Good day and welcome to the NN, Inc. Fourth Quarter and Full Year 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would now like to turn today's conference over to Mr. Mark Schuermann, Vice President, Treasurer and Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us for the call. I'd like to welcome you to NN's fourth quarter and full year 2019 earnings conference call. Our presenters this morning will be President and Chief Executive Officer, Warren Veltman. Also attending the call is Tom DeByle, SVP and Chief Financial Officer. If anyone needs a copy of the press release or the supplemental presentation, please contact Abernathy MacGregor at (212) 371-5999 and they will you with a copy. Before we begin, I'll 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 this company's 10-K for the year ended December 31, 2018, the company’s quarterly report on Form 10-Q for the three months ended September 30, 2019 and when filed, the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. 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 the 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 the company's control. The presentation also includes certain non-GAAP measures as defined by the 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. Warren and Tom will provide a business update and review our results, and then we will open the line for questions. With that said, Warren, I'll turn the call over to you.

Thanks, Mark, and good morning to everyone. I’d like to start today’s call with a brief overview of the numerous actions our management team has been working on since our third quarter conference call. During that call, I indicated we were committed to establishing a capital structure that aligns with our strategic plan. In December of 2019, we completed two significant actions that resulted in improvements in our capital structure. First, we issued $100 million of preferred stock and utilized the proceeds from that issuance to retire all outstanding borrowings on our revolver. As a result of this action, our net debt was reduced to 757 million at December 31, 2019 from 855 million at September 30, 2019. Second, we amended our existing credit agreement to extend the maturities of both the revolving credit facility and the April 2021 term loan B maturities. These maturities have been extended to July 2022 and October 2022, respectively. The results of these actions are improved liquidity and enhanced flexibility from a timing perspective to evaluate and pursue options associated with our announced strategic review. We also made some significant changes to our management structure during the fourth quarter with the goal of transforming our organizational culture, improving our operational efficiency and reducing our overhead structure. I appointed Chris Qualters to lead our Life Sciences group and John Buchan took over responsibilities for the Power Solutions group along with his existing role as EVP of the Mobile Solutions group. Chris has over 30 years of experience in various commercial and operational roles and his track record of excellent execution will be invaluable as we continue to grow our Life Sciences platform. Likewise, John has significant experience in leading operations and participating as a senior executive helping shape an organization’s strategic direction. John’s management and…

Thanks, Warren. Please turn to Slide 7, which includes our fourth quarter results on a GAAP, non-GAAP, excluding special items, and a total adjusted non-GAAP basis. As I did in the prior quarter, I further break down our adjustments into two categories for better transparency. One category is special items, which are one-time unusual expenses; and number two, transition and integration expenses the company has historically captured due to the number of acquisition and integration activities made over the past few years. There are three key points I would like to get across today. First, gross profits are improving in total dollars and as a percent of sales. The improvements in gross profit relate to the focus on higher margin value-added programs with our customers, continuous improvement efforts, integration and managing cost based upon market conditions. Second, operating income on a non-GAAP basis, excluding special items, showed a loss of 2.2 million and was essentially flat year-over-year considering the increase in depreciation and amortization expense of 3.5 million and approximately 2 million of management’s bonus reversals in Q4 of 2018 versus 2019. I’ll note that there were no executive annual cash bonuses paid in either year. The last item is that EBITDA as a percent of sales circled in the column titled non-GAAP excluding special items. You can see EBITDA improved year-over-year. Let’s go to Slide 8, which provides a bridge with more granularity between reported GAAP, non-GAAP excluding special items and total adjusted non-GAAP. There are a lot of moving parts on this page, and I will try to hit the high points. First, let’s focus our attention on the upper portion of the bridge. The large dollar tax affected special items in the quarter were 0.8 million for severance and 0.5 million for write-off of debt issuance costs.…

