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Edited Transcript of NNBR earnings conference call or presentation 8-May-20 1:00pm GMT

Q1 2020 NN Inc Earnings Call

JOHNSON CITY May 9, 2020 (Thomson StreetEvents) -- Edited Transcript of NN Inc earnings conference call or presentation Friday, May 8, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark F. Schuermann

NN, Inc. - VP, Treasurer and IR

* Thomas D. DeByle

NN, Inc. - Senior VP & CFO

* Warren A. Veltman

NN, Inc. - President, CEO & Director

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Conference Call Participants

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* Lee M. Jagoda

CJS Securities, Inc. - Director

* Robert Duncan Brown

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Robert Stephen Barger

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Young Kwon

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Presentation

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Operator [1]

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Good day, and welcome to the NN, Inc. First Quarter 2020 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Mark Schuermann. Please go ahead.

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Mark F. Schuermann, NN, Inc. - VP, Treasurer and IR [2]

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Thank you, operator. Good morning, everyone, and thanks for joining us. I'm Mark Schuermann, Vice President, Treasurer and Investor Relations. I'd like to welcome you to NN's First Quarter 2020 Earnings Conference Call.

Our presenters this morning will be President and Chief Executive Officer, Warren Veltman; and Tom DeByle, Senior Vice President and Chief Financial Officer.

If anyone needs a copy of the press release or the supplemental presentation, please contact Abernathy MacGregor at (212) 371-5999.

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, 2019, and when filed, the company's quarterly report on Form 10-Q for the 3 months ended March 31, 2020. 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, foreign exchange rates, cash flow, tax rate, acquisitions, synergies, cash and cost savings, future operating results, performance of our worldwide markets, the impacts of the coronavirus pandemic 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 the company's control.

Presentation will also include certain non-GAAP measures as defined by SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation.

Warren and Tom will provide a business update and review our results, and then we will open up the line for questions.

At this time, I will turn the call over to Warren Veltman, President and CEO.

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Warren A. Veltman, NN, Inc. - President, CEO & Director [3]

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Thanks, Mark, and good morning, everyone. As everyone is aware, there has been substantial changes in the world since our last conference call 2 months ago. At that time, the coronavirus threat had not significantly impacted our businesses outside of China, but today, all of our operating segments and geographies have been adversely impacted by the COVID-19 pandemic.

I'm proud to say that NN's employees have risen to meet one of the greatest challenges of our generation. Our employees have adapted to numerous workplace challenges -- changes and required to combat the spread of the coronavirus and have maintained a safe working environment for all. As a team, they continue to meet our customers' volume requirements while adhering to the high-quality standard that is the trademark of all NN facilities. So before I start my prepared remarks on the quarter, I want to express my sincere thanks for their collective efforts over the last 3 months. Thank you.

We'll start with an overview of the first quarter on Page 4. Given this economic uncertainty caused by COVID-19, we took immediate action to react to what we viewed would be a threat to the health and safety of our employees and a substantial and potentially prolonged reduction in our sales volumes. Our plan is focused in 4 major areas: one, keep our employees safe; two, meet our customer requirements; three, flex variable costs and reduce fixed costs; and four, fortify our liquidity.

From a cost containment standpoint, our operating groups are focused on reducing variable costs commensurate with our sales volume reductions. These costs would primarily include material and perishable tooling, direct labor and outsource-related costs. Unfortunately, to accomplish this objective, we have furloughed both direct and indirect employees where customer volumes have been dramatically reduced. We have also taken action to reduce some fixed manufacturing and SG&A expenses. I will review a summary of those actions later in the presentation.

Fortifying our liquidity is of supreme importance. To that end and prior to the end of the first quarter, we drew down $60 million under our revolving credit facility, and we held $79.2 million in cash at March 31, 2020, including $57.2 million in the United States. We will also review other actions we are taking to retain as much liquidity as possible during the balance of 2020 later in the presentation.

Moving on to financial performance in the first quarter. Our sales were $199 million for the quarter, down $13.5 million or 6.3% from the prior year after consideration of foreign exchange differences. Our Life Sciences group reported sales of $84 million, down $2 million or 2.3% from a year ago. This decrease is a result of reduced customer demand within the orthopedic end market driven by the timing of product launches and the impact of the COVID-19 pandemic.

