Good day, and welcome to the NN, Inc. Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Danehy. Please go ahead.

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 Mike Felcher, Senior Vice President and Chief Financial Officer. Yesterday afternoon, we issued a press release announcing our financial results for the second quarter ended June 30, 2021, as well as a supplemental presentation, which have been posted on the Investor Relations section of our website. If anyone needs a copy of the press release or the supplemental presentation, you may also contact Lambert & Co. at (315) 529-2348. Before we begin, I'd ask you that 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 June 30, 2021. 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 may contain forward-looking statements regarding sales, margins, foreign exchange rates, cash flow, tax rate, acquisitions, synergies, cash cost savings, future operating results, performance of our worldwide markets, the impacts of the corona virus, 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 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. Reviewing the agenda for today's call, Warren will provide a business update from the quarter. Then Mike Felcher will provide a detailed update of the financial results before turning the call back over to Warren to discuss our segment results and 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. Before we get started today, I want to take a moment to welcome Mike Felcher for his first quarterly earnings call as our new Chief Financial Officer. Mike has been a valuable member of our finance team, working closely with Tom Tom DeByle to enhance our overall accounting and financial reporting functions, which has made this recent transition, smooth and seamless. I have great confidence in Mike’s ability and look forward to him participating in our investor outreach in the coming years. Now, if you would turn to Page 5, we will review some of the highlights for the second quarter, The second quarter, marked, a continuation of the recovery in our global markets from the depths of the pandemic in the second quarter last year. We generated strong revenue growth across both mobile solutions and power solutions as demand continued to rebound. This strong sales performance was essential in our ability to drive higher margins and improve financial results in the quarter. The strong rebound in automotive continued during the quarter, despite the ongoing supply chain challenges, which particularly benefited our Mobile Solutions business, which grew an impressive 80% year-over-year. While we had strong growth across our business segments compared to the second quarter of 2020, I'll note that we faced increasing supply chain challenges within the quarter, which not only affected our customers’ operations, but our own operations as well. This was evident in the 2.9% sequential decrease in revenues compared to the first quarter. We continue to be flexible in our operations and responsive to the needs of our customers in light of the current market conditions as we work together to ensure we have adequate supply to maintain productions and meet the needs of our customers. The actions we took…

Thanks Warren. Please turn to Slide 7, which provides a high-level view of our second quarter results along with the continued recovery in our sales trend. With a $44.6 million increase in revenue, we achieved an $8.5 million increase in adjusted EBITDA, which is lower than our normal range of variable margin flow-through of 30% to 40%. This was primarily driven by rehiring of hourly and salaried employees laid off during 2020, reinstatement of cost suspended during the pandemic and the impact of precious metals pass through pricing. Looking at the bottom chart, we can 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 a rapid recovery over the past four quarters. We anticipate the recovery to continue in 2021 as we move past the pandemic-related impact and shift to more normal long-term growth patterns. Let's go to Slide 8, which provides a look at our continued focus on working capital management. The improvement and working capital turns has continued with higher sales and continued prudent working capital management as shown here. Networking capital at the end of the second quarter was $110.1 million compared to $114.8 million in the prior quarter, a decrease of $4.7 million. Despite the reduction in net working capital, inventory increased by $7.2 million as we made a conscious decision to build inventory, to prevent supply chain – supply disruption impacting our customers. We anticipate consuming the inventory build once the supply chain disruption we are experiencing is resolved. Working capital turns were 4.5 turns versus 3.0 turns in the prior year as a result of the strong recovery in sales from the prior…

Thank you, Mike. On Page 13, we outline our view of current market conditions within each of our operating groups. Within Mobile Solutions, we have seen continued strong demand for vehicles, including demand among consumers for light trucks and SUVs, with global production expected to increase approximately 10% in 2021. In addition, battery electric vehicles are now expected to take a 10% share of global production by 2024. We remain well positioned to take advantage of this trend with our product offerings of electrical connectors, terminal tabs, safety disconnect components and bus bars, along with electric motor worms and shafts and other high-precision components for electric power steering and regenerative braking. Industry inventory levels are also at their lowest since 2009 currently less than 1.5 million units or 30-day supply. With these positive demand drivers, excuse me, while these positive demand drivers are important, I would also note the industry is still grappling with ongoing semiconductor shortage, which impacts a variety of applications within each vehicle as well as shortages of more specialized materials such as specialty stainless steels, which impact throughput at the OEMs. From an industrial perspective, the medium and heavy truck markets continued their steady growth in North America, Europe and China, which has driven demand for diesel engines. We have spoken in the past about China's CN6 emission standards, which originally had a deadline in July 2021. The latest indications are that these new standards have been modified such that existing inventories of components may still be sold in the market, providing some breathing room for our key customers in this space. Within Power Solutions, we see long-term demand drivers as municipal and privately owned power companies are pushing to address aging infrastructure to prepare for new emerging technologies needed under the smart grid. We see…

[Operator Instructions] The first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Good morning.

Good morning, Rob.

Good morning.

Just first wanted to kind of clarify your comments on some of the supply chain challenges you are managing, I guess, internally in particular. You sound like you managed them pretty well in the quarter. Are those still in flux? Or – and kind of could you – challenges are?

