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

Thank you, Chad. Good morning, everyone. Thank you for joining us. I'm Alec Steinberg, Investor Relations contact for NN, Inc. 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 third quarter ended September 30, 2023, as well as a supplemental presentation, which has 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 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. Please turn to Slide 2, where you'll find our forward-looking statements and disclosure information. Before we begin, I'd 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, 2022, and when filed, the company's quarterly report on Form 10-Q for the 3 months ended September 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 table in the final section of the press release and the supplemental presentation. Please turn to Slide 3, and I'll turn the call over to our CEO, Harold Bevis.

Thank you, Alec, and good morning, everyone. I'd like to start off by saying that our enhanced management team made excellent progress against our transformation strategy that we presented and spoke with you about last quarter, and the work is clear and strong in our operating results this period. We also added two highly experienced professionals and Tim French, our new COO and David Harrison, our new Chief of Procurement to further strengthen our leadership team. We are happy to have them on board, and I personally had the opportunity to work with both of them in the past, as we successfully executed prior business transformations. I'm very confident in their ability to help support NN's transformation efforts, and I firmly believe that we are well aligned strategically to achieve our goals and deliver improved returns for NN shareholders and stakeholders. Our results in the period are highlighted by our expanded profitability and cash flow performance, with 23% growth in adjusted EBITDA year-over-year and strong free cash flow generation of $11.3 million. Sales for the quarter were $124.4 million, which we translated into $14.5 million of adjusted EBITDA. On the commercial front, we've accelerated our focus on new business and have won $37 million year-to-date of new awards, which marks solid momentum and a significant step-up from where we were just three months ago. We're focused on expanding in both legacy businesses and new markets where it makes sense for us to be participating and competing based on our capabilities and ability to create value. And we have a new focused effort to increase quality and quantity of prospecting and generating leads. We're pleased to report $11.3 million of positive free cash flow in the quarter. We're free cash flow positive across the trailing 12-month period, and we're actually running…

Thank you, Harold, and good morning, everyone. I'll start on Slide 8. Net sales for the quarter of $124.4 million was slightly down compared to the prior year period. While we captured an additional $6 million of price versus last year, this benefit was more than offset by the impact of lower volume and to a lesser extent by foreign currency. Also, the current year result includes a favorable customer settlement of $1.1 million. From a profitability standpoint, our operating loss of $2.7 million was greater compared to the $2.1 million operating loss in last year's third quarter. That said, adjusted operating income for the third quarter was $3.6 million compared to adjusted operating income of $2.5 million from the prior year, an increase of $1.1 million. As Harold highlighted, adjusted EBITDA of $14.5 million was significantly above last year's $11.8 million. We are seeing the impacts of cost reductions from facility closures and headcount reductions flow through to our adjusted EBITDA, totaling approximately $4 million of benefit in the quarter versus the prior year. As we progress further through the year, we expect to continue to benefit from cost discipline as we aggressively address the underperforming areas of the business, and we continue to expect roughly $10 million in annual adjusted EBITDA improvement once all our actions are completed. Turning to Slide 9. Sales in our Mobile Solutions group increased 3.7% versus the prior year period, improving by $2.8 million. The increase was primarily driven by improved pricing, the aforementioned customer settlement and foreign exchange effects, which were slightly offset by lower volumes. Mobile Solutions adjusted EBITDA of $9.5 million was an increase of $1.5 million from $8 million in the third quarter of 2022. Stronger year-over-year adjusted EBITDA was driven in part by the customer settlement we previously…

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And the first question will be from Rob Brown from Lake Street Capital Markets.

Good morning and congratulations on the early progress.

Thank you.

I guess first question is kind of on the operating kind of improvements. You said you're kind of in the early innings of that. What's sort of the timing of getting through those? Is that a two year period here or just a sense of kind of the view on what's remaining here?

