Good morning, and welcome to the NN, Inc. First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I'd now like to turn the conference over to Jeff Tryka, Investor Relations with NN. Please go ahead.

Thank you, everyone, for joining us this morning. I'm Jeff Tryka, the Investor Relations contact for NN, Inc., and I appreciate your attendance at today's business update. We released our financial results for the first quarter ended March 31, 2023, yesterday afternoon, along with a supplemental presentation available in the Investor Relations section of our website. If you need a copy of either the press release or the supplemental presentation, please contact Lambert & Company at 315-529-2348. Our presenters today will include Mike Felcher, Senior Vice President and Chief Financial Officer; Andrew Wall, Senior Vice President and Chief Commercial Officer; and Douglas Campos, Interim Chief Operating Officer of Mobile Solutions. Before we start, please note the cautionary language regarding forward-looking statements included in today's press release, supplemental presentation, and the Risk Factors section of our annual report on Form 10-K for the fiscal year ended December 31, 2022, as well as in the upcoming quarterly report on Form 10-Q for the three months ended March 31, 2023. This language also applies to comments made during today's conference call, including the Q&A session and the live webcast. Our presentation will include forward-looking statements about sales, margins, inflation, supply chain constraints, foreign exchange rates, cash flow, tax rates, acquisitions, synergies, cash and cost savings, future operating results, market performance, and the effects of the coronavirus pandemic and the Russian-Ukrainian conflict on the company's financial condition. These statements should be viewed cautiously and are subject to risks and uncertainties, many of which are beyond the company's control. The presentation will also contain certain non-GAAP measures, as defined by SEC rules, with reconciliations provided in the financial section of the press release and supplemental presentation. Today's agenda includes Mike opening with an overview of the first quarter and the actions taken to position NN for success; Andrew will then discuss market updates and new business opportunities; Mike will follow with a detailed financial results update for the first quarter; Douglas will provide updates on our business segments before handing it back to Mike for a discussion on our outlook for the remainder of 2023. We will have a Q&A session after the prepared remarks. At this point, I will turn the call over to Mike Felcher, Senior Vice President and CFO.

Thanks, Jeff, and good morning, everyone, and thank you for joining. Let me start by noting that Warren is unable to join the call today due to a health situation with his family. The first quarter of 2023 presented a number of challenges to our business, including the ongoing slowdown in residential and commercial construction that impacted our Power Solutions business. Our team continues to be resilient and focused on effectively managing the areas within our control to minimize the adverse effects of the current macroeconomic environment. If you turn to Page 4 of the presentation, we have summarized some of the results from our first quarter. Sales for the quarter were $127.1 million, down 0.8% from the first quarter of 2022. Power Solution sales were down 5.7%, driven by lower electric component volume and customer inventory reductions, partially offset by pricing. Mobile Solution sales were up 2.6% from the prior year, driven by pricing actions taken throughout 2022, partially offset by lower volume. We had a strong start to the year on new business wins with a 75% increase from the prior year and was 76% in our strategic segments. Net price inflation was a benefit of $2 million in the first quarter on a year-over-year basis, primarily driven by premium pricing achieved at our Irvine facility for us agreeing to extend production to meet customer requirements before we close the facility. As previously communicated, we implemented 5%-plus price increases for Power Solutions customers that are not on long-term contracts during the first quarter, which will most significantly benefit subsequent quarters. First quarter results were also impacted by unfavorable overhead absorption and lower income from our China joint venture as a result of lower volume due to the end of COVID-19 restrictions and the Chinese New Year. Combined these factors contributed to a loss from operations for the first quarter of $7.1 million and a non-GAAP adjusted loss from operations of $0.4 million. Non-GAAP adjusted EBITDA was $8.1 million or 6.4% of sales for the first quarter of 2023. We continue to maintain strong liquidity of $43 million. Our free cash flow in the first quarter was a use of $3.7 million, which was a considerable improvement over the free cash outflow from the prior year first quarter. During the first quarter, we terminated our $60 million interest rate swap, resulting in proceeds of $2.5 million, which further enhanced our liquidity. The improvement was a result of continued efforts to effectively manage working capital despite the more challenging operating environment. If you turn to Page 5 of the presentation, I will provide an update on several key initiatives. Let me start with an update on the operational improvements we are implementing at two facilities experiencing inefficiencies, which we noted on the fourth quarter call. The Wellington operational improvements are proceeding according to plan, but Juarez has been slower than expected. Improving the operating results at Juarez is the number one focus area for our leadership team. From an operations perspective, Gunars Vinkels and Douglas Campos have transitioned into leadership of the Power Solutions and Mobile Solutions teams, respectively. You will hear from Douglas a little later as he highlights the performance of each operating segment during the first quarter. We have worked to optimize our operating footprint with the closure of five facilities as previously announced, all of which we expect to be closed by the end of the second quarter of 2023. We have secured sublease agreements for the Taunton and Irvine facilities, which will offset our lease obligations over the remaining term. These closures are expected to generate approximately $11 million improvement in adjusted EBITDA versus our 2022 results. Beyond facility closures, we continue to review overall operating costs and, during the second quarter, we reduced indirect labor by 10%, which we estimate will result in approximately $7 million in annualized cost savings with a benefit of over $4 million in 2023. During 2022 and '23, we were able to increase pricing to address inflationary costs achieving approximately $13 million of year-over-year pricing. The company anticipates making an announcement regarding the CEO transition in the very near future. And now, I will turn the call over to Andrew, who will provide an update on our markets and key growth initiatives.

