Q1 2020 Earnings Call

All participants will be in listen only mode.

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After today's presentation will be an opportunity to ask questions.

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Now I'd like to turn the conference over to Mr. Brendan.

Precedents Silva Foster relations. Please go ahead.

Good morning. Thank you Nick Good morning, everyone and welcome to Lydalls first quarter 2020 earnings Conference call.

Joining me on todays call, our Sarah Greenstein, President and Chief Executive Officer.

And Randy Gonzales, Executive Vice President and Chief Financial Officer.

Sarah will begin the call with a high level overview of the quarter at how litle is addressing the dramatic impacts of the cobot 19 pandemic.

Randy will follow with a review of our financial performance and discuss the key business drivers by segment.

Sarah will then conclude the call with a brief discussion of the state of the business as we see it midway through the second quarter.

At the end of their remarks, well open the line for questions.

Please note that we are conducting the call remotely. So when we do open the line. Please address your questions directly to Sarah or Randy So they can respond accordingly.

Our quarterly earnings release was issued along with the filing.

Of our quarterly form 10-Q.

Both are available on our Investor Relations website and can be used as referenced for today's call along with the Q1 2020 earnings conference call presentation, which can be found at light all dot com in the Investor Relations section.

As noted on slide two 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 securities laws.

Please also refer to the cautionary note concerning forward looking statements within Lydalls form 10-Q for further information.

In addition, we will be referring to non-GAAP financial measures [noise].

During the conference call.

A reconciliation to GAAP financials can be found in the appendix of the presentation I just referenced.

With that I'll turn the call over to Sarah.

Thank you Brenda and good morning, everyone and thank you for joining us.

In late February during my first earnings call Lydalls, New CEO.

Talked about what attracted me to litle and the qualities that I believed would position us for success.

I mentioned lydalls unmatched ability to develop value added engineered materials and specialty filtration solutions.

A couple of adapting and scaling to meet customer specific business demand.

And I highlighted the great community of light all employees throughout the world all of whom share an unparalleled commitment to our customers.

During the two and a half month said.

As the World has changed in previously unimaginable ways. My view of Lydall has not changed in fact, I use and even more convinced that these qualities differentiate litle from our competitors.

As the novel current a virus, who good night team escalated into a global pandemic in March.

Impact with deep we felt across virtually every industry throughout the world and Litle is no exception.

When it first became apparent that Kobin night team would have a significant impact on the global economy, we acted quickly and decisively to safeguard the health and wellbeing of our global workforce and the sustainability of our business.

I, taking a number of precautionary measures, we ensure that all employees who needed to come to work could do so.

They did in a safe work environment with new policies and procedures to keep them protected.

At the same time, we aggressive we created new opportunities in response to the current environment opportunities that have enabled us to accelerate the strategic transformation that is necessary for litle to compete innovate and thrive over the long term.

Turning to slide three.

It's a technical market leader a value added engineered materials and specialty filtration solutions litle isn't an extraordinary position during this unprecedented time.

We are one of only a handful of companies in North America in Europe capable of producing the critical filtration layer of 95 respirator masks.

Safeguard our health, where healthcare workers and first responders from co. Good night team.

In addition.

We manufacture the filtration materials for other medical surgical in general use masks.

The habit and also great filtration media used by machine powered respirators, ventilators and hospital H.B.C. systems.

And the needle punch fell in medical baby wipes absorbing pads and medical account.

As trusted experts and specialty filtration with proven technical and production capabilities, we have been in regular contact with the highest levels. The U.S. government as well as leaders in Canada, Europe, and the United Kingdom.

To offer our solution expertise and support in the fight against Cobot night team.

As governments around the world recognized that availability and certainty of supply for these products are essential to their national interest there mandating that these products be manufactured and sourced locally.

Our global footprint is a strategic advantage in this regard with facilities across the United States, Canada, Europe and China.

Our team has worked tirelessly to meet the large unmet need and global shortage of these products by forging new contracts reallocating, our resources and repurchasing our production facilities.

We secured a major long term agreement with Honeywell to supply Meltblown filtration media further in 95 mass production facilities.

As a result, we've committed additional capital to acquire a new melt blown production line to satisfy this unrelated demand.

And our technical Nonwovens segment, we developed a new application for non woven materials used in medical count and in so doing secured in order for New York cities Kobin 19 emergency services.

The strong demand for specialty filtration, and P.P. products and our performance materials and technical Nonwovens segment is expected to be important as other end markets. We serve proved to be more susceptible to cobot 19th impact on the global economy.