Mobile Solutions sales were $69.9 million, a year-over-year reduction of $8.2 million, primarily due to lower demand within the global automotive markets resulting from the COVID-19 pandemic, especially during March.

Our Power Solutions group reported sales of $46.4 million in comparison to sales of $49.7 million a year ago.

Our reported EBITDA, excluding the goodwill impairment for Q1, was $16.2 million and adjusted EBITDA was $30.4 million. Adjusted EBITDA was slightly down from the first quarter a year ago due primarily to the year-over-year decline in sales, offset by fixed cost and SG&A reductions.

Our Life Sciences group reported EBITDA, excluding goodwill, of $17.8 million, while Mobile Solutions and Power Solutions each reported $6.2 million for the quarter.

The first quarter operating loss of $245 million is primarily due to the write-off of $239.7 million of goodwill during the quarter. This action resulted in a write-off of 100% of the Power Solutions goodwill and $146.8 million of goodwill associated with our Life Sciences group. This write-off also adversely impacted our reported EPS as we reported a loss of $5.96 per share versus a loss of $0.47 per share a year ago. Tom will discuss the accounting rationale associated with the goodwill impairment later in the presentation.

Our free cash flow for the first quarter was a use of $1 million, an improvement of $15.7 million from the first quarter a year ago. As we discussed last quarter, we expected an $8 million benefit in the first quarter due to having maintained our trade payables in a better aged position at December 31, 2019, versus December of 2018. The remaining improvement is due to cost reductions we have implemented, lower capital expenditures and improved working capital management.

Lastly, we previously announced a strategic review where the company will evaluate a broad range of operational, financial and strategic options with the goal of reducing leverage and enhancing shareholder value. This process is ongoing, and it is clear to us that despite the current economic environment, there continues to be a substantial number of potential buyers for high-quality assets and businesses.

As we have said before, we have a great company and really good businesses. And moreover, our organizational structure allows for good flexibility as we continue our strategic review and look to enhance shareholder value. This is the extent of our disclosure and comments regarding this process. As always, we appreciate your understanding and patience as we continue to pursue alternatives associated with this important initiative.

Circling back to our overall COVID-19 plan, Page 5 summarizes some of the action regarding maintaining a safe work environment for our employees. We have taken measures to enhance employee communication and education surrounding the coronavirus and employee-driven preventative actions. We have also coordinated a standard response protocol with local health officials based on CDC recommendations and are conducting daily temperature screening of on-site personnel and visitors. We're issuing appropriate personal protective equipment and performing frequent and responsive workplace cleaning and disinfection.

On Page 6, we have presented a summary of our efforts to further reduce costs and improve liquidity. All of these actions are in addition to our previously announced goal of improving cash flow by $32 million annually. That goal has been achieved.

Given the uncertainty regarding the COVID crisis, we feel that immediate action was required to reduce additional costs and preserve our liquidity. We have already implemented cost reductions that include temporary sale reductions for all executive management team members of 20% to 25% and temporary reductions for other salary personnel of 5% to 15%. Other significant cost reductions include reductions in employee benefits, including the suspension of the 401(k) matching employee and gainsharing programs, suspension of noncritical travel and further streamlining of our indirect and SG&A labor costs. These new cost reductions exceed $20 million annually.

As it relates to the liquidity enhancement measures, we have reduced our capital expenditure expectation to below $35 million with an extreme bias towards authorizing only maintenance CapEx items going forward. We also expect to benefit from certain provisions under the CARES Act. The ability to increase depreciation and interest expense deductions in 2018 and '19, along with new carryback provisions will allow us to carry back 2018/'19 losses back to 2017 to recover taxes paid in those years. In addition, we will be deferring the employer portion of FICA tax until 2020 and '22, including the cost actions we have or in the process of implementing actions that should provide over $45 million in cash savings from our pre-COVID business plan.

Turning to Slide 7, which details our first quarter by segment. On a consolidated basis, total revenue decreased 6.3% versus the prior year due primarily to issues associated with the coronavirus pandemic. Our China operations for Life Sciences and Mobile Solutions were impacted throughout most of the quarter, and the Mobile Solutions operations in Europe and North America were adversely impacted in the latter part of the first quarter.

