NN Q2 2009 Earnings Transcript

Aug. 5.09 | About: NN, Inc. (NNBR)

NN Inc. (NASDAQ:NNBR)

Q2 2009 Earnings Call

August 05, 2009 11:00 AM ET

Executives

Marilynn Meek - IR, Financial Relations Board

Roderick R. Baty - Chairman and Chief Executive Officer

James H. Dorton - Chief Financial Officer, Vice President - Corporate Development

Analysts

Mark Parr - KeyBanc Capital Markets

Operator

Good morning ladies and gentlemen and thank you for standing by. And welcome to the NN, Incorporated Second Quarter 2009 Earnings Release Conference Call. At this time, all participants are in listen-only mode. And following the formal presentation, instructions will be given for the question and answer session. (Operator Instructions). And as a reminder this conference is being recorded today, August 5th 2009.

At this time, I would now like to turn the conference over to Mr. Marilynn Meek, with the Financial Relations Board. Ma'am you may now begin the call.

Marilynn Meek

Thank you. Good morning. Welcome to NN's 2009 Second Quarter Results Conference Call. If anyone needs a copy of the press release, please call my office at 212-827-3777 and we will be happy to give you a copy.

Before we begin, we ask to take note of the cautionary language regarding forward-statements contained in the press release. The same language applies to the comments made on today's conference call and the live webcast available at www.earnings.com.

With us this morning is Rock Baty, Chairman and Chief Executive Officer and Max Mengerd (ph) of NN's management team. First, management will give an update and overview of the quarter and afterwards, we'll open up the lines for questions.

With that said, I'd like to turn the call over to Rock. Rock, please go ahead.

Roderick R. Baty

Thank you Marilynn and good morning everyone and thanks for joining the call. With me this morning in Johnson City I have Jim Dorton, our Chief Financial Officer; Will Kelly, our Chief administrative Officer and Tom Burwell, our Corporate Controller.

Today, Jim will provide our analysis and comments on the second quarter and year-to-date results through June 30th, 2009. In addition, he will conclude his comments by proving an update on our liquidity status including a decision regarding the rationale for class defying all our debts as a current liability, as well as an update on the charge we took in the second quarter with respect to differed taxes.

I would conclude the call with comments regarding the latest information we have with respect to business conditions, current demand levels and provide an update on management's action associated with cost reductions and cash preservation.

I would now like to turn the call over to Jim.

James H. Dorton

Thanks Rock. Good morning everyone. Regarding the results for the quarter, you can see that in that press release like Q1, sales were down 53% versus last year and its 50% reduction if you remove the currency effect.

We continue to see a strong de-stocking effect during the quarter, but other related demand did strengthen in Europe for the end of the quarter. Offsetting this was weakness in industrial demand in both the U.S and Europe. So, revenues results overall did not see any pick up and Rock will comment more on the demand outlook after my comments.

While sales were down in the 50% range, our cost of sales and SG&A costs have dropped 44% and 36% respectively. With such a large revenue reduction in such a short period of time, we are generating large net losses from operations although our continuing efforts at reducing costs are being affected.

Looking at income from operations, before interest taxes and other income items, in the second quarter we lost 8.7 million compared with 11 million in the first quarter at about the same revenue level. And we continue to look for additional ways to bring our costs down.

During the second quarter, we determined that we should price on 100% reserve against our differed tax assets from U.S. operations, and this resulted in a 5.5 million charge showing up in the provision for tax line in the income statement and this was a $0.34 per share hit.

Whereas we can carry our NOLs forward for up to 20 years for tax purposes, the accounting rules are much more restricting and require us to for book purposes to look more closely at recent financial performance. So using this method and ignoring the recovery that we expect to occur over the next several years, we concluded that we should reserve the full amount of U.S. differed taxes and not look anymore tax benefits on U.S. operations until things turnaround. Management believes that we will utilize the NOLs over the next few years, but that isn't the criteria for booking differed tax assets.

Including this tax adjustment, during in the second quarter, we had a net loss of 13.5 million or $0.83 per share. Excluding the tax charge and assuming the Q1 tax rate, we would have had a loss of 8.0 million or $0.49 a share versus 9.5 million or $0.59 per share in the first quarter. Again, you can see there our cost reduction efforts are not having an effect although we are still loosing a lot of money at this run rate. But we are continuing to study process and structural changes that can help adjust our cost levels to current revenue levels and of course we believe that demand in the market will begin to recover at some point although our visibility remains low.

