Good morning and welcome to the NN, Inc. Third Quarter 2023 Earnings Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note this event is being recorded. I would now like to turn the conference over to Alec Steinberg. Please go ahead.

Thank you, Chad. Good morning, everyone. Thank you for joining us. I'm Alec Steinberg, Investor Relations contact for NN, Inc. I'd like to thank you for attending today's business update. Last evening, we issued a press release announcing our financial results for the third quarter ended September 30, 2023, 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 the Alpha IR Group at [email protected]. Our presenters on the call this morning will be Harold Bevis, President and Chief Executive Officer, and Mike Felcher, Senior Vice President and Chief Financial Officer. 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 in the Risk Factors section in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and when filed, the company's quarterly report on Form 10-Q for the 3 months ended September 30, 2023. The same language applies to comments made on today's conference call, including the Q&A session as well as the live webcast. Our presentation today will contain forward-looking statements regarding sales, margins, inflation, supply chain constraints, foreign exchange rates, cash flow, tax rates, acquisitions, synergies, cash and cost savings, future operating results, the performance of our worldwide markets, and the impact of the coronavirus pandemic and the Russian-Ukrainian conflict on the company's financial condition, among 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. A reconciliation of such non-GAAP measures is contained in the table in the final section of the press release and the supplemental presentation. Please turn to Slide 3, and I'll turn the call over to our CEO, Harold Bevis.

Thank you, Alec, and good morning, everyone. I'd like to start off by saying that our enhanced management team made excellent progress against our transformation strategy that we presented and spoke with you about last quarter, and the work is clear and strong in our operating results this period. We also added two highly experienced professionals in Tim French, our new COO, and David Harrison, our new Chief of Procurement, to further strengthen our leadership team. We are happy to have them on board, and I personally had the opportunity to work with both of them in the past, as we successfully executed prior business transformations. I'm very confident in their ability to help support NN's transformation efforts, and I firmly believe that we are well-aligned strategically to achieve our goals and deliver improved returns for NN shareholders and stakeholders. Our results in the period are highlighted by our expanded profitability and cash flow performance, with 23% growth in adjusted EBITDA year-over-year and strong free cash flow generation of $11.3 million. Sales for the quarter were $124.4 million, which we translated into $14.5 million of adjusted EBITDA. On the commercial front, we've accelerated our focus on new business and have won $37 million year-to-date of new awards, which marks solid momentum and a significant step-up from where we were just three months ago. We're focused on expanding in both legacy businesses and new markets where it makes sense for us to participate and compete based on our capabilities and ability to create value. We have a new focused effort to increase the quality and quantity of prospecting and generating leads. We're pleased to report $11.3 million of positive free cash flow in the quarter. We're free cash flow positive across the trailing 12-month period, and we're actually running ahead of our previously stated free cash flow targets, which Mike will discuss later in the call. We're proud of our cash performance in the quarter as this became an immediate focus as we established our transformation plans. This focus on cash flows has become an organizational mantra, and we feel we can continue this growth over the long term as we've been particularly proactive with our global procurement led by David Harrison, and we've been more selective and thoughtful with inventory management. Along with these actions, we've been aggressive with other transformational initiatives for the long-term with an emphasis on value improvement. Globally, we've refocused our growth strategy and recently announced our re-entry into the medical market, which we see as a high-profile near-term opportunity. We've also implemented a total cost productivity program across our operations with the goal of offsetting the company's expected inflation and achieving net cost reduction. All of our global facilities are participating in the program, including more than 100 individual projects with project tracking and monitoring at the plant level. We believe these initiatives will help us win new business globally and will support many of our cost management goals to deliver improved profitability, margin expansion, and improve our cost competitiveness. Before turning to the next slide, I would like to briefly touch on the UAW strike. As you know, we've seen a few positive developments with recent bargaining agreements with all three automakers, and now the union is moving forward with ratification processes. To stay ahead of this situation, we've taken proactive actions to reduce our risk, but we see this as a small timing issue. We may see a few million of work slipped from the fourth quarter this year into the first quarter of next year. But again, we believe we're prepared for multiple scenarios. Most importantly, we don't see a situation today where any work is lost. Please turn to Slide 4. On the last call, we highlighted our transformation plan with a focus on increasing our organizational commitment to accelerating sales growth, profit and driving free cash flow. I'm proud to say we have already made early but meaningful progress on all three of our commitments and have been steadily progressing along with our five goals. First, the team. We are committed to strengthening our team and have done so with the additions of Tim and David, as I mentioned previously. We have the right people in place within our respective divisions to lead our transformation efforts. We're committed to winning short-term and long-term and will modify our team as we go along and assess our performance. Our second priority is focused on exiting unprofitable work, specifically a few legacy contracts that deliver negative value. This process is underway, and we'll continue to see incremental success as we exit those commitments in a prudent manner. We also have pinpointed seven manufacturing facilities that need improving. Let me be clear that this is about improving performance and improving the quality of the work we take on, and we're taking aggressive actions to improve performance. As previously stated, we see a path to improving our profitability by greater than $10 million on an annual basis following our work, but we've only just begun. Our third goal is bringing more organizational rigor to costs. Cost reduction and optimization have been a priority from the beginning, and we have already seen some early successes with our initiatives, specifically in procurement. We've eliminated numerous other non-value-added costs across the organization and streamlined where appropriate. As I noted earlier, we recently launched a new total cost productivity program, which we're rolling out across our global footprint. We have a lot more work to do here and a culture we need to continue to shape, but we've made great strides in five short months already. Our cost-cutting efforts are also in line with our fourth goal of generating positive free cash flow. We're currently cash flow positive on the trailing 12 months, and we have a global culture that's now more intently focused on driving a more profitable business for the future. Our fifth goal is focused on accelerating our new business wins. We've been working with our sales team to get more aggressive in their pursuits, and we've managed to create more wins by leveraging our existing capabilities, almost doubling our new business win sequentially. We feel there is significant room for improvement as we enter new markets, but we're also focused on utilizing our open capacity in existing markets to expand in areas where we already have a presence and where the market understands the value we bring. To summarize, we've only had a few months to both develop and start to execute our transformation strategy. As you can see, we've made very solid progress against each objective in the quarter with significant opportunity to continue enhancing the business incrementally as we move forward. As depicted in the graph, we feel we're only partially done with the transformation and we're looking forward to progressing further along all these initiatives before we talk again in early 2024.