Now I'd like to turn it over to Tom DeByle so Tom can provide a more in-depth review of our financial performance for the quarter. Tom?

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Thomas D. DeByle, NN, Inc. - Senior VP & CFO [4]

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Thanks, Warren. Please turn to Slide 8, which includes our first quarter results on a GAAP, non-GAAP, excluding special items, and a total adjusted non-GAAP basis. We break down our adjustments into 2 categories: one category is special items, which are onetime unusual expenses; and the second category is transition and integration expenses the company has historically captured due to the number of acquisitions and integration activities made over the past few years.

A couple of points on this slide. First, GAAP operating profit was impacted by a noncash charge for the write-off of goodwill of $239.7 million. This was driven by a decline in our market capitalization that was less than our net book value of our shareholders' equity. The decline in market capitalization of roughly 75% was a triggering event that caused us to perform a goodwill impairment analysis as of March 31 and a write-off of the goodwill.

Second, sales were down $13.5 million or 6.3%. Historical variable margins are approximately 42% to 45%. Therefore, expected operating profit decrease would be about $5.7 million to $6.1 million down. Operating profit on a non-GAAP, excluding special items, was only down year-over-year $800,000 circled on the right side of the page. This shows that the business is flexing results on lower volumes through cost cuts and managing production levels.

Let's go to Slide 9, which provides a bridge with more granularity between reported GAAP, non-GAAP, excluding special items and total adjusted non GAAP. There are a few moving parts on this page that I would like to discuss. First, let's focus our attention on the upper portion of the bridge. The tax-affected asset write-down of $3.8 million primarily related to the elimination of the lease obligation for a major portion of the corporate headquarters building.

As previously mentioned, there was a noncash charge for the impairment of goodwill of $239.7 million, impacting the results. The discrete tax item of $11.9 million primarily relates to the tax rate impact of the goodwill impairment as well as the impact of the CARES Act legislation. In the prior year, the large tax-affected special items consisted of $2.1 million related to the write-off of unamortized debt issuance costs and a discrete tax item of $6 million related to the toll charge for the repatriation of foreign earnings through 2017.

Now let's turn our attention to the lower section of the bridge. In Q1 2020, the tax-affected nonoperational adjustments relating to capacity and capabilities development, professional fees and integration and transformation were down $2.4 million year-over-year. Tax-affected foreign exchange on intercompany was up $0.9 million, and the amortization of intangibles was down $0.6 million year-over-year.

Turning to Slide 10. Net working capital at the end of the first quarter was $187.6 million compared with $199.4 million in the prior year, a decrease of $11.8 million. Working capital turns were 4.3 turns in both years. DSO improved versus prior year by 4.3 days. Inventory turns were the same in both years, and the accounts payable decreased as less inventory was brought in.

Please turn to Slide 11. Net debt at the end of the first quarter was $768.9 million versus $848 million in the prior year, a decrease of $79.1 million. EBITDA measured by the credit agreement to fund a debt was 4.89x versus 5.1x in the prior year. During the quarter, we drew $60 million on our revolver for liquidity purposes. Our credit agreement leverage ratio steps down from 5.25x at the end of the first quarter '20 to 5x for the remaining quarters of calendar year '20. Due to the uncertain economic environment related to the COVID-19, we are in constructive discussions with our banks. They have been supportive of our efforts as we continue our strategic review process. Although we have tangible steps -- taken tangible steps to improve our liquidity and improve -- and implement cost reductions, given the uncertainty of the economic environment, our 10-Q for the first quarter will show us as a going concern.

Slide 12 shows our free cash flow for the quarter. Free cash flow showed a cash use of $1 million during the first quarter of 2020 compared with a cash use of $16.8 million in the prior year, a significant improvement. It is worth noting that the first quarter of 2020 represents the fourth consecutive quarter of positive net cash provided by operating activities as shown on the graph.

Slide 13 summarizes our capital spending, depreciation and amortization trends. Cash capital expenditures were approximately $11.3 million in the first quarter compared with $14.1 million in the prior year. For the quarter, the company's capital spending was 5.6% of sales, down from prior year's percentage of 6.6%. The company has cut its capital spending forecast from $45 million to $35 million in response to COVID-19.

