U.S. Markets open in 1 hr 35 mins

Edited Transcript of NNBR earnings conference call or presentation 8-Nov-19 2:00pm GMT

Q3 2019 NN Inc Earnings Call

JOHNSON CITY Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of NN Inc earnings conference call or presentation Friday, November 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Mark F. Schuermann

NN, Inc. - VP, Treasurer and IR

* Thomas D. DeByle

NN, Inc. - Senior VP & CFO

* Warren A. Veltman

NN, Inc. - Interim President & CEO

================================================================================

Conference Call Participants

================================================================================

* Daniel Joseph Moore

CJS Securities, Inc. - Director of Research

* 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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day and welcome to the NN, Inc. Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, it is now my pleasure to turn today's call over to Mr. Mark Schuermann. Please go ahead, sir.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, operator. Good morning, everyone, and thanks for joining us. I'm Mark Schuermann, VP, Treasurer and Investor Relations. I'd like to welcome you to NN's Third Quarter 2019 Earnings Conference Call. Our presenter this morning is Interim President and Chief Executive Officer, Warren Veltman; also attending the call is Tom DeByle, SVP 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 and they'll be happy to send you a copy.

Before we begin, I'll ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation and the Risk Factors section of this company's 10-K for the year ended December 31, 2018. 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, foreign exchange rates, cash flow, tax rate, acquisitions, synergies, future operating results, performance of our worldwide markets 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. The presentation also includes 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 now provide commentary on the business and discuss results, and we'll open the line for questions after our prepared remarks. With that said, Warren, I'll turn the call over to you.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Mark. As this is Tom and my first NN's earnings call, we revisited some of the previous earnings calls to gain a better understanding of the information that our shareholders and analysts would like us to present. Based on that review, we have revised the company's earnings presentation to present additional information regarding the group's financial performance and outlook, adjusted results, and the financial analysis of working capital and capital expenditures. I hope you find our presentation more informative.

Let's start with an overview of the third quarter. Our sales for Q3 were $213.9 million, up 4% from the prior year, and were driven primarily by organic sales from our Life Sciences group, where sales were up $15.6 million or 20% from 1 year ago. The third quarter operating income and EPS both improved over Q3 2018. GAAP operating income margin expanded 70 basis points from 2.9% last year to 3.6% this year. EPS also improved from a loss of $0.48 per share 1 year ago to a loss of $0.13 per share in Q3 2019. Adjusted operating income margin in 2019 was up slightly to 12.9% from 12.8% in 2018, and our adjusted EPS was $0.27 this year versus $0.30 in 2018. Please note that adjusted net income was $11.4 million this quarter and $8.7 million in Q3 of 2018, and the number of weighted shares outstanding increased 46% to 42 million shares, resulting in an EPS number lower than the previous year. Both reported EBITDA and adjusted EBITDA increased consistently between the periods, with adjusted EBITDA increasing to $40.2 million in Q3 2019 or 18.8% of sales, in comparison to 18.2% of sales the previous year. NN generated $17.5 million in free cash flow in the third quarter, an increase of $29.4 million over the same quarter 1 year ago, resulting in a reduction of net debt during the quarter to $855 million.

Some significant highlights during the quarter include our announced plan to improve free cash flow through reductions in operating expenses and reduced capital expenditures. We also have eliminated the quarterly cash dividend. Life Sciences operating margins continued to improve, Power Solutions sales were up 2.9% on organic growth associated with smart meters, and Mobile Solutions continues to effectively reduce its fixed costs in response to lower sales volumes. We will review these highlights in more detail throughout the presentation.

The company had previously announced a refinancing of its capital structure that we expected to close this week. Due to the cost profile of the initial refinancing structure, we are evaluating other financing options to ensure we are achieving a result that is in the best interest of all of our stakeholders. We remain committed to establishing a capital structure that aligns with our strategic plan, and we are optimistic that such a structure can be established on reasonable terms. We have retained external advisers to assist us in fully evaluating our strategic options.