Looking at the balance sheet, one of the first things that you will notice is that we have temporarily re-classed all of our long-term debt as current. We have a $90 million revolving credit arrangement with four banks expiring in 2011 and a fixed rate note agreement with Prudential Capital with the final maturity in 2014. There are about 17 million outstanding of revolving credit loans and a balance of 28 million with Prudential.

When we amended both of these credit agreements in March to reflect the tremendous drop in revenue and profitability, the lenders set new financial covenant levels reflecting the business reality. Certain of the covenants were set for only one year at that time, so after March 31st 2010, the covenant levels are to be determined by the lenders with consultation with the company.

The lenders did this to give us both flexibility to deal with probably new would be a fast changing market. However, it leaves us in a situation where we don't know with certainty what the requirements will be for us to stay in compliance with covenants at June 30, 2010. Thus, we have to consider that the company could be in a situation where we are not in compliance with the as yet unknown covenants a year from now, which lead us to conclude that we should show the debt is current.

Also, when the lenders set the new covenants in March, they were set very tightly to our forecast with little room to miss. If our financial performance falls for lower accrual cash, we'll have to go back seeking an amendment and while we think the lenders will work with us, in this market you can't really count on anything like that. So, the tight covenant levels are another reason by showing the debt as current disputant.

Despite our losses from operations and the $3.2 million cash cost we incurred to put the new credit agreements in place, NN has remained nearly cash flow neutral this year, that is a 4.8 million from year end, but is down 2.1 million from March 31. Q2 was cash flow positive by about $1 million.

We upheld capital spending to 3.8 million year-to-date versus 8.9 million in the first half of last year. And we will the capital in the second half of this year.

Inventories down 17 million and our customer collections have stayed generally current. And we believe that we will end the year virtually cash flow neutral based on managing our working capital. Those are my financial comments and now back to Rock.

Roderick R. Baty

Jim, thank you. Let me begin my comments by commenting on the second quarter and year-to-date revenue results and the underlying business conditions that we've experienced for the first half. The second quarter debt can be characterized as more of the same as it relates to revenues we experienced in the first quarter. We shipped 57.9 million in the first quarter and 57.1 million in the second quarter, essentially flat results through the first two quarters and Jim as mentioned 53% down from the corresponding periods from 2008.

More than two-thirds of the 53% reduction or around 35% relates to reductions in underlying demand in both automotives and industrial end market associated with the global recessions while the remaining one-third or about 18% relates to the de-stocking in both end market.

As we mentioned in the release, eliminating the results over the differed tax charge, our net loss for the quarter was eight million or 1.5 million improvements from the first quarter loss of 9.5 million. As Jim mentioned, this improvement is a reflection of achieving the full impact of our cost reduction efforts taken during the fourth quarter '08 and the first quarter of this year.

The de-stocking effect, we continue to mention is both real and very significant in terms of magnitude.

Although it is difficult to know the exact impact of the de-stocking, we estimate that around one-third of the revenue reductions we've experienced or 18% of our 53% reductions are associated with the issue alone.

Like NN, virtually everyone in our supply chain is also reducing inventory significantly including all of our major customers which exacerbates the volume problems we face and have faced in the first half.

The inventory reduction and it has been significant during the first half, $17 million or 32% from year end results and has been a key reason for our good cash flow performance given the current conditions.

With respect to our tow-third macro end markets; automotive and industrial, it's honestly very difficult to distinguish which end market has been worse. We estimate that both are down around the percentages from the same period of 2008, approximately 35% in North America, Europe and Asia.

Of note during the second quarter, our monthly revenue experienced a low point for the first six months during the month of April with sequential improvement in May versus April and June a substantial improvement versus May. May and June represents the first two months of improvements from prior months revenue since we ended the global recession during the fourth quarter of 2008. This provides the safe way to my overall comments with respect to the most recent demand outlook we are seeing in the third quarter.

Although we still lack any significant visibility and I have mentioned before, no more then about 30 days out, we are seeing signs of improvement in our business both in North America, Europe and Asia. It does appear to us that April results represented a bottom with the improvement we experienced during the month of May and June I just mentioned. We believe this is a result of both the de-stocking effect bating somewhat particularly in automotive and general demand level improvements in both automotive and industrial end markets, in all three regions of the world. That enhanced since more than 50% of our revenues residing Europe, the seasonal shutdown period we experienced their during the first two months of the third quarter mainly July and August had historically represented a reduction in comparison to the first and second quarter run rate.

