Q4 2019 Earnings Call

Our quarterly earnings release was issued along with the filing of our annual form 10-K both are available on our website at and can be used as a reference for today's call along with the Q4 2019 earnings conference call presentation, which can be found at light all in the investor relations section off as noted on slide to of this presentation. Any comments made on this conference call that may constitute forward-looking statements are made available pursuant to the safe harbor provision as defined in the security wage laws, please also refer to the cautionary note concerning forward-looking statements within light all's form 10-K for further information.

In addition, we will be referring to non-gaap financial measures during this conference call a Reconciliation to Gap financials can be found in the appendix of the presentation on June 1st with that helped turn the call over to Sarah Brendan. Good morning everyone and thank you very much for joining us this morning before I get started. I'd like to just take a minute and share with you. What attracted me to light all this role and why I'm really excited to be here at this time. I've been an executive-level roles most recently us deal and around manufacturing companies for nearly two decades. One of the things that is most impressed me about Lytle is the quality and reliability of our products the extraordinary solutions-oriented approach to customer service and the spirit and passion of the three thousand plus employees around the world. I really believe that there's a lot of value to be unlocked and cream.

I also know it's going to take a lot of hard work and a little bit of patience to get their turning to slide three is Brendan mentioned. I've been on the job now for just over three months off a focus the majority of my time thus far on visiting our operating sites around the world meeting with our employees the men and women who serve as the lifeblood of Lytle and manufacture our products that our customers want to buy and initiating a process focused on where we can provide the most value to all stakeholders to our customers to our employees and our shareholders. I will soon shift my focus to speaking directly with customers. And while I have many insights to share about our business. I thought I'd start with a store rep regarding one of the experience. I had while visiting one of our largest plants in North Carolina as you might know we have over 800 employees in our Hamptonville facility many of whom have been with the company wage.

Decades, I had the privilege.

Just helping to serve a traditional holiday meal and Men December across all three shifts and the plant and it gave me a great opportunity to meet a wide cross-section of our Workforce with this visit as with all of my visits brought into sharp Focus. The fact that Lydell is not only a global manufacturing company, but also a strong community that provides economic opportunities for all of our three thousand plus employees and their families around the world. We have a responsibility to them as we do all of our stakeholders.

Well, our financial performance has been both unpredictable and unacceptable for several quarters level does have a strong platform and opportunity for each business segment wage to leverage and grow in their respective and markets the global footprint of our operations and our product portfolio are cornerstones on which we can drive growth. Although each Village has unique challenges in their markets. These challenges are manageable and addressable having said that we will be more focused on optimizing the global footprint to better adapt to any conditions.

in order to

Achieve this we must unlock value by breaking down operational barriers while each unit has a unique business model and approach. There's been limited collaboration between our businesses wage regarding vertical Market approaches or customers. We are improving Communications collaboration and driving accountability across the Enterprise. I've also been incredibly impressed and encouraged by the strong relationships. The little team has developed with our customers are highly engineered products focus on creating custom solutions that enable us to be deeply embedded with our customers and providing high-quality Innovative and value-added solutions. These relationships are a tremendous asset to the business and while some of the areas in which we compete have certainly become commoditized we can and do differentiate ourselves by delivering to customers the highest-quality lowest-cost products wage.

simultaneously partnering with them

on their most complex business challenges with unmatched Solutions

These are areas. There are areas that must be improved immediately and we recognize the need to leverage our invested Capital more efficiently to drive better Returns on our investments in particular. The interface acquisition has clearly underperformed underperformed and fixing this business is a priority given the lower demand in the market set. It serves God what's more wild has a rich repository of talent clients and other resources that must be more effectively leveraged and integrated across the entire prize to that end. We have engaged one of the world's top business Consulting and transformation firms and are in the process of conducting a strategic review with our executive team to evaluate Lytle portfolio and end-markets. This process will identify and develop actions to ensure that we are leveraging our existing invested Capital. Yep.

other resources efficiently it will also

To help prioritize strategic actions that optimize future Capital allocation all oriented towards driving long-term shareholder value.

In addition this review will provide a framework for evaluating the markets where we currently participate along with our ability to compete in these markets. We will implement the findings of this review at a pace that is consistent with the organizational bandwidth while prioritizing short-term wins and aligning the organization to deliver sustainable value month. We expect to conclude the Strategic review by the end of second-quarter twenty-twenty and expect to share more detail on the results later this year.