There's a couple of things that are underway. We have the problem plants, if you will, the one the plant -- we have seven plants that are in aggregate together, losing around a little greater than $10 million as we put in the deck here. And then we have the overall program of total cost productivity, which impacts all plants, including the ones that make money. So that's underway. That's over 100 projects. Every plant is participating. And so we have annual goals there in the seven plants that lose money. We have a game plan to cease that in 2024. So we're not ready to say numbers yet combined between those two. But it's something that we're going to do over the next year. We have firm plans in place. We're just not ready to say much about 2024 yet.

Okay. Fair enough. That’s a good on what you have given us. Switching to kind of the market environment, you mentioned EV is fairly active in terms of quoting. Are you still seeing strong kind of demand there? How is that market looking into the next period here?

Yeah. Our markets are growing. So we're definitely in growth markets. And with the whole -- on the power side of our business, which is tied into electricity and grid and electrical products, there's just a general natural low single-digit kind of base demand improvement. And then on the vehicle side, on the mobile side, it's a very flourishing environment for innovation with all the focus upon vehicle control, vehicle automation, emission reduction, greenhouse gas reduction. So whether it's an internal combustion engine platform or a hybrid or electrical, there's a lot of innovation. And so innovation at the carmaker, vehicle maker level flows down to us and that we see more opportunities to quote on. So it's a robust environment for us for the whole company and on both sides of our company. And then of course, in Medical, Medical has been growing all along here. We've just been in the tool part of it. And if you look at the title page of our deck here today, you'll see in the upper right, a tool that we make, this a spinal tool for inserting a rod into spine. So we've been in the tool business all along, but we've had a non-compete with the sale of our Life Sciences business three years ago, almost exactly, and we're re-entering that. So that is a naturally growing market as well. So we have robust opportunity environment that we're participating in.

Okay. Great. And then on the re-entries of the Medical area, how do you sort of see that playing out? I know you're early into it, but what's the sales cycle there? What sort of areas are you looking at first, maybe how long to revenue ramps in that area?

For us, we're going to be able to short circuit some of this because we know the business already, and we still have facility approvals and equipment approvals and people know the business. So I think it would be a very lengthy entry for someone that didn't know the business already or who wasn't already in it. So given that we are in the tool business still through this whole period, we're an approved supplier at a lot of participants in the industry. So generally, it's a little difficult to become an approved supplier. You have to go through a validation process. So Phase 1 for us is to go into account for where we are already approved and expand what we're selling into the stamped pieces, the machine pieces, drill bits, bone plates and other items that we had to exit and stay out of when we sold the Life Sciences business. So for us, Phase 1 is to go in where we're already approved and expand the products that we make. And then number two is to expand into other customers. So we're able to immediately get into it. We're already quoting. We're already quoting business at a very high level. It's not in our pipeline yet because we're not through the cycle. But we immediately hired a Vice President of Sales in North America, and we're looking for a Vice President of Sales in Europe, and we're looking for a leader of sales in China also. So we're entering it globally.

Okay. Thank you for all the color. I will turn it over.

You’re welcome. Thank you.

Thank you. [Operator Instructions] Ladies and gentlemen, this concludes our question-and-answer session. I will now turn the conference back over to Harold Bevis for any closing remarks.

Excuse me, but I'm looking at the details here on our screen, and I see we have one more question.

Yes. Just as I was concluding, it looks like we have Tom Kerr to join us from Zacks Investment Research. So Tom Kerr, please go ahead with your question.

Good morning, guys. Sorry about that. My star one wasn’t working. A couple of quick ones. On the transformation plan in terms of the seven plants that are losing $10 million just back to that. Would that be just operational improvement or would that include shutdowns possibly or everything?

We're not going to have to shut down. It's mainly the result of bad contracts. So I saw this movie before at my last company of not correcting customer contracts going through COVID and the disruptions that happened in supply chains. And that's number one. So it's pricing and cost. We don't foresee plant closures right now, not against it, but don't foresee it. So for us, we believe that we can fix all seven plants right where they sit today. Like everything, some are harder than other. We have one plant that really is a hard one. We're still going through. Tim French, our Chief Operating Officer, is very focused on this with the teams. But I think that our footprint is pretty good. I like it. And so we like to fix it where it is and fill it up with new business. So our growth program is tethered to the plants where they sit, and we're quoting the capacity where it is. So we have a base case to fix every plant right where it is.

