Good morning, and welcome to the NN, Inc. Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Alex Steinberg, Investor Relations with NN. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us. I’m Alex Steinberg, Investor Relations contact for NN, Inc., and I’d like to thank you for attending today’s business update. Last evening, we issued a press release announcing our financial results for the second quarter ended June 30, 2023, as well as the supplemental presentation, which have been posted on the Investor Relations section of our website. If anyone needs a copy of the press release or of the supplemental presentation, you may contact Alpha IR group at nnbr@alpha-ir.com Our presenters on the call this morning will be Harold Bevis, President and Chief Executive Officer and Mike Felcher, Senior Vice President and Chief Financial Officer. We also have a few of our new business leaders available to support our Q&A session including Verlin Bush our new Chief Commercial Officer and the new Head of our Segment, Douglas Campos GM of Mobile Solution, Gunars Vinkels, GM Power Solutions. Please turn to slide 2 where you will find our forward-looking statements and disclosure information. Before we begin, I’d like to ask that you take note of the cautionary language regarding forward-looking statements contained in today’s press release and supplemental presentation and in the Risk Factors section of the company’s annual report on Form 10-K for the fiscal year ended December 31, 2022, and, when filed, the company’s quarterly report on Form 10-Q for the three months ended June 30, 2023. 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, inflation, supply chain constraints, foreign exchange rates, cash flow, tax rates, acquisitions, synergies, cash and cost savings, future operating results, performance of our worldwide markets, the impact of the coronavirus or COVID-19 pandemic and the Russian-Ukrainian conflict 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 in the supplemental presentation. Please turn to slide 3 and I’ll turn the call over to our new CEO, Harold Bevis.

Thank you, Alex. Good morning, everyone. It’s an honor speaking with you all today regarding my first few months as the new CEO of NN. Today, you will see that we are already underway with the transformation strategy. And we are embracing change and taking decisive actions to accelerate our long-term growth and profitability and become a more predictable company. We have a tremendous opportunity to deliver significant value to all of our shareholders. I have personally spent the majority of my career working in industrial technology industries, and my focus has primarily been on driving transformational change. With four successful business transformations completed and two of them being public companies, I was immediately interested in leading NN through a transformation, as I believe there’s a clear opportunity to return this great company to the leadership position at once enjoy. As an industry veteran with more than 25 years of experience, I’m deeply familiar with NNs markets, competitive position and customers. NN has a well-respected and diverse customer set and although we are expanding, our focus includes new business verticals and in markets. There’s plenty of opportunity within our current markets to expand our share with those who already know the value that we bring. NN has decades of engineering and technical expertise. Now I’ve been very impressed by the acumen and operational capabilities we possess. I’m particularly encouraged by the competitive mode the company has with its vertically integrated manufacturing, which is further supported by a large globally installed base of equipment that’s extremely hard to replicate. That said, our brand assets and talents can clearly be leveraged in a more powerful way. You’ll hear today what our plans are, and that we’re already taking immediate actions to begin improving our commercial and operational strategies. This includes plans to…

Thanks, Harold. And good morning, everyone. I’ll start on slide 9. Net sales for the quarter of $125.2 million remained roughly flat compared to the prior year period as our ability to drive stronger pricing helped to offset lower volumes. Last year second quarter results also included a favorable customer settlement of $2.3 million. From a profitability standpoint, our operating loss of $4 million improved compared to the $4.5 million operating loss in last year second quarter. We captured approximately $2 million of benefit from that price and inflation versus last year. However, this pricing benefit was more than offset by the impact of lower volume, combined with the previously mentioned customer settlement. Adjusted operating income for the second quarter was $1.3 million compared to adjusted operating income of $0.1 million from the prior year. Adjusted EBITDA results of $10.5 million was slightly below last year’s $10.9 million result. Encouragingly, we are seeing the impacts of the targeted cost reductions flow through to our adjusted EBITDA, totaling approximately $2 million of benefit in the quarter. As we progress further through the year, we expect to continue to benefit from cost discipline and addressing underperforming areas of the business. Turning the slide 10. Sales in our Mobile Solutions Group increased 5.2% versus the prior year period improving by $3.8 million. The increase was primarily driven by improved pricing the impact of new business increased volumes from our existing business lines Mobile solutions adjusted EBITDA results of $7.5 million decrease compared to the $9.1 million in the second quarter of 2022. This was driven by performance challenges in our Wellington and Juarez facilities and the favorable customer settlement in the prior year. Profitability was supported by solid performance from our China based JV, which helped to partially offset some of the operational…

[Operator Instructions] Our first question will come from Rob Brown with Lake Street Capital Market. You may now go ahead.