Thanks, Mike, and good morning, everyone. I'm happy to be joining you on today's call to review our go-to-market strategy, new business wins and updates on current market conditions. Now if you turn to Page 7, I will review some of the new business wins in the first quarter of 2023. We secured new business wins with total estimated sales of nearly $37 million through 2026, which was up 75% compared to the first quarter last year. Peak annual sales for these wins totaled $13.5 million, up 82% compared to the prior year. I'd emphasize that these new business wins are the results of our revitalized team focusing on new business opportunities in attractive market applications where NN's unique value proposition resonates most with potential customers. With the refined approach, we have improved the margins associated with these new business wins by approximately 12 percentage points compared to the prior year. On the right side of this page, you can see the breakdown of annual sales volumes of new business wins by market segment over the next three years. We have taken a focused, selective, and disciplined approach to new business, resulting in a significant portion of our new business in the EV and universal auto segments, which is aligned with our strategy. As we look ahead, we are well positioned for strong growth in the power and electrical space with multiple pursuits we expect will be awarded over the next two quarters. Finally, I would note the efficiency of our sales efforts with a low $2.7 million CapEx investment to support these sales. If you turn to Page 8 of the presentation, we will review an exciting win our team achieved with a global market leader in electric vehicles. This customer is a key player that is expected to produce more than 3 million EVs this year. Not only does this particular win represent $3.5 million in sales at program peak, but we consider this a major breakthrough new business win as it's a new relationship with a global player that presents significant opportunity for additional programs in the future. NN's value contribution to this relationship reflects the heart of what we bring to every customer relationship. Yes, our expertise and experience in electric power steering solutions was a key to winning this initial business, but our responsiveness and speed, including the ability to start up production less than three months after the award, will be critical to growing the relationship over time. This new relationship also highlights a win that checks all of the boxes of what we look for. This represents growth in a strategic market, in this case, electric vehicle. It also highlights high-potential volume production with a market leader that has significant growth potential. This new relationship also leveraged existing assets to generate near-term financial results and significant growth potential over time. Turning to Page 9, I will provide additional detail on some key commercial actions our team has implemented to drive growth. To start, we recognize that to effectively drive new business wins, we have to effectively motivate our sales force. So, we modernized our compensation programs to incentivize and motivate new business growth. We have shifted more compensation to variable components to enable higher total earnings opportunity based on bringing in new business. This 'eat what you kill' approach directly ties the work of our sales team members to their performance, increasing payouts for high performers. We also closely tied these incentives to our strategic priorities, emphasizing a 60% target for electrical and EV hybrid new business wins. We are also expanding our sales team by 20%. With more feet on the street chartered with undiluted focus on selling, we will be better positioned to proactively engage customers, understand problems and needs, and close business for NN. We are focused on attracting new sales talent with specific experience and relationships in the electric power and EV hybrid vehicle markets, improving the depth of our team to drive results. Finally, we are working to enhance market awareness of NN's capabilities, differentiation and value proposition, as well as the differentiated approach of leveraging our multiple process technologies. We are accomplishing this goal by expanding and deepening our participation in the industry associations, forums and trade shows to connect our business development people with key decision makers in our target markets. In addition, we have and will continue to increase the volume of press releases, social media posts, and targeted advertising to enhance awareness of NN. Reaching and most importantly creating value-added connections with existing and prospective customers in our target markets is vital to our growth journey. We have positioned these sales and business development teams to win through tools and training that enable them to drive new business growth. These efforts include a lot of the basics such as a refreshed website, varieties of pitch decks and white papers and, most importantly, effective training for cross-selling opportunities. Now if you turn to Page 10, we have outlined an example of our successful efforts to drive growth by solving problems in the electrical space. One of our customers in the renewable energy space was faced with a compressed timeline for the integration and installation of a large solar project. With our in-house resources to develop a durable stamped electrical grounding assembly that met safety and durability requirements, this customer turned to NN. We were able to bring them the engineering expertise to help finalize the design and optimize for manufacturability. We brought to bear our global manufacturing footprint to support solar projects in multiple countries at scale, and we did this with a speed that allowed the customer to meet their compressed timeline to completion. This win provided NN with multiple growth opportunities. We start with additional potential orders from this customer for future solar projects, leveraging our strength. Perhaps more importantly, this provides us with a foothold in the renewable power industry that can be leveraged with solar developers across the market. On Page 11, we highlight the targeted approach to new business with nearly 80% of our $546 million new business pipeline focused on the electrical, EV hybrid, and universal auto segments in alignment with our long-term strategy. Looking at the pipeline, we do have a reduction in the total active proposals under pursuit. This decrease was the result of several factors, some of which are the result of our strategic actions. We eliminated pursuits that do not align with our strategic growth objectives as well as projects that are capital intensive or providing unattractive cash flow. We also reviewed projects within the pipeline to eliminate potential duplicative proposals with different customers for the same program, providing for more consistent data. The pipeline was also impacted by the closures of Taunton and Irvine facilities. Overall, we feel good about the size of our pipeline, particularly given the greater strategic focus of those opportunities we are going after. On Slide 12, we've highlighted key macro trends in the residential and commercial construction markets. As widely reported, current macroeconomic conditions and increasing interest rates have presented a drag on construction activity. Despite the near-term demand softness in the residential and commercial electrical components, as well as inventory reductions by certain customers, the mid- to long-range outlook remains robust. Industry forecasts project a long recovery and growth in the residential construction, as demographics and new home formations drive demand for housing. Turning to Slide 13, you will find that we have provided a macro automotive market update. In their March executive update, LMC has forecasted global light vehicle production to increase approximately 5% with a positive production outlook in all key regions. While LMC notes a deeper recession in 2023 is not expected, the effects of higher interest rates and lingering inflation will likely result in a drag on global growth in the second half of the year. Long term, we see the continued rapid expansion of hybrid and EV adoption in the industry through the end of the decade eventually comprising a majority of global production. This high growth market is our target and where our entire team is focused on positioning NN to win.