As a result of the delay in the financing, our revolving credit facility will be current prior to the filing of our Form 10-Q. Consequently, the company, in response to the technical accounting guidance surrounding these situations and with consultation with our independent auditors, will be incorporating going concern language in our 10-Q. We are optimistic that we will be able to establish a capital structure consistent with our strategic plan prior to the expiration of our revolving credit facility in October 2020.

We've provided additional detail on the select cost-reduction initiatives on Page 5. When I first started as interim CEO, I informed our employees that our focus would be on 3 things: one, servicing the customer by exceeding their expectations for quality and delivery; two, improving our operating margins; and three, improving free cash flow with a focus on paying down debt. I told the team that our overhead and SG&A costs were excessive, and we would immediately focus on reducing those expenses. To date, we have reduced the headcount of our corporate group by 20%, yielding an immediate $5 million reduction in expense. At the same time, we are consolidating the footprint of our corporate group and expect to achieve a reduction in rent of over $1.5 million annually. We will likely incur a financial penalty to exit a portion of the office space early, but I believe the payback will be less than 1 year, and our long-range plan does not contemplate us needing this space in the future.

Our operating groups are also focused on streamlining overhead related costs. Power Solutions recently announced the closure of the Fairfield facility by the end of this year, saving $800,000 annually. The bulk of this business will be transferred to other facilities. Mobile Solutions announced the reorganization of its Ohio facilities in late October, yielding an additional $1.5 million reduction in fixed expenses. Life Sciences will continue to focus on margin enhancement, which includes maintaining its current SG&A expense structure while the group experiences additional growth during 2020. We will continue to analyze our overall cost structure and facility footprint for additional opportunities for consolidation and improving our cost structure to be more cost competitive. As we have previously indicated, we have also eliminated quarterly cash dividend and are focused on reducing our annual capital expenditures.

Turning to Slide 6, which details our revenues by segment. On a consolidated basis, total revenue increased 4% for the third quarter versus the prior year. Life Sciences grew 20%, and Power Solutions grew almost 3%, assisted by incremental sales associated with the Technical Arts acquisition that closed in August of last year. Mobile Solutions posted a reduction in sales due to global automotive headwinds, coupled with the GM strike. Foreign exchange continued to reduce sales as the euro and Brazilian real weakened versus the U.S. dollar.

On a year-to-date basis, overall sales grew 13.6%, driven primarily by the acquisition of Paragon in May of 2018, organic growth within Life Sciences and to a lesser extent, the sales growth in Power Solutions. Overall, organic growth was 1.6%. Acquisitions accounted for 13.2% of our growth, and foreign exchange was a headwind of 1.2%.

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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Warren. Please turn to Slide 7, which compares our third quarter results on a GAAP basis to a non-GAAP basis. As the new CFO at NN, I chose to break down our adjustments into 2 categories for better transparency. One category is referenced as special items on the slide. These are onetime unusual expenses. The other category, called integration non-ops, includes transition and integration expenses the company has historically captured due to the number of acquisitions made over the past few years. The second category of adjustments also includes foreign exchange effects on intercompany loans and some amortization items. The next slide will provide more detail of our adjustments.

Still on Slide 7, reading from left to right for both the third quarter 2019 and 2018, the first column shows GAAP reported numbers and calculations derived using GAAP numbers. Second column shows the first category of adjustments to special items, which you will recall are generally nonrecurring adjustments. The third column is non-GAAP, excluding special items. The fourth column shows the second category of adjustments, integration non-ops. And the fifth column is the total adjusted non-GAAP, which considers both categories of adjustments.

Stepping back (inaudible) year numbers highlighted on the right side of the page, you can see both green and red shadings, indicating both positive and negative variances. Gross profit on a GAAP basis increased 90 basis points. Non-GAAP gross profit, excluding special items, increased 60 basis points and total adjusted non-op -- non-GAAP gross profit increased 70 basis points. Operating income on a GAAP basis increased 70 basis points. Non-GAAP operating income, excluding special items, increased 90 basis points, and total adjusted non-GAAP operating income increased 10 basis points. EBITDA on a reported basis was up 110 basis points. Non-GAAP EBITDA, excluding special items, increased 120 basis points. And total adjusted non-GAAP EBITDA increased 60 basis points. Bottom line is that we improved gross profit, operating income and EBITDA as a percent of sales no matter how you measure it.