Okay. It sounds good. And one of the comments in the presentation was in the industrial side where there's lower capital market spending due to increasing interest rates. What does that mean? Does that mean they're financing capital spending through borrowing or are you just saying that interest rates are taken away from free cash flow?

Can you repeat that one more time?

Your one of the comments was that I think it quoted general industrial component sales due to lower capital spending in an increasing rate environment. What does that mean exactly?

Well, I can just tell you what we're doing. You touched on a couple of things there. We are going to spend the same amount of capital that we have been. We're more aggressively using or more aggressively quoting the existing capacity that we have where it sits. But in cases where we're pursuing growth prospects that require capital, we're being careful to balance our portfolio between mobile and power, and we're also being careful to balance our vehicle portfolio across the powertrains of combustion engine, hybrid and electrical. For the specifics there, Mike, I'll turn it over to you.

Yeah. Tom, I think the comment is driven by the same cautious behavior on our customer parts that Harold is talking about on our part in terms of reduced capital investment in new programs, which is translating to some near-term softness for us just given the uncertain interest rate environment and higher interest rate costs that we're seeing.

Right. Okay. A couple of more quick ones. Refresh my memory on free cash flow uses, are you allowed to use it besides anything besides step paydown, share buybacks or dividends?

There are restrictions under our credit agreement that there's an excess cash flow calculation that could come into play depending on our cash generation that could require a pay down of the term loan and then there's also restrictions on things we can do from a capital standpoint based on leverage ratios and other considerations. But as long as we satisfy those requirements, we have the flexibility to spend our free cash flow as we see here.

Okay. Two more quick ones. The UAW strike, you said a few million slip into the first quarter from the fourth quarter. That's sales, not profits, correct?

Well, the volume will take margin with it. So I think this is my third strike I've gone through. In each case, it was primarily a timing issue because there was still demand for the vehicles. And so then the vehicle makers had to get caught up. So put it like a little kink in the supply chain. So we're going to be going through that. So there's nothing formally changed in our supply chain yet in any of our signals, our ADI signals. And the UAW is going through ratification processes, and it varies by OE. But it's possible that we have some volume move from Q4 to Q1, but it's not a big number, but it will take margin with it, of course. Just be whatever that might move. And we don't see that it is yet. We're just stating it's a risk.

Okay. Last quick one. Do you guys have any operations or sales or business in the Middle East region or Israel region?

We do not. It's a terrible thing that's happening there, but we're not impacted -- our company is not impacted by it.

Okay. That’s all I have for today. Thanks.

Thanks, Tom.

Thank you.

And the next question will be from Barry Haimes from Sage Asset Management. Please go ahead.

Thanks so much for taking the question. Can you hear me?

Yes.

Okay. Great. I had one quick question on the unprofitable or very low profitable contracts. Could you talk about how many of those there are and what sort of duration there is. I am harkening back Harold to your previous situation where some of those truck contracts lasted for a while before you could get out of them. So I would love to get some color around what kind of duration we're looking at? Thanks.

And you're correct. The contracts have notification periods. It crosses yes, how many customers does it involve good -- I don't know that, but I'll estimate it that it's between 10 and 20. And we also have a situation where my predecessor did notify a few of the big ones before I got here, so the notification period has begun. And as I stated earlier on one of the questions, I think it was to Rob, we're acting upon all of them. We're actively engaged on all of these matters right now, and our goal is to make significant improvement during 2024. So I don't believe there's a contract that would push us into 2025, but we have to use our judgment because a lot of these situations are with customers that where we make money in one place and lose money in one, and you have to kind of negotiate the whole deal. So they require a negotiated outcome, but we have a base plan underway right now that's within our control and will deliver significant improvement to our current run rate. Said differently, the results we reported have a big loss within them. So we're trying to rectify that. The double win for us, Barry, would be -- it will be when not only do we get rid of the problem, but we refill the capacity with profitable business. So it's good capacity, and we intend to use it in new business pursuits.

