Q3 2020 Lydall Inc Earnings Call
Good morning, and welcome to the Lydalls third quarter 2020 results conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after.
After todays presentation, there will be an opportunity to ask questions to ask a question. You May proceed star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I will now like turn the conference over to Chad Mcdaniel Executive Vice President and General Counsel.
Please go ahead.
Thank you Brandon good morning, everyone and welcome to Lydalls third quarter 2020 earnings conference call joining.
Joining me today on today's call RCR, 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 detailing steps taken in the quarter to optimize our portfolio and how litle 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 our current outlook and how we are well positioned for long term growth.
At the end of their remarks, well open the line for questions.
Yesterday, we issued our quarterly earnings release and filed our quarterly report on form 10-Q, both had been made available on our Investor Relations website at IR Dot Lydall Dot com and can be referenced during today's call along with the Q3 2020 earnings conference call presentation, which can also be found at litle 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 for it provision as defined in the securities laws.
Please also refer to the cautionary note concerning forward looking statements within Lydalls quarterly report on form 10-Q for further information.
In addition, we will be referring to non-GAAP financial measures a during the conference call.
A reconciliation of GAAP financials can be found in the appendix of the presentation I just referenced.
With that let's turn to slide three I will turn the call over to Sarah.
Thank you Chad good morning, everyone and thank you for joining us.
We delivered solid financial performance in the third quarter led by continued momentum in specialty filtration tail.
We expanded cash flow from operation by 28% year over year.
We announced the intent to close or exit two facilities in Europe, and the elimination of unprofitable domestic production line.
These restructuring actions will yield $5 million to $6 million of annualized savings and were the result of a detailed assessment of our portfolio and a continued commitment to unlock value by decisively addressing underperforming assets.
Turning to slide four performance materials sales increased 13% driven by robust filtration sales, which were up 38% from last year.
To better serve the EMEA region Lydall announce an additional strategic investments to expand our fine fiber meltblown filtration media and our favorable on France facility.
This new capacity will be operational late in the second quarter of 2021.
The investments further solidified idle physician is one of the largest global suppliers, a fine fiber meltblown filtration media, a crucial component of and 95 respirators and the European equivalent as well as surgical mask and mirth, but an awful grade air filter.
Don't receive up to 30% of funding for these investments through the support of France's Ministry of the economy and finance.
The previously announced expansion of melt blown production capability at our Rochester, New Hampshire facility remains one of Lydalls, most exciting near term organic growth opportunity and I'm pleased to report that the project is on schedule to be commissioned late in the fourth quarter with full rate production to be achieved.
In first quarter next year.
This will more than double our current domestic melt blown production capacity.
Furthermore, the new capacity is already fully committed to long term customer contract and will immediately contribute to 2021 result.
Rochester, New Hampshire is also home to our specialty filtration center of excellence, where.
Well, we are expanding our innovation capabilities and talent to rapidly develop high performance filtration media to serve the ever increasing standard or indoor air quality worldwide.
And in addition, litle and now we will be providing a fine fiber Melbourne filtration media technical expertise <unk>.
With the X bright.
Competition to develop the next generation of consumer face masks and she still wants to be president of performance materials will serve as a judge on the panel, which will conclude later this year.
Brandon, we're having some technical difficulties.
[noise] [noise] pardon us everyone as we hold to reconnect the speakers.
Please stay connected.
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And pardon me, everyone I have reconnected our speakers.
But you are now live.
Thank you and I apologize for that never know whats going to happen.
So in addition to vital announcing that we're going to be providing define fiber meltdown filtration media, our technical expertise and our testing capability to 10 semifinalists teams in partnership with the X price competition. It is all about developing the next generation of consumer facing.
Together with the confidence that our customers have placed in litle by trusting us with their long term needs. These investments reaffirm that specialty filtration is an area, where lydall has a clear competitive advantage.
Specialty filtration is a strategic cornerstone of idled long term growth and expansion and we are addressing not only the immediate need for P. P E. While simultaneously expanding and enhancing lydalls ability to protect places in spaces by improving indoor air quality.
We have been actively reviewing our portfolio to identify underperforming businesses and product lines and redirecting investments to higher returning assets, which provide superior returns to our shareholders.
Consistent with it in the third quarter, we announced actions to rationalize the production footprint and product line and our performance materials business.
These actions enable litle to redeploy and focus critical resources on opportunities like our fine fiber Melbourne investments.
In our thermal acoustical solutions business. The sales were up shortly in the third quarter compared to last quarter. This was felt most significantly in North America were automotive Oems reported robust sales of light truck and I see the platform.
And whats weidel has significant content.
Why don't North American parts sales more than doubled from last quarter.
Within the quarter sales increased consecutively in each month with September sales up 7% from the same month last year.
