growth that we've had in that business and experiencing in order to get production up and ready…

All right. Thanks, Tom. So as we move to page 13, just a little commentary on sort of what built into this outlook as you think about Q4, our Life Sciences business, you've heard it was growing at certainly high-single digits as we come to this point in the cycle. The underlying macros are extremely strong and getting stronger. Within the business, we are actually gaining share as well as driving substantive new research and development related growth. And candidly, many of our initiatives, as we put these businesses together and have them function as a single well-oiled machine, are starting to bear fruit. So we're very pleased at where Life Sciences is right now and we're even more pleased that it's operating as it is supposed to within the cyclical design of the organization. Mobile Solutions will be flat. Again it, we think we have a slowing market, but the continued adoption rate of our product, we're calling for a flat market. And candidly, as we look forward, we don't see a lot of benefit in at least not in the next couple of quarters for the stimulus that's being driven in the market. And so, we're looking at this market as a fairly flat market for us and a falling market sort of globally. And so again, the difference between the two is the adoption rate calculus within the market. Power Solutions mid-single digits. We're converting, I think I would trick that in to beat out the, the sales number will be a faster conversion of orders to sales. So again, let me point out, we are getting the orders. So we have the purchase orders. Much of this has to do with when the customer decides to cut in the program or move our product into the…

Thank you, ladies and gentlemen, at this time, we will open the floor for questions. [Operator Instruction] We will take our first question from Rob Brown with Lake Street Capital Markets.

Good morning, thanks for taking my question. In terms of the mobile and automotive market, how would you characterize the visibility at this point? You talked about flat and I understand that there's new programs helping, but is there visibility in the market were flat, what's your confidence level there?

Yes. So what we've done? Robin, we've gone out and we pulled the bulk of our customers to get sort of their view of it. We think that in, certainly in North America, this thing is rapidly moving to more of a 16.6%, 16.7% run rate number. We have looked at it as more of a 16.5% number. We think as we look out globally, that this is more than $93.5 million kind of SAAR rate number. We've adjusted appropriately and we're flexing the operations in concert with that. I think we have a good sort of 60-day outlook in all the regions of the world with the exception of China right now. What's going on in China is being heavily influenced by day-to-day trade activity and discussion. We've actually never seen this sort of behavior before, but what we are assuming is that we have a light behavior going forward until this thing is resolved. And so, we've kind of built that into our foresight.

Okay. And then you talked about the supply chain retooling going on kind of globally, how does that sort of play out for 2019? Do you see similar growth rates in 2019 you just talked about in Q4 or what's sort of the 2019 view given the trade activity?

So I, largely for us, I think on 2019, and I'm not giving 2019 guidance, I will tell you a couple of things that from a supply chain perspective that are definitely happening. You are seeing a lot more discussions about restoring activity and we are part of that discussion. And it is directly attributed to the fact that the more folks feel that the tariff will be a systemic long-term issue, the more, it's probably a bad word, excited, they become about the re-storing effort around a number of things. Most like, most notably, high-precision motor staff and a few other things that remains in the general industrial market. From a supply chain retooling perspective, we are in this road and we are beginning to quote more and more product in the Mobile Solutions space that is out two years, right? That is kind of the window for these products. We have to assume and other manufacturers have to assume that the tariff in this case is going to be systemic. And so when you do that, you have to quote the product from a different parts of the world, essentially than the U.S., right? Our competitors are primarily European competitors. And so, they are not subject to the raw material tariffs that we are seeing. And so in order for us to be even with them, we essentially need to quote the product out of Poland, out of a France, something like that. And in order to facilitate that, we have to build the line over there. And so when I talk about supply chain retooling taking place, we are seeing, we are being a part of, we are getting much more inquiries on moving lines to different places in the world because I think this thing has now been in place long enough that people are believing that it's potentially a long-term issue that they need to solve for and the solution is move the line from the U.S. to Europe where you're not subject to the tariff.

Okay, thank you. I will turn it over.

[Operator Instructions] We'll take our next question from Charley Brady with SunTrust Robinson Humphrey.

Thanks, good morning. Hedged on the last point on moving the production out of U.S. into other European markets like Poland and other areas. I mean is that, can you give us a sense as to if you quantify, what would be a timing on that, what would be a cost impact from a CapEx perspective, how do you mitigate the disruption in moving those lines across continents?

