Good morning, and welcome to the NN Inc. Third Quarter 2024 Earnings 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 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 third quarter ended September 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 September 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 certain 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, and good morning everyone. Thank you for joining us for a few minutes to talk about NN's performance in the quarter and look going forward. If you wouldn't mind, please turn to Page 4 in our earnings presentation. Wanted to make a few overall comments here, and then we have some information to share with you. We got some feedback after the last call, to give a little bit of extra information and we've made an attempt at doing that. You may be reading along with some of the auto industry public filers, Phinia, Ford, Stellantis, some of the other people. There's a little bit of slowness in North America, not a lot, a few percent, but enough for us to initiate another plant closure and another round of cost reductions in that business. And our goal is for our North American mobile business to be 10% adjusted EBITDA, and our first pass roll up at 2025, with this action included puts us over 10%. So we're on track to get to our goal, and the business at this point hasn't made money, so it'll be a nice improvement for us. And we're successfully transitioning the legacy auto business from North America, ICE-centricity, to be balanced with China production as well as across powertrain platforms, and we're on track. We're already showing record sales and profits in China, and new awards as well. And record capacity up 19% in the period versus prior year. And the rest of the year looks to be more the same. We're going to be breaking records going forward here, for quite a while. We've mentioned before that we have to add significant amount of new equipment, to onboard both increased production as well as new awards that we've achieved, with Top…

Thank you, Harold and good morning everybody. Today, I'll be presenting information on both a GAAP and a pro forma basis, in order to provide additional transparency in our operating results. Since we've had quite a few changes in the business, with the transformation undergoing, namely the sale of Lubbock and migrating away as Harold mentioned, on certain unprofitable business. So, we hope this presentation is indicative of how we're performing, and how we're transforming NN over time. Pretty excited about that transformation, and pretty excited to share with you some of the faster accelerated transformation activities, and how they've impacted the financials this quarter. So, I'll be starting on Slide 9, where we detail our financial results for the third quarter. This slide shows our as reported GAAP numbers, and adjusted numbers along from the left to the right. So hopefully it's clear there. The adjustments in the middle section show the sale of Lubbock, which contributed $5.6 million in revenue in the prior year, which did not contribute obviously any revenue in the third quarter this year. So, we're adjusting that out and the associated EBITDA. So those adjustments help to show the transformation that we're making to the business. Second, the rationalization of about $2.4 million of unprofitable business along with two profit benefits in the prior year, which did not repeat and negative FX impact kind of kind of shape out the adjustments for the quarter. So pro forma revenue, operating profit and adjusted EBITDA are shown on the right hand side of the chart. On an as reported basis, net sales for the quarter were $113.6 million, declining by $10.8 million versus last year in the third quarter. On a pro forma consolidated basis, accounting for the adjustments I noted earlier, net sales were down…

[Operator Instructions] The first question comes from Joe Gomes at Noble Capital.

Good morning. Thanks for taking my question.

Hi, Joe.

Good morning, Joe.

So I wanted to start off, I mean you had the chart in there for the year-to-date gross margins increasing, but gross margins in the third quarter were a little bit below where we had anticipated, and they were below the year ago quarter. Is that all just due to mix or was there anything else behind that?

Yes, Joe, good. Thanks for the question. Yes, generally due to mix, as I outlined in the call. So Power Solutions had a little bit of a mix issue, which has corrected itself. So we don't anticipate that mix issue going forward.

Okay. Great on that. And then when you're looking at, I was going through the Q this morning, you kind of breakout the revenues, and you talk a little bit about residential and commercial electrical. Revenues have kind of gone up year-over-year. And I was wondering maybe just give us a little more, I know you talked about it briefly in the call, a little more color, or detail on what is driving the increase in revenues in that target market.

Chris, you want me to take that one?

Yes, sure. So, yes, we outline our markets, Joe, on Slide 6 and the general industrial market where we sell a lot into kind of the grid, and other electrical component markets. That's very strong. There's a lot of what you'd call rebuilds and updates to that market. So we're very pleased with that. It's showing about a 3% growth overall. And it's going to be kind of long-term. Because there's structural components there that are underlying some of our demand. We've also got a couple of customers in the Power Solutions business that are really driving demand for us overall. And so, we're very happy with that business. Actually, I was just up there this past week taking a look around, and it's a great business with great people. A lot of long-term folks who've been there forever. And so, I think the customers, the products, there's some stickiness there, and the demand is there as well. It's not double-digit growth, but it's strong growth.