Turn Ali the end markets that we serve continue to be both Dynamic and challenging with recent developments related to the coronavirus and China. We remain focused first and foremost on the health and well-being of our two hundred plus employees who work across our China operations following the Lunar New Year holiday Arthur mom used to call facility in taicang return to operations on February 10th albeit with less than full staff.

we

Speck to ramp up production to support OEM, excuse me, and tier one customer requirements over the remainder of the first quarter as our customers return to full production month and our technical nonwovens operations production was slower to recover with our Russia and using facilities reopening on February 10th and 13th respectively wage the Ching poo facility resuming operations the week of February 17th at reduced Staffing levels, while our performance materials business does not have production operation China. We are working with customers to evaluate their requirements and react accordingly.

Finally the resulting impact to our supply chain including local Logistics and deliveries to our customers have been disrupted given transportation and Logistics constraints considering both of these items. We expect first quarter sales will be impacted but given the dynamic nature of this event. We cannot reliably quantify the impact at this time.

Need to slide for will ship to discussion of business conditions in in markets that we serve. Let's start with the automotive Market which after several years of growth is clearly slowing and in some regions, in fact Contracting all 2019. So I modest decline in North America including the protracted strike at General Motors volumes in Europe were essentially flat wage and production in China was down significantly despite this in 2019 are thermal acoustical Solutions business grew Global sales organically by 1.5%

Current forecast for 2020 indicate a slowing in North America and Europe were forecast indicates flat to slightly down volumes in particular of the European Union regulations mandating lower carbon dioxide emissions in 2020 could further impact European European sales volumes as Auto producers struggled not apply with fleet-wide targets or face significant monetary penalties.

while we see

Favorable uptick in 2019 European volumes related to the platform rationalization resulting from the combination of PSA and opal the potential impact of the pending merger with f name is still to be determined finally prior forecast for China indicated volumes would be flat in 2020. And although the full impact of the coronavirus is not fully understood. We anticipate it will be a negative impact.

More generally the European industrial sector saw slowing growth in 2019 from a variety of factors, including global trade uncertainties and the potential impacts of brexit how long we anticipate continued soften softness in the European industrial markets and are seeing softer backlogs in our industrial filtration segment in technical nonwovens consistent with the Slowdown large project orders in fourth quarter 2019 compared to that same. In 2018.

and

It's materials. We anticipate full year sales of interface sealing products will stabilize this assumes no significant recovery in the act and construction equipment Automotive small engine or related markets while we are expecting full-year sales to be down slightly in the ceiling and advanced Solutions segment. We expect to see same stabilize sequentially from fourth quarter 2019 followed by a modest uptick in the second half of two thousand twenty globally are liquid filtration markets were generally stable in 2019, and we fully expect the continued demand for clean air and water will drive stable demand in 2020.

On the supply side cost for aluminum used in our thermal acoustical Solutions business stabilized in 2019 average pricing is down for the six pack of quarter and we have modeled flat pricing in 2024 both the Elam e and x and Midwest premium finally conversion costs for 2020 in North America have been negotiated and are locked in at the same level as 2019 polyester fiber cost used in our filtration and engineered materials business segments wage generally been steady through the year and we anticipate that this will hold in 2020 Supply constraints and higher prices on meta aramid fibers used in technical nonwovens. An Choi formance materials have generally stabilized with that. I'll turn the call over to Randy to cover fourth-quarter results.

Thank you, sir.

Turning to Slide Five. I'll briefly briefly cover some key highlights for the fourth quarter and then provide an overview of our operating segment results as a reminder. We will be discussing adjusted Financial metrics including adjusted ebitda by segment. Before we continue. I'd like to outline the larger items that are adjusted in the fourth quarter quarter. Results wage first a non-cash impairment charge of 64.2 million dollars, including $63 million dollars of Goodwill impairment booked in the performance materials segment wage. Goodwill impairment is principally due to the under-performance of the interface business that was acquired in August 2018. In addition to point three million dollars of expense related CEO transition and 1.9 million dollars related to Severance programs have also been adjusted a complete reconciliation to comparable gaap numbers are provided in the Press Club.

in earnings presentation

Fourth quarter 2019 net sales of $193 decrease 7.9% or 16.7 million dollars from the same. 2018 organically sales decreased 8.3% driven by weakness and interface ceiling and markets lower demand for industrial filtration products wage in China and Europe and lower domestic Automotive volumes attributable to the General Motors strike, excluding a sales reduction of 3.2 million dollars from the GM strike home sales in thermal acoustical Solutions were essentially flat the strong dollar continued to be a headwind on foreign sales reducing Consolidated Revenue by one point seven million dollars or zero point eight percentage points and tooling sales were up four million dollars or 1.9%

Acquisitions and divestitures contributed a net decrease of one point six million dollars or zero point seven points of growth driven primarily by the divestiture of the GS Ott's in technical nonwovens in the second quarter of 2019.

