NN, Inc.
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good day, and welcome to the NN, Inc. Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Robbie Atkinson. Please go ahead, sir.

[James Atkinson:]

Thank you, Operator. Good morning, everyone, and thanks for joining us. I'm Robbie Atkinson, Vice President, Strategy. And on behalf of our team, I'd like to welcome you to NN's Second Quarter 2017 Earnings Conference call. Our presenters this morning are President and Chief Executive Officer, Richard Holder; and Senior Vice President and Chief Financial Officer, Tom Burwell. If anyone needs a copy of the press release or the supplemental presentation, please call Abernathy McGregor at 212-371-5999, and they'll be happy to send you a copy. Before we begin, I'd ask you to take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation and in the Risk Factors section of the company's 10-K for the year ended December 31, 2016. The same language applies to the 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, divestitures, 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 of the company's Control. This presentation also includes certain non-GAAP measures as defined by SEC rules. A reconciliation of those non-GAAP measures is contained in the tables in the final section of the press release and in the supplemental presentation. First, we'll give an update and overview of the quarter then afterwards, we'll open up the line for question. With that said, Rich, I'll turn the call over to you.

[Richard Holder:]

Thanks, Robbie, and good morning to all, and welcome to our Q2 conference call. As we did last quarter, I'll walk you through the company's results and then I'll turn it over to Tom to talk about the performance of the operating groups, and then I'll return for a wrapUp and open the line for questions. So on to the highlights of the Q2. Sales in Q2 was $225.9 million, which consisted of $11.6 million of organic growth. I think it's important to point out that we had organic growth in all 3 of our segments during the quarter. Adjusted diluted earnings per share of $0.51. Gross margins are in line with expectations at 26.5%. EBITDA at $40.5 million, and operating margins at 12.4%. I think it's important to point out here in our operating margins that they were entirely driven by investments that we're making in the growth of our aerospace business. And as we move through the presentation, we'll talk a little bit more about that, but certainly expected on our part. Completed -- we completed the refinance of our 10.25% bonds on April 3, which resulted in a $0.15 improvement in EPS for 2017 and a $7 million cash flow improvement for '17 as well. Along those same lines, we repaid $8 million in debt in the second quarter. This is the first time we've been able to repay debt so early in the year. And I think it's important to point out that we repaid this debt while we were ramping up current investments in particular in our aerospace business. So we feel pretty good about the cash position and the changing profile of the company. As we move on to Page 4. Again, adjusted diluted earnings per share of $0.51, that's an 11% increase compared to prior year. Net sales, 5% increase so $225.9 million versus $214.3 million in '16. And again I think it's worth noting that we -- this is the third consecutive quarter that we have experienced organic growth in all 3 of our segments. As we move on to Page 5, gross margin, basically flat year-to-year and in line with our expectations. Looking over at operating margin again, we're down a full point, and this a temporary impact of the increased investment in our aerospace business. I think you may recall in the past, I've talked to many of you around how the investments go in particular in aerospace, you've got to ramp up the product, you've got to make a little way to production parts, you've got to qualify the parts. And you do that in the quarter while you're not making any production or making any revenues associate with it. And then generally, the following quarter or following multiple quarters, it comes back to you. So it's fundamentally a time lag as you ramp these programs up. Clearly, we have a business today that is growing. It is growing a lot faster than even we anticipated. So the investments are there. And trust me when I tell you this is a very good thing as we position ourselves for a growing outperforming aerospace business. As we move on to Page 6, adjusted EBITDA margin, again, down about a point and again, driven by the investment in the aerospace business. SG&A is sequentially flat at $23 million, it does include $1.3 million of one-time costs associated with our M&A activity and our divestiture of PBC group. As we move on into the segments, I'll turn it over to Tom to deep dive on the segments. Tom?