Okay. And then switching gears to the medical side, I think last quarter you kind of gave us the business was running at about a $17 million annual revenue run rate, and that you were building out some dedicated capacity to that. And I was wondering where we stand on that annual revenue run rate, if it's improved any in the third quarter. And where are you on building out the dedicated capacity for that segment?

Yes, we have. Tim French is on the phone too. So we have received our first dedicated capacity. Tim, you want to speak about that?

Sure, sure. As Harold said, we've received, we ordered two dedicated capacity lines, the citizens that we've talked about before the multi access lights. The first one has been received and is going to be fully commissioned by mid-November, and then be operational. The second one will be arriving within the next two weeks, and it will be commissioned by the end of the month. So we'll have that capacity up and running before year end.

So we have, Joe, we have, we have new business tagged to run on that equipment. So as the machines come online, we will initiate production one in November, one in December kind of a thing. So before the end of the year we'll have our first two dedicated medical machines up and running with business.

Okay. Great. And then just one more from me. Kind of on a technical note. Again, looking on the income statement you have, I think it was about $5.3 million of other income. Was that all related to the sale of the gain from the sale on Lubbock, or were there other things in the other income line?

No, that's gain on sale. It's all late.

I'll get back in queue. Thank you.

Thank you.

The next question comes from Rob Brown at Lake Street Capital Markets.

Good morning.

Good morning, Rob.

Just wanted to dive in a little bit to kind of your goal for the 10% adjusted EBITDA margin. I think you made good progress getting to sort of breakeven in the troubled plants. But could you give us a sense of how your current efforts to reduce costs further can kind of get you there, and what really needs to happen and what sort of the timeline you're thinking now, in getting to that goal?

Yes. So Tim French is our architect there and we reviewed that this morning. Tim, you want to just give an overview there?

Yes, we're on track for getting to the 10% EBITDA in North American Mobile. We're looking at early preliminary numbers for 2025, and that's where we're rolling up to and how we got there. And I've talked about this before, it's basic blocking and tackling. It's a bunch of little projects that all add up to having a significant improvement when you look at the Group of Seven. We did shed unprofitable business, but the majority of it has been increasing efficiencies and throughputs through the existing line, the existing equipment. So it's been a good result so far. And we're really just, as we said in the presentation, we're only about 40% of the way there, because the objective is to get those that Group of Seven to profitability, not just breakeven.

I'll just add on there too. So two main blocking, two big pieces are plant closures. One of them is announced the [Washiak] and underway. The other one's not yet announced. So we have some rules to follow there. But we in, we're in communications with the customers that are impacted, and so we're underway with it. We'll probably be making the announcement. I don't know, Tim. January, February, it's going to be Q1 kind of a thing.

Yes, it'll be a Q1.

Yes. So they've agreed to take all of our inventory we have left. And so, we're running that out and we've agreed to help them transition to a new supplier. And the rationalized volume is having an impact. We had a chart on Page 9 there that showed that we rationalized $2.4 million of revenue, but it made our EBITDA go up almost $1 million. So we're getting rid of a business that can't be repriced or fixed. So rationalizing business closing a couple plants and targeted SG&A reduction. And the first pass is that, we're over 10% actually going into next year. So we might reset our goals. But right now we're tracking to deliver that, which has been our initial goal for those businesses, and that'll be a watershed event for us. And then we're focused in on being free cash flow positive there for the ongoing future. And we're on track and we're thankful for it.

A lot of hard work. Okay. Great. And next question is on the kind of the new growth markets. And you laid out a number of markets you're going after, but specifically in the power grid area, are there growth dynamics there that you can maybe take greater share or see some growth there that's above some of the other markets, or is there kind of have your customers there and that's kind of more incremental?