With that, I'll turn the call back to Warren.

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Warren A. Veltman, NN, Inc. - President, CEO & Director [5]

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Thanks, Tom. We have presented additional information for each of our operating groups, starting with the Life Sciences on Page 15. In spite of the year-over-year sales reduction, our Life Sciences group continues to perform well as evidenced by the expansion of operating profit, EBITDA and adjusted EBITDA as a percentage of sales. EBITDA, excluding goodwill impairment, was up $1.9 million over a year ago due to our continuous process improvement efforts and indirect labor and SG&A cost control activities. Our backlog is at $163 million, a $15 million increase from Q4 of 2019. In spite of this increase, we are cautious regarding future demand given the significant reductions in elective orthopedic surgeries caused by the coronavirus pandemic. Our focus in Q2 and Q3 is on flex productivity and cost control, given we expect customer demand will be significantly reduced from first quarter levels.

The Mobile Solutions business summary is included on Page 16. As I have indicated, the Mobile Solutions group was hardest hit by the coronavirus pandemic during the first quarter, as sales were down 10.5% from one year ago. EBITDA declined to $10 million in -- EBITDA declined from $10 million in Q1 2019 to $6.2 million during 2020 first quarter due to the sales reduction and operational inefficiencies experienced with the sharp volume reduction that occurred in mid-March. We expect that volumes will be substantially reduced over the next couple of quarters due to OEM shutdowns that started in mid-March and will extend to mid-May. Once up and running, production will likely remain below normal capacity for a period of time. If the Europe and North America recovery models that of China, OEMs will take up to 2 months to return to normalized production, assuming consumer demand returns. Our focus in Mobile Solutions will be on CapEx containment, working capital management and flex productivity.

Moving on to Power Solutions on Page 17. Power's first quarter sales decreased 6.6% year-over-year is due primarily to lower sales caused by COVID-19 uncertainty and delayed customer approvals associated with moving production due to a facility closure. Reported EBITDA, excluding goodwill impairment, was negatively impacted $1.4 million due to the sales loss and sales mix. Power has been relatively resilient to the coronavirus effect. We expect that sales will be negatively impacted in Q2, as Q2 will have a full quarter of coronavirus impact, but the likely effect will be less than that experienced by our Mobile Solutions and Life Sciences groups. As with other groups, our Power management team will be focused on flex productivity, working capital management and cost reductions.

Normally, I would conclude my commentary by providing guidance for the next quarter and year. However, as you are aware, due to the COVID-19 impact, we withdrew our sales and earnings guidance for the year and do not plan to reinstate any guidance until we have a better view of how the industries in which we operate and world economies will recover. That said, I'd like to provide some additional insight on how we view the remaining portion of the year. Given its concentration in orthopedic products, our Life Sciences group is dependent on elective surgeries, such as those for joint replacements. Elective surgeries have seen a massive reduction over the last 2 months and are just now starting to be performed. As a result, we expect our Life Sciences group will have reduced sales from Q1 levels over the next 2 quarters with a recovery recurring after that and through the first quarter of 2021.

We expect the recovery for our Mobile Solutions group will be longer than that of Life Sciences. We expect that European and North American automotive OEMs will gradually ramp up their production over the next 8 to 10 weeks, with consumer demand being the ultimate determinant of overall production levels. Given the extreme levels of recent unemployment and uncertainty regarding economic growth, coupled with the significant purchase price of an automobile, we believe that a return to pre-COVID production levels will not happen until the second half of 2021.

As I stated previously, I believe the Power Solutions path will lie somewhere in the middle and will be more dependent on economic growth and improvement in consumer confidence. We believe the Q2, Q3 volume reductions will not be as severe as either Life or Mobile, and the recovery path will likely not be as sharp as Life Sciences or as long as the Mobile Solutions' recovery path.

As a reminder, my comments on market trends and revenue estimates do not represent guidance and are intended to be illustrative -- for illustrative purposes only as there are many uncertainties surrounding how the COVID-19 crisis will impact demand and revenue.