[Thomas Burwell:]

Thanks, Rich. So we're turning on to Page 7, we'll look at the Autocam Precision Components Group. Start off with sales. Sales were up 4.5% in this group with growth in our global CAFE automotive business, really globally around the world in the U.S., Asia and South America. And we do continue to see adoption of the fuel-efficient technologies around the globe as the automakers continue to meet the goals for this fuel efficiency into the future. Additionally, we've seen growth in the industrial component of this segment within the U.S. and Asia. Turning to the adjusted operating margins for the group, the 20 basis points improvement in adjusted operating margin was driven by the flex productivity on the additional sales volume. And additionally, this segment continues to benefit from operational improvements from the NN Operating System. Turning to Page 8, with the PBC, Precision Bearing Components Group. This segment has also experienced the 4% sales growth driven by share gains and new program wins, within the top-level customers of the group in both the automotive and industrial end-markets. The growth in the industrial market in the quarter was pretty much as expected. And as we said in the first quarter, we continue to watch the development within this part of our business very carefully. Europe, Asia and South America were really the global markets, in which we experienced the majority of the sales growth. The margins in the PBC group also improved 20 basis points. And it is also driven by the flex productivity on the additional sales volume and from continued operational improvements as part of the NN Operating System. Turning to Page 9, with the PEP sales. The PEP group experienced an 8% growth in sales in the second quarter. This follows a 12% growth that they experienced in the first quarter of 2017. And we continue to see sales growth in our medical portfolio from new program wins and share growth with existing customers, principally and then minimally invasive surgery and the drug delivery markets of this vertical. Additionally, we're seeing growth within our aerospace businesses, as Rich has just discussed. As we said on the Q1 call, we'd expect a few share gains in this market -- this aerospace markets throughout 2017 as we ramped up the sales throughout the year. It's important to note that only a portion of these new programs are actually reflected in our Q2 sales as we are currently in the process of ramping up sales that will come on line in the second half, and in some cases of '17 and in some cases the first half of '18. Now turning to the adjusted operating margins. The margins for PEP were generally in line with our expectations. The Q2 adjusted operating margins, as Rich mentioned, was impacted by our rapidly growing aerospace business with upfront investments in infrastructure and costs incurred to qualify products ahead of the full run rate volumes and in some cases, start of production. The impact of the operating margin in these investments will be reduced throughout the remainder of the year as these programs achieve full production levels, and we optimize the operations of these new product lines through the NN Operating System. Full run rate margins on these new aerospace sales programs are at or exceed the adjusted operating margins of the PEP segment. And it is important to note, as Rich mentioned, we would expect to see this lag between the timing of investment in new program startups and achieving full production volumes until we are reaching up an appropriate level of scale in the business, which is approximately $40 million to $30 million, currently the way we're looking at it. And until we achieve this scale, we will not really be able to effectively absorb these costs without having to be visible from time to time within the operating margin of the group. So with that, I'll turn it back over to Rich.

[Richard Holder:]