Good morning, and congrats on all the progress.

Good morning. Thank you.

You enter a number of things on kind of your plan in terms of operational excellence. I guess I’d like to get just your view on the ability to kind of cut costs and the opportunities you see here. And maybe, kind of how long you think that’ll take to kind of get implemented?

Yes. Good question. So on our cost agenda, we have a few elements. One is we do have some underperforming areas of the company that explicitly are dilutive. And so they’re getting special attention. You could call them stop the bleeders or whatever cliche, you want to use, but we do have some highly dilutive situations that are causing us to be held back and cost performance is an element of those -- an element of that. So you have that number one, which is fixing some of our problems, which Mike and I both alluded that if you combine the cost problems with our underperforming customer contracts, it’s greater than $10 million of EBITDA. In other words, in our reported results, we’re carrying $10 million of below zero kind of profit rates. And so we’re attacking those aggressively. Number two, on procured materials and our conversion costs, we have not had a routine cost productivity program, the new Chief Operating Officer that’s joining us and we’ll announce him shortly, is very experienced at having -- every plant having a cost agenda where they at least offset their inflation and the goal, obviously, to have net productivity. So that one is kind of starting from scratch. I think it -- will you asked about timing, Rob. I think that one in my experience takes a little while to get up to full run rate, I’d say that we’ll get to full run rate in like four quarters on the first one on fixing the problem children. We have a much more immediate kind of game plan there -- this -- two or three quarters. So those are the two main elements. In terms of SG&A, which is the overhead costs, we kind of have two things going. We have our Power business is really benefiting from electrification, electric vehicles and grid investment and we’re having to grow that team to invest in it. And the Mobile one, we’re really kind of keeping our cost structure stable. As the industry transitions from internal combustion engine to electric vehicles, there’s a transition there in the kind of the top level, the number of vehicles made is steady. And so we’re really focused on rightsizing our overhead structure to the realities of the market. A lot of public filers this week in our industry, our customers, if you will, and -- they’re guiding a little softer in the vehicle world, and they’re guiding a little stronger in the electrification world. And that nets out as Mike said to us kind of being a flat second half to the first half. So I think our SG&A structure is appropriate right now. But we’ll monitor it if we need to adjust it, we will, Rob.

Okay. Good. And I think you touched on kind of the demand environment and what you’re seeing there. I guess it’s a bit of a tweak down. But are you seeing any -- I guess, would you characterize it as a tweak down? Or what’s sort of the demand environment changes that you’ve seen? And how much sort of indications from customers, I guess what’s the sort of visibility at this stage in terms of the demand environment?

Yes. So the public reporters, the OEs, if you will who are the big arbiter of the answer there. And then you have the supply chain of Tier 1s, Tier 2s into those vehicle makers on our vehicle side, they’re all painting a slightly softer second half and we’ve embraced that as part of our guidance here. On the other hand, if you look at the bellwethers into grid investment in electrification, they’re guiding to a stronger second half. And we’re seeing that -- so we’re seeing that internally also. So we’re seeing net flat kind of an outlook to our run rate. In terms of contribution to our run rate from new business wins, new business wins really take about 18 to 24 months to manifest themselves. And then in the second half of this year, we don’t have meaningful new business wins that are going to be additive to our run rate. We hope to change that in the future with a bigger program. But right now, its deminimis in the second half, the amount of contributions from new business win, in essence, 18 to 24 months ago. So we have a put -- we have a good guy and a bad guy in net out to a flat outlook, Rob.

Okay. Great. Thanks for the color there. And then in terms of just the new business activity, you’re showing a lot of activity on underlying things that’s, like you said, 18 months to get to revenue, but sort of how would you characterize the new business kind of pipeline? And is it the momentum you’re seeing in EV and grid, I guess, could you give us some sense on how that’s coming in and where you’re seeing growth and maybe how you’re gaining maybe share there and maybe just some color on the new business environment.