Thanks, Tom. If we go to Page 16, we presented some additional information there for our Life Sciences group. The 11% year-over-year sales increase has been driven primarily by our orthopedic and delivery system or case and tray products, yielding an improvement in margins over the prior year. Adjusted operating profit has increased to 20.2% from 19.7% for the prior year period. Please note that 62% of the adjustments from GAAP operating income are due to intangible amortization. We have also seen expansion of our reported and adjusted EBITDA margins. Our positive margin trend is a result of continuous process improvement, installation of automation and improved performance in our international operations. Our backlog is 149 million, a $36 million reduction from Q3. As we discussed last quarter, we have recently launched our new sales and ops planning application that allows us to proactively interact with our customers and improve the process of matching product requirements with expected delivery dates. We expected that a byproduct of a more full implementation of this application would be a reduction in the total backlog. Looking forward, our 2020 focus will be on continuous improvement, managing the impact of the coronavirus on our business and targeting growth of our MedSurg products. We expect growth in the orthopedic segment to be modest in 2020 due to the significant 2019 product introductions that will not repeat in 2020. We expect orthopedic-related sales to expand in 2021 when the next round of new product introductions are scheduled. The Mobile Solutions business summary is included on Page 17. Mobile sales are down 10.9% from a year ago, due primarily to sales declines in North America due to programs moving to end of production, delays in new business launches, an unfriendly tariff environment and the impact of the UAW strike…

Thank you. [Operator Instructions]. Our first question will be from Daniel Moore from CJS Securities.

Good morning, gentlemen. Thanks for taking the questions and the color this morning. I wanted to start with, obviously a challenging one. You gave good color there in context around the guide. I’m wondering how as you formulated it, how that’s changed over the last week, if it has at all? You said it’s based on your current thinking. Just wondering if that’s been adjusted relative to how the world was operating maybe 5, 10 days ago?

Yes. Dan, obviously it’s a very fluid situation and we have been reflecting as best we can the results of what’s going on globally in our forecast. I think the last update we really received from the teams – at some point in time you got to draw a line in the sand, right, was mid to late last week so we could finalize everything and formulate our opinion. And that’s the nature of the genesis of the commentary regarding no future disruptions in North America or the European continent. It’s something that, as I indicated, we’re very much focused on especially on the supply side. I mentioned Italy, we have a key supplier there that provides us some specialty steel. So we’ve actually ordered ahead. So we might actually take on some additional raw material and supplies, inventories in the first quarter or early second quarter as we evaluate how this thing is going to unfold, because, as you know, it’s changing every day.

Helpful. And in the context of what’s going on in China, you mentioned your customers not yet operating. Back to sort of 92% staffing, the customers not ordering at normal levels. Roughly what percentage would you say that they are ordering at today relative to 60, 90 days ago? And I guess you said early May, is that right? Is that your best guess? Just any color --

Yes. So we saw – sorry to interrupt. So we saw – we get schedules from our customers on the auto side. The OEMs released timing on when they expected to open their facilities back up, but it was going to take them – the real drag there was getting all the employees back into the facilities after the Chinese New Year, because if they travelled out of state, they were essentially trapped trying to get back into the state or the province where they were working and had to go through an isolation period. So we’re pretty much at full staff right now on the Life Sciences side. We’re at 92% on the Mobile side in our facility there. And I would tell you our customers are probably taking anywhere from 50% – hence my comment on the joint venture – to maybe 75% of what we would consider normalized production volumes right now and we expect that to improve over the next four to five weeks, and then looking at a May period where we might be back to more normalized production levels.

Perfect. Switching gears a little, Life Sciences, you mentioned obviously you had a pretty big sell-in of MedSurg [ph] product last year. So what does the guidance contemplate for overall growth from Life Sciences this year? And maybe similar line of questions on the supply chain interruptions, where are we now in that continuum and how quickly does the guide expect until we get back to normal?

Yes, on the Life Sciences side we’ve seen a couple of developments there. When we talked last, we had pegged that growth in the 5% to 9% range on an overall basis. And what we’ve seen in the coronavirus I think there’s a couple other dynamics going on there. One is the coronavirus, the impact of that. Number two is some of the consolidations in the Life Sciences space have caused our customers to look harder at inventory levels. We’ve seen several large customers trim back some of their production needs solely as it relates to them managing inventory levels. So as we look at that business on an overall basis now, we’re actually looking at a lower growth profile maybe marginally up to flat as we look at 2020 at this point in time.

Perfect. And then lastly from me, just maybe talk about any steps you would be contemplating to reduce costs and how much flexibility do you have to reduce costs further, particularly in auto and industrial if it does become a little bit longer sustained disruption from a demand perspective?