Transition and integration costs will no longer be reported after the fourth quarter of 2019. These expenses were shown in the past as the business transitioned from a ball-and-roller company to a diversified industrial company with 3 segments: Life Sciences, Power Solutions and Mobile Solutions.

Let's go to Slide 8, which provides a bridge with more granularity between reported GAAP, non-GAAP excluding special items, and total adjusted non-GAAP. Tax-affected special items in the quarter were CEO transition costs of $0.7 million and asset-impairment charge of $0.3 million related from a relocation from the Johnson City office. Compared to the prior year, we incurred tax-affected special items of $0.3 million specifically related to the August 2018 Technical Arts acquisition, $0.4 million of other acquisition transaction costs, $5 million of a write-off of unamortized debt issuance cost, $0.2 million for the reduction of prior restructuring cost and a discrete tax item of $600,000.

In Q3 2019, tax-affected nonoperational adjustments were $1.5 million for capacity and capabilities development, professional fees of $0.4 million, integration and transformation of $4 million, foreign exchange on intercompany loans of $0.3 million and $9.9 million of amortization of intangibles and deferred financing costs.

Tax-affected adjustments in the prior year were $1.8 million for capacity and capabilities development, professional fees of $1.2 million, integration and transformation of $3.4 million, foreign exchange on intercompany loans of $0.5 million and $9.4 million of amortization of intangibles and deferred financing costs. Again, the bottom line on the right side of the chart shows that our metrics are improving year-over-year.

Turning to Slide 9. Net working capital at the end of the fiscal third quarter was $202.9 million compared with $207.8 million at the end of the third quarter in the prior year, a decrease of $4.9 million. Working capital turns were 4.2 versus 4.0 in the prior year. Our Life Sciences segment showed improvements in DSO and inventory turns, positively impacting the overall company's results.

Please turn to Slide 10. Net debt at the end of the third quarter was $855 million versus $864 million in the prior year, a decrease of $9 million. The ratio of EBITDA to funded debt as measured by the credit agreement was 5.1x versus 4.96x in the prior year. The company is focused on paying down debt and improving cash flow in the coming quarters.

Slide 11 shows our free cash flow for the quarter and year-to-date. We generated free cash flow of $17.5 million in the third quarter 2019 compared to a negative free cash flow of $11.9 million in the third quarter of 2018. The increase in cash flow was partially a result of improvements in working capital management, improved operating results and lower capital spending. Free cash flow was negative $7.1 million on a year-to-date basis in 2019 and negative $60.2 million in the prior year, primarily due to less cash provided from operations and higher capital expenditures.

It is very important to note that the fourth quarter of 2018 net cash provided by operations and free cash flow had a positive $34.4 million tax refund that will not repeat in the fourth quarter of 2019, as footnoted on that slide. We anticipate positive cash flow in the fourth quarter, and we'll speak more to this point later in the presentation.

Slide 12 summarizes our capital spending, depreciation and amortization trends. Cash capital expenditures were approximately $11.7 million compared to $18.1 million in the third quarter 2018. For the quarter, company's capital spending was 5.5% of sales, down from the prior year's percentage of 8.8%. There was lower capital spending in Q3 2019 across all our business units compared to the prior year.

On a year-to-date basis, the company spent $40.7 million or 6.3% of sales versus $47 million or 8.2% of sales in the prior year. NN anticipates spending a total of $50 million on capital in 2019. NN has increased its manufacturing capacity and -- as capital spending has exceeded depreciation expense over the past 4 years. Going forward, NN will focus on directing sales and operating activities to better utilize this capacity and targets capital spending to be in the range of 4%. This will allow us to free up cash to pay down debt.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Tom. We have presented additional information for each of our operating groups, starting with the Life Sciences group on Page 14. The 20% year-over-year sales increase has been driven primarily by our orthopedic and delivery system or case and tray products, yielding an improvement in margins over the prior year. Adjusted operating profit has increased to 21.8% from 20.7% for the prior year. As a reminder, approximately 70% to 75% of the adjustments from the GAAP results are due to intangibles amortization. We have also seen expansion of our reported and adjusted EBITDA margins. Our positive margin trend is the result of continuous process improvement, installation of automation and improved performance of our international operations.