Thanks, Tom. So let's just get to the summary, Page 10. This is our third consecutive quarter with organic growth in all 3 groups. I think we feel pretty good about that. Because I think it's proving the thesis that we had -- once we created this strapline around how we could grow and be able to ride this cycle. Again, we can't point this out enough. We continue to invest in our aerospace and medical businesses at record level. Again, you will see this sort of lumpy activity in the margins when we make these big program investments from time to time, but to Tom's point, when we get this business somewhere around a full production rate of $30 million, $35 million, we feel pretty confident that at that point of time you'll see expending margins in -- while we continue to invest at the same time. So we're looking forward to getting that business to that size, so we have sort of that normalization within the business. The PBC divestiture remains on track. And it's planned to close some time in H2. Things are going well, there's nothing in particular to report around that. Everyone is fairly excited about getting that closed. Once again, we repriced our senior notes into a new term loan on April 3. And we begin to reap the benefits of that financing -- reduced financing rate. And we repaid $8 million of debt the quarter. And again, I tell you, this is the first time we've been able to do that. I think certainly, since I've been here. And in the near history of the company. I think, it shows you the changing profile of the company, and where we can go. So if we get to a point where -- no, we are cash flow positive of this nature in the second quarter that is a much more balanced organization and certainly what we see -- what we seek to be. Maybe one other note on that point, while we are -- why we paid down this debt, we have made a record level of capital investment, especially on the aerospace business in this quarter. And so we are somewhere around $14 million of capital investment within the quarter. Again, a record quarter for us. So to be able to accomplish both at the same time, I think, allows us to put the business on a good footing for certainly future revenues and margins going forward. As we move over to guidance -- guidance in the third quarter. As obviously, this is posted divestiture, so the PBC sales are excluded from both third and fourth quarter. We're looking at $146 million to $151 million top line in the third quarter. Margins, we're holding margins as expected against the lumpiness and so on, it will come back to us. So between 12.4% and 13% points. EBITDA of $29 million to $31 million. So clearly, you can see the implied improving profitability of both the EPS line and the EBITDA line. Adjusted diluted EPS of $0.26 to $0.31. So clearly as we finish the divestitures in business and we continue to run this business appropriately, you have a business that is a couple of points more efficient until you can see that in the number. With that said, as we go over to the guidance for the year, we are raising the bottom end of our sales guidance some $5 million. So we'll take that to $745 million to $755 million, again ex the PBC sales for third and fourth quarter. Margins are still in line, 12.5% to 13%. And again, keep in mind, we are holding some SG&A that we expect to be able to leverage once we are able to execute on an acquisition going forward. And we think that is near term enough that we should hold on to the infrastructure. EBITDA, $141 million to $144 million, again same comment around the infrastructure. EPS of $1.57 to $1.70, again you see the implied increase or improvement in profitability. CapEx of $40 million to $50 million, this goes back to my earlier comment. We are holding CapEx steady even ex the divestiture. So the implied statement here is we actually increased, for the balance of the business, CapEx by some $15 million -- $12 million to $15 million and all-around growth programs. So again, lot of investment in growing company. And even outside of the deal of ex PBC, we should generate $47 million to $53 million in cash available for debt repayment by the end of the year. So with that, I'll open the line for questions.

[Operator:]

[Operator Instructions]. We'll go to Justin Long with Stephens.

[Justin Long:]

So a lot of discussion about aerospace and the success you're having in that market, it's definitely good to hear. I was wondering if you could help us think about the ramp in revenue for that business going forward? When we look at the guidance for the second half, what's the top line contribution you're expecting from aerospace? And how should we think about the growth potential of that business as we get into next year?

[Richard Holder:]

Yes, I think with respect to the second half, I will tell you, we don't have an awful lot of top line in the second half. Obviously, we are in the midst of qualifying parts, in the midst of building and all reps and situps and all these different things that need to happen within that space. So I would tell you, there's, I don't know, a couple of million dollars, maybe at this stage of the game, embedded. I think the big result will be in '18. We think we'll have this thing somewhere between $25 million and $35 million run rate at the end of the year. So if you think about it, '17 to '18, it could be as much as $10 million to $12 million sort of all in when we're at peak production and carrying, like, margins if you will.

[Justin Long:]

Okay. That's helpful. And secondly, it sounds like there's potential for a sizeable acquisition in the near term based on the pipeline. And I just wanted to get a little bit more color on how you're assessing some of the different opportunities. Do you have a synergy target in mind as you look at these deals? I'm just curious if -- how you're thinking about these deals? And if it's is going to be more of a synergy play like we saw with Autocam or more of an in-market diversification play, like we saw with PEP?