Candidly, I'll tell you us. Let me be clear, when I talk about the supply chain retooling, I'm talking more about my customer than me. We do not have in our plan any intent to move our lines in '19. What we will do is, as we bid our new programs going forward, we will construct the new lines in Europe instead of constructing the new lines in the U.S. That is how we're going to do it. And so if you project that over the long term, we're not going to spend the CapEx, we're not going to spend the additional resources to fundamentally move a line on a program that's coming to an end in the next two, probably three years. So, we will be focused on the new programs and the geography of the new programs rather than actually moving the line. Now in full transparency, what that could mean is we could find ourselves in towards the end of '19, 2020 under a little bit more pressure from the customer if these tariffs don't go away to be more productive and to find more and more cost out, we are prepared to do that and drive more and more business excellence activity and lean activity into the business to try and facilitate and offset as much as possible. But on the new programs, we just unable to do that.

Okay, thanks for the clarity that. That's helpful. Can you remind us how much of the CAFE business is directly China, it's a majority and is it not?

No, it's not the majority. It's about half when you roll in, perhaps about a third when you roll in the JV and the like. Now I'll point this out. Most of the new generation stuff is in China. And so what has happened over the course of the last year and a half. I think you've heard me say it before, where the traditional path was we launched product in the West, whether it be Europe or the U.S. and migrated to the East. The last two new generation products have been launched in China and will migrate to, or the assumption is it will migrate to Western Europe and the U.S. So the newer technology fuel system activity is definitely in China.

So, that percentage as we look out to '19 and '20 should go -- should increase from a third of that business, is that fair?

I'm not sure if I understand the question.

If it's a third of -- the third is China today and the new programs are largely China going forward that one third percentage should -- could move higher to some higher number?

Yes, that's correct. That's correct.

And just one more from --

The new programs are kind of split between China and Europe.

Okay.

Just keep that in mind.

That's helpful. One more from me. On the Power Systems business, you talked about seeing a shift resi to non-resi, but no real revenue impact and from a margin perspective, is there any impact on that -- the shift of resi to non-resi?

Yes. We generally get a little margin improvement in the non-res part of the market, typically because products are a little bit bigger, it's a little bit less volume. We can drive a little bit more efficiency across the line. I don't know that it's appreciable, right? But it's probably kind of a quarter point kind of movement in the business. The issue is going to be as we're in this -- as we are in the transition heavy. So we're actually in both spaces right now, as the transition goes kind of one way to the next.

Thank you.

We'll take our next question from Steve Barger with KeyBanc Capital Markets.

Thank you. Rich, I hear you when you say the organization is working as designed and I know you don't want to talk a lot about 2019, but stock is down a lot right now. I think it's important to help people think about the bridge to next year. On Slide 57, from the Analyst Day, you showed the NN next 5, which included 6% to 8%organic growth and 20% EBITDA growth. Are those ranges a reasonable way to think about what next year can look like or do we need to temper expectations on the front end, given some of the macro issues we're seeing?

No, I think those ranges continue to be reasonable. Those ranges are heavily dependent on the growth of our late-cycle business, which is Life Sciences. And as Life Sciences obviously become a greater part of the organization as we go through the cycle, to some degree, we just get the natural uplift from that and then inclusive of that is the synergy movements and a lot of new programs that are out there. So I think that is still a good number. I think the numbers we talked about for cash generation and debt paydown in 2019 are still good numbers. I think it's fair to assume that our CapEx spend is substantively less in 2019. I think that's an appropriate way to look at it. And candidly just overall in 2019, we just have less moving pieces in the enterprise.

So I'm glad you brought up free cash flow, a big part has obviously been having a higher margin, lower CapEx model. You did just reduced free cash flow for the current program spending. Can you just talk about the decision process for spending versus harvesting in the context of how focused investors are on free cash flow generation?

And again, I've got to take us back to and point to the Life Sciences business. We are outpacing the demand in that business and we have to put to continue with the growth path that we're on. We needed to put some capital to use and within that business to more often than not just simply expand capacity as this is not even a brand spanking new program. This is really an adjunct to a program that's already running that we're seeing demand on. So just to give you some high level numbers, we are building a backlog in that business that is significant. It is plus a $100 million backlog in that business, and it continues to grow and so lead times are moving out. And so, we have the ability with some CapEx input to pull that backlog down to turn that into nearer term sales and that is kind of the thought process around the investment.

Understood. Given the free cash flow is such a key focus here, will that metric be a part of senior management compensation targets in 2019?

Free cash, it is a part of the senior metric compensation today. So, the answer is yes.

Okay, I’ll jump in line. Thanks.

We'll take our next question from Stanley Elliott with Stifel.