Great. Thanks so much and congrats on all progress so far.

Thank you, Barry.

And our next question is from Peter Sidoti from Sidoti & Company. Please go ahead.

Hi, Harold. Two quick questions. What's the economic assumptions you're making for the next 12 to 18 months, just for the general economy.

The vehicle outlook, you probably know them very well. The commercial vehicle outlook is for slightly less heavy-duty trucks, but stable medium-duty kind of work trucks. On the passenger vehicle side, it's going to be heavily dependent on rates, but we adopt third-party outlooks on vehicles, which is a steady outlook for us. Overall, globally, it varies by market in China. Thankfully, we're tethered to the electric vehicle government mandates that are underway. And so we're benefiting from that both in new business and existing business. In Europe, we have a smaller business and it's steady. And in Brazil, we have a nice business there and several big OEs that we're partnered with the product, the vehicle platforms we're on our growth platforms. And in North America is where our support is as a company, where we're going with the market evolution. We're not placing a bet on the type of vehicle powertrain. So we're balancing our portfolio between combustion engine, hybrid and electric, so that no matter the end customer choice, we have an ability to win there. And so that's a big thing that the transformation plan is doing is balancing our forward risk. And so we're being very careful to tether ourselves to growth platforms. Overall, vehicles, as you know, right now, there's not a lot of firm outlook, but we're basically assuming in North America a stable number of vehicles made.

Okay. And my other question, you've played this game before. As it relates to turnarounds, how does this run rate to the ones you've worked in the past and what's the timing in terms of when you think you'll get to? What inning are you in? And what's the timing on finishing where you want to get to?

Yes. Good question, Peter. We're right at the front end, very front end here. And this particular company had a lot of operational opportunity to improve on flat sales. So the results we just turned in, as Mike mentioned, had a -- was it $4 million in the quarter, Mike, versus prior year cost-out?

Correct.

Yeah. So a big number, and we're still going after that number. And on top of it, the company was rolling with money-losing situations. And so the juice, if you will, on the existing business as it is, is bigger than normal. So there's a larger opportunity than normal to grow profit without hitting a home run, if you will, in the sales arena. On the sales side, it's a little harder than than my just prior company, Peter, because we weren't aligned properly. That's very fixable, and we're doing that right now, hiring people, swapping out people. So a degree of difficulty versus the prior company, where I led the turnaround there, what you know of it's, I'd say, slightly easier here, slightly easier. We have a great team. We have great products. We're really good at what we do. We make sub-micron level machine parts and stamp parts. In other words, at the nanometer level, submicron, not very people can do that. We're vertically integrated. We're digging in on this medical thing. So I believe that our -- we have strong profit potential here, stronger than the last company I was at because they were not vertical, mainly an assembler. We are vertical in what we do. And so we control our own destiny as a manufacturer. So I think that our profits can benefit from that. And given that we had so much opportunity, if you will, not optimize when I came into it, it was not optimized operationally, not. And so Tim French has done this before, David Harrison have, I have and the team here, we've rallied together. And you can see 1 quarter we made a big difference. So we're committed to keeping on with that and adding to it new wins. And so I believe it's very doable, Peter, and it's not going to take forever, but we'll have to report results as we go. Q - Peter Sidoti Okay. Thank you very much, sir.

Thank you, Peter.

And ladies and gentlemen, this does conclude our question-and-answer session. I would like to turn the conference back over to Harold Bevis for any closing remarks.

I appreciate it, and thank you to the investors on the phone, and thank you for being patient with NN and investing in our company. We very much believe in the words that we spoke on behalf of the team today, and we look forward to delivering against our plans and exceeding your expectations. And with that, we'll conclude the call for today, Chad.

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