The automotive industry shutdown triggered by Kobin 19 has had a significant effect on our thermal acoustical solutions business.

Moving to slide four.

As many of our automotive OEM customers shut down operations late in the first quarter. We quickly ceased production at our task facility in the United States in Europe.

We also ramped down select production mine and our technical nonwovens and performance materials facilities that serve the automotive end market in total.

Packed in more than 1000, lydall employees, approximately 30% of our total workforce.

This was not a decision that we made lightly we realize the economic burden. This action places on our employees and we strive to help them take advantage of the social programs available to them and the countries in which they reside.

Additionally, we have taken action to minimize the operational expenses by eliminating all non essential travel reducing temporary and contract workers.

Instituting furloughs for many of our salaried employees and just last week completed a permanent reduction in force and our task business.

In this challenging environment, we bolstered our liquidity in the first quarter by taking additional measures to preserve cash, including drawing down $20 billion from our existing credit facility and reducing all non critical capital spending.

We're also deferring our pension and for one K. company matching contribution to our U.S. employees and deferring domestic employer payroll taxes in the U.S. three to care that.

All of these decisions were in acted quickly and with the intent of emerging from this crisis strong healthy and viable for the long term with that I will now turn the call were Randy to cover first quarter results.

Thank you Sarah.

Turning to slide five I'll briefly cover some key highlights for the first 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.

Complete reconciliation to comparable GAAP numbers is provided in the press release and earnings presentation.

Before we continue I'd like to address the noncash impairment charge of $61.1 million included in the first quarter results in the performance materials segment.

Given the sharp downturn in the overall economy, driven by Cobot 19, we reassessed, our goodwill and long lived assets.

While the performance materials segment performed well in the first quarter. The cobot 19 pandemic negatively impacted the outlook in automotive ceiling and other industrial end markets, requiring an impairment charge.

Goodwill was impaired by $48.7 million and long lived assets were impaired by $12.4 million.

First quarter 2020, net sales of $200.5 million decreased 8% or 17, and a half million dollars from the same period in 2019.

Organically sales decreased 5.7% or 12, and a half million dollars driven by the covert 19 pandemic principally in our thermal acoustical solutions business and to a lesser extent in our thermal technical nonwovens business.

The strong dollar was a headwind on foreign sales, reducing consolidated revenue by $2.2 million or one percentage point.

And tooling sales were down $3.2 million, well worn and a half percent.

Net acquisitions and divestitures contributed a half million dollarss with the H. and be acquisition in performance materials offset by the divestiture of the G.S. all business and the technical Nonwovens business.

Sales were up 1% in performance materials with filtration sales growing 8.2% offset by a 3.2% decline in sealing and advanced solutions.

Adjusted EBITDA for the first quarter of $20 million decreased by $1.8 million were 8.2% from the same period in 2019.

Adjusted EBITDA margin in P.M. was 16% up 420 basis points from the first quarter of 2019.

With compressed margins in task and T. NW due to covert 19 consolidated adjusted EBITDA margin was 10% flat to the first quarter of 2000 might team.

Compared to four fourth quarter of 2019, adjusted EBITDA improved $7.6 million up 61% despite headwinds related to covert night team.

Sequentially consolidated EBITDA margin expanded 360 basis points, driven by productivity gains and Taz benefits from reductions in force actions completed in fourth quarter of 2019, and accretive incremental volumes and performance materials.

The first quarter effective tax rate of 3.5% was impacted by the goodwill impairment charge that is not tax deductible.

Adjusted for this and other non-GAAP items, the first quarter tax rate was 29.5% driven higher by Wasinger, a strict jurisdictions, where a tax benefit cannot be recognized.

We expect the 2020 tax rate to be in the range of 25% to 27%.

Adjusted earnings were 20 cents per share down eight cents from the first quarter 2019.

And up 37 cents sequentially from fourth quarter 2019.

Finally cash flow from operations of $26.7 million was very robust in the quarter up $12.4 million from the same period last year and improved sequentially by $2.8 million from fourth quarter 2019.

Moving to slide six I'll discuss our segment results starting with our thermal acoustical solutions segment.

This is our global automotive business that specializes in providing innovative engineered thermal and acoustical solutions for vehicle Underhood underbody powertrain and exhaust applications.

First quarter sales in this business were $83.8 million with parts sales down $7.3 million compared to the prior year period or down 6.9% organically.

While domestic and European sales started strong with park sales up over 5% through February covert 19 related OEM shut downs impacted sales in these regions in March.