[Richard Holder:]

Yes, I think of course, I could probably wax on about that all day. But in the interest of time, I'll just kind of put it this way. Our first filter in any acquisition is around the strategic plan, that is never changed, right? So it's market fit, it is the plan to the margin profile that we've built for the company. And it's either coming in that way and getting better, or we can certainly build a roadmap to get it there. It is around being able to display and bring the market the correct portfolio that we are building within each one of the segments. So those are the kind of primary filters, right? There are those pieces. And there's probably 1 or 2 properties in our -- on our list today that could bring substance of synergies to the game. But that's kind of not our first goal, right? I mean if you think about what we did with PEP, PEP was nothing close to the synergy play. We got synergy. We got $6.5 million of synergies, but that wasn't on #1. So it is always about the strategic plan, building the proper portfolio, building the go-to-market strategy. And then being able to lift the margins as a result of that.

[Justin Long:]

And maybe from my last question. I believe the last update that you gave on the 2018 EPS run rate target was somewhere in that $3 to $3.20 range. I guess first, is that still the right ballpark to be thinking about? And second, what would that number look like just based on the business today? I just wanted to get a sense for how much acquired EPS you're assuming as we bridge to that target in the next 12 months or so?

[Richard Holder:]

Yes, I think what we would certainly like to do is kind of take you through this in more depth at the conference in late September. But just as a quick hit, I think the way we are think about it is as we think that we can replace the EBITDA that we're carving out of the business with this divestiture within in the next 6 to 12 months. We think we can do that on what will probably be something around $100 million less in sales. So the implication there, obviously, is a much more profitable group of businesses and/or growth coming into the corporation than we otherwise had. With that in mind, we think we're reasonably successful going down that path. That $3 number is still in range. And so we're not prepared to come off that number just yet, but we'd like to take you through with a great detail at the investor conference.

[Operator:]

And we'll go next to Daniel Moore with CJS Securities.

[Daniel Moore:]

Maybe just focus on, Rich, on Auto, what you're seeing there? Obviously you continue to outpace the market given CAFE standards. But maybe your updated outlook for the rest that -- for the remainder of the year and thoughts on 2018?

[Richard Holder:]

Yes, so I've got to up to this in sort of 2 ways, right? So if you think about the auto business pre the divestiture, we've already said that when North American SAAR gets down around 16.8 million, the potential for, let's call it a volumetric chase, begins, right? And so pre this deal, I would tell you that we feel that the North American part of our businesses is giving in -- getting in a space that we would certainly be looking at potentially for business restructuring. We that said, however, post the deal, we don't -- we no longer have that much of that component within the business. And so our numbers go from a volumetric chase of 16.8 million down to a volumetric chase of 16 million or 16.1 million. So said another way, in the business post the divestiture, we still feel very good about the automotive market globally as well as in North America. And we don't see an issue associated with the current adjustment in SAAR. So that's kind of number 1. Number 2, you have to pay attention to the global nature of our business, right? We are double-digit growing in China, we are high single-digit growing in Europe, we are high single-digit growing in South America, right? And we are low single digit growing in the U.S., in our CAFE product. So we are actually, relative to the CAFE product, essentially hitting on all cylinders as much as one could in this market. And we don't see anything in '18 that changes that. In fact, if anything, certainly in Asia the data is starting to telling us that '18 could be as robust if not more so than '17 was, simply because the adoption rate in Asia seems to be ramping up.

[Daniel Moore:]

Very helpful. And just to clarify that last question in terms of the ramp of revenue around the aerospace business. Did I hear, $25 million to $35 million run rate at the end of the year, that's the end of '17? Is that correct? Or the exiting the end of '18?

[Richard Holder:]

No, no. That would be exiting '17.

[Daniel Moore:]

Got it. And so there's a -- that would give you $12-ish million sort of revenue uptick '17 to '18.

[Richard Holder:]

Yes, $10 million to $12 million. Yes.

[Daniel Moore:]

$10 million to $12 million. Got it. And so by kind of mid year next year, we should be thinking somewhere in that range, give or take a quarter, getting to that sort of full mature margin run rate?