At the same time, our Hamptonville North Carolina facility Litle largest facility by employee count.
Also experienced increases in cold at night Teen cases.
Resulting in higher absenteeism labor shortages and lost production shows all of which contributed to higher labor overtime and logistics costs.
Given the recent upward trend in cobot cases nationally we have mobilized additional internal resources engaged external manufacturing and logistics experts.
Hired recruiting and temporary staffing agency to help address the labor shortages and reinforce the safety measures in protocol to ensure that our employees remain sales, while continuing to balance the increasing demands of our customers with that I will now turn the call over to Randy to cover third quarter results.
Thank you Sarah and good morning, everyone.
Turning to slide five before we address consolidated or segment financial results.
I wanted to provide some additional detail around the restructuring activities announced in the third quarter.
As Sarah mentioned these actions focused on optimizing the portfolio and redeploying our critical resources to focus on higher return opportunities.
Yes.
The company announced are intact exit in underperforming performance materials facility in Germany, which consolidates production facility in the ceiling and advanced solutions business from five facilities just for.
The sealing products at this facility will be resourced internally to existing manufacturing locations and we plan to exit the remaining non core product line.
Why don't we also announced the closure of our Netherlands facility and will cease production of a low volume Mitch membrane filtration products.
Finally, we idled and unprofitable filtration line, which produced lower efficiency filtration media.
We anticipate these actions will result in annualized sales reduction of $11 million to $13 million. When they are completed in the first half of 2021 and drive net annualized savings.
$5 million to $6 million.
The total investment for these actions is approximately $20 million of which $15 million was expensed in the third quarter, including five and a half million dollars in noncash charges.
The remaining $5 million, we'll be sure incurred in Q4 this year and into early next year.
The cash outflows of approximately $15 million for the severance and related closure costs.
European operations will largely be incurred in early 2021, when these operations are <unk>.
Turning to slide six I'll briefly cover some key highlights for the third 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.
A complete reconciliation to comparable GAAP numbers is provided in the press release and earnings presentation.
Third quarter 2020, net sales of $207.1 million increased 8.9% or $1.8 million from the same period in 2019.
Organically sales grew 8.3% led by strong organic sales growth of 11.4% in performance materials offset by lower sales and technical non oakmont nonwovens and thermal acoustical solutions.
The weaker dollar was a tailwind on foreign sales, increasing consolidated revenue by $3 million or one and a half percentage point, which was largely offset by tooling sales, which declined $1.8 million 4.9 percentage points.
We continue to see very strong results in our performance materials filtration sub segment, where sales grew by 38% from prior year.
Going by robust demand for specialty filtration products, including media for in 95, respirators and surgical masks to support the fight against Cobot nicely.
Consolidated adjusted gross margin was 18.3% an increase of 50 basis points from prior year, which was led by favorable volume and mix of strong filtration sales and productivity and performance materials offset by incremental overhead costs and thermal acoustical.
Solutions and unfavorable absorption from lower volumes and technical nonwovens.
Adjusted EBITDA for the quarter was $17.6 million or eight and a half a percent of sales.
EBITDA margins were particularly strong in performance materials at 20.5% offset by declines in thermal acoustical solutions and technical nonwovens.
Interest expense of four and a half million dollars was flat to prior quarter, but up from prior year driven by changes to our credit agreement earlier this year.
For the full year, we continue to expect interest expense to be about $16 million.
The third quarter effective tax rate of 16.6% was impacted primarily by valuation allowances.
Well the third for the quarter adjusted loss per share was two cents compared to adjusted earnings per share of 19 cents in the third quarter 2019.
Before we discuss segment results I'd like to highlight our continued focus on cash and liquidity.
Turning to slide seven cap.
Cash flow from operations was $34.2 million in the third quarter up 28% from last year.
On a trailing 12 month basis through the third quarter of 2023 cash flow expanded to $69 million compared to $55 million from the same period last year.
Our focus on working capital and disciplined disciplined capital spending resulted in increasing our cash balance by $29 million in the quarter and we ended the quarter with a consolidated cash balance of $122 million.
We view this elevated cash balance is prudent in the current economic environment, while also providing flexibility to fund our key organic growth investments such as the performance material milk, one expansion project and restructuring programs.
Capital spending in the third quarter was $5.1 million and 20, and a half million dollars year to date, including approximately $12 million related to the domestic meltblown capacity expansion.
With the recently announced malformed expansion in Europe, we are increasing our full year 2020 outlook for gross capital spend to be in the range of $40 million to $45 million offset by approximately $9 billion. A previously announced you out in French government commitments.
We continue to forecast that repayment of at least $12 million in 20 Twond.
Moving to slide eight I'll discuss our segment results starting with our thermal acoustical solutions segment.
Following a historic decline in sales last quarter third quarter sales were 85, and a half million dollars more than doubling from second quarter sales of $37.4 million.