Thank you, Harold, and good morning, everyone. I'll start on Slide 8. Net sales for the quarter of $124.4 million was slightly down compared to the prior year period. While we captured an additional $6 million of price versus last year, this benefit was more than offset by the impact of lower volume and to a lesser extent by foreign currency. Also, the current year result includes a favorable customer settlement of $1.1 million. From a profitability standpoint, our operating loss of $2.7 million was greater compared to the $2.1 million operating loss in last year's third quarter. That said, adjusted operating income for the third quarter was $3.6 million compared to adjusted operating income of $2.5 million from the prior year, an increase of $1.1 million. As Harold highlighted, adjusted EBITDA of $14.5 million was significantly above last year's $11.8 million. We are seeing the impacts of cost reductions from facility closures and headcount reductions flow through to our adjusted EBITDA, totaling approximately $4 million of benefit in the quarter versus the prior year. As we progress further through the year, we expect to continue to benefit from cost discipline as we aggressively address the underperforming areas of the business, and we continue to expect roughly $10 million in annual adjusted EBITDA improvement once all our actions are completed.

The vehicle outlook, you probably know them very well. The commercial vehicle outlook is for slightly less heavy-duty trucks, but stable medium-duty kind of work trucks. On the passenger vehicle side, it's going to be heavily dependent on rates, but we adopt third-party outlooks on vehicles, which is a steady outlook for us. Overall, globally, it varies by market; in China, thankfully, we're tethered to the electric vehicle government mandates that are underway. And so we're benefiting from that, both in new business and existing business. In Europe, we have a smaller business and it's steady. In Brazil, we have a nice business there and several big OEMs that we're partnered with; the product, the vehicle platforms we're on are growth platforms. In North America, we support the market evolution. We're not placing a bet on the type of vehicle powertrain. So we're balancing our portfolio between combustion engine, hybrid, and electric, so that no matter the end customer choice, we have an ability to win there. Our focus on new business wins performance has remained strong in China, where we are seeing growth as we enter into more non-fuel applications on electric platforms. We also anticipate continued operational improvement.