[Richard Holder:]

Yes, I think that's fair. Because if you think through, we should be somewhere around mid year, let's call it 15 '17, and that's kind of the line of demarcation that we should be able to absorb those investments. We'll have enough scale to do both. Because we really -- we don't, right? It's -- I mean we've grown the business nicely, but it's still a little business. So to some degree everyone else has to contribute to help grow this business.

[Daniel Moore:]

Perfect. And then lastly, you talked about aerospace, maybe, medical, just give us some update there. What we should be thinking about in terms of new product launches, opportunity set for revenue for the next year or 2? Any comments would we great.

[Richard Holder:]

Yes, I think in the medical space, I think certainly these last 2 quarters have been proved very positive for us, right? We were 12%, 15% in the first quarter. We're 8%-ish in this quarter. We don't see anything that causes us to sort of move off those number. That's kind of what we thought we would, and we continue to ramp in that same direction. We've got a few new programs that we think can hit. We're not necessarily having those program, because as you recall last year, we still are at the mercy of various regulatory agencies signing off before these things can go. So we feel good about the plan for the business for the balance of the year, right? We're not inclined to lift it, but is there opportunity to outperform? Absolutely.

[Operator:]

And we'll go next to Charley Brady with SunTrust Robinson Humphrey.

[Charles Brady:]

Just a one quick question, I guess on -- there's some discussion U.S. omission standards being frozen, I mean, it was going to happen. I'm just kind of -- would like to get your comments on sort of that scenario and what if anything it might have an impact on your business?

[Richard Holder:]

Yes. I think if the standards were frozen, I think there is very little impact in the near term on our business, right? And we'll define near-term out to, let's call it 2023 to 2025. The way you need to think about this business is that the engineering out to those year on the platforms is essentially already been done. And so there's really not an opportunity if you will to undo the engineer. That's number one. Number 2, while we talk about this in terms of omission standards, what it's really manifest itself in is efficiency in the vehicle. And so what you have is there's a general public that's already been conditioned to drive a 25 miles to the gallon Chevy Suburban, right? So there's not an inclination to say all of a sudden I'll go buy a 50 miles for the gallon, Chevy Suburban. So I think the market demand variance are there and are not going to change. So that's number 2. Number 3, and maybe most important, this is being driven more by the globality of these platforms rather than what's going on in North America. And I will submit to you the biggest indicator of that is Bosch launched their generation GDI system in Asia, before they launched that in Europe and North America. In part, because of the regulatory environment, in part because of the demand stream on the globe. So what you fundamentally have now is technology going from east to west, that traditionally has gone from West to East. And so the creation of -- the fundamental creation of the demand is in a different place today. So we could freeze it if you like. The places in the world that have the largest demand is going to drive the technology, and that technology will come into the market. So I don't think there's much impact that the freezing of that can have, certainly not between now and 2025.

[Charles Brady:]

That's great color. So next question just on the Q3 sales guidance, it looks like it's implying flat to maybe up 3%. First half of the year, you're up 6.5-ish percent just under that. I'm just trying to understand the Q3 revenue guidance, it seems conservative.

[Richard Holder:]

Well, I would just simply tell you that our guidance is reflective of what we think should happen in the business. I think it does reflect continued single-digit growth in the business quarter-to-quarter.

[Charles Brady:]

There's not something in PEP going into Q3 that would -- I guess what I'm saying is Q -- first half of the year didn't have some abnormal growth item in it that just doesn't repeat in Q3, is that correct?

[Richard Holder:]

No, there's no one-times or abnormalities or anything like that. There are pieces in the business that perform to a normal cycle, right? And so especially when you think about the medical business, right? You get more surgeries toward the back end of the year than the front end of the year. So you have those kinds of cycles inside the business. But there's nothing out of the ordinary or any outlier.

[Operator:]

And we'll go next to Stanley Elliott with Stifel.