With part sales down less than 1% from third quarter 2016.
While all regions saw sequential growth from prior quarter, we saw the highest growth in North America were part sales were up over 170% as Oems quickly increased production of popular white from NFC UBI platforms.
European volumes were also up sharply as production resumed but not as significantly as more comerica.
In China, where production stabilized earlier in 2020 part sales grew 7.8% organically compared to prior year.
Tooling sales of $5.8 million were down $1.9 million compared to prior year and foreign exchange increased segment sales by $1.3 million.
In the third quarter Litle was also awarded significant acoustical content on the new Cadillac lyric all electric vehicle scheduled to launch in 2022.
This is one of the first wins on an all electric platform and we continue to focus on winning E content in the small but rapidly growing segment to accelerate future growth.
In our Hamptonville North Carolina facility, the rapid increase in volume combined with cobot related labor shortages shortages in absenteeism resulted in lost production shifts driving incremental overtime temporary labor cost and logistics costs, which impacted segment margins by approximately.
The 400 basis points.
Lower aluminum costs and productivity programs provided a modest tailwind compared to last year, but these were offset by contractual pricing actions.
The resulting segment EBITDA of $4.1 million was down $3.7 million from last year with margins of 4.8% down for 400 basis points from prior year.
Moving to slide nine I'll cover our performance material segment, which includes the filtration and healing an advanced solution sub segments.
Sales of $67.8 million grew $7.8 million from third quarter of 2019 led by continued strong demand for specialty filtration products.
Including media for 95, respirators and surgical masks.
Filtration sales up $30.9 million were 37.8% or eight and a half million dollars.
Sales in sealing and advanced solutions were $36.9 million down, 1.7% or $700000 from prior year with modest growth in sealing end markets offset by lower sales of thermal insulation products.
Dealing at a bit solutions saw 28% sequential growth compared to second quarter as automotive and other end markets recover.
Adjusted segment EBITDA margin in the third quarter was 20.5% up sharply from prior year on favorable mix of higher margin filtration products cost management actions operational and material productivity and benefits from previously announced reduction in force actions.
Slide 10 covers our technical Nonwovens segment.
Third quarter sales were $58.5 million down $5.4 million for 8.5% from prior year.
Industrial filtration sales were down $3.3 million or 10% following softer industrial demand across all regions, except China, which delivered strong year over year volume gains of over 20%.
Of note in the third quarter, the Tw, China team delivered a large order of industrial filtration bags for the Mongeon power plant in Malaysia, incorporating a specialty, especially engineered blend of Taiwan and poly Phoenix, all quite fibers to provide additional durability and perform.
Yes, and demanding operating conditions.
Advanced material sales declined $2.1 million, including $800000 of lower automotive related intercompany sales to thermal acoustical solutions.
In terms of profitability adjusted segment EBITDA margin of 14.2% was down 230 basis points from prior year, driven by lower absorption and unfavorable geographic mix.
That concludes our review of the third quarter segment results I'll now turn it back to Sara for her closing comments.
Do you Randy as we move into the last quarter of the year and reflect on the year ahead, we remain focused on meeting the needs of our customers driving.
Driving more value for our shareholders and the safety and well being of every single one of our employees we.
We will continue to focus in areas, where we provide unique technologies and applications and have a distinct competitive advantage.
Turning to slide 11, we continue to see sustaining long term demand for performance materials specialty filtration products.
Driven by localized supply chains, and the structural market shift underway, a higher efficiency filtration for indoor air quality application.
In addition to significant capacity expansion in both North America, and Europe, Litle is expanding our innovation capabilities and.
Through our investment and our specialty filtration center of excellence and partnering with our largest customer <unk> co.
Oh co develop the next generation of innovative filtration solutions to address the ever increasing standard for indoor air quality the world over.
After significant volume increases in the third quarter, we expect North American and European automotive market will stabilize in the fourth quarter consistent with historical seasonality patterns.
Our team and happy, though it's rapidly addressing the labor cost issues to ensure that business is positioned for success in 2021.
Reflecting on my first three quarters at Litle.
We are certainly at the beginning of a transformation that will focus on people process and priorities all focused on unlocking value.
The reshaping of the Litle portfolio will continue to be driven by deliberate decision to allocate capital, where our decades of experience organizational agility and innovative nature provide us with a clear competitive advantage.
These actions will improve margin drive capital efficiency and increase cash flow.
Litle will be a stronger healthier and even more innovative company over the long term and I look forward to discussing our strategy and our value creation roadmap in further detail at our upcoming Investor day in December.
With that let's open the call for questions.
We will now begin the question and answer session to.
To ask a question you May proceed Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from John Franzreb with Sidoti and company. Please go ahead.
Good morning, Sir and Randy.
