NN, Inc. (NNBR) Earnings Call Transcript & Summary

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Hello, everyone. Thank you for joining us and welcome to the NN Inc. Second Quarter Earnings Call and Webcast. After today's prepared remarks, we will host a question and answer session. If you If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. will now hand the conference over to Joseph Caminiti, Investor Relations. Joseph, please go ahead.

Thank you, Christine. Good morning, everyone, and thanks for joining us. I'm Joe Caminiti 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 second quarter ended June 30th, 2026, 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 at nnbr at alpha-ir.com. Joining us today from NN Management are Harold Beavis, President and Chief Executive Officer, and Chris Bonnard, Senior Vice President and Chief Financial Officer. PLEASE TURN TO SLIDE TWO WHILE YOU FIND OUR FORWARD-LOOKING STATEMENTS AND DISCLOSURE INFORMATION. Before we begin, I'd like to ask that you take a 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-Q for the fiscal second quarter ended June 30, 2026. The same language applies to the comments made on today's conference call, including the Q&A session as well as live webcast. Our presentation today will contain forward-looking statements regarding sales, margins, inflation, supply chain constraints, foreign exchange rates, 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 U.S. in the industrial sector, including the potential impacts and ramifications of tariffs, the impacts of pandemics and other public health crises or military conflicts, all 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, which may cause actual results to be materially different from such forward-looking statements. 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. Please turn to slide three and I will now turn the call over to our CEO, Harold Beavis.

Thank you, Joe. Good morning, everybody. I would like to announce that we had a really good, strong second quarter. It was consistent with our first quarter. We arranged some looks here for you on Q2 in the first half, and you can see that it's pretty consistent. Our results show significant growth across the business and the first half finished ahead of our expectations. Our second quarter sales increased 19% year over year. Our second quarter adjusted, even getting increased 36%. Our first half, NBDA increased 35%. And in the first half, we were able to secure $65 million of new business awards. So we had profitable growth achieved across both of our reporting segments. And then subsequent to the end of the quarter, we had a significant strategic development. wherein we completed and announced the retirement of $89 million of preferred stock. as part of a multi-leg refinancing. Knowing that's one of the big events that we wanna talk about today, I wanna address it right up front with Chris, and we're going to turn it over here to Chris to discuss the refinancing on the next page.

