Q2 2020 Lydall Inc Earnings Call
Okay and welcome to the light all second quarter 2020 results conference call.
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After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
Now, let's turn the conference over to Brendan Moynihan, Vice President Investor Relations. Please go ahead.
Thank you Melissa good morning, everyone and welcome to light all second 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, how we weathered the impacts of the covert 19 pandemic and how light all has further solidified its position as a world leader in specialty filtration.
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 on the current outlook for the remainder of 2020, and how we are well positioned for long term growth.
At the end of their remarks, well open the line for questions.
Our quarterly earnings release was issued along with the filing of our quarterly form 10-Q, both are available on our Investor Relations website, IR Dot light all dot com and can be used as reference for today's call along with the Q2 2020 earnings conference call presentation, which can be found it.
Right, all dot com and 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 during this 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 thanks for joining us.
Our second quarter performance reflects the earnings potential of this business.
We aggressively manage our cost structure to address historic declines and the automotive industry.
While simultaneously redeploying resources to meet surging demand for critical filtration applications.
And strengthened our liquidity position.
As a global leader and specialty filtration, we responded to the call producing some of the most highly sought after products in the world for the fight against Cobot 19.
Litle has proven it has the capability and agility required to pay that quickly to meet the markets demand.
Turning to slide three while the immediate demand is for lifesaving personal protective equipment or P. P. Significant demand is also emerging for high efficiency filtration products for the insurance at healthy buildings and indoor spaces.
Indoor Air quality is the ongoing defense against current virus. The U.S. Center for disease control recently released guidance to commercial building owners recommending upgrading the pre filter stage of each back equipment to filters rated murph 13, or higher which capture the sub micron sized airborne viruses.
The state of New York recently announced the government buildings and large public malls across New York should not reopen until these filters are installed.
With decades of experience in developing and manufacturing high performance filtration media Litle is well positioned to address this need through its existing product portfolio.
The next evolution and the production of high efficiency filtration media requires unique sign of fiber assets to provide exceptional performance at the sub micron level.
With the combination of the long term structural shift in demand for these higher performance products.
And the localization of supply chain for critical materials, which are essential for national security and public health.
Litle recently announced strategic investments in two new find fiber melt blown production lines that will be located at our Rochester, New Hampshire facility.
These assets provide lydall the ability to produce superior fine fiber meltblown media to improve indoor air quality, while allowing end user customers to minimize capital investment to their age HVAC systems, all while reducing energy consumption.
Last Friday, we celebrated these investments at a groundbreaking ceremony with our employees, our partners and local state and federal officials.
The first of these two lines will be operational by the end of this year and the other in full production before the end of the second quarter of 2021.
Also in June we secured a 13 and a half million dollar commitment from the U.S. Department of defense, which helps to underwrite these critical investments.
With the completion of these lines are Rochester facility will be the largest site for fine fiber melt on production in the United States supporting the domestic manufacturing of approximately 1.7 billion and 95, respirators or six and a half billion surgical masks each year.
The Rochester facility will also be the home to our center of excellence for innovative high performance will tracing solutions addressing indoor air quality for buildings, including hospitals nursing home schooled offices restaurants malls and our homes.
These investments reaffirm that specialty filtration is and will remain a cornerstone of lydalls growth expansion end strategy moving forward.
Somebody else duration solutions go well beyond P. P E.
By providing us a tremendous opportunity to enhance our ability to protect places and spaces by improving indoor air quality.
Moving to slide four you can see that we saw a 20% increase in filtration sales in the second quarter compared to the prior year a trend we expect to continue throughout 2020 and to improve beyond as each of the two additional fine fiber meltblown assets come online.
Specialty filtration as an important and growing market and with our global footprint and rigorous approach to innovation Litle has a strong competitive advantage.
And our technical Nonwovens segment, we quickly adapted to address challenges created by the pandemic.
In the second quarter in partnership with the New York City Economic Development Corporation.
We rapidly engineered tested and qualified nonwoven material used in medical gallons.
We delivered a large order of this new product to the New York City Department of Health to support first responders and medical personnel and New York.
Our team is also develop new applications for needle punch fell to be used in face masks and other P. P.
Additionally, NTN W. Despite the external headwinds, resulting from the pandemic, we aggressively managed cost and maintained a flat EBITDA margin, despite 25% lower sales.