Well, we have a portfolio of opportunities there. I will say our biggest, largest single opportunity is in power grid. But we also have a lot of small ones and a big one for us would be like $20 million a year kind of a thing. These are customers like Siemens and Schneider and Eaton, the power grid people ABB. But I would say that it's similar to the rest of the business. The average size of opportunity might be. We were looking at it. The average wind value this year is around $400,000 per year. And it has a longer program, a higher program value, but peak annual sales around 400 and powers like that. But we do have a couple big ones in that arena, and it's stamped products predominantly and we have a couple that would require plant expansions. So I don't know, I don't know what the, what else to say other than we're pretty excited about it and we're gaining steam. We've added some people that had prior relationships in the industry, and we've been able to unlock a lot of opportunities here. And the Chris mentioned the pipeline is up to $230 million now. So we're picking and choosing here so that we can get on a steady path of growth in that business.

Okay. Thank you. Congratulations on all the progress. Turnover.

Thank you. Thank you.

[Operator Instructions] The next question comes from Tom Kerr at Zacks Investment Research.

Good morning, guys.

Good morning.

A couple quick ones. All these new business wins say in 2024. Are these contracts materially different than what's been going on the last three to five years? And then related to that, is the contract signed to revenue still in the 24-month range or something like that?

What was the second part of the question, Tom?

The signing to revenue generation. I think you guys said it was 24 months or something. If I had that right?

Yes, yes. So a little more information, on Page 7. So the first question was, is there anything different about the business you're winning versus the business that's going into life or that you're rationalizing? The answer is yes. Generally speaking, we are not pursuing takeover business. We're not just going in and trying to bust off a piece of existing business by just going in with pricing. So instead of that, we're participating in the new products, the innovation at these customers. So generally speaking, the awards we're getting are for new products and most of the time the new product has some type of a new machine feature enabling it to have a new product feature. So we're replacing generally older legacy business that's in, not being innovated and it's basically into an economic, steady state cycle. And we're generally pursuing new business that has some initial value and pricing in it because of its newness. And we had previously given some information that the average gross margins on the new business are over 20%, and they're generally replacing business that's around 11%. So it's a, it's a big increase in gross profit. And that's, that continues to be true. So we're going to keep doing that. Usually, we've looked at a little bit of takeover business, but generally speaking, the IRR isn't that good. When you look at the working capital that you have to put against it and the taking up of machine time, it's better to pursue something with better initial pricing. So we're staying true to that.

Okay, thanks. And then on the refi of the ABL on the term loan, does that, or could that involve a preferred stock refinance or take out or. I guess the question is what else can you do about the preferred stock? Is that a second transaction than sort of refinancing the term in ABL?

Yes. Yes. So Chris.

Yes, I'm taking that, Harold. Thanks. Yes. So right now we're focused on trying to get some additional flexibility to support our growth initiatives. So that's our key focus right now. Obviously the prep is out there, and it's going to be part of our optimization of the capital structure at some point. But initially we want to get the ABL, and the term loan set up so that we've got the capacity and the ability to grow the business. And I think the pref may or may not be part of that, but probably a second tier or second approach.

Got it. And last question for me on the China seems like good growth there, but you look at the macro and you see the economy slowing down, consumer slowing down, car sales slowing down. So what is the dynamic there that you guys can grow in sort of a slowing market?

Yes. So the China market is growing and they have some government mandates and government incentives to encourage auto procurement. But also earlier this year, China passed Japan in terms of the largest exporter of vehicles globally. And they are a large exporter, so they have a goal to lead in the export markets. There's some tariffs in the United States on products made in China. But not so in the rest of the world as much. Some smaller ones in Europe, but their big export markets are, they're doing fine. So there's a lot of pressure on people that are serving the market like us. We are nearing capacity in our ability to produce products both for vehicles that are going to be made and sold in China, and vehicles that are going to be made and exported from China. So the impact is on vehicles that are high priced, and the overall global production of cars is flat year-to-year. It's not declining. There's some sport on powertrains with ice going down a little bit, electric vehicles going up a little bit, hybrid going up. And you can get into powertrain talk. But overall, the number of vehicles being made globally is up just a little bit. And China is winning in that market and we're a supplier into it, so we're benefiting from that.

Great. Thanks for the answers. Nice job. That's all I have for now. Thank you.

Thank you.

At this time, there are no further questions. I would like to turn the conference back over to management for closing remarks.

Thank you for calling in. We appreciate it and we're pretty excited about our forward looking here, and we look forward to speaking about the fourth quarter, and 2025 goals in our next call. Thank you.

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