Good day and welcome to the NN Incorporated First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mike Danehy, Director of Investor Relations and Financial Planning. Please go ahead sir.

Thank you, operator. Good morning everyone and thanks for joining us. I'm Mike Danehy, Director of Investor Relations and Financial Planning. I'd like to thank you for attending today's business update. Our presenters this morning will be President and Chief Executive Officer, Warren Veltman and Tom DeByle, Senior Vice President and Chief Financial Officer. Yesterday afternoon, we issued a press release announcing our financial results for the first quarter ended March 31st, 2021 as well as supplemental presentation, which has been posted to the Investor Relations section of our website. If anyone needs a copy of the press release or supplemental presentation you may also contact Lambert and Company at 616-258-5788. Before we begin, I 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 annual report on Form 10-K for the fiscal year ended December 31, 2020 and when filed the Company's quarterly report on Form 10-Q for the three months ended March 31st, 2021. The same language applies to comments made on today's conference call, including the Q&A session as well as the live broadcast. Our presentation today may contain forward-looking statements regarding sales, margins, foreign exchange rates, cash flow, tax rates, acquisitions, synergies, cash and cost savings, future operating results, performance of our worldwide markets, the impact of Coronavirus COVID-19 pandemic on the company's financial condition 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 SEC rules. A reconciliation of non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation. Reviewing the agenda for today's call, Warren will provide an overview of key highlights from the quarter, followed by a detailed financial results update from Tom. Warren will then discuss our segment results and end-markets as well as the outlook for the remainder of 2021. At the conclusion of the prepared remarks, there will be a Q&A session. At this time, I will turn the call over to Warren Veltman, President and CEO.

Thanks, Mike and good morning everyone. If you would turn to page 5, we will review some of the highlights for the first quarter. The solid momentum we achieved in the second half of 2020 continued and in many ways even accelerated into the New Year. With the tailwinds of economic recovery boosting our business and that of our customers, we are encouraged by the progress being made to overcome the impacts of the COVID-19 pandemic. We completed our refinancing during the quarter, which has substantially reduced our overall cost of capital and put NN on a stable long-term financial footing that will provide the flexibility we need to achieve our 2025 growth and margin targets. With the broad recovery, we achieved another strong -- another quarter of strong growth in revenues both sequentially and year-over-year. We saw this growth especially in our automotive products during the quarter, which had a significant influence on our Mobile Solutions business, which grew even faster. The impact of our many cost improvement and operational initiatives undertaken in 2020 generated solid results in the quarter with year-over-year increases in both GAAP and adjusted financial results along with a high conversion of EBITDA on the incremental sales. We also maintained our focus on working capital by increasing turns for the third sequential quarter resulting in a rebound and free cash flow generation. Turning to page 6, we have summarized some of the other key highlights for the quarter. As I mentioned, our business continued to rebound from the significant impact of the COVID-19 pandemic as sales for the quarter were $126.8 million, up 9.1% from a year ago and up 6.5% from last quarter. The improvement in sales volume coupled with the operational improvements we have implemented resulted in significant improvements in operating income and EBITDA as well as earnings per share. Reported operating income improved to $1 million versus a loss from operation of $103.9 million one year ago though of note that the prior year results included a significant goodwill impairment. Non-GAAP adjusted EBITDA was $16.9 million or 13.3% of sales, up from $10.1 million a year ago when adjusted EBITDA was 8.7% of sales. GAAP EPS from continuing operations was a loss of $0.46 per share versus a $5.96 per share loss from a year ago. I would note that the loss from the current period was driven primarily by costs associated with the refinancing transaction and the elimination of our interest rate swap. Our adjusted net income from continuing operations was a profit of $0.05 per share versus a loss of $0.16 per share in the prior year. Now I'd like to turn it over to Tom DeByle. So he can provide a more in-depth review of our financial performance for the quarter. Tom?