[Stanley Elliott:]

Rich, when you guys were putting into $20 million to $30 million kind of investment or -- pardon me, the revenue targets that you hope to get out of these investments. What's typically the duration of those contracts? How long would that continue to carry forward before you have to make a re-up I guess?

[Richard Holder:]

Yes. So these contracts are long-term contracts. So our LTAs in this space, the ones we signed so far has been in the -- kind of in the 5-year range, which is shorter than we usually do in our automotive business, but probably about just right for aerospaces, especially as we grow it. But know that, that in these LTAs, as you all know about aerospace, it's a lumpy business, right? So it's -- and much of these products are on programs that have already been launched, right? So we are delta qualifying into these programs. So we come into the program initially crossing over where we share -- we may be sharing the product with another supplier in the first couple of 6 months, and then it goes over to our product entirely. So it ramps towards the end. So you probably have a good 4 years, let's call it a -- it's our product entirely on the contract.

[Stanley Elliott:]

Perfect. So what we're talking about right now being qualified in the low rate initial production. That's really more than kind of 6 months window of joint manufacturing with another entity. And then after that, kind of as we get in the middle of next year, you would assume the total revenue of that contract?

[Richard Holder:]

Correct.

[Stanley Elliott:]

Perfect. And then last one for me. You kind of talk about normal margins within this business. What do we think it should look like? My guess is that you have a little bit of headwind in the first part of the year, but then margin should ramp pretty significantly in the back part of the year and into '18. So do we think about this as kind of -- what would you consider more of a normal margin target that we should be thinking about for this business in the next year?

[Richard Holder:]

I mean I think we should think about it in the same range as we think about the PEP business today. It's going to be those kind of very high double-digit operating margins.

[Stanley Elliott:]

Perfect. And then lastly on the acquisition piece. You -- so the way the pipeline's looking right now, effectively bringing something in maybe on the medical side. Is that kind of what I'm hearing to kind of help flesh out that business?

[Richard Holder:]

Yes, I think it would be fair to say that our priority and our focus certainly is in the medical space. We think that is certainly the business we're going to be going after to get it to the scale we want it to. And replace the EBITDA that we're carving out. With that said, and I think you've probably heard me say this before, we have a need for a base of operations on the West Coast for aerospace. It is likely that we will acquire something that is already working on the West Coast and turn it into NN facility distributing the kind of -- the kinds of characteristics that we expect via the NN Operating System. So from the outside and it looks like an acquisition what it really is more than anything but probably be a CapEx buy. But inside the medical space, those really will be fulling out the portfolios real -- sort of real strategic bolt-ons.

[Stanley Elliott:]

And as you expand kind of in the medical space and build up scale, does that open more doors for your with some of the larger equipment providers, medical device manufacturers in terms of being able to get on additional programs?

[Richard Holder:]

It absolutely does, right? Because what we're trying to do is to make sure that we provide, let's pull out a better phrase, all the accessories around the OEMs leading products. So let's say another way, if a major manufacturer of a knee says that we've done all this engineering, here is the knee. We want to be the guys that provide everything around the knee and everything around within the kits for the knee surgery. But that kind of gives us a roadmap of the things we need to acquire to fill out the portfolio in that space. The same thing applies for our implant business, right? There's a series of spaces that we want to play in. And as we fill out the portfolio, obviously, it gives us a greater foray and a greater wallet share of the big guys.

[Operator:]

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

[Robert Brown:]

You mentioned the industrial market was sort of stabilizing, you were watching it carefully. Could you give us some color how that's trending ending in sort of week to week? Is it getting better at some point? Or is there any sign there, that's getting better?