Thank you, Harold. Good morning, everyone. I'll begin my remarks on slide 4. Those of you who have been following along on our progress, you know we've been working hard in the background to improve and optimize our capital structure. We spent the last few quarters alongside our strategic advisors comprehensively assessing the potential options available to address the preferred stock. We concluded that this was the best path to creating a capital structure that allows more of the value we have created through our transformation to accrete to common equity holders position the company to capitalize on the growth we are generating through our commercial programs. As we previously announced back in July, we successfully raised $75 million of capital through a pipe transaction, bringing multiple new investors into our investor base. This effectively expanded the optionality for how we could strategically address the capital structure overhang, namely through the preferred equity security. Last evening, we announced that NN successfully completed a $124 million refinancing transaction to address the preferred. This is a significant strategic and financial milestone for the company, as we're largely out from under the structure that NN entered back when the company was experiencing. and its business and financial performance. I'll take a moment to walk through the details of this multi-level transaction. First, we utilize cash from the recent pipe transaction to materially de-lever the company's balance sheet. We used the 70 million of cash to redeem a large portion of the outstanding preferred equity. Second, we equitized roughly 19 million of preferred into NN common stock. Third, the remaining stub of preferred equity of approximately 35 million in total will now carry a lower pick interest rate of 10% one year, significantly below the previous rate of 14.5%. Additionally, the remaining PREF will be discounted by 5 million if we pay off or refinance it by December 31st of 2026. This successful transaction is materially delivered and annual pick interest will be reduced by approximately $13 million. This transaction did not impact our existing term loan. However, we expect to have a greater degree of optionality on how we address existing other debt and the refinance of our term loan when it makes sense strategically and financially. Here Harold discussed NN's five pillar growth strategy shortly, but achieving this refinancing was a critical step in enabling the acceleration of our growth across the enterprise. This is a significant strategic win for the company and the value will now more comprehensively accrete to our business and our shareholder value creation. Now, I'll spend some time walking through our financial performance for the business and its segments, beginning on slide five. Q2 net sales of 128.79 were up 20.8 million, or roughly 19% versus the prior year period. supported by growth across both segments. Further Q2 net sales growth was driven by the contributions from new business launches, higher precious metals pass-through pricing, volume growth, and slightly favorable FX translation. Over the first half of the year, net sales of 247.2 million are up 33.6 million or 16%, demonstrating a very strong start to the year and a continuation of our momentum from the first quarter. Our Q2 adjusted gross margin dollars of $26.1 million grew $5 million or 24% versus the prior year period. This growth was supported by a stronger mix of sales as a function of new business launches. Across the first half of the year, adjusted gross margin dollars of 49.2 million are up 10.3 million or 26%. These results reflect a very solid adjusted gross margin of 20.3% in the second quarter and 19.9% year to date. Each displaying meaningful expansion as margins for the quarter and year to date have grown by 80 basis points and 170 basis points respectively, compared to the respective periods of year ago. Second quarter adjusted EBITDA of $17.9 million grew by $4.7 million or 36% versus last year's second quarter. This increase was led by higher sales and improved mix and volume leverage from past cost improvement actions, partially offset by higher SG&A. Across the first half of 2026, total adjusted EBITDA of 32.1 million is up 8.3 million worth 35% versus results of 23.1 million versus the first half of 2025. The first half growth in our profitability measure has been driven by similar drivers as noted in our quarterly results. Adjusted EBITDA growth has come with an improvement in our margins. At second quarter adjusted EBITDA margins of 13.9 percent of sales expanded 170 basis points versus last year's second quarter. On a year-to-date basis, through the first two quarters of 2026, adjusted EBITDA margins of 13 percent are up 190 basis points versus the 11.1% in the first half of 2025. I'll now turn to our segments starting on slide six. In our power solution segment where business consists largely of stamp products, net sales for the quarter were 62.3 million, up 40%, compared to 44.6 million in the prior year period. This increase was driven by higher precious metals pass-through pricing and higher volumes. Across the first half of the year, Power Solutions net sales of 117.7 million grew 34% versus the first half of 2026, or 2025, sorry, driven largely by the same factors impacting second quarter. Power Solutions adjusted EBITDA was 12.7 million, an increase of 3.6 million or 40% versus last year's second quarter of 9.1 million. Driven by sales growth, improved mix from growth in targeted high value end markets and contributions from ongoing cost out initiatives. Additionally, the first quarter, additionally quarterly and first half adjusted EBITDA margins were 20% of net sales up meaningfully versus the first half of 2025. Our next segment, Mobile Solutions on slide seven, covers our machine products business. Net sales for the first quarter were 66.6 million compared to 63.4 million in last year's first quarter, an increase of 3.2 million or 5%. This segment has now delivered two consecutive quarters of net sales growth year over year. year. This sales growth reflected solid volumes from new program launches along with favorable foreign exchange impacts. Across the first half of the year, net sales of 129.7 million are up 3% versus 125.6 million in the first half of the prior year period. Our second quarter adjusted EBITDA in the mobile solution segment was 9.8 million, up 13% versus last year's second quarter results of 8.7 million, with the segments adjusted EBITDA margins of 14.7 million, expanding 100 basis points versus 13.7%. Adjusted EBITDA First half of the 2026 has seen a similar theme play out with 18 million at nearly 14% margin rate, improving versus 16.8 million or just over 13% of sales. With that, I'll turn the call back over to Harold. Harold? Thank you, Chris. I appreciate it. Wanted to talk a minute.