Custody for the quarter was twelve point four million dollars a decrease of $13 manufacturing and efficiencies in the thermal acoustical Solutions segment and sub favorable Max and lower cost absorption and performance materials both contributed to this performance.

Notably technical nonwovens drove 30 basis points of segment ebitda. Margin expansion compared to Prior Year. I'll talk in more detail about each segment. Later.

Consistent consistent with our guidance last year. We invested 1.9 million dollars or last quarter. We invested 1.9 million dollars of severance related expenses in the wage order to align our expense structure within market conditions. This investment was all related to headcount reductions and were returned approximately 4 and 1/2 million dollars of run rate. Same things in 2020 and Beyond

adjusted loss per share was seventeen cents per share down $0.69 from the fourth quarter 2018, including approximately $0.07 of incremental amortization associated with the interface acquisition.

Turning to slide six full year 2019 sales or 837 up 51 and 1/2 million dollars would net acquisition activity log 81.5 million to sales offset by FX headwinds of 16.3 million dollars and lower tooling sales of 1.2 million dollars wage being organic sales declined 12.6 million dollars or 1.6% adjusted ebitda of 80.4 million and adjusted ebitda. Margin of 96% decline 9.9 million and 190 basis points respectively from 2018.

Cash generation of twenty three point nine million dollars in the quarter in eighty-six point nine million dollars for the year was supported by improvements in working capital. This includes $15 of cash generation from factoring of accounts receivable, that would normally have been collected in first-quarter 2020 debt-reduction continues to be one of our top it'll allocation priorities with $14 paid down in the quarter and $52 million dollars in 2019. Total outstanding debt on the company's Club facility was $273 at the end of the year for a net leverage ratio of approximately three times adjusted ebitda as defined in our credit agreement.

Capital expenditures in fourth quarter 2019 were 8.6 million and 35.9 million for the full year at the low end of our previous estimate am moving into twenty-twenty. We anticipate lower Capital spending of approximately 25 to 3 million dollars as larger Investments particularly in thermal acoustical Solutions wage are predominantly behind us fourth-quarter effective tax rate of 1.3% and full-year 2019 tax rate of 8.3% were both impacted by the Goodwill impairment charge. That is not tax-deductible.

Adjusted for this the tax benefit associated with pension settlement charges earlier in 2019 and other adjustments the full year tax rate is 29% driven Higher by losses in jurisdictions where a tax benefit is not recognized in tax law changes. We expect the 2020 tax rate to be in the range of 25 to 27%

moving to

I'd 7 I'll discuss our segment results starting with our thermal acoustical Solutions segment. This is our Global Automotive business that specializes in providing Innovative in June and thermal and acoustical solutions for vehicle under hood underbody powertrain and exhaust applications.

Fourth-quarter sales in this business where eighty-six Point 1 million down organically 3.1% or 2.7 million dollars adjusted for three point five million dollars of lost sales from the General Motors strike in October sales or a half a million dollars organically. Regionally North American Sales were down from fourth quarter 2018 largely on lower sales of acoustical products partially offset by higher sales of thermal Shields European parts sales grew slightly more than 5% off unfavorable unfavorable foreign exchange with continued volume gains on selected Platforms in China while the overall Market continues to be down year-over-year wage.

lytle's parts sales were

Drop significantly as new programs continue to ramp tooling sales of ten point two million dollars were up three point nine million dollars compared to Prior year contributing 470 basis points to segment sales foreign-exchange. Primarily the Euro reduced segment sales growth by a hundred basis points or nine hundred thousand dollars.

Profitability and the thermal acoustical Solutions segment was negatively impacted by four million dollars or four hundred sixty basis points of additional operating costs compared to the entire year in North America. We continue to see overhead costs increased temporary labor and overtime while our European operations continue to incur incremental Xbox and Outsourcing costs because of higher OEM delivery volumes in addition unfavorable product mix specifically lower volumes of higher-margin and acoustic projects products impacted margins with fourth quarter adjusted ebitda margin of 6.6% down 640 basis points from prior-year.

