Good morning, and welcome to the NN Inc. Third Quarter 2024 Earnings 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 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. 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 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 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 ahead. If you wouldn't mind, please turn to Page 4 in our earnings presentation. I want to make a few overall comments here, and then we have some information to share with you. We received some feedback after the last call to provide a little bit of extra information and we've attempted to do that. You may be reading along with some of the auto industry public filers such as Phinia, Ford, Stellantis, and others. There's a little bit of slowness in North America, not a lot, just a few percent, but enough for us to initiate another plant closure and a new round of cost reductions in that business. Our goal is for our North American mobile business to achieve a 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 reach our goal. At this point, the business hasn't made money, so it will be a significant improvement for us. We are also successfully transitioning the legacy auto business from North America, focusing on balancing our production between North America and China across various powertrain platforms, and we're on track. We are already showing record sales and profits in China, alongside new awards as well, with capacity up 19% compared to the prior year. The remainder of the year looks promising, and we expect to continue breaking records. We previously mentioned that we need to add a significant amount of new equipment to onboard both increased production levels as well as new awards that we've achieved with our top Tier 1 customers, and that is progressing well. We're working within our capital structure to grow as swiftly as we can with the cash flow we have while also reducing North American costs and footprint. We are excited and content with our current status in transitioning this business. The second major point is that our new business win program is performing exceptionally. We have surpassed $100 million in new wins over the past 21 months. We just reviewed October before the call, and it is also showing promise. This program is achieving our goals for 2025 budgeting alongside our year-over-year growth, which will mark a pivotal moment for our company, considering our historical performance. We are currently aligning our numbers for 2025 with our analysts' projections on performance metrics, including EBITDA and cash flow. Regarding refinancing, we have been actively working in the market to refinance our ABL and term loan, and we remain dedicated to making this happen. We anticipate that this refinancing process will result in expanded operational and financial flexibility. However, it is still a work in progress, and we are determining all asset values and related evaluations as we move forward. So that provides a brief overview. I'd like to turn to Page 5 to provide additional detail on our transformation plan here at our company. We continue to make solid progress and our plan consists of five major elements. We've been utilizing the same format for about a year, which includes new leadership, as Tim French and I have been the architects of this initiative. We self-assessed our progress and believe we are approximately 60% along on leadership. We are still enhancing our teams in the medical market, electrical goods market, and stamping products while upgrading several plant teams that need improvement. We think we are about 60% there on leadership. We're making significant strides in fixing our unprofitable plants, referred to as the 'Group of Seven' by Tim. Last year, these plants lost $8.4 million in EBITDA through three quarters; we have managed to reduce that to $0.8 million this year, meeting Tim's goal to reach breakeven this year. It is a substantial improvement. We also mentioned that we are halfway through our margin expansion efforts, with plans to enhance our gross profit margins across each business. This progress is reflected in our actual year-to-date numbers. Moreover, we are making considerable progress in debt reduction; following the sale of Lubbock in July, we've utilized all net proceeds to pay down our debt. This achievement has already provided us with operational flexibility to act faster while we also consolidate another plant. The final element of fixing the sales engine and growing the company indicates that our declining and rationalized legacy sales will be fully offset by our new wins, which we are not done pursuing. We're on track for year-over-year sales growth to begin in '25. Our market update is overall healthy and constructive for our objectives. The passenger vehicles market is experiencing some slowness in North America but strength in China, which positions us favorably since our Chinese operations are among our most profitable, while our North American operations rank as less profitable. Our general industrial market is also growing, which aligns with our power business. Stamped products, powered grid, and electricity control remain strong as well. Although housing construction has weakened, the smart grid market continues to thrive, benefiting our operations. In summary, we expect to maintain our course in growth while seeing favorable dynamics in our markets.