Tooling sales of $6.4 million were down $3.3 million compared to prior year impacting reported sales growth by 340 basis points.

Foreign exchange, primarily the euro reduced segment sales growth by $800000 or 90 basis points.

EBITDA and the thermal acoustical solutions segment was impacted negatively by lost volume from factory ramp downs due to covert 19.

In addition, pricing and unfavorable product mix, specifically lower volumes of higher margin acoustical products were partially offset by lower commodity costs and material productivity.

More importantly, despite covert 19 related shutdowns. This segment saw sequential margin expansion of 340 basis points compared to the fourth quarter of 2019 with improvements. It every operating site led by improved efficiencies in North America.

Moving to slide seven I will cover our performance materials segment, which provide specialty filtration and engineered sealing solutions to a variety of end markets in industries globally.

Sales of $65.2 million were up $600000 or 1% compared to first quarter 2019.

Led by filtration sales, which grew 8.2% partially offset by a 3.2% decline in sealing at advanced solutions, which had a difficult comparison to a very strong topline and first quarter 2019.

As discussed in our yearend call, we expected that for fourth quarter sales of $33.6 million would be the trough for ceiling and advanced solutions and we saw a rebound with sales expanding 17.1% sequentially to $39.3 million.

Filtration sales were also up sequentially from last quarter, posting topline growth of 16, and a half per sat on strong demand for specialty air filtration products, including media used for in 95, respirator surgical and medical masks.

First quarter segment, adjusted EBITDA margin of 16% was up 600 basis points sequentially and up 420 basis points from the prior year period.

The fourth quarter, 2019 reduction enforce material productivity and favorable mix on higher margin specialty filtration products. All contributed to this result.

The sequential improvement in volume drove incremental EBITDA margins of over 50%.

Slide eight covers our technical Nonwovens segment.

This segment produces air and liquid filtration media as well as other value added engineered products and specialty filtration for use in various commercial applications, such as Gio synthetics automotive industrial and medical among others.

Sales in the first quarter of 2020 were $57.4 million down 12, and a half for SAP from prior year.

Adjusting for FX headwinds of 120 basis points, and 30 basis points for the G.S., all divestiture organic sales were down 11% compared to prior year.

Industrial filtration sales were down $11 million or 26% impacted by lower demand across all regions, but most notably in China, which was down over 50% driven by covert 19 related shut downs.

Advanced materials sales grew $2.8 million or 12%, despite a half million dollarss of lower intercompany sales the thermal acoustical solutions and lower sales due to the GE us all divestiture.

Adjusted for these items advanced materials sales were up three and a half million dollars or 13.4% driven by healthy demand for non woven medical applications, such as wipes and absorbent bed pads.

In terms of profitability adjusted segment EBITDA margin of 11.9% was down 60 basis points from the first quarter 2019, driven by 150 basis point headwind for flood related losses in our UK facilities for which we are currently pursuing.

Insurance recovery and will likely offset the loss when received.

That concludes our review of the first quarter results.

Despite the impacts of the cobot 19 pendant pandemic on our global operations, we delivered adjusted EBITDA growth of $7.6 million sequentially from fourth quarter, 2019, and adjusted EBITDA margins of 10% flat compared to the first quarter of 2019.

Turning to slide nine.

We've highlighted the company strong cash flow and improvement in working capital for several quarters now with 2019 showing significant improvement in accounts receivable.

Late in fourth quarter last year before the pandemic, we kicked off a companywide initiative focused on improving accounts payable and these efforts efforts paid dividends in the first quarter.

On a trailing 12 month basis free cash flow expanded dramatically from $30 million and first quarter of 2000 $19 million to $63 million in first quarter 2020.

Adjusting for $18 million, a factoring of select trade accounts receivable in first quarter free cash flow expanded 50% in this time period. So we're clearly seeing the results from these efforts.

Along with the $20 million drawdown Cerro referenced earlier Lydalls cash balance has grown to $87.8 million at the end of the first quarter compared to $51.3 million at the end of fourth quarter 2019.

As of April Thirtyth 2020, the company's cash balance was $98.2 million.

In terms of capital allocation, while debt reduction continues to be one of our top capital allocation priorities longer term in the short term, we have taken actions to maximize our liquidity position and we are forecasting debt repayment of $12 million in 2020.

We have reprioritized capital expenditures to business critical investments, which we anticipate will be in the range of $18 million to $22 million for 2020.