[Richard Holder:]

Yes, look, I think for us -- let me recap what we've sort of always said that we thought that the first half of the year was a channel refilling plate. right? We felt that last year -- late last year, the channel depleted itself to a point where it couldn't hold up and it had to refill. And so we saw some of the benefits of that refilling in the fourth quarter. We certainly planned for it in the first 2 quarters of the year, and I think it's materialized that way. I think we've always said that we thought the market right now would find its way to be somewhere around 2% to 3% sort of net growth over the course of this year. I think what we're seeing now, it's probably trending more to the 3.5% to 4% kind of growth, so it's a little bit more robust than we thought it would we. And that's what the data is telling us right now. But I think we're at the point where the channel has normalized. I think it's fair to say that. And so what you see now through the balance of the year is real growth. And again, we were saying 3 points, we think it's probably more like 4.

[Robert Brown:]

Okay. Great. That's good color. And then on your guidance, I know you raised the lower end. But I guess my question is, what sort of has to happen to get to that high-end or above for the remainder of the year?

[Richard Holder:]

Well, there's some programs that if they move a little swifter than we otherwise think they will at this point in time, they're certainly upside there. And there's always a discussion on market windage, right? If we see market windage, especially in the industrial space of prolong and the thing kicks to 7, we'll certainly get the benefits of that, right? But we feel pretty good about those numbers.

[Operator:]

And we'll go next to Steve Barger with KeyBanc Capital Markets.

[Kenneth Newman:]

It's Ken in on for Steve. I want to go back to your normal margin comment for the aerospace business; Can you maybe give us a little bit color? And how we should think about incremental margins for that business, and maybe for PEP, when do they start to make sense again in the back half? And what could they look like as we ramp up on those new contracts?

[Richard Holder:]

Right. So a number of things in that one question, right? So think about -- from an incremental basis, we've always said what we're try to do is design the company to be 35% incremental, 25% decrimental. On the aerospace side, we are trending closer to 40% incremental in a normal run rate situation, right? If you think about that on an operating margin perspective, so let's call it, on the low end, let's call it 14%, 15% on the high-end, let's call it 18%, 19%, okay? Depends on the program itself. In terms of getting back to normal sort of ripe through margin. That's a interesting question, right? Because it's a little bit of feast and famine. And here's why I say that, The more programs we win, the more investment we have to make the better future we have. Of course, if we stop winning, we stop making the investments. And then immediately, this top kind of comes back, right? So it's a finite sort of process of managing the investments that we are making until we get the business to the appropriate scale. So I think it's safe to say, we'll be there sort of unequivocally in the middle of next year. But certainly, if we win more programs and we have the ability to continue to invest, we will do so, right? We've always said that, especially in this platform, there are those times where we've pulled our margins and win programs to bring the margin back up, and we haven't come up with that, right? I think we've proven that, that is a normal sort of path for us, right? And the more we apply the NN Operating System to something we've won, the more margin we pull out of it. And so just kind of a normal activity.

[Kenneth Newman:]

That's really good color. And then going back to the acquisition pipeline, you talked a little bit about it in terms of targets and the strategic play. Can you maybe talk about -- has anything come in or fallouts since the early July call? Just wanted to get a better sense of how active that pipeline is?

[Richard Holder:]

I guess I would characterize that, that pipeline, certainly the things that we say are our priorities in the pipeline, I would characterize it as extremely active. I will tell you that nothing's fallen out since the July call. And in fact, we probably had a 1 or two come in. So it's pretty robust. It's kind of activity, we're looking forward to sort of turning our entire attention on to executing within the pipeline. And hopefully, we can hang 1 or 2 or 3 things on maybe even before year-end.

[Operator:]

And that concludes our question-and-answer session. I would like turn the conference back over to our speakers for any closing remarks.

[Richard Holder:]

Hey, Thanks, operator. Now we're -- we appreciate you joining us today. We think we continue to execute on this strategic plan. Hopefully, you all see at the same way. And we look forward to seeing you at the conference in September. We'll be sending out notifications of when, where and all the details around that here shortly. So that's real time, and we'll talk to in next quarter.

[Operator:]

Thank you, everyone. That does conclude today's conference. We thank you for your participation.