[laughter] Coven 19 had a material impact on our thermal acoustical solutions business.
With our automotive OEM customers ceasing production in mid March Tas saw a historic decline in volumes across North America and Europe.
The team responded quickly and decisively immediately reducing production at those facilities.
In late May with Oems coming back online our factories managed production commensurate with our customers demands.
Our team has worked tirelessly to uncover every opportunity investing in new equipment, securing long term contracts with seven of the largest face mask manufacturers in North America.
Contributing to the production of medical Downs, and even sewing face masks at our facilities that were affected by the OEM shutdowns.
I believe that our response to the situation has been world class and I'm incredibly proud of our employees around the world who came together to deliver extraordinary results and this unprecedented and ever changing environment.
Most importantly, we continue to operate safely as the pandemic into.
Our employees have shown incredible resilient and commitment during these challenging times.
And I want to thank all of them for their contributions.
With that I will now turn the call over to Randy to cover second quarter results.
Thank you Sarah turning to slide five I'll briefly cover some key highlights for the second quarter and then provide an overview of our operating segment results.
As a reminder, we'll be discussing adjusted financial metrics, including adjusted EBITDA by segment.
A complete reconciliation to comparable GAAP numbers is provided in the press release and earnings presentation.
Second quarter 2020, net sales of $146.2 million decreased 33.8% or $74.7 million from the same period in 2019.
Organically sales decreased 31.7% or $70 million impacted by cobot, 19, pandemic related shutdowns, which as Sarah mentioned, primarily impacted our thermal acoustical solutions business and to a lesser ex that our technical nonwovens and performance materials.
Feeling businesses.
The strong dollar was a headwind on foreign sales, reducing consolidated revenue by $2 million or 0.9 percentage points and tooling sales were down $2.6 million or 1.2 percentage points.
Within the quarter, we saw very strong results in our performance materials filtration segment, where sales grew by 20% from prior year driven by exceptional demand for specialty filtration products, including media for in 95, respirators and surgical masks to support the fight against covert 19.
Despite significant headwinds on sales adjusted EBITDA for the second quarter was $11.4 million or 7.8% of sales.
EBITDA margins expanded substantially in performance materials, and technical nonwovens, even on lower sales, but were offset by margin compression and thermal acoustical solutions.
We were able to rapidly flax, our cost structure and reduce overhead expenses by almost $15 million compared to prior year, while simultaneously leveraging resources to support surging demand for filtration products.
This mitigated the impact to EBITDA, which was down a $13.9 million on a sales decline of $74.6 million or a drop through of 18.6%.
Interest expense of four and a half million Dollarss was up from prior year and prior quarter driven by changes to our credit agreement discussed in the last quarterly call as a result of a higher interest rate and one time fees.
For the full year, we expect interest expense to be about $16 million.
The second quarter effective tax rate of 9.2% was impacted by foreign income taxes and valuation allowances.
For the quarter adjusted loss per share was 27 cents compared to adjusted earnings per share a 41 cents and the second quarter 2019.
Before we discuss segment results I'd like to highlight our continued focus on liquidity.
Turning to slide six cash flow from operations was $13.7 million in the second quarter and $40.4 million year to date up from $36.2 million last year.
Aggressive management of working capital has contributed over $11 million and cash flows this year.
We also took advantage of payroll tax deferrals under the care Zack.
On a trailing 12 month basis through the second quarter of 2020.
Free cash flow expanded to $60 million from $38 million in the same period last year.
This was accomplished through disciplined management of working capital and Capex reductions, enabling us to grow our cash balance to 92 and a half million dollars at the end of the second quarter.
Combined with available credit of $24 million, our total liquidity is $116 million, which provides us sufficient flexibility to navigate the current economic environment.
In the near term, we plan to hold elevated cash levels for ongoing operations and to fund key investments such as the performance material Meltblown expansion projects Sarah mentioned at the beginning of this call.
Capital spending in the second quarter was $6.3 million and 15, and a half million dollars year to date, including approximately $4 million related to the meltblown capacity expansion.
We expect full year 2020 capital spend to be in the range of $35 million to $40 million, including spending on new meltblown capacity.
A portion of which will be offset by the previously announced U.S. government commitment.
We continue to forecast debt repayment of $12 million in 2020.