Our backlog is $186 million, a $20 million reduction from Q2. We have recently launched our new sales and ops planning application that allows us to proactively interact with our customers and improve the process of matching product requirements with expected delivery dates. As this application is more fully implemented, we expect that it will result in a reduction of our backlog.

As we look forward, we expect Q4 to continue the positive trend as it relates to year-over-year comparisons, with a greater than 10% growth expectation in the upcoming quarter. 2020 growth expectation is tempered somewhat at 5% to 9% as we do not expect the same level of new product introductions that occurred in 2019. As we expect -- and we expect continued margin improvement due to leveraging incremental sales, while continuing to improve our manufacturing processes during the latter stages of the Paragon integration plan.

The Mobile Solutions business summary is included on Page 15. Mobile sales are down 10.7% from a year ago due primarily to sales declines in North America due to programs moving to end of production, delays in new business launches, a tariff environment that has created uncertainty in the supply chain, and the impact of the GM strike, which started in mid-September. In spite of the sales reductions, both reported EBITDA and adjusted EBITDA increased as a percentage of sales over Q3 2018. The impact of the sales reduction has been offset by reduction in fixed costs.

Through the end of September 2019, indirect labor, SG&A labor and related benefits were reduced by $4.9 million on an annualized basis. The results of the quarter were also positively impacted by the settlement of litigation with a customer that had defaulted on a supplier contract. As previously announced, the Mobile's fourth quarter results will be adversely impacted by the United Auto Workers strike that concluded on October 25. Based on our current customer inventory schedules, we do not believe that the lost volume will be recovered during the fourth quarter. It will likely occur after the first of the year.

We expect modest growth for this group in 2020 due to start-up production on some new programs, and the focus will be on margin improvement through manufacturing process improvements and additional reduction of fixed costs, including the carryover impact of some of the completed 2019 indirect labor reductions. In addition, improved free cash flow is expected from reduced capital expenditures and improvement in working capital management, including reduced inventory levels.

Moving to Power Solutions. As previously discussed, Power sales increase 2.9% year-over-year was driven by organic growth due to increased demand from smart meters and incremental sales associated with the Technical Arts acquisition. GAAP operating profit and adjusted operating profit both increased in comparison to prior years by 120 basis points and 90 basis points, respectively. Margin improvement is due to reduction in indirect and SG&A labor and direct labor efficiencies. We expect moderate sales growth during 2020 coming from both Electrical and Aerospace and Defense, with continued margin expansion due to optimization of our facility footprint such as the closure of our Fairfield facility and continuous process improvement. Power will continue to generate significant free cash flow due to higher EBITDA margins and a low capital expenditure profile.

Lastly, we have summarized our guidance for the fourth quarter and the year on Page 18. As it relates to sales and EBITDA, the guidance is the same as previously announced on October 29. Sales for the fourth quarter are expected to be in the range of $190 million to $203 million, with an adjusted EBITDA range from $31 million to $36 million. We expect positive free cash flow of $12 million to $22 million, with an adjusted EPS of $0.12 to $0.18. Please note, these estimates assume the current debt structure remains in place through the end of this year. That concludes our prepared remarks, and we will now turn the call back to the operator for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question will be from Rob Brown with Lake Street Capital Markets.

--------------------------------------------------------------------------------

Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2]

--------------------------------------------------------------------------------

First, on the Life Sciences business. I think you talked about growth rates in 2020 in the high single digits. Could you give us a little more color there? And is that a slowing from your prior thinking? Or is that sort of in line with your expectation?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think that's in line with our expectation. One of the things that we've been expecting due to the significant number of new product introductions in that business was that, that would -- that pace of the new product introductions would slow down starting in the first quarter or the first half of next year. And we're seeing that in our business. So the growth -- this single-digit growth rate from 5% to 9% is in line with our expectations.