Yes, so if you look on the auto side in North America, we have I think a pretty good track record of being able to flex all the variable costs of that business with production. And one of the ways that we can do that is we typically run our facilities there on a 50-hour work week. So we can dial back 20% without any significant layoffs. It also affords us an opportunity to – if there is any sort of health-related issues that we have and production volumes are down, it allows us to have a certain level of absenteeism on a go-forward basis. So I think that we have the ability to flex on the variable side. On the fixed side, I think that we’ve done a very good job on the auto, mobile group reducing some of the fixed-based cost in that business on the indirect side. We’ve taken that business back down to an 8% of sales range for indirect labor. The team understands that if sales can track below what we’ve targeted for our plan for this year, that there’s an expectation that they flex that indirect labor either even further. And I think that there’s an opportunity to do that. I think the best opportunity for us right now exists in some of the facility consolidation efforts that we have underway. And in addition, we’ve looked very closely at how we can capture some synergies especially on SG&A functional side with the combination of those two groups. We’ve already been working to kind of bring the financial teams together, to bring the human resource teams together and to capture some additional cost opportunities there as well. So I think everything that we can do, we’re focused on right now. It’s just a matter of making sure that our processes are robust enough going forward to start taking the appropriate level of personnel reductions out as our improved processes afford us the ability to do that.

Okay, very helpful. I appreciate the color and best of luck.

Okay. Thank you.

Thank you. Our next question will be from Rob Brown from Lake Street Capital Markets.

Good morning and thank you for all the detailed information. First question is in the Power Solutions business or the business overall, how much exposure do you have with the commercial aero market, and what’s sort of the program activity you’re doing at this point there?

Yes. Rob, clearly, it’s a targeted growth area for us. But when we look at that overall business, the aerospace and defense side, it’s approximately 10% of the overall Power Solutions group. We’ve spent considerable amount of resources over the last year getting that business up and ready. You’ve probably heard us talk about the fact that a year or so ago, 18 months ago, we were on seven or eight approved supplier list and today that total is like 56. And the effort to do that was not minimal. It entails a lot of development work with customers, manufacturing prototypes, that type of thing. None of that type of business early on is extremely profitable. Matter of fact, it’s not profitable at that. So we’ll buy a lot of that at this point in time and looking to bring some programs on that are actually contributing to the bottom line. So as it relates to the total size of that business, like I said, it’s about 10% of the Power Solutions group today.

Okay. Thank you. And then in terms of visibility around the order flow, how much visibility do you typically get and when do you sort of see demand starting to tail off or pick up, how much sort of heads up do you get there?

I think it really depends on the group. If you take the Mobile, as an example, typically we would get a 12-week look forward from our customers where four weeks might be firm and the next eight weeks are for planning-related purposes. But I would tell you even though that is the theoretical case that everybody is operating to, it is not uncommon for our customers to zero out their demand in a relatively short timeframe. So we’re constantly watching that and trying to evaluate where our customers inventory levels are as well to make sure that we understand where their long-term demand would be. On the Life Sciences side, we monitor very closely the backlog. And with this new supply in operations forecasting program that we put in place with our customer, it’s given us a better insight into what their expectations are, what their inventory levels are and what their expectations are from a delivery standpoint going forward. So when we look at that from a best case scenario, we would like to have that backlog at somewhere 12 to 14 weeks out. We don’t want to deliver – we don’t want to have lead times that long, but it would be nice to understand exactly what our customers need for a 12-week window and that’s really what we’re hoping to operate to.

Okay, great. Thank you. I’ll turn it over.

Thank you. Our next question will be from Steve Barger with KeyBanc Capital Markets.

Hi. Good morning, guys.

Good morning, Steve.

Good morning, Steve.

Warren, most of the questions I get overnight were on the portfolio review and I get that you don’t want to talk about specifics or predictions, but can you tell us if there are external talks taking place or if the review is still all internal?

Yes. I will tell you that we’re in the process right now, Steve. I’m not trying to be coy about this and we are having some external conversations as well.

Okay. And you detailed a lot of the balance sheet and maturity progress along with some of the aggressive cost save actions. Beyond some of the tactical things you already discussed, can you talk about how your view on NN’s ability to manage through the current environment in a sustainable way has evolved?