Moving to slide seven I'll discuss our segment results starting with our task automotive solutions segment.
Second quarter sales in this business were $37.4 million with parts sales down $53.2 million or 62% compared to the prior year period, driven by automotive OEM factory shutdowns in both Europe and North America.
These shutdowns resulted in a 90% reduction and global part sales in April.
As major manufacturers resumed production in mid to late May volumes rats, and by the end of June our North American and European factories had returned to approximately 80% of prior year production rates.
Notably after experiencing slowdowns in the first quarter parts sales and our China operations were up 3% net of FX compared to second quarter 2019.
Tooling sales of $5 million were down $2.6 million compared to prior year and foreign exchange reduced segment sales by $300000.
EBITDA on the task segment was significantly impacted by lost volume due to covert 19.
In total EBITDA declined by $13.1 million on sales that dropped $55.8 million, resulting in a margin drop through of 23.5%.
This performance was achieved by quickly addressing our cost structure, which included reducing direct labor overhead and administrative expenses in reaction to the drastic reduction in sales.
Moving to slide eight I will cover our performance materials segment, which includes the specialty filtration and engineered sealing solutions sub segments.
Sales of 58, and a half million dollars were down $6.6 million or 10.2% compared to second quarter of 2019.
Filtration sales grew 19.8% or $4.9 million led by sales of specialty filtration solutions, including media for in 95, respirators and surgical masks.
This was more than offset by a 28.6% decline in sealing and advanced solutions, which was impacted by slower demand and agricultural construction and automotive end markets.
Second quarter adjusted segment EBITDA margin of 19.5% expanded by 470 basis points from last year on favorable mix of higher margin filtration products cost management actions operational and material productivity and benefits from previously announced reduction.
To enforce actions.
Slide nine covers our technical Nonwovens segment.
Sales in the second quarter of 2020 were $52 million down 24.7% from prior year.
Industrial filtration sales were down $9.3 million or 24% was softer industrial demand across all regions.
Of note, while trying to sales were down compared to prior year. They did increase sequentially from first quarter.
Advanced materials sales declined $7.8 million, including $3.2 million of lower automotive related intercompany sales to thermal acoustical solutions.
In terms of profitability adjusted segment EBITDA margin of 18.8% was up 260 basis points from prior year aided by insurance recovery of $1.3 million related to a flood loss recorded in the first quarter 2020.
Adjusted for this onetime benefit second quarter EBITDA margin is 16.3% essentially flat from prior year with lower volume being offset by cost reduction actions, including furloughs material productivity and lower selling and administrative expenses.
That concludes our review of the second quarter segment results in summary, we demonstrated our ability to flex our cost structure, while we have ramping up filtration production all in the Mets the broad economic uncertainty.
Additionally, us well for the future as volumes recover.
I'll now turn it back to Sarah for her closing comments.
Thank you Randy.
As we move into the second half of the year, our focus remains on meeting the needs of our customers driving more value for shareholders and the health and wellbeing of our employees. We will continue to prioritize markets, where we provide unique technologies and applications and have a distinct competitive advantage turning to slide 10.
We continue to see strong demand for performance materials filtration products and anticipate Meltblown filtration media for and 95 respirators surgical masks and air filtration system will contribute incremental sales.
Of $10 million to $12 million and the second half of the year.
In addition, litle continues to be at the forefront of discussions with government agencies and leaders around the globe regarding investments to further increase our filtration media capacity addressing the need for high quality localized supply chains for critical pp applications.
And technical Nonwovens, we anticipate softer sales and industrial filtration to continue as the industrial outlook remains uncertain.
And our advanced materials business, we're seeing strong construction activity driving seasonally robust demand for Geosynthetic and continued demand for medical related non woven products, which will be partially offset by lower sales to automotive end market.
We anticipate the North American and European automotive markets will recover and similar fashion to what we experienced in China.
While the timing in the magnitude of the recovery by region remains uncertain. We believe auto production will begin to stabilize in the third quarter, albeit at volumes and the second half of 2020 lower than the same period in 2019.
This will most directly impact our thermal acoustical solutions business and to a lesser degree the sealing business within performance materials.
Slide 11 outlined our near term focus areas, which will enable us to be stronger healthier and more innovative company over the long term.