That concludes our prepared remarks, and I will now turn the call back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go to our first question from Dan Moore with CJS Securities.

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Lee M. Jagoda, CJS Securities, Inc. - Director [2]

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This is actually Lee Jagoda for Dan this morning. So just -- you did a pretty good job outlining the outlook for the various segments. As I look at the cost-cutting measures you've taken, how should we think about sort of levels of EBITDA, either flat EBITDA or perhaps growing EBITDA, given all the costs you've already taken out and your outlook for these segments?

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Warren A. Veltman, NN, Inc. - President, CEO & Director [3]

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Yes. I think, Dan -- not Dan, sorry. I think our EBITDA clearly is going to be dependent on where the sales volume ends up. And as I indicated, it's really tough for us to provide guidance on that, given how uncertain it is at this point in time. So we're focused more on providing the guidance as it relates to overall sales and where we think directionally that's going to go at this point in time. I would encourage you to continue to use the rule of thumb that Tom indicated in his prepared remarks that typically, when sales fluctuate, we see a fall through a variable margin at about 42% to 45% of the sales change. And we expect that to continue going forward. I think our teams have done an extremely good job over the last couple of months of flexing our businesses consistent with the change in the sales volume.

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Lee M. Jagoda, CJS Securities, Inc. - Director [4]

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Okay. And then just switching to the liquidity. Can you kind of give us a view of your current level of liquidity, remind us of any near-term debt maturities and then kind of give us a refresher on the piece of paper that you took out, I guess, late last year in that private placement? And how that impacts both interest expense and liquidity needs going forward?

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Warren A. Veltman, NN, Inc. - President, CEO & Director [5]

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Yes. I'll let -- I'll talk about the preferred stock that we issued in the fourth quarter. One of the primary benefits of that issuance was that it didn't create any demands on our liquidity or our cash position. The interest associated with that was epic. And that's -- one of the reasons that we pursued that instrument is it gave us some flexibility from a liquidity standpoint. Tom, do you want to address some of the comments as it relates to where our cash and liquidity position is today?

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Thomas D. DeByle, NN, Inc. - Senior VP & CFO [6]

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Sure. So we have about $4.5 million due every quarter of principal payments. And so that's ongoing, as we speak. And right now, Warren had mentioned how much cash we had on the balance sheet that we show at March 31, and we have roughly $75 million of cash today, that's including overseas cash. Did that answer your question?

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Lee M. Jagoda, CJS Securities, Inc. - Director [7]

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Yes, it does.

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Operator [8]

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We'll go to our next question from Steve Barger with KeyBanc Capital Markets.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [9]

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I'm trying to think about the magnitude of revenue decline in mobile in 2Q. We know China has restarted to some degree, but North American auto plants are going to be shut down for half the quarter, probably a slow ramp. Is down 50% a good proxy for how we should think about that revenue decline? Is that not enough to extreme?

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Warren A. Veltman, NN, Inc. - President, CEO & Director [10]

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Steve, here's the data points that I'll give you as it relates to our performance in April, okay? The Mobile Solutions group -- in comparison to the trend that we had in the first quarter. So in comparison to first quarter volumes, Mobile sales in April were operating at about 45% of what we did in the first quarter; Power was at about 80%; and Life was at 90%. So that gives you some sort of indication of what we've seen so far.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [11]

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Right. No, that's really helpful. So if revenue is down whatever, pick a number, $30 million, $40 million in 2Q sequentially, what percentage of that revenue loss would be released from working cap? Could it be $10 million or $20 million?

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Warren A. Veltman, NN, Inc. - President, CEO & Director [12]

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Yes. We -- when we do our modeling on that, we typically look at somewhere around 20% of working -- of the sales change. We should be able to pick up in working capital. It's between 15% and 20%.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [13]

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Got it. So if you net out what you think happens in 2Q from a revenue standpoint versus a working cap and cost action standpoint, do you burn or generate cash in 2Q? And at what level?

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Warren A. Veltman, NN, Inc. - President, CEO & Director [14]

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Well, I think we've modeled out a lot of different scenarios as you might imagine. And certainly, if we're down 30% from our plan on an overall company-wide basis, there is a cash burn, okay, before consideration of -- and even after consideration of some of the working capital pickups that we would get.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [15]

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Is there any way to frame the size of the cash burn in 2Q?