Good morning guys, thank you for taking the question. On the Life Sciences business kind of looking at the guide, I mean, is it reasonable to think that this business is doing something like $130 million plus or minus in terms of revenue for the year?

No it's doing -- I'm not going to give you a number on it, but I'll tell you that is a low number. That's not -- more than that.

And then, when thinking about kind of the Paragon slide deck, you had $8 million of kind of day one synergies and $16 million of kind of full year numbers, where are we in realizing those values?

Obviously, we've taken the day one. We are, I would say, roughly 3/4 of the way through the balance of the year synergies. We will continue to drive that. I will tell you that part of what's happening is in some cases, we're making the decision to facilitate the growth in the business and the margin and such that comes with it rather than executing on some of the synergy actions, but growing again a lot faster than we had certainly in the model and sometimes -- some of these moves require us to do some things on the factory floor that certainly in the fourth quarter we probably will not want to shut down the line to do. And so, we continue to work at it. We think optimally we'll get it on both ends, the synergy and the growth, but we're certainly leaning towards the growth.

Perfect. And then, just make sure I heard correctly. Talking about CapEx into next year, even with some of the retooling that it was going to taking place, you expect that to be lower on a run rate from where we are today?

That's correct.

Great guys, thanks. Appreciate it.

We'll take our next question from Daniel Moore with CJS Securities.

Thank you, good morning. Mobile Solutions, given the context of the outlook for, let's assume that flat is correct for the next few quarters, how do we think about margins and your ability to hold the line or drive margins in that kind of demand environment?

Well, I think the right way to think about it is that the margins will be coming back, right? The margins have been under pressure because of the spend on starting up these new programs. And so, even if these new programs are not at an expected volume, we still get the margin uplift within the business and should get back into our 11% to 12% range as these programs, as they launch.

Got it. And on the tax rate, just trying to understand, it doesn't seem like just the slowdown in China would be enough to explain that the full delta between the prior guide and where we are ending up in the sort of low to mid-20s, or low-20s, anything else change on the tax front other than just the geographic mix?

Yes, it's primarily geographic mix by including Paragon. They have operations in Poland. They have operations in China also. It's just we are having higher earnings in those geographies than we originally expected when we put the ETR together in Q2.

Okay and then just housekeeping, Tom, do you have where cash flow from ops and CapEx were in the quarter?

Yes. That will be in the 10-Q that's being filed I think early this afternoon.

Okay. Thank you.

[Operator Instructions] We'll take our next question from Charley Brady with SunTrust Robinson Humphrey.

[Indiscernible] on a follow-up here. I think it'll be very helpful for everyone if we can better understand all these programs that are coming those are ramping and hitting in '19. I know you don't want to give '19 guidance, but I think there's a lot of moving parts here with costs coming out, revenues going up across the segments, can you give us some sense and frame the ramp speed or timing on that and how that would impact margins on a go forward basis, again you don't want to give specifics, but I think we have to have some framework from a modeling perspective to understand when does the ramp time when these programs start hitting and what is the margin impact across the three businesses, primarily the power and [indiscernible] mobile?

I guess I'll, let me frame it that way. I think it's a fair question. I don't have. I won't lay out the detailed numbers for '19 there again, because we'll give '19 guidance next time around. But I think the way to think about it is the bulk of these programs will be at production run levels towards the end of the second quarter. And so they are on or in most cases, a little bit better than the normal run rate contribution margins for the mobile business. And so on an operating basis, that's kind of somewhere between 10% and 13%. For the power business, the program is coming through. They are actually a little bit better. And so on an operating basis, they are closer to 18%, 19%. The power businesses will come online towards the end of the first quarter. Again the mobile stuff will come full production towards the end of the second quarter. And as we look at the forecast right now, what we think will happen is really those programs coming on, in large part offset what's going to be a falling market and keep us flat as we think about '19 and then of course the fact that we are no longer spending on these programs and comes right back to the margin line.

Is that, when you talk about the margins on these new programs 10% to 13% for mobile and 18% and 19% on power, is that including the drop-off in the costs being spent or is the cost drop-off incremental to that?

The cost drop-off would be incremental to that.

Got it. Thanks very much. Appreciate it.

Thank you. Once again, ladies and gentlemen, go ahead sir.

Looks like we don't have any more questions in the queue. So I will thank everybody for joining us. I absolutely understand that it's been a challenging quarter. I think again, I'll say it again, I think the business is operating through the challenges the way we had expected. And we'll continue to drive and go from there. So, thanks for joining us and we will see you next quarter.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.