Yes. That’s a good question. I would tell you that as it relates to how we view the business and how we’re gearing the management team, our focus – and this I think was pervasive throughout our commentary this morning – is very much on the cash flow side of the business. We’re focused on EPS. But given the uncertainly in the marketplace, we feel that our primary focus needs to be on generating cash flow and paying down debt. And that’s why in the first quarter I talked about some under absorption of inventory and that type of thing. So we’re trying to get this business down to a point where we can still be at a minimum free cash flow neutral even if we see a 10% reduction and volume on where we’re operating today. And I think the teams are geared up to do that. We’ve been very focused on the capital expenditure side. And the other thing that I think that we’ve done is we’re trying to create a better communication platform between the three operating groups. And by having John Buchan lead Power and Mobile together and Chris over at Life Sciences, I think that from a communications standpoint we’ve significantly improved that in the business. I know that John and Chris talk frequently. I’m engaged with those guys. I’m talking to them daily. So I think from that standpoint there’s been a significant improvement. I knew when I came into this it was going to be a difficult situation. We have a good team here. I think that we made some substantial progress that puts the company on more sound footing going forward, and I’m pretty excited about where we’re going and that we’ve got a plan in place this year to pay down $25 million to $30 million of that. We feel pretty good about that range.

I think that’s a great segue into my next question. Obviously there has not been a great track record of forecasting EPS and free cash flow over the last few years. So now that you and Tom are there in the seats, can you just talk about your confidence and the line of the sight to these numbers? Do you feel like this is a reasonable forecast, but still conservative enough that you can hit midpoint or better on the ranges?

That’s our goal. That’s our goal definitely. We have levers to pull and we’re focused on it. It’s definitely a point where we have ways to improve our receivables, for example, and working capital, and Warren talked about inventory. Once we start, we can focus more on our suppliers, consolidating our suppliers lengthening, our payable terms, stuff like that, the controllables of capital spending really making sure that we get the payback and the IRR that we signed up for, and then of course ongoing cost reductions, continuous improvement because everything can be improved upon.

I agree with everything Tom said, Steve. And I would tell you that we were diligent I think as we could possibly be in trying to put this range together. But I would just take you back to some of the comments, the lead into that, as it relates to the uncertainty in the environment today. So if there’s stability as it relates to volumes, if automotive volumes go from 16 to 12, obviously that’s going to impact our guidance. We did not project anything like that, a significant disruption because of corona in North America. We did incorporate what we’ve seen in the first quarter and what we expect to see in the first couple of months of the second quarter. But beyond that, it’s difficult to predict where this thing is going to go at this point in time.

Right. That’s really understandable. Last question from me. As you think about the growth rates on the three segments, talking about lower growth on Life Sciences and some CapEx for start-ups and then what’s happening with Mobile, do you expect positive free cash flow in all three segments this year?

Yes.

That’s great. Thanks.

Thank you. [Operator Instructions]. Our next question will come from Paresh Shah from Telos Asset Management.

Good morning and thanks for taking my question. One of the things I guess every lender is concerned right now is the liquidity at the company. So as of today, is there something that you could discuss in terms of what is the cash on the balance sheet and what is the availability considering covenants and MAC clause and everything else?

Yes, sure. We finished the year with $31 million of cash on the balance sheet and no borrowings on the revolver at December 31, 2019. And our guidance shows that our expectation is that we’re going to be cash flow negative in the first quarter from 4 million and on the outside to 5 million positive. And I guess it’s important to understand that in the first quarter is typically a cash-intensive quarter for us as we come out of what is a slower December period and we have to build our receivables balance back up and usually some inventory build as well. So we feel – I would tell you from a liquidity standpoint, I think that we feel pretty good. Tom, do you want to add something on that?

In the financing that we put in place with the preferred giving us room, but we feel pretty good about our liquidity, we feel good about where our cash balances are and the path forward.

Okay. So in some ways, like if I had to estimate your liquidity today, are you saying that there is still no revolver borrowings at this point and the cash would be in that $25 million to $30 million range?

We’re still in a positive net cash position, okay. Significant positive net cash position. But in North America where we have the revolver, we’re still even in a positive net cash position today. I would classify that borrowings on the revolver is minimal at this point.

Okay, that’s helpful. Thank you.

Thank you.

Thank you. [Operator Instructions]. I’m showing no further questions in the queue at this time.

Thank you, operator. With that, we’ll bring the call to a close. Thank you for joining us. If you need further information, please reach out to Mark Schuermann at Investor Relations or Abernathy MacGregor. Thank you again and have a good weekend.

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