Exclusive of the investment and new Meltblown capacity to meet the exceptional demand in our filtration markets.

This is down from our prior guidance of $25 million to $30 million.

As a result of the covert 19 pandemic and subsequent economic slowdown the company expected to be out of compliance with at least one of its financial covenants in the second quarter of 2020.

As a result, we amended our credit agreement with the support of our entire banking syndicate.

The amended agreement consists of a term loan of $144 million with a revolving facility of $170 million.

The maximum that that leverage ratio is six and a half through the period ending March 31st 2021 and steps down thereafter.

The fixed charge ratio is adjusted to 1.1 for the period ending June Thirtyth 2020.

The applicable rate margin above LIBOR increases to a maximum of 4.25 per site.

The amendment required a fee of 0.25%.

There's no change to the maturity date of the facility, which is August 2023.

At the end of March, including four and a half million dollars of repayments and the 20 million dollar drawdown in the quarter total outstanding debt on the company's credit facility was $288 million for a net leverage ratio of approximately 2.9 times adjusted EBITDA as.

Defined in the credit agreement.

In closing all address our current thinking on end markets that we serve and how they are impacted by the current crisis.

In performance materials, we're seeing significantly higher demand in the filtration sub segment driven by media for in 95, respirators and other critical applications as well a stronger demand for the higher grade how about an open filtration products.

The ceiling in advanced solutions business will likely be unfavorably impacted by lower automotive volumes and softer demand in the agriculture and construction markets.

And our technical Nonwovens business, we see upside in advanced materials, driven by increased demand for medical related applications in jeans, Geo synthetics tempered by lower automotive demand.

We anticipate slower global growth will likely lead the softer industrial activity impacting demand for industrial filtration applications as companies look to curtail capital investment in the short term.

Finally, and thermal acoustical solutions, the global auto industry will be down significantly in 2020.

In China, we saw relatively quick ramp up after shutdowns in February with production increasing over several weeks.

We expect to see a measured ramp up of production in North America in Europe in the remainder of the second quarter with the operation stabilizing in the third quarter, but likely at levels below pre co would forecasts.

As a result in the second quarter, we performed a reduction in force in our thermal acoustical solutions, North American operations to better align our fixed cost structure with lower short term volumes, while providing flexibility to lever leverage our cost base as production levels grow.

I'll now turn it back to Sarah for her closing comments.

Thanks Randy.

To reiterate despite facing strong headwind this quarter, we were able to respond to the demand surge is created by code that night team, while simultaneously managing a significant downturn in automotive demand.

We did all of this while growing our profitability from last quarter, and enhancing our liquidity and cash position.

We are optimistic that lighter will come out of this crisis stronger and more viable over the mid and long term then we were before cobot night team and the rapid adaptation to the needs of the market has accelerated the strategic transformation that we had embarked on earlier this year.

As we transition from crisis response to normal operation.

Slide 10 outlined when a new normal may look like for us.

First and foremost we remain committed to upholding enhanced safety standards for all of our employees.

And we're starting to see light at the end of the tunnel and our thermal acoustical solutions business.

Our China sites are back to normal operation and our European factories have started to slowly ramp up as OEM customers come back online.

In North America for GM, and Chrysler have announced plans to restart production on May 18.

We are ready to support them as their strategic partner and with a leaner more agile cost structure.

We continue to see very strong demand for specialty filtration products.

Back in April volumes, and our performance materials filtration Sunset sub segment increased 20% compared to the previous year.

Lydalls mission is and has been for the past 150 years.

To create a cleaner quieter and safer world.

We could not have imagined three months ago significant said, what creating a scene for world would mean for lydall.

Our products protect people from the Kobin 19 disease and save lives.

We do not take this responsibility lightly and we are up for the task.

When I joined Lydall back in November when it my first priority was to break down operational bears and foster communication among our three business units.

Hey situation that you cannot ever fully prepare for like a global pandemic kind of exposure weaknesses, but.

But it can also show you what your made up.

Over the past several months I.

I have seen a level of intensity collaboration impact and most important outcome from my colleagues that as far surpassed my expectation.

Our teams are coming up with new ways of working together.

Mining resources, and sharing knowledge to create new and innovative solution to the world biggest challenges.

Our drive to become one litle is moving forward at full steam.

The spirit and tenacity of our employee makes me feel proud and I'm looking forward to the day when I can once again visit them and thank everyone at our facilities across the globe.

With that let's open the call for questions.

Well I'll begin the question answer session.

The asking question here May Press Star then one on your Touchtone phone.