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Warren A. Veltman, NN, Inc. - President, CEO & Director [16]

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Yes. I would tell, we look at our liquidity. We're very comfortable that with a 30% down case scenario over the next 2 quarters with a slight recovery in the fourth quarter that our liquidity will definitely hold up through the end of the year. That's not an issue for us.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [17]

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Meaning you continue shipping product and meeting your interest in other obligations based on what you can see through the year?

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Warren A. Veltman, NN, Inc. - President, CEO & Director [18]

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Correct.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [19]

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One last question for me on the impairment. I'm no accountant, so I'm sure I don't understand this, but my thought is that impairments typically relate to the future value of cash flows falling below the carrying cost of goodwill. So does the Life Sciences impairment inherently suggest a lack of profitability in that segment? Or can you just talk through the mechanics of that?

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Thomas D. DeByle, NN, Inc. - Senior VP & CFO [20]

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Sure. I'll take that one, Warren. So it's all related to our market capitalization. I mean our share price went from, let's say, at year-end, our measurement time, like above $7 down to $1.50 at March 31. And so it was just clearly a function of -- that our market capitalization went down below our book value of our shareholder equity, and we have to do a reconciliation of that. And the result is that with the market capitalization going down 75% or roughly $225 million, we have a -- we had to -- you have to write off goodwill. And you do -- otherwise, we'd have just such an extreme premium on our discounted cash flows out of our businesses that the market is not accepting. So it's an accounting machination. I don't agree with it, but it is what it is.

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Operator [21]

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(Operator Instructions) We'll go next to Rob Brown with Lake Street Capital Markets.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [22]

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Life Sciences business, in particular. Obviously, it's a tough environment right now, but how much visibility do you have when things start to improve? How long does it take to sort of flow through into your business as procedures start to happen?

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Warren A. Veltman, NN, Inc. - President, CEO & Director [23]

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Well, Rob, I would tell you that we are -- we have been in constant contact with our customers on the Life Sciences side as it relates to their expectations for demand through the end of -- let's call it, through the end of this summer. Our view is that -- I just gave you the statistics as it related to April, and that business held up reasonably well in April, given the fact that there hasn't been any major -- there hasn't been significant amount of elective surgeries that have been done over the last 6 to 7 weeks, right? And so that means our customers have still been taking product. And what we're trying to gauge right now is where their inventory level's at and when will they dial some of that back. They clearly believe that -- and most of the data that we've looked at, there's an expectation that the recovery of elective surgeries will happen reasonably quickly. So none of our customers want to be left in a situation where they don't have the inventory on hand to be ready for a surge in volume when that occurs. So I think that they're probably in a reasonably good position of that at this point in time. So now they're planning their schedules for the summer. And that's why when we talk about where we see the hole in the Life Sciences business, it's more in the late May, June, early July time frame than right now because our customers are trying to make sure they have the inventory in place for potential future volume, and then they'll dial it back once they see how the recovery occurs. So I wish I could give you a more definitive response on that, but that's what we're seeing, and those are the conversations we're having with our customers today.

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Operator [24]

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We'll go next to Young Kwon with Wellfleet Credit Partners.

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Young Kwon, [25]

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I know you discussed this a little bit, but I was hoping maybe if you give a little more detail as far as how the conversations are going with the revolver lenders. Certainly, it seems like you're getting pretty close against that covenant. So maybe if you could just share any more detail on that topic as far as getting a waiver and whatnot?

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Warren A. Veltman, NN, Inc. - President, CEO & Director [26]

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Tom, you want to take that one?

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Thomas D. DeByle, NN, Inc. - Senior VP & CFO [27]

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Sure. So we're in active discussions with our Left Lead Bank, Truist. And they're very supportive of what we're doing. We've gone through all of our cost reduction actions. We've gone through all of our liquidity. We've shared forecast with them, and we're just working together. They want to see us through the strategic alternatives. We want to get through that process to delever the balance sheet as we've discussed before. And we're just -- it's going to be a few weeks down the road that we're going back and forth, and it's been productive.