--------------------------------------------------------------------------------

Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4]

--------------------------------------------------------------------------------

Okay. Good. And then in the Mobile business, I guess I just wanted to clarify your thinking there. How do you see that at this point with this market cycle? Is it down again in 2020? And I think you said new programs maybe offset some of that, but help me understand, I guess, why that business should not decline in 2020 again.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. We don't expect a decline in 2020 primarily due to some new program launches that, frankly, we anticipated in 2019 that were delayed. We've also had -- we've seen a delay in some of the volumes due to the tariff environment. And we've been working with our customers to make sure that some of the capacity that we have in place today is more fully utilized in 2020.

--------------------------------------------------------------------------------

Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [6]

--------------------------------------------------------------------------------

Okay. Okay. Great. And then the last question, I guess, on the financing discussion. You talked about -- you said that you're sort of resetting your thinking on -- what are sort of the alternatives you're looking at? And what's the time line you're hoping for?

--------------------------------------------------------------------------------

Warren A. Veltman, NN, Inc. - Interim President & CEO [7]

--------------------------------------------------------------------------------

Yes. I think the most important thing for us there is that we put a capital structure in place that is aligned with our strategic plan. So we're going to be very thoughtful in the way that we go about this. We haven't set a specific time line. We understand the urgency surrounding it, so we're approaching it with that in mind. But we are continuing to talk to our lenders and going through various structures and trying to optimize the structure that would make the most sense for us vis-à-vis our strategic plan.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question will be from Steve Barger with KeyBanc Capital Markets.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Really nice improvement on the slide deck. My first question is, how long have J.P. Morgan and the law firm been engaged? I'm just trying to get a sense of where we are in the strategic review.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Both of those, J.P. Morgan and Simpson Thacher, are trusted advisers to the company and have been for an extended period of time. More recently, we've focused some of their efforts to helping us evaluate our strategic options. So we'll go forward with that -- with them and are excited about the prospect.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Did that process start a couple of months ago or a couple of weeks ago?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It's more recent than a couple of weeks ago -- excuse me, more extended than just a couple of weeks ago. The Board goes through annually a planning process where we evaluate the strategic direction of the company. So for us, it's an ongoing process. With the recent changes that we've seen in the business as it relates to the goals of deleveraging, and we've had to redefine how we look at the strategic plan, and we're in the process of doing that. But it's an ongoing process.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It's really great to see the $32 million in cash savings geared towards debt reduction. Can you give any early look at how you think about 2020 free cash flow? And realistically, is there a path to significant debt paydown without asset sales?

--------------------------------------------------------------------------------

Thomas D. DeByle, NN, Inc. - Senior VP & CFO [14]

--------------------------------------------------------------------------------

Yes, there is. It's through better working capital management, obviously, with the elimination of the dividend, looking at certain, let's say, plant optimization movements along with these SG&A reductions. So we have a line of sight that we're going to be reducing debt in 2020.

--------------------------------------------------------------------------------

Warren A. Veltman, NN, Inc. - Interim President & CEO [15]

--------------------------------------------------------------------------------

I think, Steve, what you've seen too in the third quarter with the $17.5 million reduction and our expectation for the fourth quarter, this management team and this Board is extremely focused on deleveraging the business. And this is, in our view, just the beginning of that.

--------------------------------------------------------------------------------

Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [16]

--------------------------------------------------------------------------------

Yes. No question. Good job on free cash flow in 3Q and expected 4Q. Is it reasonable to think going forward that you could be free cash flow positive in all the quarters? Or are you still going to be a draw in the first half and then a source in the back half?