Yes. I’m going to answer a piece of that, and then I’m going to pull in Verlin Bush, who’s actually on the call with us, who is our Chief Commercial Officer. On the EV -- on the substitution rate of vehicles from combustion engine to electric powertrains or alternate fuel powertrains, tremendous amount of information out there on that and the substitution rates vary by class of vehicle and by geography and government mandates influence the substitution rates, but it’s definitely happening. And that manifests itself to us as more looks as people are modernizing and changing their vehicle platforms, we get a chance to bid on our new platform. So this substitution rate in this transition ends up being an opportunity for us because there’s a quoting opportunity on a new vehicle deployment. So the macro environment of that is good for us -- is good for our company. With regards to how we’re doing, I’d like to invite Verlin to make a comment here, Verlin? You might need to come off mute.

Yes. Thank you, Harold. As far as where we’re doing and where we’re going, several of our markets are actually doing pretty well. We’re staying focused on our EV and our grid applications, residential, commercial, electrical applications are down, but we’re seeing a lot of activity right now in some of our regions. So we’re seeing focus there. We recently made some changes in some staffing and hired some guys out there that are focused on growing in those key areas. So we’re seeing much more activity and new business wins in those areas. We’ll continue to see and focus on those markets that were -- that we do well in and that we’ve been in for a while. In the short term, there will be definitely some powertrain components that we’ll capitalize on with our current capacities and capabilities as we make the transition more into the EV space. So I think there’s a lot of good news on both sides. I think the operational effectiveness that we’re seeing with the new structure is going to help us be more competitive in all of our markets in all of our regions. We’ll -- we’re laying out a plan now to begin to expand our presence in medical after our restrictions lift in October of this year. So that will be another area that we’ll focus on.

Thank you, Verlin.

[Operator Instructions] It appears we have no further questions. Pardon me; our next question will come from Tom Kerr with Zacks Investment Research. You may now go ahead.

Hi, good morning guys. And just following up on the last comment on the medical market. Is that a big enough business opportunity where that would be a third segment going forward down the road?

It is a big segment. And if you look at the types of machinery that we have in-house and if you talk to the people that sell the types of machines that we buy, actually the biggest end market for these types of machines is medical. And transportation second, I’m talking now on the machining side. On the stamping side, we’re still in the business today. The divestiture that we did in 2020 largely did not touch that business, and we’re still active in the medical market and have a line-up and a roster of medical customers that we’ve had for a long time. So for both stamping and machining, it’s a great alternate use of our precision know-how on submicron stamping, submicron assemblies and machinings, that you think implants, think meshes and the tools, the cutting blades, all of it is very small and very precise. And it fits our capabilities perfectly. To be honest, it’s a little easier than the vehicle world. The vehicle world has a lot higher pressures associated with atomizing of fuels and this sort of thing. So it fits us like a hand in a glove. With regards to the non-compete that Verlin touched on, we do have a ballot not compete that’s in place for a few more weeks. So we’re already seeing that coming to an end. And we’re getting ready to re-enter there. We still have plant certifications, operators that know what to do, executives that know what to do. We have an old catalog to dust off. We know where to go. So I hope it becomes a segment. But initially, it’s smaller than that, Tom. So it will just be a product line really for us for a while. But that would be a goal of ours. And obviously, we could jump start that with a small acquisition, too. But it’s going to be a new leg in Verlin’s tool to grow our company at a higher rate. Our overall goal is to get 15% new wins per year on 500. So that’s kind of what we’re trying to do. So every vintage year, this being 2023, we’d like to get around $65 million of wins and do it year in, year in, year in. So over a few year periods, you’ve won a few hundred million dollars with the business. And for us, that’s going to add up. So we’re getting organized to do that medical, aerospace -- parts of aerospace, parts of defense, of course, electric vehicles, the grid, these are all good areas for us. And we have small market shares in a very large market. And so simple thing to say is we’re putting more feet on the street to go after more opportunities right now with open capacity we have and know-how that we have.

That sounds great. And on the separate note on the China business, is that kind of where -- back to where it should be after all the COVID stuff? Or is there still a lot of room for improvement in that area?

