Good day. And welcome to the NN, Inc. Fourth Quarter 2023 Earnings Conference Call [Operator Instructions]. Please note, today's event is being recorded. I would now like to turn the conference over to Stephen Poe with Alpha IR Group. Please go ahead, sir.

Thank you, operator. Good morning everyone, and thanks for joining us. I'm Stephen Poe, 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 fourth quarter and full year ended December 31, 2023, as well as a supplemental presentation, which has been posted on the Investor Relations section of our Web site. 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. Tim French, our Senior Vice President and Chief Operating Officer will also join us for the Q&A portion of the call. 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 when filed the Risk Factors section in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 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 and divestitures, synergies, cash and cost savings, future operating results, performance of our worldwide markets, general economic conditions and economic conditions in the industrial sector, the impacts of the pandemic and other public health crises military conflicts 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. The reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation. Please turn to Slide 3 and I will now turn the call over to our CEO, Harold Bevis.

Thank you Stephen. And good morning everyone. Before reviewing our results for the quarter and full year I'd like to thank and recognize all of our NN team members globally for their ongoing commitment to delivering on our business transformation strategy. Our collective efforts were evident in our 2023 results as the renewed culture of winning new business, increased accountability and strong focus on operational excellence have yielded quick improvements in our EBITDA, free cash flow and new business results. Our momentum is clearly building and we're proud of how hard our associates have embraced the necessary changes that NN needs to make. Looking at Slide 3 in your deck, our results were largely in line with our expectations. Net sales were $113 million and $489 million for the fourth quarter and full year respectively. These results were down slightly compared to the prior year due in part to the closing of some underperforming facilities earlier in 2023 as well as our strategic decision to exit certain unprofitable business areas. Those decisions allowed us to deliver strong adjusted EBITDA results delivering $10 million for the quarter and $43 million for the full year. The EBITDA performance helped drive free cash flow of $12 million in 2023, which was up $21 million year-over-year. As we have stated since the launch of our transformation plan, we reset the thinking on cash flow generation and that imperative is now ingrained in the company. While we're seeing immediate improvements in our EBITDA and free cash flow performance, it's important to note that our top line expansion efforts to win more business are on track but take a little more time to fully flow into the reported results. And we continue to address and fix underperforming areas of the company globally while simultaneously executing refresh…

Thanks, Harold, and good morning, everyone. I'll start on Slide 7 where we will detail our results for the fourth quarter. Net sales for the quarter of $112.5 million were down 4.6% compared to last year's fourth quarter. While our discipline on pricing helped drive an additional $5 million benefit to the top line versus last year's fourth quarter, this pricing strength was more than offset by the impact of lower sales volume driven in part by $3 million associated with the closure of our Taunton and Irvine facilities. Looking to profitability, our operating loss of $7.9 million improved by $3.1 million compared to the $11 million operating loss in last year's fourth quarter. On an adjusted basis, our fourth quarter operating loss was $1.4 million, which also improved compared to the adjusted operating loss of $3.3 million seen in the prior year. As Harold referenced earlier, adjusted EBITDA result of $10 million grew by $2.2 million or 28% versus last year's $7.8 million result. Our profitability results reflect the impact of the early transformative initiatives we've applied to our operations, including targeted cost reductions and better operational planning. These efforts allowed us to improve profitability despite lower volume. Our cost savings efforts contributed approximately $3 million of benefit in the quarter and the closures of Taunton and Irvine facilities contributed approximately $2 million of benefit. We also had favorable overhead absorption of $1 million compared to the prior year. Our consolidated adjusted EBITDA margin results expanded by 230 basis points to 8.9% versus last year's fourth quarter. Turning to Slide 8, I'll summarize our full year 2023 financial performance. For the full year, net sales were $489.3 million, a number that declined marginally relative to full year 2022. The slight decline in year-over-year sales was driven largely by the…

[Operator Instructions] And our first question today comes from Rob Brown with Lake Street Capital Markets.

First question's on the outlook and the, I guess, the automotive environment, I just wanted to clarify or understand your assumptions on the sales outlook. Are you assuming kind of overall steady end market but seeing some North American headwinds, or do you do factor in some of the headwinds here in the guidance?

We are looking and -- so our two big markets really are the Americas, North America and South America and China specifically. So China outlook for passenger vehicle production is flat with the indigenous consumption of vehicles being added to with a strong export market. And as you know, Rob, that's all over the news about what China's doing with exporting their vehicles. We're benefiting from that as an in-country supplier. And then in the Americas, South America, North America, we're assuming a flat to single digit increase in the platforms that we're on. So we look specifically at our platform exposure to the market and it's flattish to slightly up.