Thank you, Andrew. Now if you turn to page 15, I will review some of the financial highlights for the first quarter. Compared to the prior year, sales decreased 0.8% to $127.1 million, driven primarily by lower volumes and foreign exchange headwinds, partially offset by pricing actions. From a profitability standpoint, net price inflation was approximately $2 million favorable year-over-year. This benefit was offset by unfavorable impacts of approximately $5 million due to lower volume; a reduction of China joint venture income of $1.8 million, driven by lower volume associated with eliminating COVID-19 restrictions and the Chinese New Year; and unfavorable overhead absorption of $1 million. Turning to Slide 16, working capital turns improved in the first quarter to 4.5 turns from 4.3 turns in the previous quarter. We saw our working capital increase by $2.9 million compared to the fourth quarter as a result of normal seasonality, but decreased by $9.9 million from the first quarter of 2022 as we more effectively managed inventory receivables and payables in the current environment. Turning to Slide 17, we have slightly increased CapEx for the first quarter to $5 million from $4.3 million in 2022. As we continue to maintain focus on cash, we will maintain our stance of taking a disciplined approach to CapEx and allocate capital expenditures to higher growth and key end markets that we have previously identified as part of our long-term growth strategy. Please turn to Slide 18. This slide illustrates our free cash flow for the quarter. Free cash flow was a use of $3.7 million in the first quarter of 2023. Our results in the first quarter were positively impacted by $2.5 million from the terminated interest rate swap along with a $1.8 million benefit from equipment sales, including advance payments on some of those sales. The outflow of $3.7 million in the first quarter is compared with an outflow of $9.4 million in the first quarter of 2022, an improvement of $5.7 million. We incurred approximately $2.6 million in cash costs for severance, settlement and facility closures during the quarter. Turning to Slide 19, net debt at the end of the first quarter was $147.7 million versus $146.3 million in the fourth quarter of 2022, an increase of $1.4 million. Our net debt to adjusted EBITDA ratio stood at 3.82x at the end of the first quarter compared to 3.33x at the end of the fourth quarter. We had $43 million of global liquidity, including cash and availability on our revolver as of March 31, 2023. Our ABL was drawn by $1 million and our domestic liquidity was $33 million. We are still evaluating a potential preferred equity raise. The decision will be based on our ability to execute the raise by June 30, which would secure a reduction in our term loan PIK interest and warrant cost of approximately $3 million through Q2 of 2025. We would target a $10 million preferred equity raise, which would improve domestic liquidity and reduce domestic liquidity covenant from $20 million to $15 million. I would like to emphasize that we are not required to complete an equity raise and we would only do so if we conclude the net cost on the incremental capital and liquidity is attractive. With that, I would like to turn it over to Douglas to cover our first quarter segment highlights.