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Young Kwon, [28]

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Okay. As we think about these strategic alternative discussions, like, are those still active? It seems like this is a really tough time to pursue those opportunities. So how should we think about that?

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Thomas D. DeByle, NN, Inc. - Senior VP & CFO [29]

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Well, I'll start off with that. I mean we have 3 great businesses, absolutely fantastic businesses. They all have generated positive free cash flow. They're good businesses. And they're sought after assets. So I mean, I'll let Warren comment on -- as he said he didn't really want to comment anymore on it. But everyone should just remember that we have great businesses and -- that are valuable. Warren, do you want to add any comment...

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Warren A. Veltman, NN, Inc. - President, CEO & Director [30]

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Yes. I think the answer to that question is that certainly, it's a difficult time given where the debt markets are at, and we've had to be creative in the way that we're talking to people, and we're trying to evaluate opportunities. And -- but I think the overriding point is that in spite of that and in spite of where the debt markets are at today, that we have had what we would consider to be a reasonable amount of success -- good success and continuing on with this process. So to answer your question, it is still ongoing. And we expect that it will continue -- we will continue on with that process in spite of what's going on in the markets today at this point.

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Young Kwon, [31]

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Okay. Also like just going back to the fourth quarter, I remember there was some commentary about cash flow being a little bit weaker because you guys were ahead on your payables and that you expected that to benefit cash flow in 1Q, yet working capital was still negative. Did that actually flow through first quarter result?

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Warren A. Veltman, NN, Inc. - President, CEO & Director [32]

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Yes. I mean -- oh, go ahead, Tom...

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Thomas D. DeByle, NN, Inc. - Senior VP & CFO [33]

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Go ahead, Warren. Please, go ahead.

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Warren A. Veltman, NN, Inc. - President, CEO & Director [34]

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Sorry, we're not in the -- unfortunately, we're not in the same room, and we can't see each other, so there's a -- we're trying to transition this as smooth as we can. In the fourth quarter, we did indicate that our accounts payable were in much better position, and we expected that we would benefit from that in the first quarter. And we believe that we have. When you look at our performance in the first quarter a year ago, we had a use of cash of $16.8 million. This year, it was a use of $1 million. So we're up $15.8 million versus a year ago. Certainly, the fact that we were in better shape on our payables at 12/31 contributed to that. But in addition, the fact that we've cut costs and some of the other things that we've done in the business to improve liquidity has resulted in us being in a better situation today clearly than we were a year ago and actually met our expectations. If you go back to look at the guidance that we provided for the first quarter as it relates to cash generation, free cash flow, we're pretty much in the middle of the range that we provided.

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Young Kwon, [35]

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Okay. Great. And just one more for me. On the cost savings activities, is there going to be a cash component to that number? And is there a number you can provide?

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Warren A. Veltman, NN, Inc. - President, CEO & Director [36]

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The cash savings of the $20 million that we've itemized out is the cost reduction. That's all cash.

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Young Kwon, [37]

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No, I guess, is there a cash component in that cash outlay that you're going to have to...

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Warren A. Veltman, NN, Inc. - President, CEO & Director [38]

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To accomplish those?

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Young Kwon, [39]

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Yes.

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Warren A. Veltman, NN, Inc. - President, CEO & Director [40]

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There could be some minor severance amounts. The biggest cash outlay that we had was associated with the termination of our lease on almost 2 full floors in Charlotte. And that is already the cash number that Tom provided earlier, which was the $75 million of cash that we have on our balance sheet -- that we currently have. That's after actually paying a $4.4 million termination fee to terminate the lease for the Charlotte office. So that was the biggest item -- or hurdle that we had in order to accomplish some of our cost reduction efforts. The things that we're doing today, there's very little friction costs related to accomplishing those.

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Operator [41]

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And at this time, there are no further questions.

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Warren A. Veltman, NN, Inc. - President, CEO & Director [42]

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Okay. I'd like to just thank everybody for their support and for their time this morning. Once again, a big shout out and thank you to the employees of NN. And everything that they've done for the organization over the last 3 months really appreciated not only by me, but our whole management team. Proud to be a leader of that group. And thank you, again, for your time today.

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Operator [43]

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This does conclude today's conference. We thank you for your participation.