about our growth program and our portfolio objectives that we have in the second quarter we continued advancement uh in that regard and automotive has now declined to about 40 of the company our our ultimate goal is to have that be about a third not really by shrinking but by the other areas growing more quickly. And that is in fact happening. The top three growth markets that we're focused on are listed here. center electric grid defense electronics and medical products we had decent winds each of those three segments in the second quarter and year to date. And those areas now are over $150 million of our sales, about a third of the company. And we have near term targets to increase that percentage. And it obviously starts with prospecting and then bidding on new awards and then winning on close opportunities. And we've been winning at an about above expectation rate and the highest rate that we've ever done. And our prospecting is expanding actually. And I wanted to give just some vignette updates on each one of these segments, turning to the next page. starting with just an overview of our five pillar program. The five components are the three areas I just mentioned, plus high value vehicle parts, where we have a curated portfolio that we attack in the commercial vehicle, recreational vehicle, and passenger vehicle space, where we believe that it's very profitable and high return on investment for us. And it helps us push our technology. And then high value stamping. So we have a few niches that we're in on the stamping side as well, and we're staying close to them. Many of them in the smart home area, smoke detectors, alarm systems, switches. So those are the five areas that we're focused on, on a go forward basis. And that's how we've organized our sales team, our business development teams, our engineering, And we're allocating our capital to those areas as well. So on the next page, I want to dive down a little more deeply into data center electric grid. Um, as seen on the prior pages of $80 million business already on a trailing 12 month basis with a near term, global one 20. We have multiple large opportunities that we're evaluating, uh, in the in this space right now. Everyone knows that AI and data center is one of the biggest things happening in the world. And it's the biggest thing happening to our company. We are getting very large asks to us. We're a well-known precision metal part maker, and that finds itself in a lot of aspects of the data centers, especially with the liquid management regarding the cold plates as well as the pumps to make sure that system is good. But on the top end of the system is electrical, and that also plays into our electrical business, our stamping business and assemblies business. So it's our second largest market right now behind the high value vehicle parts. But it's closing the gap. And our goal is to have it to be our largest segment, recent news in the quarter that we that we gave out via a specific press release. We had some big wins here. We're focused on establishing supply chain positions with the right people and the right platforms and it's expanding. We started off in Asia. It's now expanded to Europe and into North America. And we're leveraging our assets and technical know-how to have leak-proof metal parts. And also the aesthetic qualities are quite high on these parts as well. And we know how to do that. We have many ramp ups underway. a chance to look at our 10Q, you'll note that in Note 3, We expanded the look into the end markets that we serve. And you'll notice that we don't have a lot of sales showing up yet. in our machine products business for grid and data center. And the wins that we've had are primarily going to be a second half ramp up for us. And those ramp ups are underway. We were in the third point here is we've secured significant new awards that will be ramping up into the beginning of 27. We already have about 50 machines we're bringing online. We have about 25 in-house already. And we are running out of space. Tim French is not on the call today because he's in China. And he's looking at new space in the area of our, one of our plants, Wushi. We'd like to just be 10 or 15 minutes away. We need about another 100,000 square feet to accommodate the equipment that we're going to need. And this business is on track with expanding opportunities. On the next page, I wanted to talk about defense and electronics for a minute. That's already at 60 million on a trailing 12-month basis. Our near-term goal there is 90. We supply critical components into weapons systems, guidance systems, and we're evaluating anti-drone munitions, making the munitions themselves for shooting down drones. Recent news we announced in the quarter was that we had secured a multi-year agreement. to produce parts of weapons. And that alone is expected to be about another $12 to $15 million just with that one customer. and we're ramping up now. We have many, many new firsts associated with that. It took us, you know, it's a multi-year project. We had a lot of advancements on surface coatings, as well as mastering high-volume titanium machining. And if you don't know much about metal fabricating, titanium retains heat and swells and changes its dimensions as you're forming it. So there's a lot of things that get right to be able to do high-volume titanium machining, but we were able to master that. after a few quarters. We're expanding our defense and electronics growth platform We've won a bunch of programs over the last few years, but it's an expanding area for us. And we have a $75 million working pipeline. We've achieved a lot of credentials with the Department of Defense and ITAR and other types certifications that you need in order to compete here. And we have a very, very big aspiration in this area. It's not exploding in demand like data center is, but it's right behind it. And so we're opportunity rich in this segment as well. And then on the next page, I wanted to talk about medical. It's smaller than the others. It's about $15 million on a trillion, 12-month basis. We have a near-term goal of $40. But it is coming from behind. And it's taken us a while to get the credentials that we needed here. That's very clean manufacturing required, as you would guess. It took us a while to get the plants certifications, the parts themselves are not that hard to make. But we did have some breakthroughs this year and and we are approved to make surgical, the tips, if you will, and the ends and pieces that go into the robotic machines that do surgery, and we received our initial purchase orders. And so we're underway with a ramp up there in our Kentwood, Michigan plant. And we have had to renovate our quality system. It's taken a multi-year investment program from us. And we've done it. And that new business that we announced effectively will double the business itself. And it's upward from there. Our pipeline is now about $75 million in this area also. And we have a dedicated team who's found its stride. And we're now evaluating the market in China, the second largest market for robotic assisted surgery. And we have all the approvals we need to go in with the exact same customer. So this business is gaining momentum for us and we have a strong team in place and we have high aspirations for our medical business. So with that and the next page, Chris gave you an overview of the really exciting and fundamental improvement we've done to our balance sheet with the refinancing, coupled with the growing business, we missed for this year. And if you look at it, we raised it in the last quarter also due to our actual results. And we were asked about, you know, how we think about our guidance and really we're letting the results flow before we're, changing our outlooks and we're doing it again here. So we do expect our sales to be 460 to 480 this year, our EBITDA 55 to 65. and our new business wins 80 to 100. In our earnings release that we put out this morning, you'll see that through July, whose business wins are al we increased the high end and the expectations and along the need for talent also capital equipment to able to produce at a high So that's our new guidance, and we're very happy about it. And as events unfold, we'll look at our guidance further as we go along through the second half of the year. With that, we'd like to turn it over and open up the webcast to questions and answers.