Thanks, Warren. Please turn to slide 7, which highlights the big picture view of our first quarter results along with the continued recovery in our sales trend. We saw a much stronger increase in our adjusted EBITDA than you might expect given our usual incremental margins. With an $11 million increase in revenue, we achieved a $7 million increase in our adjusted EBITDA, which is higher than our normal 40% variable margin flow through. Sales volume, JV net income and the impact of absorption into inventory increased EBITDA year-over-year. Note that management made a conscientious decision to increase inventory to prevent supply disruption impacting our customers. The improvement in EBITDA was partially offset by the impact of temporary cost reductions such as gain sharing, which was reinstated at the beginning of 2021. Looking at the bottom chart, we can also see the continued recovery in our markets as reflected in our net sales. After falling dramatically in the second quarter of 2020 due to the impact of the COVID-19 pandemic and related production shutdowns at our customers, we have seen rapid sequential recovery over the past three quarters. We anticipate the recovery to continue into 2021 as we move past the pandemic-related impact and shift to more normal growth pattern. Let's go to slide 8, which provides a look at our continued focus on working capital management. The recovery in working capital turns as continued with higher sales and continued prudent working capital management is showing an improvement over the past three quarters. Net working capital at the end of the first quarter was $114.8 million, compared with $104 million in the prior year, an increase of $10.8 million there. This is primarily due to an increase in accounts receivable ultimately driven by higher sales volume within the quarter. Inventory…

Thanks Tom. On page 13, we outline our view of current market conditions within each of our operating groups. Within Mobile Solutions we have seen a continued recovery of automotive production with 2021 North American volumes expected to increase 24% and nearly reaching the levels of 2019. The industry is also combating the ongoing shortage of chips that are essential for a variety of applications within each vehicle as well as the shortage of materials such as specialty stainless steels. With these supply chain issues we remain proactive in supporting our automotive customers through various actions including increasing inventory safety stock, which has generated positive customer feedback. From an industrial perspective, the medium and heavy truck markets continue their steady growth in North America Europe and China, which has driven demand for diesel engines. Specifically with China's CN6 emission standard deadline of July 2021 approaching, we are experiencing accelerations of volume prior to the effective date. Within Power Solutions, power companies have continued to justify and execute upgrades for aging infrastructure to prepare for installations of smart grid systems, green power generation and storage solutions. We believe grid infrastructure investment will continue to grow with future power demand resulting from increased penetration of electric vehicles in the market. The current administration has also prioritized green initiatives and carbon reduction in the recent $2.25 trillion infrastructure proposal. With renewed focus and incentive on electric vehicles and the related grid infrastructure necessary to support them, we expect to see additional demand to benefit both of our business segments over the long-term. We have presented additional information for each of our operating groups starting with Mobile Solutions on page 14. Mobile Solutions sales grew 11.3% in the first quarter from one year ago as we saw continued recovery from the pandemic as well…

Thank you. We will begin the question-and-answer session. [Operator Instructions] And the first question will come from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Good morning guys.

Good morning, Steve.

Good morning.

Good to see some things stabilizing. But you did note unpredictable volumes through 2Q, but that your mix should mitigate some of the chip shortage. First, do I have that right? And second, do you expect revenue will be up sequentially, in Mobile?

First, you have it right. We are concerned about the semiconductor chip shortage Steve. But a lot -- a significant portion of our product in North America ends-up on SUV and large truck platforms. I should say, a disproportionate share of it, majority. And that has protected us somewhat, because the OEM that's a high margin product for them. So they are prioritizing that as it relates to supply shortages. So we've I think benefited somewhat from that. As it relates to sequential -- I mean, we were looking at the second quarter. At this point, we're seeing consistency of volumes, in comparison to the first quarter at this point in time.

Consistency, okay.

Yeah.

And slide 13 says North American auto production is expected to recover 24% from last year. Do you expect your mobile segment will be up a similar amount?

Again, we're not going to give guidance over the long-term. But certainly our volumes fluctuate with overall automotive productions. But we are a global supplier, right? So that statistic was primarily related to North America.

Right. Still, is it a reasonable way to think about what the year-over-year increase could look like?

I think so. I mean, as the overall automotive production volumes recover we should benefit from that, certainly.

And what about, the Class eight side or heavier trucks, do you have confidence in the production schedule, or is there a risk to disruptions for the same reason?