Thank you, Harold, and good morning everybody. Today, I'll be presenting information on both a GAAP and a pro forma basis to provide additional transparency in our operating results. Given the many changes in our business related to the ongoing transformation, including the sale of Lubbock and our movement away from certain unprofitable business aspects, we hope this presentation reflects how we are performing and evolving NN over time. Starting with Slide 9, we detail our financial results for the third quarter. This slide showcases our as-reported GAAP numbers alongside adjusted figures. The middle section of the adjustments reflects the sale of Lubbock which contributed $5.6 million in revenue in the prior year but no revenue in the current third quarter. Secondly, we are rationalizing about $2.4 million of unprofitable business. These adjustments illustrate our transformation process. On a GAAP basis, net sales for the quarter were $113.6 million, down $10.8 million compared to last year's third quarter. On a pro forma basis, accounting for the previous adjustments, net sales were down only 0.5% or about $600,000. This performance reflected an unfavorable mix in our Power Solutions business, which we expect to recover in the fourth quarter, minimizing concerns about the mix from the third quarter. The adverse mix was partially offset by stronger organic sales growth in Power Solutions, as well as robust performance from our China-based operations, which experienced a considerable 19% year-on-year increase in the Mobile Solutions segment. Operating loss for the third quarter reached $3.8 million, up $1.1 million from the third quarter a year prior. Adjusted operating income was $1.3 million compared to $3.6 million in the prior year, impacted partially by the non-cash effect of reducing our inventory. Our adjusted EBITDA results amounted to $11.6 million, decreasing from $14.6 million year-on-year. On a pro forma basis, adjusted EBITDA declined slightly by $1.3 million primarily due to the unfavorable Power Solutions mix, which has now started to improve. Accelerating progress in optimizing our sales mix through our transformation efforts, we anticipate capturing these benefits as we continue into fiscal 2025, which Harold previously mentioned will support our long-term margin improvement initiatives. We are proceeding with our cost-cutting strategies and addressing underperforming areas of the business. Next, turning to Slide 10, we will discuss our segment results, beginning with our Power Solutions segment where our chief offerings include stamped products. Revenue was reported at $42.9 million compared to $45.5 million in the prior year's period. However, a pro forma basis excluding the sale of Lubbock showed revenue increased by $3 million or 7.5%. This growth resulted from strong demand from a key electrical customer as we work actively to alleviate the backlog caused by extended supply chain interruptions, alongside higher pricing adjustments based on precious metals. New business wins reached $3.4 million in Q3, and as Harold noted, we experienced great success continuing through October. Our segment pipeline has now expanded to roughly $230 million as we add more sales specialists for the electrical and medical markets – areas we remain enthusiastic about. While adjusted EBITDA margins currently face some near-term headwinds due to mix, we have seen a 200 basis point improvement in our margin performance this year. Our focus remains on capacity expansion with new advanced equipment and enhancing our hit rates in key product categories. Now, turning to our Mobile Solutions segment on Slide 11, which supports the machinery part of our products business. Our Mobile Solutions segment continues to lead our successes through the new business wins program, recently achieving over $50 million of new business awards in the past year, with $11.5 million captured during this year's third quarter. We are noticing momentum driven by new awards involving NN's best quality products. The turnaround initiatives for some of our previously underperforming plants have created new business opportunities, leading to consistent demand growth. In China, where we produce many of NN's best products, we observed a remarkable 19% year-on-year increase in sales, driven by key global Tier 1 customers. For the current quarter, sales in Mobile Solutions stood at $70.7 million, slightly declining from $74.4 million in the third quarter of the previous year. These results were influenced by adverse foreign exchange effects and certain customer pricing reductions. Despite lower volumes in North America impacting margins, our Group of Seven initiatives aimed at improving performance remain on track to generate positive adjusted EBITDA for the group on a consolidated basis, with a goal of reaching a minimum 10% adjusted EBITDA margin for the North American Mobile Solutions business. As we look ahead, we maintain our focus on essential growth areas such as steering, braking, vehicle control components, and high-efficiency fuel injection systems. Harold has highlighted our tremendous success in China, and our efforts in these areas will drive future growth and profitability. Please refer to Slide 12, which delves into our actions to delever NN and improve our capital structure. As noted in Q3 2024, we continue to show progress in our leverage position, invigorated by the proceeds from our divestiture of the non-core plastics plant in Lubbock, Texas. Reflecting on our performance over the past year, we have seen leverage markedly decline from 3.9 times in Q2 of 2023, to just under three times in Q3 of 2024. This decrease is due in part to improved adjusted EBITDA contributions, paired with the strategic divestitures aimed at streamlining operations and reducing our debt load. As we look forward, our refinancing strategy will further enhance financial flexibility, broadening the capacity to support our growth initiatives. As communicated in the past, our refinancing process is ongoing, and we're anticipating small improvements to our current debt structure. This process plays a crucial role in optimizing our long-term capital structure and supporting our overall transformation strategy. However, we acknowledge that broader macroeconomic factors, such as elevated interest rates in the U.S. and challenging elements in the global economy, underscore a cautious approach to refinancing. Therefore, we're not rushing; we want to ensure we align the right refinancing deal and partner to support NN's transformation. Lastly, as we turn to Slide 13, I will briefly outline our outlook for 2024. We maintain our outlook for 2024, with projections subject to market demand fluctuations, particularly within the North American auto sector. We anticipate continuing to win new business at a robust pace while focusing on power, medical, and electrical markets, as previously mentioned. NN is committed to making strategic cash flow investments to support these new business programs, with our cost initiatives and footprint rationalizations positively impacting our underlying results. With that, I will turn the call back over to the operator for questions. Thank you.