We use a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then too.

At this time, we'll pause momentarily to assemble roster.

First question comes from Chris more so yes. Please go ahead.

Hey, good morning, guys here, maybe the first question would be for Sarah.

So obviously you ramped down production and all three businesses that serve the auto end markets.

Just trying to get a sense as to whether they know kind of what they will be ramped up at different times, and then you kind of looking out into <unk>.

The first half of 2021.

Which one of those will look the most different in terms of.

No.

Hi, guys employees cost structure.

I think that news, you're trying to get a sense of how this likely will evolve.

Sure, let me kind of take that piece by piece. So first of all we ramped down quickly.

In response to the automotive end markets ceasing operations, and we did that on a country by country basis directly related to our demand signal and each of those countries as you well know the automotive end market came down very quickly in Europe in the U.S. in March.

And our.

Site that serve those customers came down very quickly and I think in our prepared remarks, we said and you know it was about a thousand employees that we furloughed in very short order in direct response to the automotive end market ceasing operations.

Across Europe and he left.

Now when you think about ramping up I'm sure you hear that news as we do.

But there is a slow ramp up beginning in Europe.

And as a result, we bring our workforce back to match the demand that we have from the customers.

And in the U.S. The current signal is that the large Oems will come back on May 18.

And again, we will match our.

Workforce to the demands of our customers.

And and work to keep that in seat.

In terms of what do I see into 2021.

I would argue as you probably know if anybody has a crystal ball or when the world over would be.

Working to see into it.

But our expectation is that.

Assuming the.

Current pandemic.

Is able to.

Staying the course that we're currently on.

And our customers come back to work and produce.

Against what the current Sars numbers reflect.

But it will be a slow ramp up.

Between now and he ended the year.

All coming back at a lower level.

Then anyone was anticipating.

And probably stay at that lower level.

For the foreseeable future.

We have done it's worked very hard to manage our cost structure.

So that we can flex it.

According to our customers demand and needs as they ramp up to meet their demand.

Got it helpful.

Maybe just switch gears activity.

Comes up or some of the opportunities that you're talking about 95 and.

Respirators.

And kind of sense in terms of.

What the total addressable market.

Might be for for for you know a patient media.

In that and and 95 side any respirators you know even.

Somebody other more ancillary uses there just trying to get.

[laughter] or feel for or what that might look like.

Well, we understand Chris and and what I will tell you is on the demand right now outweighs the supply.

And the expectation is that there is a structural demand shift underway when it comes to specialty filtration and general first and foremost used to protect people.

But evolving to protect places in the environment in which we live in work.

In addition to that structural demand shift there's also a significant shift in in supply chain.

Where countries.

In some instances region, but even more particularly countries are are forcing the localization of those supply chain because as a result of what's occurred.

P. P E is viewed as <unk>.

And a national.

Security.

Need so the combination of supply chain shifts that are occurring structural demand shifts that are occurring.

And the ongoing need demands and change behaviors that are underway gives us.

Great confidence that our ability to supply the market in the regions in countries that we work are strong.

And in terms of size of the market.

On a global basis supply is less than what the demand is an even more so when you take that on a country by country region by region basis.

Got it and in terms of specifics there there's no number that that you guys target you know.

I don't have a sense of what the demand number is at this point in time, obviously, it's a outstripping supply but.

And no other specifics on that front.

MOLP you know, it's a it's a multiple more right now.

Part of it is you know I'm not trying to be baby part of it is the demand is so strong.

To to try to put guardrails around that right now.

You know is not something that that.

I, all I know, what I would be wrong [laughter].

Fair, Yes, just fair to say that imbalance exists and ER.

And and the the reality is you know this isn't just a short term. This is a change behavior, but also part of what we are doing to make sure that we're well positioned here not just today, but into the future is signing up the long term agreements that you know enable us to.

To supply the people that intend to be in this for the long term.

I appreciate that last one for me, it's just to Randy actually on the amended credit facility. So looks like leverage could you know could go as high at 6.5 pretax 6.5 times in any agreement, but I mean, what would have to happen to even approach that level.

Hi, Chris Good morning, Yes, so the financial covenants in terms of net debt leverage ratio now the Max is six and a half times so good.

The the.

The forecast shows that you know, we're not going to work when we're not gonna be [noise] approaching that but as you can imagine a based on the events our forecast has been modified and adjusted downwards.

But there's there's been lots of pressure testing and the forecast and discussion with the banks for us all to be comfortable that we're not going to breach those covenants.