And then on the new business activity, you've got the strength there. Just wanted to get a little more color on the drivers, are you sort of engaging more, is it sales efforts or are you seeing some competitive sort of weakness that you're taking advantage of, some understanding of the new business traction?

Yes, it's a good point. And we highlighted on Page 5 kind of the categories where we're winning, steerings, by far the biggest, electric power steering and it's platform independent. There's a little bit higher content on the BEV vehicles. But generally speaking, we're on steering systems that are platform independent. It's a very high tolerance machine parts. We have the same competitors. There's been no decrease in competitive intensity per se, but there's a lot of innovation going on in vehicles. As everyone jocking for the same level of autonomy and vehicle safety and features, it’s leading to a lot of improvements, which lead to precise vehicle control, which leads to additional looks for us. I would say that we're in a target rich environment and we're focused on competing and winning like never before. The big thing that we did is we changed the way that we were quoting, we changed our quoting process. And Tim French, who's on the phone here also, we both noted that we had quite a bit of existing open capacity already within the company. And we were quoting it in the same manner, which we were quoting capacity we didn't have and would need to buy new equipment for, et cetera. So we bifurcated that and expanded our thinking to really at a much higher level try to fill up open capacity. And it gave the sales force a little more competitiveness, if you will. Mike also mentioned that we are using contemporary tools, which the company wasn't using Zoominfo, lead generation tools, which are known and we have a Google ad campaign out there for lead generation, which we weren't doing Google ads or search engine optimization or keyword management. So we're seeing -- we're getting higher leads. We have a focused sales effort and we have good targets. And the electrification arena, the electric grid phenomenon is on the same side on our electrical businesses is giving more looks for us. I'm kind of leading that part of it. Tim, who's on the phone is leading the fixing of the seven plants that are getting healthy right now, as well as the cost reduction efforts across the board. And when you have a better cost position, it lets you be more competitive. So it kind of goes together. And so I would say it's tactical improvements Rob, target and how we quote, a revised thinking on how we think about existing capacity versus capacity we don't have and a combined effort to be more competitive and be able to win at a higher rate. So that's the game plan. It's still -- we're winning right now in the quarter and we're on track with our comments that we're making here. So it's a knock on wood still gaining momentum.

And then lastly on the medical segment, good -- sounds like you won a program there and good progress. How do you see that business developing over time? I think you said it as a 2025 sort of time frame where that really kicks in but maybe just help understand the steps that that segment takes together?

It's one that -- it's the shielding and connector one, we were in it to a minor degree, as I mentioned, in our legacy business. And now we're basically upsizing something that was there. In the case of the new medical non-tool market, it's a startup. And so we had to hire a commercial leader, Willy Beach, who came from competition. We had to hire an engineering and quote leader Tim Dunham, who came from a competitor. We had to hire a medical plant manager, Brian Barton, who came in operationally. So we had to generate a team from scratch and then we had to focus in on what customers we were going to go call on and what products we’re going to sell them and what plants we’re going to make them in. We have medical certifications at four plants right now and we're expanding it to eight. And when we're getting into our RFQs, we're being careful to note, say it has seven processes, seven manufacturing processes on the five where we are competitive and the two where we're not competitive. And then gathering this and having patterning recognition about what we want to do about it and what equipment we might want to consider buying. We have some initial thoughts. We know that we need to buy what's called gun drills, which are deep, boring, high tolerance drills. We didn't need those so much in the automotive business, if you will, but it's A item in the medical arena. And then on the stamp products, it's about getting certifications and expanded product lines. So we have a weekly meeting. We're going logically. We're not trying to rush out and waste money or waste time. So we're building -- trying to build up to a $50 million business, that's what we've all embraced our goals around. And we have an initial five year plan to get there. So we're don't think it's going to add too much to this year, Rob, in ‘24, unless something happens that we're not expecting. But we are beginning to win business, and you have to go through all the customer certification. So it's a little bit longer lead time. And so I think that in our results, it'll start showing up in ‘25.

And our next question today comes from John Franzreb with Sidoti & Company.

I'd like to start on the sales guidance for 2024, Harold. Can you talk a little bit of how much embedded in that outlook is repriced existing contracts and how much is in that outlook of assumed exited of existing contracts?

So on pricing for this year, we have about the same amount of activity on price up activities versus requested price down. So net price right now in this outlook is minimal up or down. With regards to exiting business, we do have some of that in here. So we have the seven plants, which I've nicknamed the group of seven that are going through negotiations right now and we've already come to terms with a certain piece of business that was negative contribution margin that we're going to walk away from. So right now, John, I'd say the outlook is it's $5 million to $10 million of sales losses from that, so it's not massive, it's not a massive reason, and so really we're being conservative and adopted third party outlooks on our end markets. And I think you probably know the commercial vehicle market in North America has a negative outlook for ‘24 and we participate in that market, it's about 10% of our business. So we're assuming a decline there. So those are your pieces. Not much on the price. $5 million to $10 million hit on volume that we'll walk away from as part of fixing the seven plants and a slight hit in commercial vehicles and a slight lift primarily from ramping in new business.