Thank you, Mike, and good morning everyone. We have presented additional information for each of our group, starting with Power Solutions on Page 21. Power Solutions sales decreased 5.7% year-over-year, primarily driven by decreased electrical and general industrial component sales due to lower housing starts. As you can see on the graph, they were down almost 19% year-over-year for the first quarter along with customer inventory reductions. We recognize favorable movements stemming from premium pricing in connection with the closure of our Irvine California facility, which helped improve sales and profit in the first quarter. Profitability increased compared to the prior-year period, driven by favorable impact from the Irvine premium pricing and rationalizing unprofitable business within Taunton facility partially offset by lower volumes. Looking forward, the closures of our Taunton and Irvine facilities continue to proceed on schedule and we expect them to be completed in the second quarter. We expect that new business wins and market dynamics will continue to drive growth through the remainder of 2023. On Page 22, sales in our Mobile Solutions group increased 2.6% versus the prior-year period. The increase was primarily driven by increased pricing, partially offset by reduced volumes through the quarter as well as foreign exchange headwinds due to the stronger dollar. Profitability decreased in Mobile Solutions compared to the first quarter of 2022, driven by performance challenges in our Wellington and Juarez facilities. We are addressing performance issues at each of these facilities, as Mike previously mentioned. We are seeing good progress in our Wellington facility operations, but the Juarez facility is a bit more challenging and will require additional time. Profitability at Juarez is further complicated by the strengthening of the peso relative to the U.S. dollar as our sales are primarily in dollars but labor expenses are generally paid in pesos. Profitability was also adversely impacted by volume reductions through the quarter, including the impact of the China joint venture income due to the Chinese New Year, also known as the Spring Festival, when business was shut down. Due to the relaxation of the COVID-19 restrictions in China, this year the festival involved longer business closures than experienced since the start of the pandemic. Looking ahead, we continue to see positive trends in customer demands and expect stronger sales in the second quarter compared to the first quarter. We should start to recognize some of the incremental cost savings and efficiencies associated with the three facility closures in the second quarter of this year and the right-sizing of indirect labor in our operations. With that, I now turn it back over to Mike.

Thank you, Douglas. Turning to Page 23, we are updating our outlook for 2023, which reflects lower expected volume across end markets driven by market conditions as well as customers resetting inventory levels and taking a more cautious approach to ordering patterns. As a result of these drivers, we are updating our outlook as follows: Net sales in the range of $515 million to $545 million, a reduction of $10 million from our previous range. Adjusted EBITDA in the range of $47 million to $57 million, a reduction of $3 million from our previous range. And free cash flow in the range of $7 million to $17 million, a reduction of $3 million from our previous range. Our adjusted EBITDA and free cash flow outlook reflects the conversion impact of our lower sales volume expectation as well as slower-than-expected improvement in Juarez operation. We implemented a 10% reduction in indirect labor, which will begin to show results in the second quarter. Our free cash flow guidance includes an estimated $7 million in cash outlays for severance settlement and facility closure costs, but does not include the CARES Act tax refund of approximately $11 million due to uncertain timing. I would like to conclude my remarks noting that our team continue to make solid progress to position our company for long-term success by focusing on top-line growth and expansion of our new business pipeline. These efforts are enhanced as we maintain cost discipline in every area of our operations while looking for new opportunities to drive efficiency. And we are focused on effectively managing working capital and capital expenditures to drive improved free cash flow. I will now turn the call back to the operator for questions.

We will now begin the question-and-answer session. Our first question will come from Rob Brown with Lake Street Capital Markets. You may now go ahead.

Good morning.

Good morning, Rob.

On the revised outlook, I guess, could you give us some color, is it mostly in the Power Solutions market or is it sort of evenly split between Power Solutions and Mobile in terms of the lower outlook?