Moving to slide eight. I will cover our performance materials segment which provides specialty filtration and engineered sealing solutions to a variety of end markets and industries globally month sales of 55.8 million dollars were down nine point eight million dollars or decline of 15.1% Organically. The contraction was driven by software and Mark in our ceiling and advanced Solutions segment, which was down almost 19% on Broad weakness in all regions sales and our filtration segment were down 8.3% off with games and air filtration and offset by lower liquid filtration volumes, foreign-exchange headwinds were offset by higher inorganic growth from the h&v product line Aqueduct completed in the second quarter of 2018.

Fourth-quarter segment adjusted ebitda margin of 10% is down 570 basis points from the prior year. Impact impacted by lower absorption on reduced volumes in our ceiling segment in higher labor and overhead costs.

seizing

He says were partially mitigated by lower material costs productivity improvements and improved sg&a efficiencies.

Fourth-quarter results include 4.1 million dollars of intangible amortization for interphase which is in incremental one and half million dollars from the same period in 2018.

For the full-year intangibles amortization related to interface with 16.2 million dollars an increase of 12.7 million dollars compared to 2018 in 2012 that we are projecting amortization expenses related to interface to be flat to 2019 at approximately four million dollars per quarter.

Why nine covers our technical nonwovens segment this segment produces are and liquid filtration media as well as other engineered products for use in various commercial applications such as geosynthetics automotive industrial and medical among others.

C

Those in the fourth quarter of 2019 were fifty six point eight million dollars down 12.4% from prior-year adjusting for FX headwinds of 70 basis points off and another 330 basis points for the GS. All divestiture organic sales were down 8.4% compared to Prior year.

Industrial filtration sales were down six point nine million dollars or 18.6% heavily impacted by lower sales in China and software industrial markets in Europe.

Advanced Materials sales is reported are down 1.1 million dollars, but adjusted for the two point 1 million dollars of lower sales from the GSL divestiture sales are up one point one thousand dollars or 3.9%

In terms of profitability adjusted segment ebitda margin of 12% was up 30 basis points from fourth quarter 2018. This was driven primarily by productivity improvements and lower sg&a spending meta aramid Fiber prices were up in the fourth quarter compared to Prior year, but were offset by higher pricing as a reminder adjusted segment ebitda accounts for restructuring expenses and Severance expenses of 80 basis points in fourth quarter, 2019, and fifty basis points in fourth quarter 2018.

That concludes our review of the fourth quarter results. It was a challenging quarter with top-line sales impacts from the GM strike weaker demand in Europe and China for technical nonwovens wage continued weakness in interface sales given the end market conditions Sarah discussed earlier. We enter 2020 with a focus on the Key activities that we can control on that topic. I'll turn it back to Sarah for her closing comments. Thanks Randy and then the spirit of the things that we can control. I'd like to close with some comments on our Focus areas for 2028 and thermal acoustical Solutions. Our priority is to mitigate higher labor and overhead costs to offset the mix impacts of the significant sales drop of high-margin acoustical foam products in technical nonwovens. We will focus on further Market penetration of new products and Innovation that is a creative to our portfolio and in performance materials, we will continue to age

a more flexible and agile

Structure that enables us to react to changes in market demand and across all segments. We are focused on the stability and growth in China acknowledging the current uncertainty around with virus across the Enterprise. We remain fully engaged in improving working capital and accelerating strong cash flow generation and 2020 which which took the company to reduce its outstanding debt and improve our net leverage ratio. Although many challenges lie ahead. We are cautiously optimistic for the future. We truly believe life stands apart from competitors in terms of our products our focus on Innovation and our relationships with our customers our Focus for 2020 will be ensuring that as a company we are strategic. How are utilizing our Capital personnel and all resources across the organization?

When I started this call I shared with you that I believe that there's a lot of value to be unlocked and that this will require some patience and a lot of hard work at Lytle. We have a strong Foundation of assets. We have a strong customer base. We have very dedicated employees and we are building an exciting new strategic vision and plan that we will share with you in the coming months.

the fact

is the trust is earned from what you do not just what you say I always say words matter actions matter more I experienced this first-hand growing up on a farm in the midwest where I learned very early on the value of hard work always showing up performing and most importantly keep your word I recognize these values in light of culture and employees may look to Foster them because I know that we can and will win together with that let's open it up for questions

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you were using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

Our first question is from Edward Marshall and Company, please go ahead.