Yeah, I think that, obviously, we actually in that business -- we have had some interruptions because of material shortages, unrelated to the semiconductor chip issue our teams have. This is something that has been -- I wouldn't say pervasive, but it has cropped up throughout the first quarter where we've had to solve problems, in conjunction with the cooperatively with our customers and so far we've been -- our teams have been very diligent in fixing any of those types of situations. So I think wary of the word, we're still wary of that but we – as it relates to overall volumes in our discussions with our customers, we expect those to hold reasonably well throughout the end of the year.

Got it. And one more for me. With all this talk about chip shortages and just investment flowing in that direction for capacity, do you make any parts for the semiconductor capital equipment part of the world or is that something you've explored.

It certainly is something that we've explored and I – we would have to look into the – the exact amount but my guess is that on the Power Solution side, there are some connectors and product that we made that ends up in semiconductor or electronic related applications for sure.

Got it. Thanks.

The next question will come from Dan Moore with CJS Securities. Please go ahead.

Hi, good morning, it's Pete Lucas for Dan. Can you just talk a little about your expectation for gross margins over the next couple of quarters in light of rapidly rising steel prices and the impact that's going to have?

Yes, Tom I'll take that one to start. We've talked at length about our ability to pass through material cost to our customers. Most of the contracts. I would tell you on the mobile side, most of the contracts that we have allow us to pass through material price adjustments, where there is a movement greater than 10%, and depending on the customer relationship that true-up occurs. In some cases that occurs quarterly in some cases that occurs at the end of each year, where we sit down with the customer and review the cost of materials, primarily the specialty stainless steels and either get paid back or pay the customer, depending on which way it goes. Right now obviously there is more pressure on the upside. So we would be talking to our customers about a price increase and our contracts allow us to do that. On the Power Solution side we have the ability as it relates to precious metals. Those metals are actually priced on the day of shipment. So that's a real time price that's passed through to the customer on the day of shipment. As it relates to other types of materials, typically we have the ability to reprice the new purchase orders are given because that business is not, although we do have some long-term supply arrangements that's not the norm in that group. So we do have the ability to reprice as customers order new products.

Very helpful. Thanks. In terms of general industrial demand, it seems to be gaining momentum there. As far as looking at that from our side, any particular end-markets or geographies worth noting that standout here?

Well on the GI side we do report our business with diesel engines and diesel dosing in that because it's not passenger car related and that has been a strong product group for us so far in 2021.

Great. Thanks. And the last one for me, just in terms of looking at M&A, how do you think about that going forward, in terms of how would sourcing deals, what size deals you're focused on and are large deals on the table and if, so what type of leverage would you be comfortable with going forward?

Yeah we are – when we did our Investor conference call about a month ago, we talked a little bit about that and I think our thought process is consistent. What we would like to show here is some positive free cash flow over Q1 and Q2. We are starting to look at some transactions to see what's out in the marketplace and what could set us. Certainly, if we saw the right fit and the size was right, it would be something that we would look at probably in the third or fourth maybe early 2022 period. We'd like to get our leverage down below three, that's our objective. On an overall basis and to maintain that type of leverage position, would we go up to 3.5, if something really fit with our strategic plan and gave us an additional technology or landed us a better position with a strategic customer. Certainly we would evaluate that.

Very helpful. Thank you very much.

You bet.

[Operator Instructions] Our next question will come from Rob Brown with Lake Street Capital Markets. Please go ahead.

Hi, good morning. Just wanted to follow up a little bit more on the kind of the market disruption risks. It sounds like Q2 is sort of you're managing through it, but how do you kind of see that playing out for the back half of the year, do you sort of see that now as uncertain. Do you feel like it can kind of stabilize this gives a sense of how you sort of see that stepping out for the rest of the year?

Yes, I think for sure it's going to be with us, at least that risk will be with us through the end of the second quarter and based on what I've read and what we're seeing, it's probably going to be there in the third quarter as well, given the time frame that it will take some of the semiconductor chip manufacturers to bring on additional production lines. So we're looking at it over the next six months. Certainly, it is something that our teams are aware of and focused on. We do get production schedules on the mobile side, which would be most impacted obviously from an automotive standpoint and those schedules tend to run out for a period of 10 to 12 weeks that are – they're not firm but they're planning schedule. So it gives us a reasonable amount of comfort, subject to any unusual interruption that may occur, as it relates to what we can expect in Q2. Q3, right now is a little bit we're expecting a reasonably strong Q3 and Q4, but again, we don't have any current forecast from customers and we want to see how things develop with how the OEMs are dealing with the chip shortage going forward.

