Good day, and welcome to the NN Inc. Second Quarter 2024 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 Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us. I'm Stephen Poe with NN Inc.'s Investor Relations team, and I'd like to thank you for attending today's earnings call and business update. Last evening we issued a press release announcing our financial results for the second quarter ended June 30, 2024 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 Chris Bohnert, 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 in the risk factors section in the company's quarterly report 10-Q for the fiscal quarter ended June 30, 2024. The same language applies to comments made on today's conference call including the Q&A session as well as 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 pandemics and other public health crises and 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 non-GAAP measures as defined by SEC rules. 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. Good morning, everyone for calling in. I am going to be speaking and referring to the presentation that's on our website. And if you could turn to slide 4 in the earnings presentation, I'd appreciate it. NN delivered strong second quarter results driven by the continued execution of our transformation plan, which is on track. We are increasing the scope and magnitude of our goals across our operational footprint and have advanced an aggressive cultural reset, centered around customer service and our leading quality. These efforts to structurally improve our business performance are evident in our quarterly results and help deliver our fourth consecutive quarter of year-over-year adjusted EBITDA growth. Our operational advancements are aiding our business development efforts as well as we have seen significantly increased customer satisfaction as evidenced by improved customer scorecards and feedback. To that end, we continue to add targeted growth capacity, have revitalized several key customer relationships, established new partnerships in several markets and have won $34.3 million in new business awards year-to-date through June. We expect our new business pipeline of over $600 million to grow as we continue to execute. As part of our commercial growth strategy, we're also getting more aggressive in the areas of new product development and product innovation, with particular emphasis applied within our medical, electrical and high-end automotive markets. We're currently bidding on R&D projects with key targeted accounts, which in turn strengthening our knowledge of leading-edge competitiveness. Specific to the medical market, our NN Medical team is building out dedicated capacity and developing advanced industrial and mechanical capabilities to service the fast-growing pipeline of opportunities. We will touch more on this encouraging development later in the call. For the full year 2024, we continue to expect to deliver bottom-line growth along with continued…

Thank you, Harold, and good morning everyone. I'll start on Slide 8, where we'll detail our results for the second quarter. Net sales for the quarter of $123 million were down slightly by 1.8%, or $2.2 million compared to last year's second quarter. Roughly half of the sales decline was caused by unfavorable foreign exchange impacts of approximately $1 million, or 0.8% largely within our Mobile business. Additionally, rationalization of low margin business in the Mobile Solutions segment accounted for most of the remaining decline versus last year. Our operating loss declined significantly to $2.1 million, an improvement of $1.9 million compared to the $4 million operating loss in last year's second quarter. On an adjusted basis we delivered adjusted operating income of $2.1 million, which again grew relative to the adjusted operating income of $1.3 million seen in the prior year. As Harold referenced earlier, adjusted EBITDA results of $13.4 million grew by $2.9 million, or 28% versus the $10.5 million last year. As a result of our adjusted EBITDA growth, our consolidated adjusted EBITDA margin of 10.9% expanded by 250 basis points versus last year's second quarter, driven in part by improved operational performance across our base business and a stronger first half of the year for our China joint venture. This step up in our profitability on a modestly lower revenue base again speaks to the success of NN's transformation and our improved ability to generate stronger profits from our existing business. We have shown solid progress in optimizing our sales mix through the transformation and expect these benefits to carry forward supporting long-term margin improvement goals. On a GAAP basis, our quarterly net loss per share of $0.12 showed marked improvement compared to the $0.38 net loss per share seen in last year's second quarter. On…