I'm good morning, sir. Welcome to the call. I'm looking forward to working with you and understanding your vision for the company. Good morning. Randy Brandon. How are you? What are you at home? So with the context of the commoditized products in which?

You see existing within the business in the more commoditized they've become I'm wondering if we could take a step back and look at the earnings power of the business historically and wondering if they you if in Your Vision do you feel that that is achievable over the next few years?

So, you know when I look at our portfolio as I said, I mean we certainly have some in markets in which we operate that is marching toward more commoditized position and yet it with those very same customers were actively innovating around with them around their portfolio to become more differentiated products. So my comment that I made in my remarks is reflecting the fact that we have the footprint and capability to deliver in a commoditized market while simultaneously the relationships and Technical expertise and capability to continue to innovate and I think that you know in in in providing my early perspective acknowledging that and that is a foundation upon which we can continue to grow it is useful and we certainly will

They got it. So when I look at the description of commercial performance, I'm wondering how you plan to Target it looking at say pricing actions off spanding your product lines to say Innovation, which I think you just mentioned or or finally finding some larger or larger number of customers within the within the base. I'm just trying to understand the commercial performance piece that you call that as one of the initiatives. Right? Right, and and I mean, I would say all of that and write a big part of the process that we're calling following as it relates to laying out the Strategic vision is to understand exactly that the markets that we play in the trends around those markets and and our ability to compete in those markets and make the conscious Choice around we're best to deploy Capital both human and financial to ensure that we're dead.

Go.

driving real value and so

You know, I would say in the near-term. It's about ensuring that we have further penetration of the products that we've launched and in the mid and long-term. It's using this app process that we have underway to inform where and how we continue to pursue and deploy Capital accordingly.

Got it. Got it. And then I guess following up on the capitol comment. As I heard Randy say, you know, you're continuing priorities. Are are are Cash and June Cash is debt reduction. I'm curious if the pace of the debt reduction continues understanding that balance of your balance of your Capital position between using that cash for the debt reduction and loss also for the necessary changes, I guess in the use of the business through either restructuring or Severance actions as well as growth potential as we move forward.

So I'll take that one ad so in our in our cash modeling and and debt paydown modeling. We're very comfortable in respect to being adequately able to continue to pay down debt and then aggressive manner like we did in 2019 in addition to continuing to fully fund our our Capital programs many of which are carryovers from last year, which may have a clear return on investment on investment have a good business case and you know gives us the ability to to you know compete with different products and different markets that we haven't been in in the past. So I think it's consistent with the theme on what just what Sarah just said about, you know De Page.

Capital um

In the correct way, we'll be able to fund those completely.

Okay, great to here looking forward to kind of the developments over the next several quarters. Thanks very much. Thanks. Thanks. Again. If you have a question, please press * then 1 please stay on by as we pull for questions.

Our next question is from Chris more with c j s Securities, please go ahead. Hey, good morning guys. Yeah. I know you're obviously still very much in the kind of big big picture analysis mode. I was and Sarah started to touch on a little bit. I was wondering maybe if you could just walk through the the margin challenges, you know on a segment by segment basis, you know, I'm kind of from that ability things that are under your control and and areas that are more and market-related like for example on the on the outside. I'm just kind of compare the the fiber versus Metal in terms of you know, where you have control and and where you don't

Yeah.

Chris this is Randy certainly within the task segment in in 2019. You know, we continue to talk about the same operational challenges. So the expedited freight the Outsourcing the overtime that continue to be a challenge for us in Q2 for along with the challenges of the unfavorable mix between the thermal products and the acoustical products, I will say that that unfavorable mix. We we see continuing in 2020. But you know, we anticipate being able to offset those with the improvements in the operations in 20 20, which you know earlier in the year. We've already seen significant Improvement so far.

Gotcha. So helpful, maybe just on the on the $64 charge. So obviously it's all in performance materials. Looks like you know, I'm focused on interface. So the Outlook sounds like it's stable for fiscal twenty or or their end markets that you're questioning that that maybe are no longer any kind of longer-term viable to you or just trying to get a better sense as to what drove the the right down at this stage.

so

When we would hear a kind of the Good Bad and The Ugly.

The expectation at this point Chris is that you know, we will certainly share the Strategic View and and that road map in the in the second half of this year. I don't anticipate that coming out in the queue to call got it. All right. I appreciate it guys.

Only adults crust excuse me, showing no further questions. This concludes our question-and-answer session and the conference is also now concluded thank you for attending today's presentation month. You may now disconnect.

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