Okay. Thank you. And then on the Power business, some of the new growth areas you've talked about, are you in terms of getting customer activity for sort of the EV products in particular, I guess, are they in the design and discussion stages. Are you quoting on things and maybe give us and how the pipeline is looking there for that market.

Yes, I would tell you, it's fluid. Our teams are focused on it product is being sourced every quarter. We -- I would tell you in the last six or seven weeks, we received new business awards and $3.5 million to $4 million of product that ends up on electric vehicles, battery electric vehicles some of that relates to connections -- electrical connections within the vehicle some relates to as an example power steering system that is solely going to be used on a battery electric vehicle. So it's been a focus as we've talked about of the teams our sales groups from a strategic standpoint those are the programs that we're looking at, and we're pressing hard on to get those awards and we've seen some pretty good traction, I would tell you, over the last five or six weeks with some awards that are on battery electric vehicles. So it's ongoing, obviously, it will take time and as we've talked about. We think that transition maybe is a little bit longer than what's portrayed in the media, given some of the constraints that may exist with the ability to manufacture batteries in that volume charging infrastructure and those types of things.

Okay. Thank you very much. I’ll turn it over.

The next question will come from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Hey, thanks for the follow-up. Warren on your comment about the power companies accelerating efforts to drive great upgrades. Are those initiatives funded and approved by regulators, or is that more of something that you just kind of see out there as a wish list?

No, I think Steve every public utility has to go through their process, especially, if they're making an investment. As I understand it if they're making an investment they have to look at their rates to make sure that it supports the investment in each individual Utility has to work with the regulators in order to get that type of investment improved. So I would just tell you based on the research that our team has done what we're seeing in the marketplace and talking to experts and people that are engaged in the process in the marketplace. That's how we formulated our decision and how we view that from a growth perspective.

And as you look at that once those programs start, how long does it take to benefit you and does that give you quarters or years of incremental work as a grid upgrade project size?

I think most people think and I am in that group that the great infrastructure is going to happen over a longer period of time. So I think that for us continuing to pursue our existing customers on that expanding our breadth of reach in wallet share with them is going to be critical. And then I think that that will benefit us for a long period of time and I would say a decade. This is going to take some time to update a grid and an infrastructure across this country and many countries that has been in place for 50 years to 80 years right or more.

Yes, all right. It seems like it's been a long time coming and it's certainly been slow to materialize. So hopefully, we're going to do that. I mean, how do you track those projects for planning that business whether it's grid upgrade renewable projects or smart meter installations what sources do you use?

Yes. So we use -- we have different market research firms that we utilize for that. On the automotive side we use IHS. Obviously, we use a company called MarketsandMarkets. It's another one that we used for research. And then obviously you've seen the company's interest in this has manifested itself in putting industry experts on our Board. We have one of the preeminent individuals with knowledge about how green renewable energy is going to be connected to the grid, including battery storage and those types of things. Apologize for that there is a lot more running outside my also you can hear that, but so we're excited directionally and where we're going and the knowledge that we have on the Board that will assist us in developing and fine-tuning our strategy.

Yes. Makes sense. And Tom just a couple of quick ones for you. What should we use now for quarterly interest expense?

Quarterly interest expense it will be roughly $4 million -- no, excuse me, $3 million going forward.

$3 million. All right.

Yes.

And minority interest certainly had a nice benefit this quarter is that a good run rate?

We're not giving guidance, but, yes, I mean, as Warren talked about it earlier the JV is going very strong. So I would say that that would probably be reasonable.

Okay. Thanks.

Great. Bye.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Warren Veltman for any closing remarks. Please go ahead sir.

Well, thank you for your time this morning and listening to our results for the quarter. Obviously, we're very excited about the quarter not only the sales and the earnings, but the free cash flow during the first quarter was certainly in our view a significant accomplishment. And again, I appreciate the time and wish you all a good day. Thank you. Thank you again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.