All right I'll leave it there thanks guys.

Again, if you ever question. Please press Star then one.

Our next question comes from Edward Marshall of Sidoti and company. Please go ahead.

Good morning era, Randy and Brendan you guys are trust your healthy as well.

Right.

Good morning idea. Thank you same to you.

So.

I look at the Oh.

I want to discuss the P. P and maybe you can size what the impact was in one Q.

And secondly, I guess when I when I say when I hear demand outweighs supply I just a general first of all this price is comment on each of those I'd appreciate it.

Size I mean, how much of it how much did you sell in Q1.

So so Ed I'm based on the numbers in Q1, you we specified by by sub segment within performance materials and the increase year over year for the filtration sub sub segment. Some some of.

That some of that impact is reflected in there.

And at that time, we were seeing large orders from Asian customers.

Now it's shifted as Sarah just discuss now it shifted more towards North America, and and you asked based customers.

So I I think what you saw in Q1, and they increase year over year and the reference to the April results year over year is reflective of you know, what we anticipate to see going forward, especially with.

The supply demand equation and the fact that we we are securing long term agreements with customers.

So how much was in the quarter.

Yeah. So it just just to put some color around what Randy said in the quarter to filtration sub segment within performance materials was up 8% year over year, which is about $2 million.

And another data point to triangulate that is quarter to quarter. So Q4 to Q1, we were up 16.5% or about $3.7 million.

So.

The bulk of that increase driven.

Hi, what we're talking about here.

Right right, Okay with of declines that offset that and other business segments or is are we tried to say that this is less than 5 million dollar opportunity today with the melt blown machine that we have and then ultimately we see that growing too.

As we as we as we add additional machines I'm, just trying to get size scale and ultimately timing as to what this could be for for litle.

[noise], what they say in general yes, it will have will partially offset I mean, it and they.

With regards to Q2, particularly aware the automotive operations with the exception of the China facility have been shut down for all all of April and for the first park of May.

That's certainly the increased filtration sales and P.P. he is not going to completely offset that.

But you know starting in Q3 as we start to see automotive come back online. It is it is gonna be a slower ramp than we anticipate but the the filtration and the P.P.E. specialty filtration and the P. P E sales.

Well, we'll definitely partially offset the lost volume and and demand in.

Automotive so it's it's certainly it's certainly a tailwind that is going to partially offset what we're saying on the automotive end market.

Exposure.

Are you unable to talk about the size of and the N. 90 fives.

Sales within within your business for us for any reason due to the contracts that you're kind of setting up or is there other reasons that we can't get.

Kind of clear a picture of that that number just curious what I think we I think we've tried to define that so we we also mentioned in April in the filtration sub segment of performance materials, the increase year over year was 20% so.

Based on what's the base number to work from that's what I'm trying to get too.

The base number for April itself.

Well for the <unk>, you're saying, it's up 20% year over year, what what was the number it's based on what was last year's number.

For a or for for a 94.

Yeah, I don't have that number directly in front of me, but we're at a run rate I mean Q1 filtration sales Ed were $26 million. So you know it divide that out that would be about $8 million a little over $8 million per month and were up 20% on that.

Got it got it okay. So.

When when I think about the melt blown machine.

The capex associated with which I think Randy you said 18 to 20 million exclusive of the project for and 95. So can you kind of that maybe talk about is it wouldn't mind that you're adding is at multiple lines, what what could be the project and what what maybe we see there and secondly, there was a point.

Clarification I'm looking for I guess deck, you said your securing the contract with Honeywell in the press release, you said you secured they're probably just the timing thing, but I just want to make sure things.

So the the contract with exit with Honeywell has been executed with regards to the the amount of the of the capital and the timing. So yes, we we have ordered an additional production line.

That we anticipate will be online and commissioned by the end of this year.

So it will be incremental but the the of capex from that range, we specified but the payback period will be very short.

How much more you're going to spend for the project.

Hi, I'm not at this point out I don't think we're gonna disclose publicly what the amount of the Capex is.

Got it.

If I think of switching gears, just the thermal acoustical solutions the margin performance or increase on a sequential basis, we talk maybe about increased volume Barb you.

You know how much of that is revised cost structure, maybe the acceleration of a cost structure that you previously were planning and maybe reduce startup costs I'm, just trying to get a sense as to that improvement sequentially business. Thank you.

[music].