While those shutdowns are still occurring as of today, we would say that the revenue improvements we experienced in the later part of the second quarter are holding up into the third quarter which is encouraging. Virtually all of the key economic indicators associated with global and regional manufacturing activities are mirroring the gradual demand in the revenue improvements we have experienced at NN.

I said in the first quarter call that the net results of the first quarter and second quarter outlook in Europe, North America and Asia was unfortunately more of the same, namely no real immediate improvement and overall global demand was foreseen and no real change for us and at NN with respect to the short-term outlook. That appears going into the third quarter to have changed ever so slightly and a word like encouraging is actually believe it or not creeping back into February.

Finally, I would like to conclude today's call by providing an update regarding the management actions that we've taken associated with cost reductions and cash preservation in the current environment. Although, I just mentioned the incremental improvement we are experiencing, virtually everyone worldwide agrees that any recovery when it does occur will be gradual in nature. As a result, we continue to manage with the basic assumption that we need to identify further opportunities for cost reduction, cash preservation and associated reductions in both of our cash flow and net income breakeven point.

With the respect to cost reductions, today we have removed the total of 52 million in annual expenses from the broad categories of employment, purchase cost, restructuring SG&A and other fixed costs. This has served to lower our breakeven point, but clearly as Jim mentioned, not to a point of current volumes based upon our results for the first half and enhanced our cash flow position as well.

In addition to the 52 million in annual expense reductions, we have taken annual cash preservation actions today totaling 18 million associated with suspension of our dividend and we do think the levels of capital expenditure. These actions coupled with the 10.9 million in working capital reductions that we achieved during the first six months of '09 have allowed us to remain very close to cash flow neutral.

The net results from a liquidity perspective is that we were cash flow positive during the second quarter. Our year-to-date operating cash flow which excludes a 3.2 million of new credit facility issuance cost, now down a negative 2.9 million. Our total debt has increased from the beginning of the year by 1.8 million.

We remain actively engaged to the company in identifying fluid of the cost reduction initiatives to our Level 3 program as low as further restructuring actions that will enhance our cost and cash positions once the recovery occurs.

Our focus continues to be upon the dual objective of cost reduction and cash flow maximizations as we continue to manage through the current environment. We look forward to a future recovery and then an emerging as a linear and more globally competitive company as a result.

With that, we would be glad to open up the call for any questions that you may have.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will be begin question and answer session. (Operator Instructions). And our first question does come from the line of Mark Parr with KeyBanc Capital Markets. Please go ahead.

Mark Parr - KeyBanc Capital Markets

Hi, good morning Rock.

Roderick Baty

Good morning Mark.

Mark Parr - KeyBanc Capital Markets

How you are doing?

Roderick Baty

Good. How are you?

Mark Parr - KeyBanc Capital Markets

Hanging in there. And so is that in Alabama yesterday is a lot hotter and I just appeared in Cleveland?

Roderick Baty

I see. No global warming happening in Cleveland.

Mark Parr - KeyBanc Capital Markets

That was 64 degrees this morning. Actually got down to 62 on the way anyway. I don't need to -- and one thing I was curious about, you talked a little bit about the pick up in the macro environment.

Roderick Baty

Yes.

Mark Parr - KeyBanc Capital Markets

And I have may have missed some of your comments, but did you give you some color on whether you're seeing more pick up in Europe than in the U.S. or did you talk about the magnitude as it relative to the second quarter levels and what the potential impact on revenues might be for the third quarter?

Roderick Baty

Yeah, I didn't quantify, but I'm okay with quantifying by saying that we've seen around our low single-digit improvements Markin revenue in demand versus the second quarter not into the third quarter. Of course I would tell you that we don't have visibility into the month of September yes, the final month of the quarter. But as of right, if we had to give you a forecast of the third quarter, we'd say that it’s low single-digit, high -- excuse me high single-digit improvement over the first half run rate.

James Dorton

And normally we have -- hey Mark, this is Jim. We have a nine or 10 to 15% reductions in the third quarter due to the some of shutdowns in Europe. So, de-stocks are up it's an improvement itself.