Thank you, Chris. Please turn to Slide 12 in the presentation. NN's organic growth program continues to perform very well and we remain encouraged by the acceleration of new award programs. Since January of 2023, NN has secured $97 million of new awards. And we are advancing our pipeline of opportunities in higher margin, higher growth areas of the market. Additionally, our teams have developed a robust product development and prototyping program, which will be a critical step in improving our sales hit rates and overall participation in innovative programs with large key customers. Year-to-date, we have secured over $34 million of new awards and we remain on track to deliver between $55 million and $70 million of new wins in total for this year. Our key growth areas continue to be the China auto markets, US electrification and grid technologies, selective vehicle programs in markets of North America South America and Europe, as well as selective investments into medical markets, where we have the capacity to know how to compete and win. Our pipeline is growing and we remain steady in our efforts to initiate cultural change to become even more directly customer-oriented, as quality and on-time delivery are key pillars of our customer value proposition. Please turn to Page 13. I'd like to provide an update on our growing NN Medical business, which we reentered in October of last year. We are uniquely positioned to continue growing this business globally, as we leverage our deep expertise in precision manufacturing and capacity. We are ramping up quickly and advancing towards our newly upsized goal of $100 million in revenue. Upon reentry into the medical market, we had set our initial goal of organically growing this business to $50 million, a goal that was based on our available capacity and…

Thank you [Operator Instructions] Today's first question comes from Joe Gomes with Noble Capital. Please go ahead.

Hey. Good morning. Nice quarter. Thanks for taking my questions.

Good morning, Joe.

I just wanted to touch base. You said that you're on track to fix the underperforming plants for break-even. The last time we talked, you had, I think, three of the seven now at breakeven or better. Where do we stand on that number today?

Yeah. We have Tim French on the phone, our Chief Operating Officer, and he's the commander of fixing the underperforming plants. I'd like Tim to answer the question.

Sure.

Tim, you might be on mute.

Are you able to hear me now?

Yes.

Yes. We're still tracking on a consolidated basis. We expect that group to be at breakeven or better. Through Q2, we had nine of the seven that are profitable, and all of them are performing better than the prior year.

Okay. And we're still at that $100 million of revenue? I think those seven plants were accounted for. We're still on track for that same type of level of revenue? Or do you think some of that revenue is going to go away, so that when they're all profitable, that revenue would be somewhat less than $100 million?

Yes, we did shed some unprofitable business in that area. So, it would be slightly less than $100 million that they started out with. Now, there is some organic growth coming in from some of the other facilities, but net-net, they'll be slightly down from the $100 million.

Okay. Fair enough. Thanks for that. And I'm just wondering, Harold, maybe you could talk a little bit about the Chinese joint venture. It has shown some really good strength. Maybe give us a little more color as to what's driving the strength there, and do you see that continuing here at least through the end of 2024?

Yeah, you're correct that the JV is showing strength, and we have a big customer there named UAES. That JV is focused on high-end fuel systems. The market in China has a strong hybrid component, and the hybrid vehicles themselves also have fuel injection systems. The business has been flat in terms of units made, but we've benefited from a good cost-out program in that business as well. Our outlook for the year is for the business to continue to do better than last year, Joe. I don't know if it's going to be as strong in the second half as it was in the first half, but it will continue to be year-over-year stronger. The outlook for the business is also fine going into next year and the year after. Tim and I were just in China last week, and we had a thorough review of the JV business unit. We had a JV Board meeting, and that business is good for us, Joe.

Good. Good. And one more from me, I'll get back in queue. On the strategic refinancing, I was wondering if you could give us a little more color on what kind of rates you're thinking you can get versus where your rates are today. And how much of the convert do you think you're going to be able to take out initially?

Yeah, Chris, you want to take that one?

Sure, Harold. Thanks. Hey, Joe. Yeah, so we're in the middle of our refinance process. Right now, the markets are pretty good. Rates are lower than what we're paying today. As you know, we're closer to the 14% range with the PIK interest. So, we expect to have lower rates than that. As far as use, the primary driver of this is obviously to aid with our transformation as well as reducing our overall cost of capital, and that includes potentially paying down some of the preferred debt as well. So, the timing of that we'll talk about in the future, but hopefully, we'll have the capacity and the lower rates to really help the business grow and transform in the future. Those are the key goals.

Okay. Great. Thanks for taking my questions. I'll get back in queue.