Yes, so ed you're just to be clear you're looking on a on a go forward basis for the rest of the year I'm looking about Q1 into Q4. The comparison there <unk> Q1 to Q4 and then ultimately what drove the improvement on a margin Q1 from Q4.

Yeah, I called out so cost I called out increased volume I called out the lower tooling and then also maybe a revised cost structure I'm just trying to get a sense, it's to those buckets therapy don't mind.

So so sequentially from Q4 to Q1 right we did have.

Obviously, a little less two weeks of the quarter in Europe, and North America were impacted in Q1 by covert 19 and earlier in the quarter, we had some impact on on sales within China.

I think if if you remove those the quarter would be roughly you would have been roughly flat in terms of topline.

But what we're seeing you know overall is a nice pick up in terms of efficiency in North America.

With within the quarter and also the actions that we took in Q4 last year related to the reduction in force.

Specifically in Taz helped it helped all the other business units as well, but certainly it has that was a key driver in terms of lower fixed overhead and labor costs.

Got it okay.

Okay. Thanks, very much appreciated.

Thank you. Our next question comes from ran casing Neuberger. Please go ahead.

Hey, guys.

Good morning ran rats.

Welcome to the.

Micro cap company.

Who could be helpful and solving they are.

Sars Koby too.

Bockel club.

You know obviously, we're getting a lot of questions on if people are trying to figure out.

How big it can be how important you know how important oh.

A driver.

It could be for you guys. So that's obviously, it's early days and.

Looking forward to hearing you guys flush out the opportunity more Holly.

In essence are you sort of doubling the capacity or is it.

Sure if you have on.

No one production line and this is sort of doubling that are or how should we think about.

What you're really sort of doing here in the near term.

So let me start and.

You know I'm sure the T Mo.

Again here so.

Again, right and it hit we reacted quickly.

Almost in a completely bifurcated way, we had a significant demand surge to meet and eat shows a pandemic, while the automotive market shut down in a matter of day.

So we took the capacity and capability that we have it's capable of making critical specialty filtration product and stood that up everywhere we could.

Some of that is geared and able to make the and 95.

And.

All of it is able to make.

Yes, he rated.

Filtration material to go into masks.

What we had done.

Is keep everybody healthy keep everybody coming to work keep the machines that we have capable of running that's running.

And and serving the demand.

Oh, there's many as we can.

While securing long term contracts like we mentioned with Honeywell.

And adding capacity.

As we have high confidence and then during nature of that demand.

So Randy mentioned the additional machine that we are getting and putting in place and we'll be in place by the ended the year.

And and our current capacity that we have is less than the demand that we have and we will continue to manage the supply demand equation very tightly.

Understanding the environment that we're in.

In order to continue to ramp up.

Our capability and profitable.

Cash smart way.

And the reason I'm not able to tell you what that demand is three is it three axis six axis. It is it 10 x. is because.

The most honest answer right now is there is far greater demand than supply for these specialty filtration products.

We are absolutely be viewed as the technical experts and informing.

Countries and leaders on on how to go about doing what they need to do even when resources are scarce and you have to make adaptation.

And our products.

Are all part of that consideration.

That in and in addition to.

The local supply chain reality.

And moving away from.

Importing all of this and setting up real viable sustainable supply chains in countries and or region.

Is all contributing towards.

Any market sizing right now being premature.

I'll pause there.

Okay, great Yeah, I know I [noise].

It seems like the position in the foundation is there and I just one of the things I Wonder and obviously, it's super early days, but.

Do you think that Theres the risk that you know honeywell, while securing what they can honeywell and others like that.

Downstream.

You know securing capacity from people that are in space, but I I do agree that this is going to be a long term a very long term.

Oh.

[noise] critical industry for all all nations.

And I wonder if if there's a risk that.

A lot of capital is gonna overtime slow you know into this into the whole supply chain and whether other competitors, who gets <unk> stood up.

How do you feel I know, it's super early in its sort of a silly question, but how do you how sustainable do you feel your.

You're a position here is a given the fact that.

There's a chance that a lot of cat capital could sort of come out this.

Yeah, no. So hey, I I agree with you right I mean, its supply and demand is economics when or what.

And and we are very attuned to all of that so do I think other capacity will come on yes.

Do I think that.

There's room for that yes, do I think that we are well positioned and that this is a sustainable play for US absolutely. The reason why is it it's more complicated than just putting a new machine.

There's a series material science. It goes along with this there's application engineering that goes along with it there's decades of experience that we have in technical nonwovens and specialty filtration products that goes into that and we're just talking right now about P. P, but it's going to extend beyond <unk>.