Roderick Baty

And then the other part of your question Mark was are we seeing by region, differences and we are. Asia in particular as everybody knows is coming back very strong and the demand for facility and the Xingjian China looks to be very good for the last half versus the first half and I think that initially we saw improvement first from automotive in Europe, but that's been followed by some automotive improvement in terms of just the month of August was an example in our U.S. operations as well.

Industrial is a little bit harder to track. We have a couple of parameters in the company that we look closely towards, name and the (ph) all the business in our U.S. and all other operations and that operation is trending up as well, not as much percentage wise as the automotive we've seen, but it's trending up and in fact that operation is a working of schedule, little different lower plan is working with both schedule meaning five day week, more in the month of August for the first time in essentially in 2009. So that those are all in what we would call encouraging signs.

Mark Parr - KeyBanc Capital Markets

What's driving the roll of business?

Roderick Baty

They're sort of a broad range of industrial end market Mark and there is not one specific end market that's better than the others. But it's just a very broad range in terms of the construction equipment all five ways, not all five ways stock in terms of motor vehicle, but there are just a number of segments that are all trending up.

Mark Parr - KeyBanc Capital Markets

Okay. So it does seem as if that you had first half probably represents a bottom as far as your shipment activity is concerned, at least over the near term?

Roderick Baty

Yeah, I mean it does and I felt that I really held the sense to say that there is a trend here, but everything that we're seeing at least in the last three months, namely May, June, July is quite different than what we experienced in the first five months for the year, four month of the year. So if here is what you're hearing just most recently in the last week or two with respect to GDP data, all the global and North America manufacturing and their activity indexes are up versus sequentially versus the first and second quarter. And of course the automotive is well documented.

Mark Parr - KeyBanc Capital Markets

Yeah, now that's true. In terms of your cost, your fixed cost momentum, clearly you were incrementally focused on that or got additional reductions as the second quarter progressed and probably had, could you quantify a little bit incremental reductions that you've taken in July and kind of what the third quarter fix cost number might look like relative to the second quarter?

Roderick Baty

I think that the second quarter was a pretty good reflection of what we anticipate for the third and fourth in the absence of any additional actions that both Jim and I indicated we are constantly looking at in out business. As we mentioned, both for the fourth quarter and the first quarter, the full value of both the reductions did not really start to occur until the second quarter. So I wouldn't say that there is -- we have momentum for sure, we're continuing to look at other things, other structure of potential issues as restructuring potentially as well as additional cost reduction which we always do, but quantify what the third and fourth quarter might look like and with respect to any of those things that we don't know as of yet probably don't have anything to comment on that.

Mark Parr - KeyBanc Capital Markets

Okay. Can you give us an update on steel cost?

Roderick Baty

It comes down pretty substantially as I think we mentioned in the first quarter and of course we have in place in some parts of the world, pricing that is effective of January 1st to full year of 2009 and then other pricing that's just six months in nature, but all of it comes down pretty substantially percentage wise and of course that good, it's good for us our customers from the perspective of --

Mark Parr - KeyBanc Capital Markets

Are 100% of those changes are pass through?

Roderick Baty

For all of our major customers that we have contractual agreements with or in some cases, we don't have renewed contract because of the current economic environment, but we honor of that we had in the previous written contracts, we pass it through dollar for dollar or euro for euro, and so that is the majority of our business.

Mark Parr - KeyBanc Capital Markets

Okay. Well okay, thanks for all that color good luck bringing as shots some improvement to the bottom line in the third quarter relative to the second.

Roderick Baty

Thanks Mark.

Operator

(Operator Instructions). And gentlemen at this time, there are do not appear to be any further questions in the queue, please continue with any closing comments that you may have.

Roderick Baty

Thank you. Let me summarize and conclude today's call by restating with the second quarter and our year-to-date results which are of course visible in terms of the magnitude of the revenue reductions and the resulting losses we incurred in it with reflective actions we have taken today on cost reduction on the cash side to moderate improvement in demand and revenue will produce acceleration in our rate of improvement for both earnings and cash flow moving forward.

With that, I conclude the call and again thanks for joining.

Operator

Thank you. Ladies and gentlemen, this does concludes the NN, Incorporated second quarter 2009 earnings release conference call. If you would like to listen to the replay of today's conference, you may do some by dialing either 1800-406-7325 or for international participants 4303-590-3030. You will need to enter the access code of 412-86-02. Those telephone numbers once again are 1800-406-7325, 4303-590-3030 with the access code of 412-86-02. With this, we do thank you for your participation. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!