NN (NNBR) Q2 FY26 earnings call: guidance and Q&A

Characterize the data center pipeline, areas of interest, and scale.

Harold Bevis detailed the diverse products NN makes for data centers (transformer parts, bus bars, liquid connectors, cold plate plating, couplings for heat pumps, stampings for racks, whips/cabling). He mentioned a multi-product approach, expanding into welding/brazing, and a large expanding prospecting pipeline approaching $100 million, with potential for $100 million in connectors alone over time. The focus is on strategic partnerships and asset placement.

“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.”

asked by Rob Brown · answered by Harold Bevis

Is the gross margin improvement sustainable, and can it continue to increase with product mix changes?

Chris Bonnard stated that margin improvements are sustainable due to past cost reductions, leverage from reduced cost structure, and accretive new business ramp-ups. He noted that higher precious metals pass-through also contributed. Future improvements depend on more accretive new business and diversification into verticals like medical and data center.

“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.”

asked by Rob Brown · answered by Christopher Bohnert

How much of the new business is currently flowing through the P&L, given positive H1 results and seemingly conservative H2 guidance?

Harold Bevis explained that Q2 is typically the strongest quarter, but this year will be different due to significant new wins (medical, data center, defense) ramping up in H2. He confirmed that these new wins did not impact H1 results and will start hitting in H2, with data center sales expected to exceed $1 million/month by November. He acknowledged the guidance is 'slightly conservative' but comfortable, balancing typical Q4 lightness with offsetting new business.

“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.”

asked by Greg Palm · answered by Harold Bevis

Given the 14% EBITDA margin in Q2 on lower revenue than long-term targets, what is the potential upside to longer-term EBITDA margin guidance?

Harold Bevis stated that the business is definitely moving to the next level and the current performance looks sustainable. He suggested that the longer-term adjusted EBITDA margin goal should be more like 14% to 16%, driven by a better product mix, with new wins having gross margins about five points higher than existing business. He indicated an update on longer-term goals would be provided in the next call.

“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.”

asked by Greg Palm · answered by Harold Bevis

Details on the China manufacturing expansion, including production and timeline.

Harold Bevis explained that the expansion is at their Wuxi, China machining plant, which handles data center sampling and approvals. They believe they can fit 80 machines in the current facility and need space for at least another 200 machines (approx. 100,000 sq ft). The timing goal is to complete this within 12 months, acknowledging current challenges in sourcing equipment and parts.

“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.”

asked by George Post · answered by Harold Bevis

What materials are most volatile, and how does this alter sourcing decisions?

Harold Bevis identified precious metals (gold, silver) as having the biggest dollar value volatility, and steel/copper for tonnage. He noted year-over-year inflation in all metals and tariffs on steel. NN has the right to pass through cost changes and seeks full recovery, meaning they don't make or lose money on it, but it impacts working capital and can negatively affect EBITDA percentages.

“The biggest dollar value of materials is precious metals, gold and silver. the biggest tonnage is steel and then copper. So we have year over year inflation in all metals.”

asked by George Post · answered by Harold Bevis

How will the share count change, and what is the progress/timing on renegotiating the term loan?

Chris Bonnard stated that 5.5 million shares were swapped for approximately $19 million of preferred reduction, increasing the overall share count. Harold Bevis added that the current share count is 82.6 million, with 90 million authorized. For the term loan, Chris mentioned ongoing background work with Marathon, hoping for better terms given business performance and lower debt, aiming for reduced rates and more flexibility for growth.

“we swapped about, well, we swapped 5.5 million shares for that roughly $19 million of reduction in the PREF. So that'll increase the overall share count.”

asked by Barry Hames · answered by Christopher Bohnert

What unique skill set enables NN to achieve so many wins in diverse markets?

Harold Bevis attributed the multi-year wins to a strategic shift from automotive focus to leveraging assets and know-how in new markets (data center, defense, medical). This involved hiring new executives, prospecting, identifying gaps, and using Salesforce to track wins/losses. Marquee projects with large partners helped establish credentials and references. He highlighted a 27% hit rate on closed opportunities, above industry average, driven by disciplined financials and a differentiated value proposition.

“What's happened this year is, we've had some multi-year kind of marquee things that we're working on with some big people that we thought would help our credentials. and establish us as a real competitor. And that helped us. So we have references now.”

asked by Robert Sussman · answered by Harold Bevis

What is the ROIC target or range for capital spending on new programs?

Harold Bevis stated a floor of 25% for gross margin and 25% for IRR if capital spending is needed. He emphasized that the real decision-making revolves around the customer's commitment to multi-year volume and whether NN has a differentiated value proposition. He noted that they are selective, cherry-picking better return programs, and currently have over 150 programs in ramp-up mode.

“So the floor on gross margin is 25% and the floor on IRR, if spending is needed, is 25%. Those are the floors we've been averaging quite a bit above those floors.”

asked by Barry Hames · answered by Harold Bevis