P into arm buyer Matt.

And that is at the core of who lydall isn't always the always has been so I firmly believe that our position.

Because of our know how because of our legacy because of.

Whose called US and how we've responded in the past five weeks puts us in a position.

This is dangerous.

And why we have required long term agreements with customers.

'cause that in of itself gives us the continuity to continue to invest in innovate with good partners.

Great.

Okay.

I'll also I'll also add ran to that.

It's important to understand what the engineering capabilities are of the manufacturers of this equipment.

And as such for a meltblown assets to make this fine fiber meltblown product that goes into in 95 respirators. There's only a few companies across the world that can make that but have the technical capabilities and as you can imagine.

And they all have a backlog as well lydall has secured a.

A place in line and with the the order that we made to to be able to get that asset in the near term, which the supply and demand equation works for the manufacturers of this equipment as well.

Remind me, where where are you guys have the capacity.

Globally whats locations.

Yes.

So we have in Rochester, New Hampshire, and or performance materials facility.

We also produce.

Meltblown in St Revlon, France.

Okay. So there's no meltblown in China, but you have other.

Filtration, Oh actually capacity there just to serve the just the broader need.

Correct.

Got you Okay guys, great. Thanks, you well, we'll talk soon.

Thanks Randy.

Thank you next we have a follow up question from Edward Marshall of Sidoti and company. Please go ahead.

Hi, I'm, sorry, I just want I'm, just curious falling on what grant just touching on can you talk about me times with if you work to.

Placed an order for a new melt blown machine today.

When do you think you get in the in the and the order in the order book for quarter for your support.

So that is but it's something that I prefer to not not disclosed publicly I can tell you that the lead times are sentence, but I can also assure you that.

We've worked with these folks for a long long time and have a longstanding relationship then and I think we would be able to navigate accordingly, as we needed to and as demand.

You know dictated we needed to that's something we look at every day.

Got it and that goes to the second part of the question when we talked earlier about demand outweighing supply talks about the dynamics of the market. I'm curious are you only making decisions to back these capex and machineries. If you have a purchase order or supply contract in hand.

Well you take the approach of if we build that they will come.

So to date.

And this and environment, we have been very purposeful about how we deployed cash.

And the long term agreements that we have in the demand signal that we have.

Would dictate that that it wasn't very risk mitigated decision as each day unfold literally each day unfold.

We are evaluating that decision in terms of additional demand and we will make decisions in an appropriate.

Manner based on the and then that were end to make sure we drive the most value for litle and our investors.

That's fair that's fair it sounds like you have a competitive advantage on.

I guess getting at least the machinery and then of course, the technical know how well that would make you a.

A wire supplier of choice for and any such and 95 manufacturer.

And if we're doing it now I mean, I I think the reality I don't think I know the reality is we have done. Thus we are doing a and were rising to the occasion every day and that's how we have the contracts that we have and the partners that we haven't are continuing to develop and grow.

No. So yes, I I would agree with what you said I there there will certainly be new entrants.

And and yet it isn't as straight forward as putting it on the she there are certifications that are required. There's you know stricter regulations that are in place. Today. Then then weren't you know before all of this and and it it doesn't come easy.

So I think that as more people.

Get into that that is quickly realized oh, so I do believe litle again, it goes to the cornerstone of who we are I mean, we have done specialty filtration for decades and it.

This this pandemic is highlighting.

The need for that and our expertise in it.

Got it and we see available footprint and I'm, assuming sticks and water is really not I cannot be a limiting factor, but it would be existing footprint.

If I look to your capacity today.

How how quickly how fast if you were to get the machinery, how fast how quickly could you get everything in place and operating optimally.

Benefit both to margin and ultimately your cost.

Yeah, It goes something like Randy children.

Oh, just where god.

I'll take that had we anticipate that it's going to be very quick remember, we just added melt blown capacity.

Kept Melbourne capacity in Rochester last April so just over a year ago and so that's that capital deployment was executed very very well I'm on time on budget and the business cases being exceed it.

And then start running and sent utilization by the way Rochester.

<unk> it is.

And and the square footage there that's kind of where I was getting on the square footage there I mean, how fast what's the you know as there are additional rooms or additional floor space do you have.

The people in Rochester, or other to be able to us kind of beat the certifications meet the.

Weve customers needs, that's kind of what I'm trying to understand that that is not a limiting factor for us.

Great great. Thank you very much guys.

Thank you Ed Thanks, Ed.

Thank you.

Conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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