Thanks, Joe.

Thank you.

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

Good morning, everyone, and thanks for taking questions. Harold, I'm kind of curious. It seems like this earnings season, we've seen a lot of tempering of expectations but it doesn't seem like you're seeing the exact same thing. I'm just curious what you see stronger or weaker today in your guidance versus say three months ago.

Well, for sure there's a rebalancing between EV hybrid and ICE across our customer base, which is 40% of the company's revenue. What it does for us is, it extends the outlook on the ICE programs, some push outs on conversions to electric and hybrid. There's been an increase in R&D programs in hybrid. So for us that's a positive mix shift. So the desire for the vehicles to do more whether it'd be range on electric or efficiency on hybrid and ICE that's a good mix for us. So it trends towards our good mix. If you look at China's exporting of China made vehicles around the world that's net impacting Europe and some other markets. So we have some puts and takes. We have three plants in China and we're spotting a fourth plant in China. So we're benefiting from the strength that's happening and we're feeling it a little bit on where it's weaker. So there are some puts and takes, but overall the amount of vehicles being made is steady. On the power side that's been largely unimpacted. What's been happening to the grid and the power grid upgrade and medical is a new one for us. So we're stepping into that market and participating it where we weren't doing that before. And so overall for us our demand is okay John. And the revenue moves that we have are largely deliberate by us as we negotiate and confront dilutive situations. And we're willing to take a loss if it's negative EBITDA. So our revenue downside if you will is of our own doing as we confront areas of the company to fix. So I wouldn't say we have a dramatically different view John than we had three months ago on end market demand.

Fair enough. And regarding your pricing actions, I came with the impression that it was largely positive in the quarter even though you had some contractual givebacks in the Mobile Solutions side of the business. Is that the case? Can you walk through how much you had positive pricing impact on a year-over-year basis?

Help me out, Chris. But we -- pricing was minimal, we had a good mix. On our contractual price downs in mobile, you're correct, we do have some. It's not big. And on our Power business and Medical business and Industrial business, it's largely PO based. So we price each order we get. But the net price impact on the business wasn't that great, John.

Yeah, that's right, Harold, and we had some inflation pricing in the power side and then precious metals have increased, we had a little inflation there on the pricing side as well, which is pass-through.

That's a passthrough, John.

And just can you remind me on the commercial vehicle side, how you're able to outperform some negative industry trends that we're seeing in the broader marketplace?

Yeah. Our biggest exposure in that market is with Cummins. And the part of Cummins where we are a supply chain participant is on the very fuel-efficient lineup that they have. And the vehicles that are getting made are mixing towards high energy efficiency, which is a mix towards the products that we make John and we've been winning new positions. So also on the accelerate side of Cummins. So overall for us, although the Class A trucks or however you want to look at the truck market as the units are expected to come down. The units that are getting ordered are mixed shifting towards the type of engines that we participate in.

And I guess just quickly on the medical side. So you kind of upsize the target potential, can you talk about the timeline of the new $100 million versus the $50 million? And the wins from what I recall they churn quicker than the balance of the portfolio. How much CapEx are you going to need to support some of those new wins?

Yeah. So there's two pieces to it. There's the capital expansion that we are underway with in the medical side. And I'll ask Tim French to speak to that. He's leading it. And then there's the addition of targeted acquisitions. So the acquisition program we're just getting organized to do that. Tim myself Chris have all bought plenty of companies in the past. We're not really set up at this moment to do it. We're working with an investment bank B. Riley to help us get set up. We're looking at our first small acquisitions. We don't really have a capital structure that would be accommodative or supportive of any type of acquisition. So it's tied in to the outlook that we have right now when our refinancing that Chris is leading. So in parallel, we're gearing up to do targeted acquisitions in the areas that we're focused on to get bigger faster than we can kind of go one win at a time at the accounts we're selling into. With regards to the capacity expansion of what we're doing, Tim, could you give a couple comments there?