Yes. Sure. We've had – I mean first and foremost has been the semiconductor chip issue impacting our customers. During the second quarter, we had several instances where we had customers shut down their facilities during the quarter, obviously, limiting our ability to provide them products and, honestly, impacting the efficiency of our operations with more of a start-stop type of an approach. In addition, Rob, we've had several instances where we had customers, because of COVID-related issues within their facility or other supply issues that they're struggling with, notifying us that they would expect to be short on deliveries of the raw materials that we utilize in our manufacturing processes. Now when that happens, obviously, we look for another source of supply. But given, in instances, the specialty nature of some of the alloys that we machine, sometimes it's difficult to get a replacement. So in that case, we work directly with our customers to find another solution. And fortunately, during the second quarter, we didn't have any significant interruptions as a result of those types of situations.

Great, great. And then in terms of kind of the EV growth, could you give us a sense of the kind of chipset increase you have on a per vehicle basis for an EV versus maybe a regular vehicle or just some gauge of what an EV growth really means to you?

I think that's still – as the electric vehicle car evolves, I think that's still certainly moving around a little bit as the OEMs become more efficient in the transfer of power within the vehicle. But as we look at it, certainly, we think there's significant opportunity, especially on the power side. I listed some of the types of components that we have the ability to manufacture for an electric vehicle. And certainly, our teams are pursuing that rigorously at this point.

Great. Thank you for the color. I will turn over.

Yes.

[Operator Instructions] The next question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Hey, good morning, guys. It’s Ken Newman on for Steve.

Hey, good morning.

I just kind of wanted to circle back to the stop-start comments that you've made, obviously, in probably the auto sector. Can you just quantify what the impact of the supply chain challenges were to revenue and EBIT in the quarter? And what are your expectations for that persisting into the third quarter?

Yes. So I would tell you, obviously, when we look at the second quarter, the falloff from the first quarter, I think, certainly can be attributable to some of the semiconductor chip issues. As we look out into the balance of the year, we're still seeing – we've kind of extended our outlook on that, given the fact that we're still seeing issues. Our customers are still experiencing issues. You've seen GM talk about the fact that they've had to, in certain instances, idle briefly some of their production lines on the truck side. That – if they're doing that, you know that the semiconductor chip issue is still prevalent. If Apple is having difficulty getting chips for their phones, it is still an issue for us in the third quarter, and that’s why, as we look at the volumes in the third quarter, we are a little bit cautious. And that's one of the reasons that we've hesitated to give additional guidance because of the interruptions that we're still seeing as a result of that, okay? And from a longer term, we still think that this is going to be an issue in the quarter and probably won't be fully resolved until the latter part of the fourth quarter or the beginning of 2022.

Right. So when I think about that in the context of the plant inefficiencies, I mean, how do you view running your plants? Are you expecting to run that at a normalized schedule if there's volume to manage the costs or any way that you can kind of help us think about potential improvements in margins given the limited visibility?

Yes, so, for us, as our businesses, as our facilities run, and most of them run in a repetitive type of environment on the auto side, certainly consistency in supply is important for us to fine-tune our facilities. And when customers pull out a significant portion of their volume with very short notice due to some plant shutdown or that type of an issue, it's a little bit harder for us to react, especially as it relates to our inventory levels. And the flexing down of our variable costs involved in the business. So if we can have a more stable environment, certainly we can become more efficient. I can't specifically quantify a margin issue for you, but I would tell you, we've talked in the past as it relates to the positive impact of incremental volume on the business being in the 30% to 40% incremental contribution to EBITDA or gross margin. And we still certainly think that that's an appropriate metric in which to use.

Okay. So I guess tying this together, if the back half revenue is expected to be similar to the front half, is there any way that you can kind of help us contextualize what the step up in operating income should be for the second half versus the first half? I guess I'm trying to also get a better sense of if you'd expect adjusted net income to be greater than breakeven in the second half?

Yes. So, we're not not going to give guidance on that. I would tell you that some of the factors that come into play for us certainly will be the volume that we talked about. I mentioned a seasonality in the second half of the year normally during the Thanksgiving and the Christmas holidays where we could potentially lose three to four shift days in comparison to the first year. And certainly I think all the cost drivers in the business at this point in time, we don't expect to change considerably, at least upward there's still opportunities to improve the business and improve the margins. We're still seeing improvement as you saw this quarter in our overall selling general and administrative expenses and some of the indirect type of costs that we have. We're still seeing an improvement there.

Okay. Maybe just one more, then I'll jump back in queue. You talked a little bit about benefiting from buying ahead on inventory. I'm curious just how much of an inventory step up are you looking for in the second half and just your confidence in and your thoughts on the potential of being free cash flow positive ahead of the working capital?

Yes, Mike you want to address that?

Yes, so from an inventory perspective, both in Q1 and Q2, primarily on the mobile side, we had an inventory build where we had some favorable overhead absorption. The favorability in Q2 from an overhead standpoint, it was favorable, but it was less favorable sequentially than Q1. So really, our ability to monetize that inventory in the second half that inventory build was largely to protect our customers with the supply chain disruption factors, as we noted. And our ability to monetize that in the second half, as Warren said, is going to be dependent on how things materialize from the supply chain chip shortage standpoint. But if that's largely resolved, we would expect to be able to reduce that inventory to normal year-end levels and monetize that investment we made in first half.

Got it. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Warren Veltman for any closing remarks,

Yes just like to thank everybody for participating in the call today. Certainly, we'd like the NN teams around the globe for continuing to provide value here in a very difficult environment with the interruption supply, and certainly ongoing dealing with the COVID pandemic, certainly appreciate their support over the last quarter. And with that, we'll conclude the call with just a final thanks. Appreciate the time.

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