As one of the world's top producers of specialty filtration materials, we will continue to meet the demand for supplies that are critical to frontline and first responder personnel, while continuing to drive innovative solutions.
At our Rochester, New Hampshire facility, we are establishing a center of excellence to develop new high performance and environmentally sustainable filtration media with a wide variety of applications.
To ensure that lydall remains at the forefront of the next wave of innovation, we have secured partnership with some of the world's leading manufacturing and chemical engineering companies to jointly advance specialty filtration technologies.
We expect strong demand for filtration media for and 95 respirators and surgical masks will last through 2022 and even after the pandemic is before behind US we fully expect the emphasis on well establish domestic manufacturers of ppt to remain.
In parallel is economies around the world reopened our fine fiber meltblown investments will allow us to expand our product portfolio to new higher performance clean air applications that address indoor air quality.
When it comes to high performance filtration solutions, what's inside matters.
And litle is the leader at producing the media inside these critical applications.
Over the past two quarters, we have demonstrated our ability to navigate unprecedented economic conditions and adapt quickly to market shift.
And I have full confidence we will continue to do so as cobot 19 evolves and the products required to fight this pandemic change.
As I shared during our previous earnings call in many ways cover 19 is accelerated changes that were already underway at lydall sharpening our strategic focus on value added specialty engineered materials and filtration products.
Our decades of experience in these areas along with a strong heritage of innovation deeply ingrained customer and supplier relationships.
And a world class team positions lydall to win.
Although many unknowns related to co the 19 remain.
Im very confident in our ability to deliver long term shareholder value through our focus on creating a cleaner safer and quieter world and I believe that Lydalls best days are ahead with that let's open the call for questions.
Thank you we will now begin question and answer session to ask a question you May Press Star then one on your Touchstones. So if you are using speakerphone. Please pick up your handset before pressing Mickey.
To withdraw your question. Please press Star then too.
This time, we will pause momentarily to assemble the roster.
The first question today comes from Chris Moore of CJS. Please go ahead.
Good morning, this as Stefano scripts, calling in for Chris.
Good morning Stefano this.
Good morning.
First question is it reasonable to assume that Q3 margins can be modestly better than than Q2, and what are the most important puts and takes to consider when you think about margins going forward.
So I think it with the recovery of automotive that we expect in Q3 versus very difficult Q2, Stefano. So I think I think on a consolidated basis, you can expect that.
I think maintaining the.
You know extremely.
Extremely strong margins that we saw in both PM and CNW in and in in Q2 into Q3.
I don't know if we'll be able to maintain those kind of margins just because of the.
Aggressive cost actions that we did take as volumes recover across the board.
We will have to to add back some of the variable cost that we took out very quickly in Q2. So in short on a consolidated basis, Yes, you should see some improvement.
But but maybe not across the board by segment.
Got it that makes sense.
And then other than the Kobin related shutdowns what are the biggest wild cards for the second half to 2020.
Yeah, I would say I mean, as you well know just the.
Uncertainty that in ensuing as to what's going to happen across the globe as it relates to both coated and then the local and regional decisions.
Around you know the economy and shut downs I mean, it really depends upon the country that we're talking about we're seeing China come back pretty stable and strong I think in the U.S. as you might imagine there's quite a bit of.
Tumult, continuing and in Europe.
It's just managing each day, what we've done I think very well and therefore I fully expect us to continue to do.
As to be able to flex.
Our production to our customers needs and have a stable supply chain in place in order to be able to do that and so regardless of the wild cards that might come which I certainly am not smart enough to predict.
Where I have confidence is in our ability to respond to them.
That makes sense. Thank you very much I'll jump back in Q.
Again, if you have a question. Please press Star then one.
The next question today comes from Sean Ken Gabelli funds. Please go ahead.
Hi, good morning, Thanks for taking my question.
Just curious how much of the variable cost taken out over the past few months.
To be permanent.
So certainly what the so we referenced $15 million of cost of overhead cost that we took out in Q2, Sean a large portion of that about $9 million or that it is variable cost so I would say.
That some of the overhead piece.
Of the fixed overhead and the SGN a that remains of course some of that is permanent. So we did take significant cost action in the thermal acoustical solution business that affected both fixed cost and ask DNA.
And the.