--------------------------------------------------------------------------------

Thomas D. DeByle, NN, Inc. - Senior VP & CFO [17]

--------------------------------------------------------------------------------

I don't want to promise anything at this time. But I mean ultimate goal eventually would be positive free cash flow every quarter.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The seasonality of the business, too, I would add, Steve, the seasonality of the business, the first quarter is the one where we come out and there's some inventory build and some receivable build, and we're analyzing some of that right now. But that probably, from a seasonality standpoint, is the most difficult quarter from a free cash flow standpoint.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Right. And last one for me. The press release said the strategic options include a sale or -- part or all of NN. I'm sure it's not lost on you that public and private companies that look like Life Sciences trade at double-digit EBITDA margins. So if you're going to sell something, wouldn't it be better to divest Mobile and/or Power so shareholders can really get the benefit of a delevered balance sheet and what is really clearly a great business in Life Sciences?

--------------------------------------------------------------------------------

Warren A. Veltman, NN, Inc. - Interim President & CEO [20]

--------------------------------------------------------------------------------

Yes. We're not going to speak specifically about how we're going to approach that or what businesses are most likely, if any, to be sold. We're going to go through the process with a goal in mind of doing what's best for our shareholders, trying to maximize value and also trying to create a scenario where we have the most certain approach as it relates to deleveraging the company. That's our goal.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question will be from Daniel Moore with CJS Securities.

--------------------------------------------------------------------------------

Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [22]

--------------------------------------------------------------------------------

Echo, thanks for the additional transparency as it relates to the presentation, very helpful. I wanted to start with -- maybe just start, Tom, with the balance sheet, and you talked about the cost profile of the potential refinancing of the credit facility. Where are we today? Maybe just walk us through the updated terms of each of the tranches of debt, what your expectations look like for interest expense for Q4. And any color on timing of, sort of -- the goal of when you might be in position to improve the overall interest expense profile?

--------------------------------------------------------------------------------

Thomas D. DeByle, NN, Inc. - Senior VP & CFO [23]

--------------------------------------------------------------------------------

Well, as I said, for our Q4, what we've modeled into the guidance that Warren went over is that there's going to be no new refinancing before the end of the year. That's what we have in our guidance. Going forward, obviously, with the markets, we will have higher interest expense. We have that one tranche coming up in a year from April that will become current of our Term B. And so we're just looking at various different structures to try to do the best thing for what our long-range plan is. So we're looking at all options at this time.

--------------------------------------------------------------------------------

Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [24]

--------------------------------------------------------------------------------

Got it. And then very helpful color in terms of the outlook for 2020 across the segments. Any commentary at this point as it relates to margin profile or potential improvement given some of those cost-restructuring initiatives?

--------------------------------------------------------------------------------

Thomas D. DeByle, NN, Inc. - Senior VP & CFO [25]

--------------------------------------------------------------------------------

Well, we expect to improve margins as we move forward. As volume increases and plus with our cost reduction and plant optimization, SG&A reductions, margins should improve going forward. But we're not guiding on that until the fourth quarter, which we'll give when we issue our 10-K and have this next conference call, which will be in -- probably in March.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question will be from Steve Barger with KeyBanc Capital Markets.

--------------------------------------------------------------------------------

Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [27]

--------------------------------------------------------------------------------

Yes. Primary working cap got down to $203 million in the quarter. Where can that go? Or just how much more cash can you take out of working cap? And where can you get on the cash conversion cycle days as you think about going into next year?

--------------------------------------------------------------------------------

Thomas D. DeByle, NN, Inc. - Senior VP & CFO [28]

--------------------------------------------------------------------------------

This is just early days for me, Steve. I focus on working capital. And I mean we're looking at all past due receivables, improving inventory, as Warren talked about, lowering inventory so that we have higher turns, more cash coming in. And I'm looking at just DPO terms, trying to push those out further. So I'm just in the -- I've just been drinking from the fire hose, and we'll be focusing on this going forward, if you understand.

--------------------------------------------------------------------------------

Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [29]

--------------------------------------------------------------------------------

Totally get it. And just a modeling question, if you have this. How should we think about SG&A dollars or the spend in dollars next year? And what will run rate corporate expense be?