Since you brought it out on the commercial vehicle side. Have you seen that decline yet or are you assuming that's a second half kind of reality?

We haven't seen it yet, John, and we believe it's going to be the second half. And I still track the ACT and FTR data, like you probably do also, and the build rates in the first half are still there. We're primarily serving into the engine market, into the engine market for those vehicles, John. So they're not a big supply chain, you don't build ahead those, those are pretty much made to order. So first half we're not seeing much activity yet.

And the question on the new business wins, you've got a good number last year and looking at a nice number in this year 55 to 70. Have you got a sense of -- as you readdress the pricing environment, how the contribution margins starting to change in the new business wins from what you used to record, what your company used to record two years ago or so?

Mike, you might be able to help me out on that one. I would -- I'm just going to say right now, John, we're spending money a little bit on ramping up these programs. So one of our largest ones that we won is in a prototype mode. And I don't want to say we're in the hairy edge of technology but we're pushing the technology expansion here and capability expansion. We're kind of breaking even, I would say, initially on these new business wins. We haven't set up budgets for it. So Tim's expensing the startup costs and the plant results as we go along. And that's why in my comment I said they're accretive at full run rate, because we know right now we review our every plant every week and so we know some of these ramp up are costing us a little money. But the run rates that we do, we look at it when we do the CER, the capital requests associated with the wins and as a group they are creative. I'm going to say it's 3 to 5 points better, John, it's not a miracle, it's just a few points better.

And just one last question. You mentioned in your prepared remarks that you replaced roughly 40% of your plant managers. I'm curious how much of those were promoted internally and how many -- how much of those were brought in externally? And any kind of initial feedback about the new plant managers?

Tim are you able to speak?

So the majority of them, they are internal promotions. We have brought in two from the outside, one specifically that's running the medical facility. But for the most part they are coming from internal promotions.

Any initial thoughts?

Initial thoughts regarding the group?

Correct.

Tim, you might want to say the big plan that you're putting in place on metrics and safety and quality and on time.

Well, exactly. Our big focus with the transformation plan is implementing strategic KPIs within the facilities and driving the accountability down to the lowest level possible within the facilities. And the plant managers that we've selected are very in-tuned with the capabilities of the facilities and so far are adopting the new KPIs very well. Very good outlook so far with what we've done.

[Operator Instructions] Our next question today comes from Joe Gomes with Noble Capital.

So you just announced the sale leaseback of three facilities. And I was wondering if those three facilities, are those in the group of seven? And if so kind of what is the lease arrangement for those facilities, the length of the leases?

You want to take that, Mike?

The three facilities are not in the group of seven and we expect the lease term will be an initial term of 20 years. So there's no plan to change the operations at those facilities that we're doing the transaction on.

And our next question today comes from Tom Kerr at Zacks Investment Research.

A couple of quick questions. Back on the sale leaseback issue, is that -- are there more opportunities for that or is that kind of a one and done deal?

We've looked at both real estate and equipment. I think, on the real estate side, that's probably what we're going to do in the near term although we'll continue to evaluate it over time. And then on the equipment side that's something that we're also looking at. So there is potential more opportunity for us to use leasing to pay down debt or finance capital.

And back on the 60 program awards mentioned, roughly 60, is that a concentrated customer base in those awards or is it a large number of customers?

It's a large number of customers. But there we had a couple big wins, Tom, so just those data points. We had big wins with specific customers. So there were two big customers in there. And one was an existing customer and one was a new customer, and one was electrical stamped parts for shielding, we announced that in the fourth quarter and one was for diesel engines, high end, off-road, heavy equipment engines, next generation. So two big customers and quite different products.

A couple more quick ones on the -- can you refresh my memory on the Taunton and Irvine closures, the timing of that? In other words, how much does that carry into 2024 in terms of volume hits, is it first and second quarter or can you give me any color on that?

Taunton was closed for the most part in Q1 of 2023 and Irvine ran into Q2. They were both effectively closed by mid-year last year.

So still a little bit of volume hit from that in the first half.

And we had some premium pricing at Irvine associated with the ramp-down. So yes, there will be a little bit of sequential volume pressure still.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Thank you for spending time with us today and speaking about NN's performance, its transformation plans and our value adding focus areas. We're a committed global team and we're pretty excited about 2024 and going forward. And we look forward to speaking with you again. Everyone, have a great day. Thank you.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.