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, it's generally due to mix, as I outlined in the call. Power Solutions had a small mix issue, which has now corrected itself. So we don't anticipate that mix issue affecting us going forward.

Okay. Great on that. And then when you're looking at, I was going through the Q this morning, you kind of break out 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, would you like to take that one?

Yes, sure. So, yes, we outline our markets on Slide 6, and the general industrial market where we sell a lot into kind of the grid and other electrical component markets is very strong. There's a lot of efforts towards rebuilds and updates in that market. So, we're very pleased. This market is showing about a 3% growth overall, and this trend is expected to continue as there are structural components underlying some of our demand. Additionally, we have key customers in the Power Solutions business assisting in driving this demand. I was just visiting the site this past week, and it's a robust business with dedicated employees that have been there for a long time. The customers, the products, there’s a lot of stickiness, and the demand remains consistent. It's not double-digit growth, but it is strong growth.

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

Yes, we have seen progress. Tim French is on the line as well. We have received our first dedicated capacity. Tim, would you like to speak about that?

Sure, sure. As Harold mentioned, we ordered two dedicated capacity lines, which we discussed previously regarding the multi-access lights. The first line has arrived and will be fully commissioned by mid-November, thereafter becoming operational. The second line will be arriving within the next two weeks, and will be commissioned by the end of the month. Therefore, we will have that capacity operational before the year's end.

So we have new business ready to run on that equipment. As the machines come online, we will initiate production one in November, one in December, so we expect to have our first two dedicated medical machines operational before the year ends.

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

No, that's solely gain on sale from Lubbock.

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.

I just wanted to dive in a little bit to your goal for the 10% adjusted EBITDA margin. I think you've made good progress getting to breakeven in the troubled plants. Could you provide a sense of how your current efforts to reduce costs can get you there, and what needs to happen in terms of the timeline you're considering to achieve that goal?

Yes. Tim French leads our initiatives there, and as we reviewed this morning, Tim, would you like to provide an overview?

Yes, we are on track to achieve the 10% EBITDA in North American Mobile Solutions. We are rolling up early preliminary numbers for 2025 on how we are getting there. I have discussed this previously; it's a series of minor projects that collectively yield significant improvements, particularly regarding the Group of Seven. While we've shed unprofitable business, a large part of our success comes from increasing efficiencies and throughput in our existing lines and equipment. We believe we are making great strides, while acknowledging that we are only about 40% of the way toward our overall goal of profitability for the Group of Seven.