--------------------------------------------------------------------------------

Thomas D. DeByle, NN, Inc. - Senior VP & CFO [30]

--------------------------------------------------------------------------------

We're still working through that. We'll give further guidance in March next year when we release our Q4.

--------------------------------------------------------------------------------

Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [31]

--------------------------------------------------------------------------------

And just one more. Can we just talk about the CapEx philosophy for Auto? And Warren, correct me if I'm wrong, but I think there can be big differences between launching a product you've done in the past, even if it's in a new location, versus something brand new, where you're building the tooling and kind of riding that learning curve. So how are you approaching the market right now in terms of what programs you're willing to look at?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. That's a good question, Steve. So when we look at capital across the organization, we're looking at it from a return on invested capital modeling standpoint. And clearly, the Mobile group is the most capital intensive of our 3 businesses. And one of the things that we've been working with the team there is trying to redeploy, or to deploy from a sales strategy standpoint, existing capacity. And that's why we're reasonably confident that we're going to be able to reduce the CapEx spend there in 2020. As an example, if you look at the China operation, we probably have the capacity there to manufacture $60 million of product on an annual basis, which is 40% above the current level from a sales volume standpoint. So the team is focused on selling into existing capacity today as opposed to pursuing programs that will require significant CapEx spend.

--------------------------------------------------------------------------------

Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [33]

--------------------------------------------------------------------------------

Understood. And just going back to Life Sciences for a second. Can you talk about recent conversations or new contract wins? Just give us an update on how the model and the value proposition is evolving in the marketplace.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. We've -- obviously, we've had significant success there when you look at the year-over-year comparison, and we expect that to continue going out. One of the things that the team there has done is we've modernized some of the facilities through additional investments and machining capability. And just as important, on the automation side, there's been a lot of automation put in to make us more cost-effective from a labor standpoint. That will -- that is ongoing. And I would tell you, some of that action really is what makes us an indispensable supplier to some of our end customers. So the ongoing quoting and the hit rate continues to be extremely positive, and we expect that business to be a solid performer for us, obviously, going forward.

--------------------------------------------------------------------------------

Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [35]

--------------------------------------------------------------------------------

That's great color. And maybe I missed this, I -- in the prior Life Sciences question, but what would have to happen for you to hit the lower end of that 5% to 9%? Because given the backlog you've seen and the value proposition in Life Sciences, it seems like that would require a pretty significant end-market slowdown or something.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I think we're going to stick with the 5% to 9% range. It's hard to speculate what specific events could happen that would drive us to the lower end of the range. That's what we're looking at right now. And certainly, new product introductions can impact that, either positively or negatively, which require an inventory fill, but we will learn more about that in the upcoming months.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Our next question will be from Daniel Moore with CJS Securities.

--------------------------------------------------------------------------------

Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [38]

--------------------------------------------------------------------------------

Just a quick clarification on the go-forward guidance. You will, it sounds like in 2020, no longer be backing out transition-related type expenses. Does that indicate the likelihood that those will be fairly minimal from your perspective right now in 2020? Or there -- could there be some, let's say, delta between where we've kind of finished the year this year and what 2020 could look like from an adjusted EBITDA perspective? Just trying to get a sense of those -- your thoughts on the add backs for next year.

--------------------------------------------------------------------------------

Thomas D. DeByle, NN, Inc. - Senior VP & CFO [39]

--------------------------------------------------------------------------------

So my thoughts on add backs is I don't like add backs. And those are going down substantially next year as there's so many portfolio moves in this business. So it goes down to a minimal result that the business is actually absorbing. We will definitely do reconciliations to the prior year to show what it is. We'll comment in the MD&A on certain things that are, let's say, suppressing margins should we have new product launches, such as we had this year, 2 large ones: 1 in Mobile, 1 in Life Sciences. We'll be very, very transparent, and you'll be able to reconcile.

--------------------------------------------------------------------------------

Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [40]

--------------------------------------------------------------------------------

All right. Very helpful. I think it'll be well received.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Thank you. I'm showing no further questions in the queue at this time. And this will conclude today's teleconference. You may now disconnect. Thank you.