When the facilities were shut down just to get our cost in line with with volumes. So certainly some of that as port is permanent so out of the out of the 15 I would estimate.
You know $3 million to $5 million of that is going to be a permanent cost reduction.
Okay, Great that was really helpful. And then I had another question you guys. Obviously spent a lot of time talking about.
Your your filtration media for Pp in all the great things you guys are doing there.
You look at your Ta segment you.
The team have a long term goal and reduced amount of motive exposure for the entire business or are you guys currently satisfied with the 40% plus exposure yesterday.
Sure Good question.
So we are we are in the process.
Finalizing our are kind of near and long term strategy and at the point that we rolled that out I think though there will be a lot more specifics to the answer of your question, but the quick answer is.
We have been on that path for four quite quite some time in terms of broadening our exposure to other end market.
While holding cold serve if you will on the automotive piece I think what the exciting things second quarter taught us is.
We have that ability, we have that portfolio and this business demonstrated the value of that of the diversification of the portfolio.
And in addition, we are making improvements in our automotive business that is that has value, creating so if you look to the future I fully expect.
We will compete in areas that we know we can win and if there are pockets of that in the automotive side. It will be where we have highly engineered products.
You know that we can extract fair value for and as we identify other opportunities like we havent specialty filtration. We will we will certainly focus there long winded answer too we've got a strong portfolio. Its demonstrated its earnings power, we know that we where we need to focus.
And we will focus where we can win.
Terrific. Thanks for the color appreciate it and best of luck for the remainder of the year.
Thank you thanks, Sean Sean.
Your next question today comes from Arvind singer please.
Please go ahead.
Hi, Thank you good morning.
I wanted to understand where are you talking so in the slide 11 about some of the.
Strategy is one of the things you talk about as the and 95 demand expected through 2022.
My question is.
What happens if there is a vaccine.
Oh by the end of the end of this year or early next year, how do you how do you anticipate the and 95.
Investments that you're making admittedly with government money, but how do you expect that generate returns.
Over the next couple of years, how do you bet on something like that not knowing how quickly.
Thanks, Mike.
Sure. So a couple of things first and foremost we have sufficient demand to fill the additional capacity that we're we're bringing online and have secured long term contracts for the majority of that so so my confidence in stating the through 2022, it does or direct result of.
That arvind.
And simultaneously establishing the center of excellence that is working on creating the next generation air applications for places and spaces is very active right now and with the policy changes and recommendation.
And then requirements like I cited.
Regarding.
HM upgrades of each fab filtration media I have full confidence that.
Regardless of what happens with the and 95 and surgical mask market, which I would argue there's ample demand for even post pandemic because of the.
Local supply chains that are being established in countries around the world that that the applications of specialty air filtration solutions will be every bit is critical and sustainable long term.
So that brings me I guess two related question, which is how much of the current demand is met by.
Imported, especially from China. So I guess, we should think about even recovered.
Market being much larger post go but given that theres likely to be are much more it'll make locally requirement.
How much in the us.
I was being met by.
Imported primarily from China demand.
Sure our inland, let let me start so according to the data we have.
From 2019, the baseline period pre pandemic four in 95 respirators. This is a 95 respirators only.
The U.S. demands.
No. The vast majority of that was Matt outside of of the U.S. So.
You know estimated at probably 25% or last was us production for that you asked demand. So now during the the pandemic and the post pandemic period.
Thats going to flip flop and.
And so the lead the supply of the product.
From from its going to be as much capacity as the U.S. has online. So when we when we start coming online than you know, it's going to be probably 75% you asked to 25% outside of the U.S. only because of the fact that.
You know, there's just not enough capacity to meet the demands.
Got it and then.
Second bullet point in your slide 11 was about expanding the product portfolio for indoor air quality gain applications is that organic or is that inorganic what kind of opportunities to you're seeing that market.
Our in it is organic and we make the products today as part of our existing ports product portfolio and capability.
For Mirv rated have all been air grade filters and we are working as we increase our capacity to innovate off of the current product portfolio as the criteria and standards continue to increase and we are actively engaged with the standard.
Setting and regulatory bodies.
Which is who are setting those criteria because we've got the scientific expertise to do so.
Great. Thank you.
Thank you Evan Thanks Arvind.
Again, if you have a question. Please press Star then one.
Okay.
Going no further questions. This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.