Sure. The primary difference in this market is the need to have versatile flexible and capable capacity ready. The timeline from new business award to revenue is significantly shorter in this segment. So we've identified very flexible multi access lays that are pretty much industry standard within the medical industry. And we've -- we're putting together a program to begin acquiring that capacity as necessary. We've already placed orders for two of these lines that should be installed later this year. And we will continue to invest in this capability as the demand gets utilized by the sales team.

Great. Thanks guys for taking my questions. I'll get back into queue.

Thank you, John.

[Operator Instructions] Today's next question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Good morning.

Good morning.

Hey, Rob.

On the new medical goal of $100 million from sort of $17 million run rate, what do you have to do to get there in terms of new program wins? Or how many steps does it take to sort of get to that level?

Yeah. So the type of machine that we're ordering is that Tim referred to as a industry standard workhorse we have some of these machines now. And when we look at the first six months of quoting, we can already tell that $8 million worth of wins we've had to walk away from because we didn't have open capacity of this type. And we look at our pipeline it continues to be centered on these type of capabilities. And we have a decent sized pipeline here. It's somewhat held down because we don't have open capacity. As Tim referred to this market is a bit different than our other ones in that it's a first mover advantage to have the open capacity of the type needed. So we're going to put it in place. And the eight machines that we have in our game plan of which we've ordered the first two are the add up to $50 million with the machines that we already have in place. And I think it's probably going to take probably 2.5 years or so Rob to work our way into that with the normal hit rates that we have. So, it's a three-year plan is what we have and we have a five-person team. And that's the first move that we're making. We're still kind of timing our quoting because we don't have the machines installed. We are close to sold out with the we've basically sold out the capacity we have. We haven't onboarded it all yet. And so we need to get this next increment of capacity. So, if you're putting a model down, I would model it over three years.

Okay. Thank you. That’s helpful. And then on your efforts to kind of reduce the legacy loss contracts you made good progress. Could you characterize how much you have to go there how far you're through that effort?

Yes. So, the first phase and first goal that we set was to have these businesses break-even and make a little money. And then the second phase is for them to make money at the company average and we keep raising the average. We're now right at 11% and these businesses were close to a negative 11% when we walked in the door. So, they were way, way off the mark in terms of being able to be at company average. So, relative to Joe -- I think Joe brought it up on whether we're going to have to say goodbye to some of the business that's still holding us back. Probably but we're trying to hold onto as much as we can and negotiate with our customers. And I'm going to say that Tim's on track. Actually he's a little bit ahead of a plan with getting the group to be break-even or above but a few of the plants are still losing money. And so as we look forward into that reality, it might be that we need to rationalize some of the rooftops if we can't fix the business in place. And we're prepared to do that. Also we -- those require cash and so you don't rush into those things. Phase 1 we've been trying to fix every plant right where it sits but some of the capabilities in these plants are limited in whether they'll be able to make 11% EBITDA down the road remains to be done. Tim I don't know if you have any further comments you'd like to make on that.

Nothing specific. I think we've addressed a large portion of it. There may be a little left as you indicated Harold. But for the most part I think we've cleaned up a lot of that underperforming substandard business at this point.

Okay, great. Thank you. I'll turn it over.

Thank you, Rob.

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

Thank you very much. We appreciate you joining us today. And I'd just like to reiterate that our transformation is still underway and it's taking shape and we're showing progress as we go through it. We're happy with our progress so far and we can obviously see what we need to do next and so can you. And we are being very deliberate with our activities. And the transformation plan which we have in our deck today is what we're following. And although there's more work to do, we're gaining momentum and confidence in our new growth program. We're off new business hold at every plant globally now and that's a first. And that's due to operational performance and saying what we're doing, doing what we say with our customers. And our quality has been great all the way through and we're looking at green scorecards. And so our aperture has expanded somewhat to grow the company and puts us in a good position to execute. Look forward to speaking with you in the next quarter and wish everyone a good day. Thank you.

Thank you, sir. 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.