Yes. So there’s -- the China business for us is primarily on the Mobile side, although we do have a small plant in China for Power as well. But the biggest part of it is on the Mobile side, and we’re tied into vehicles in China, for China. The vehicle market there is doing fine. It had a big rebound in the second quarter if you follow that this week with the quarterly results from public filers. So the China vehicle market is doing fine now for us. We’re a supply chain participant into that vehicle manufacturing. And so for us, we still are stabilizing supply chains where our customers kind of beefed up on their inventory profiles of products we make. And we see that now leaning out. And so we see normal supply chain pull through us in more normal operations. So it’s smoothing out. And again, we also have Douglas Campos on the phone who -- that operation has traditionally reported into him. Douglas, if you could come off mute and make a comment there?

Sure, Harold. Exactly that. We also see in China, there’s a big incentive from the government on the -- what they call the new energy vehicles. To incentivize, we see the transition happening fast there from a 26%, 27% penetration of EVs to 30% versus ICE. So the overall volume we are monitoring very closely what Harold said, we see the improving in Q2 versus Q1, still for the year, maybe a little bit up compared to last year, not a lot. Certainly, we do have a lot of opportunities still there. We have capacity. We’re working with our customers. There is also a big trend from China that they have a lot of open capacity exploring exports, and that might drive the volume in the short term up. So those are the trends that we see in China going on right now.

Okay. Great, thanks. And then one more question on the Power segment. I mean, you guys always talk about the residential and commercial construction markets being tough all year. Any trends on that? And is that more just sort of the macroeconomic type situation? Or was there also internal issues of not taking advantage of the residential and commercial construction market?

Yes. So I’ll answer part of that, and then we have Gunars Vinkels on the phone, who is the General Manager of our Power business. Obviously, these are well-reported areas, residential, commercial, construction and obviously, residential in North America has been down. Non-residential has been better. For us, we’re heavily tied into heating and cooling and electrification of the grid and the creation of a smart grid and the creation of a grid that can take on electric vehicles. There’s some information out there that an electric vehicle driving around town is the same electrical use as a house. So you have these houses driving around and then they decide to book up to the network and start charging and it draws the equivalent of a house is worth of electricity during that charge. And so the grid needs investment, the biggest reporter here that I read this week was Itron. I don’t know if you know that company, but they put a lot of good information on this, and they’re growing their third growing quarter in a row. And they gave a lot of information on this topic. So overall, there’s kind of the construction independent thing here that’s happening is that the network -- the electrical network needs to expand, again, because of this electrification trend. With regards to starts on single-family and multifamily, that’s been down, but non-residential construction has been steady. Gunars is on the phone, I’d like to have Gunars come off of mute here and make a couple of comments also. Gunars?

Sure. Sure. Thanks, Harold. Yes. So yes, you absolutely hit it right. We do see some impact related to the residential being down, but we actually have quite a bit of activity on the quoting front that supports largely the industrial side and the grid opportunities that are out there. There’s a lot of work to be done there, and we’re seeing that quoting activity ramp up. And the good news on those is that some of that can have some short-term impact for us, the types of processes that are related to making those products has a shorter launch time than some of the ones that Harold had mentioned earlier are more classic ones that take somewhere around 14, 16 months. These can be -- parts can be produced and launched in a matter of closer to three months, three to five months’ time frame. So we hope to see the impact of that early next year.

Okay. Great, thanks for the color. And one more quick financial question. Have you guys set a leverage ratio target? I think you had at some point in the past, 3.87 now. Is there the goal to get by end of the year or next year or something like that?

Yes Mike, you want to take that one?

Sure. Yes. We haven’t set -- provided an outlook on a specific target. Obviously, we’re focused as we said in the commentary on improving liquidity and reducing the leverage ratio going forward, and we would -- our forecast reflects sequential improvement in the leverage ratio as we move forward.

Okay, thanks. That’s all the questions I have for now.

Thank you, Tom.

That’s all the time we have allotted for questions. I’ll turn the call back to Harold for closing remarks.

Thank you everyone for calling in and listening to our company report. And we look forward to reporting and speaking with you again at the end of the next quarter on our transformation plan, our on-going results, our new wins as well as the health of our markets. Thank you very much for your time. And operator, we’ll end the call at this point. Thank you.

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