I would like to add that two key components are plant closures. One closure is announced and underway, while the other closure is yet to be disclosed. We are currently communicating with affected customers, and we'll likely announce it in the first quarter. They have consented to take our remaining inventory, and are preparing to transition to a new supplier. Additionally, we've noted our rationalization efforts, which had a significant impact on revenue shown on Page 9: we rationalized $2.4 million of revenue, while our EBITDA improved by almost $1 million. By eliminating unfixable business, we are rationalizing, closing several plants, and targeted SG&A reductions. Our first estimates show we may achieve over 10% into next year. Hence, we might reset our goals as needed. We are tracking to meet our initial targets, which would culminate in a pivotal event for us. Our focus is also on achieving a positive cash flow for the foreseeable future, and we are on track.

Great job with all the hard work. And as a follow-up, could you discuss the new growth markets? While you've outlined various markets you're targeting, specifically in the power grid area, are there notable growth dynamics there where you could capture more market share, or is the growth more incremental?

We have a portfolio of opportunities within the power grid area. Our largest opportunity is located there, but we also have numerous smaller opportunities. A significant potential job might yield around $20 million annually. Our customer base includes notable companies like Siemens, Schneider, Eaton, and ABB. The average size opportunity this year is around $400,000 annually. These opportunities come with longer programs and higher program values, but peak annual sales are pegged at around 400. We're enthusiastic about our progress and efficacy, and we’ve recently bolstered our team for better industry collaboration, unlocking more opportunities. Our pipeline has increased to $230 million.

Thank you, and congratulations on your progress.

Thank you.

The next question comes from Tom Kerr at Zacks Investment Research.

Good morning, guys.

Good morning.

A couple quick ones. Regarding all these new business wins slated for 2024, how are these contracts materially different from what's been done over the past three to five years? Also, relatedly, is the timeline from contract signing to revenue generation still around 24 months?

To clarify, the new business we are winning is generally distinct from the business going live or the operations we are rationalizing. The most significant change is our conscious decision to avoid takeover business. We are not merely attempting to undercut existing business by aggressive pricing. Instead, we are engaging in new product innovations alongside our customers. As a result, the awards we are garnering are for new products requiring new machine features, showcasing the innovation shift. Typically, we are phasing out older legacy business, which isn't evolving and is thus falling into a steady state. Our renewed focus lies in new business offers, providing initial value and pricing due to the novelty involved. Our initial margin feedback for the new business indicates above 20%, compared with around 11% for older contracts. This is a significant increase in gross profit, and we remain steadfast in pursuing this trend.

Thanks. On the refinancing of the ABL and term loan, does that, or could that include a preferred stock refinance or buyout? Essentially, is there a plan to address the preferred stock in the second step after refinancing the term loan?

Yes, that’s correct.

Thanks, Harold. At the moment, our priority is on gaining additional flexibility to bolster growth initiatives. This is our key focus right now. The preferred stock is indeed part of our optimization strategy eventually, although our initial goal is to establish the ABL and term loan arrangement that provides us the capability and growth prospects. Addressing the preferred stock could occur later on, post-term loan refinances.

Got it. My final question, regarding China, I see strong growth, but globally we are noticing some slowdown indicators – consumer slowdown, car sales declining. How do you position yourself for growth in the context of a slowing market?

The China market is witnessing growth, supported by government incentives and mandates promoting vehicle procurement. Earlier this year, China surpassed Japan as the largest global vehicle exporter. Their focus on expanding export markets places significant pressure on suppliers, like us, attempting to navigate through the market keeping pace. We are nearing capacity, producing both vehicles for local sales and those exported from China. While the high-end vehicle sector may experience pressures, the overall global vehicle production remains flat year-on-year and is not in decline. Trends within powertrains show a reduction in internal combustion engine vehicles coupled with growth in electric and hybrid variations. We can discuss powertrains in detail, but overall, vehicle manufacturing numbers are slightly rising, and China remains a key player which benefits companies like us.

Great. I appreciate your insights. That's all from me. 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 joining us. We appreciate your time, and we are excited about our forward outlook. We look forward to discussing our fourth quarter and 2025 goals during our next call. Thank you.

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