question and answer period. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask further questions, kindly rejoin the queue. Reminder, if you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Our first question comes from the line of Rob Brown with Lake Street Capital Market. Rob, your line is now open.

Hi, congratulations on all the progress and great to see the steps that you've taken. Just wanted to follow up on the kind of start with the data center market. You've had some nice winds in the quarter. Could you kind of characterize the pipeline in that market? What sort of the building pipeline, what areas are you most interested in and just maybe the scale of the pipeline? Thank you. Yep. That's Christine, that's page 10 in the deck. So,.

You know, our products right now, Rob, we're making transformer parts, bus bar parts. test probes, liquid, the liquid connector parts. We branched into the cold plate itself, plating of the gold plate, of the cold plate. It actually is plated. with a nickel kind of plating. And we are looking at couplings that go into the heat pumps. The heat pump system itself, there's a lot of well-known people in that area, Dan Foss, Parker, Stobley, kind of well-known fluid management people, and all the couplings are also metal. So we are looking at the stampings that are also inside that go into the racks. both up and down, and as well as the whips and cabling that controls the electricity. inside of the center. So we have a multi product, look at the data center ecosystem, but basically we're focused in on our core markets. We're getting pulled into a few new areas of welding and brazing, and that's fine because we know how to do that. And then you have to be able to automate it. So it's not a one product story. It's a bring everything the company has to the game plan story. And we have a large expanding pipeline on this chart here at the bottom. I mentioned that we're now approaching $100 million on prospecting. And just to delineate that, we talk about pipeline figures, years if we've rendered an RFQ and the customer has an RFQ from us. But prospecting begins before that. So we have discussions underway that are large. And in our last call, someone asked, how big are you trying to get in these connectors? And we think we could do 100 million in that alone. over time. The real the real thing for us is who to partner with, what type of assets do we want to put in place, where do we want to put them? So it's an evolving market for us, Rob. And it's quite fulsome. It's quite fulsome. It's a big story for us.

Great. Thank you for all the color on that. And just on the kind of the gross margin improvement, nice to see there. How do you sort of see it? Is it sustainable at this level or can you continue to move that up as you change your product mix?.

Yes, Chris, you want to take that? Sure, sure. Thanks, Rob. Yes. So, you know, we've benefited in a lot of areas with our margins. You know, we took a lot, as you know, Rob, we took a lot of costs out over the last eight quarters or more. We've got some just leverage based on the overall cost structure reduction. Additionally, we've got new business ramp-ups. We talked in the past quarters about those new business pieces are creative. We are benefiting from higher precious metals pass through as well. I think the dependencies on the improvements going forward are going to be just more new business brought on and accretive levels. and dependency on precious metals, and then getting in these new business segments like medical and data center. If we keep diversifying in these other verticals, I think you'll see margins moving up. Obviously precious metals can drag it down a little bit in near term if prices come down, but I think overall we've got some tailwinds with these new verticals. And so keep an eye on these verticals and the revenue they're generating as well as new business. And I think that'll help guide the margins going forward.

All right. Thank you. I'll turn it over. Thank you.

Your next question comes from the line of Greg Palm with Craig Hallam. Greg, your line is now open.