I guess first question is kind of on the operating kind of improvements. You said you're in the early innings of that. What's sort of the timing of getting through those? Is that a two-year period here or just a sense of kind of the view on what's remaining here?

There are a couple of initiatives in progress. We have several plants that are facing challenges, collectively losing over $10 million as indicated. Additionally, we are implementing a total cost productivity program that affects all plants, even those that are profitable. This initiative involves over 100 projects, and every plant is involved. We have set annual goals for the seven plants that are currently unprofitable, with a strategy aimed at addressing this issue by 2024. While we are not ready to share specific figures related to these initiatives, we have solid plans in place and will provide more details about 2024 when the time is right.

On the transformation plan in terms of the seven plants that are losing $10 million just back to that. Would that be just operational improvement or would that include shutdowns possibly or everything?

We're not going to have to shut down. It's mainly the result of bad contracts. So I saw this movie before at my last company of not correcting customer contracts going through COVID and the disruptions that happened in supply chains. And that's number one. So it's pricing and cost. We don't foresee plant closures right now, not against it, but don't foresee it. So for us, we believe that we can fix all seven plants right where they sit today. Like everything, some are harder than others. We have one plant that really is a hard one. We're still going through. Tim French, our Chief Operating Officer, is very focused on this with the teams. But I think that our footprint is pretty good. I like it. And so we like to fix it where it is and fill it up with new business. So our growth program is tethered to the plants where they sit, and we're quoting the capacity where it is. So we have a base case to fix every plant right where it is.

I had one quick question on the unprofitable or very low profitable contracts. Could you talk about how many of those there are and what sort of duration there is? I am harkening back Harold to your previous situation where some of those truck contracts lasted for a while before you could get out of them. So I would love to get some color around what kind of duration we're looking at?

The contracts have notification periods, and while I'm not sure of the exact number of customers involved, I estimate it's between 10 and 20. My predecessor did inform some of the larger customers before I came on board, so the notification period has started. As I mentioned earlier, we are actively working on all of these matters, and our goal is to achieve significant improvement during 2024. I don't think any contract will extend into 2025, but we need to be cautious since many of these situations involve customers where we profit in one area and incur losses in another, requiring us to negotiate the overall deal. We have a base plan in place that we are managing, which will lead to considerable improvement in our current run rate.

Two quick questions. What's the economic assumptions you're making for the next 12 to 18 months, just for the general economy?

The vehicle outlook, you probably know them very well. The commercial vehicle outlook is for slightly less heavy-duty trucks, but stable medium-duty kind of work trucks. On the passenger vehicle side, it's going to be heavily dependent on rates, but we adopt third-party outlooks on vehicles, which is a steady outlook for us. Overall, globally, it varies by market in China. Thankfully, we're tethered to the electric vehicle government mandates that are underway. And so we're benefiting from that both in new business and existing business. In Europe, we have a smaller business and it's steady. And in Brazil, we have a nice business there and several big OEs that we're partnered with the product, the vehicle platforms we're on our growth platforms. In North America is where our support is as a company, where we're going with the market evolution. We're not placing a bet on the type of vehicle powertrain. So we're balancing our portfolio between combustion engine, hybrid, and electric, so that no matter the end customer choice, we have an ability to win there.

Thank you. We will now start the question-and-answer session. The first question will come from Rob Brown from Lake Street Capital Markets.

Thank you to the investors on the phone, and thank you for being patient with NN and investing in our company. We very much believe in the words that we spoke on behalf of the team today, and we look forward to delivering against our plans and exceeding your expectations. With that, we'll conclude the call for today, Chad.

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