Yes, I think the volume softness we saw particularly in the first quarter was a little bit more weighted towards Power. I think in terms of the operational challenges, obviously, Juarez is within the Mobile Solutions segment. And as we saw slower-than-expected recovery for Juarez profitability as well as some of the volume impacts for the year, we obviously took a pretty significant action in the Q2 with a 10% indirect labor reduction that will benefit both groups pretty evenly starting in Q2 and with full realized savings in Q3 and Q4.

Okay. And then, on the Power Solutions business, how much visibility do you have there? I know you gave some real market statistics. But at this point, what's the visibility for the rest of the year and sort of confidence level in kind of the current outlook?

Yeah, I'll take that one. This is Andrew. Hey, Rob. Yeah, so looking at the Power Solutions business, we have been studying it very carefully, the recent trends and some that have been a little bit further back in assessing that. We're talking to customers regularly about their outlooks and getting their feelings. We baked all of that obviously into our year-end outlook. I think what's going to go on with interest rates going forward will certainly play a role in how the year pans out. So, if we think about our view, I think it's going to be a tough year, but at the same time, we've got a line of sight to still achieve what we're estimating to have for Power Solutions. So, we're watching it carefully, getting a lot of feedback and just making sure that we're removing all roadblocks to keep the volumes going through the business and working with customers. One thing that hasn't impacted us that's going to be an improvement, I would say, is that as the supply chain has healed or gotten a lot better, I'll say over the last several quarters, the number of customers have reduced their inventory levels. And we're starting to see that wean off where they're starting to take about reordering again at the older rate. So that will probably help in terms of completing the year as well.

Great. Thank you. That's very helpful color. And then, my last question is on kind of a new business win with the EV manufacturer. I guess I think you implied one product there. What's the sort of product and what's the opportunity? Are there several other products that could become products you supply them at that point...

Yeah, absolutely. Yeah, I'm glad you asked about it. So the component is part of their electric power steering system. And so, it's a breakthrough. It's an awesome win for us. What that already has represented is now that they've seen what we can do, what our capabilities are, how we do things, how we're ramping up the business, we're already seeing a number of other opportunities from that same customer, right? So, we're in that early stage, proving ourselves out, but based on the size of where this particular customer is, we anticipate this opening. It's a really good market for us and they're a true leader in the space.

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

Our next question will come from Tom Kerr with Zacks Investment Research. You may now go ahead.

Good morning, everyone. I have a few quick questions. I believe most of my questions have been addressed. Can you provide insight into the timing of the slowdown in China? I recall you mentioned in the last earnings call that things were expected to bounce back in January. Did that rebound happen as anticipated, or did it take a turn for the worse? What was happening there during the quarter?

Hey, this is Douglas. I'll take that one. So, of course, we've been in close contact with the team there. And in Q1, it was mostly impacted by an extended holiday for what they call the Spring Festival, which is the Chinese New Year. It was the first time after several years since the COVID pandemic that they were able to travel around and visit family. So, most business shutdown and that was extended, okay? So, that impacted Q1. Going forward, we see an improvement compared to Q1. But of course, we're monitoring the market closely, the overall Chinese economy and how the overall market keeps going there.

All right. Okay. All right, thanks. Another area, can you refresh my memory on the challenges at Juarez? Is that just a labor issue? Or is there a process stuff involved? Like, I don't recall the details on that.

And I will take that one, too. So first of all, since I took this role in early January this year, I've been going to Juarez is myself on an often basis there, in close contact with the leadership and the team there. I would highlight three main factors affecting the Juarez. First one is regarding labor, the high labor turnover that we have there in the region. It's kind of a regional thing there that is affecting us because we need high-skilled labor. We're not only an assembly type of company. So that's number one. Number two is associated with process capabilities that we have with new business launches. So we're facing some lower efficiencies regarding this capability. And the third one, some struggles in efficiencies because of the machine's condition in overall efficiency in some other areas. We have a very clear assessment of what's going on. We understand. We have a plan, okay? It's a complex issue, of course. Not everything is under our control. Some of the solutions and the plans that we have are linked to conversations we are having with our customers there. So that's how we're going to address it.

All right, great. Thanks for the color on that. One quick one for Mike. I didn't see any comment on capital expenditure outlook for this year. Is it still in the $17 million range?

Yes, I believe the initial forecast we provided was for net capital expenditures between $16 million and $18 million, which accounts for approximately $2.5 million in proceeds from the sale of equipment in Taunton and Irvine. I would say we still anticipate being within that range.

All right, great. All right, that's all I have for now. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Mike Felcher for any closing remarks.

Thank you. I'd like to thank everyone for joining the call today. Certainly, look forward to speaking with many of you on follow-up calls later in the day. Thank you.

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