Yes, good morning. Congrats on all the positive news and frankly, just really impressive progress. So pretty impressive stuff. Thank you. Thank you, Greg. Can we maybe just start a little bit bit tied into the last kind of answer around, you know, new business wins. And I'm wondering at this point, you know, how much of that is currently flowing through the P&L? It sounds like there's actually a pretty big chunk that's still yet to come, at least on the stuff that you've announced, you know, the liquid cooling connectors, the firearms accessions. I think you talked about that ramping up in Q3. I only ask in light of really positive first half results, I'm guessing you're just maybe building some extra conservatism in the second half guide, but maybe you can just address that as some of these newer business opportunities start to ramp up. Yes, good point.

So Greg, if all things being equal, if we weren't winning new business and things were just steady state, the second quarter usually is our strongest quarter. That's when we have our highest production volumes on existing contracts. And then the next quarter is Q3 and then Q1 and then Q4. So Q4 is usually our lightest quarter. just because our customers are big and they try to pretty up their balance sheet and inventory positions before they report their year end results. This year is going to be a little different because we have a lot of new wins that we're ramping up in the second half. And your posit is true. The announcements we made, all three of them, medical, data center, And defense there they are not impacting the first half at all, so they ramp up in the second half. For instance, the 50 machines. make data center parts will start to hit its stride in November. We'll have all the machines installed then and the sales outlook in November is going to go over $1 million a month. and keep building into Q1. We don't have any benefit from that right now. And the same with medical and the same with defense. So through the end of July, we'd want $80 million worth of business And the majority of it is immediate ramp up. So we will benefit from that in the second half. And so the way we're playing it right now, Greg, is we know that Q4 is usually light. But we have offsetting winds. So that's what's led us to think through our guidance and how much to increase it or not. You're right that it's slightly conservative, but we don't really control our demand. So we have to get pull signals. Our visibility is really in this quarter. We don't have polls going into the fourth quarter yet, with the exception of data center, where basically they're saying, we want everything you can make this year, make it. But we're comfortable right now with the guidance that we've given Greg and it will have those variables playing out.

Yep, okay, makes sense. And I know you're not addressing the longer term EBITDA margin guidance here today, but you just realized a 14% EBITDA margin on the quarter on revenue that's significantly lower than what your long term target was. is on a quarterly basis. So I don't know, maybe you could just talk about that in light of those targets, because it seems like there could be some pretty meaningful upside to that as well. Yes.

Well, we have the business is definitely going to the next level right now and it looks sustainable. And to Chris's point, you know, we're mapping out the metal and every part of our cost structure and that sort of a thing. So. It's looking like we're a couple points light right now, Greg. It looks like the goal's more like 14% to 16%. longer term if you're talking about the adjusted EVDA margin. And that's really going to be pulled through by a better mix. So the mix of the products is going to drive that and we're still maintaining about five points higher on gross margins on our new lens versus the existing. And that's a good point. I think in our next update, Greg, we'll give an update on the longer term goals, but I I would say right now, you're right, our longer term guidance should be more like 14 to 16% on the just to give the DA.

Yes, it makes sense. All right, I'll leave it there. Thanks for the call. Thank you.

Your next question comes from the line of Joe Gomez with Noble Capital. Joe, your line is now open.

Hi, this is George Post. I'm filling in for Joe this morning. Congratulations on the quarter. I'm curious about the manufacturing expansion you guys mentioned earlier in China and what that looks like in terms of production and a timeline to hopefully bring that online.

Yes, so right now we have two facilities in China that are wholly owned. What's called locally is Wolfies, wholly owned foreign entities. And then we have one JV plant. And the machining plant is in Wuxi, China, which is a suburb of Shanghai. And that's the plant where we are been doing all of the sampling for all of the data center customers that we're prospecting with. And it's where we have our approvals. So we kind of chose that location. get our certifications approvals and equipment organized. We believe we can get in about 80 machines into that facility. We've already ordered We're getting ready to order the next batch. As we think it through, We think that we need space for at least another 200 machines. from our estimates and the timing is hard to understand right now because everyone is kind of in a feeding frenzy to get equipment. line up, parts line up, parts supply. And so the size of the facility that we're looking for would be a facility that can accommodate another 200 machines after we have filled up our current envelope. And the timing, you mentioned the timing. We need to get this done by within 12 months.