Hello, Good morning, I was just so the the course that hit the test segment.
Talk about the timing of when those costs hit and what are your expectations for how long the last into the fourth quarter.
Yes, John so the the the costs were incurred throughout the quarter I would say they were more acute definitely later in the third quarter.
Especially with regard to be the Oh logistics costs, the expedited freight costs in in the month of September.
So those bill that the expedited freight costs.
Will.
Have have tapered off significantly where we sit here in the fourth quarter early in the fourth quarter I'm not sure we'll see additional incremental cost continue in the near term in Q4 with related to the.
The temporary staffing and additional overtime costs. So.
In summary, I'm seeing good progress on expedited freight.
But what you see in other overhead type costs on the on the addressing labor shortages those will continue.
In the near term.
When would you expect them to roll off Randy.
So I wish I had a crystal ball John I'm. So we we are are working vigorously to get the adequate staffing in that facility, we were making significant progress.
You know every day.
We're we're adding that the the staffing not only on the production labor side, but yeah on the talent in support functions and so.
You know.
It will continuing in Q4 and you.
You know hopefully we see some improvement as we go into next year and that's fair I hear what I would say is.
You know really through July even in.
The world over we had been successfully navigating and managing everything related to coal bed and the impact on our business.
What happened frankly late August and September is that in Hamptonville North Carolina. They typically in that area. We really started to see a significant uptick in terms of coal that in the area and on off and our operation.
We are doing all the things that we described which you know others are doing as well in terms of how to navigate it, especially if you're operating in an area that has been hit.
Okay.
Well in a challenging way recall that I think the reason we have the uncertainty that we do it because we really don't know how to you know what the over under is on the call that impact so to Randy's point you know, we we know that we are actively managing be expedited costs.
Pete.
In a better way now, but well be unknown is the continued effect and impact of Kobe and the labor.
You know impacts and navigating that.
Oh, hi, hopefully that seems a micro climates type issue.
So in your prepared remarks, you said something about reaching.
So I'm like equilibrium in enterprises as far as supply demand and restocking depleted automotive inventories.
Is that the case, so I understand you properly and how are you preparing for 2021.
Against the restocking a resetting of the environment next year.
So in those in the third quarter, we saw significant surge in demand.
Especially as it relates to what was going on in the second quarter, right and and and we were working feverously in order to be able to ensure that we could meet that surging demand there.
The comments that I made in the prepared remarks is that we look forward to the fourth quarter. There is a natural cyclicality that come with the automotive demand and we are anticipating that to occur this year I eat less demand in the fourth quarter, then we would historically see.
And third and perhaps even the second, albeit 2020 being an anomaly. So my my forward comments were around that that we are predicting the automotive demand to mirror the natural cyclicality of it there for the Q4 demand being moderately.
Then then what the Q3 demand.
Okay Fair enough and one last question I'll get back into queue regarding the cost saving actions I'm, sorry could you characterize this as a low hanging fruit and that's more and west can you talk about temple realizing those cost savings in the next couple of quarters.
Great. Thank you.
Sure.
To be sure you know we have taken actions.
Wait 19 early 2020 to make sure that the cost structure, where where it had you know to improve we certainly wanted to address that.
In addition, we've taken cross enterprise initiatives like around cash management, where we saw opportunity to organize and align ourselves and do better and deliver it and you can see that in that area specifics you.
Cost over all the actions that we took in this quarter and just announced around you know identifying underperforming assets.
Being decisive about what to do about that and or site is all because we are very focused on making sure that.
The critical resources, you know talent time money is put in areas that we know are going to not only deliver near term, but long term value and and and purposely get out of areas, where that you know it doesn't make sense right. So when I think about that the cost piece.
But I think about all the right not just see where do we have the opportunity to decrease cost, but also how do we adjust the footprint and the portfolio such that our overall cost basis improved and we can focus the resources married that drive real value.
Yeah, I'll just add John I think you were asking about the the profile of one those additional expenses are expected to come through.
So of the total expected $20 million of which $15 million was expensed in the third quarter. So we have $5 million to go we expect $3 million in Q4 to be Expensed right now $2 million in first.
Quarter of 2021 and of that total 25, and a half million dollars is non cash the cash outlay of that is expected in right now the first quarter of 2020.
2020, I'm sorry.
Granted to the temple of you're realizing the cost benefits does that line up at the end.
Expense play out or is it different.
So on the annualized savings.
You will see that.
Well, we'll see that next year, so the announcement of exiting or closure of the facilities, one German facility, one Netherlands facility.
Those facilities are still operating now so the $5 million to $6 million you will see starting in the second half of 2021, you will see that full run rate.
So I would anticipate that the five to six half of that you'll see in the second half of 2021.
Perfect. Thank you guys are going to get back into queue.
All right. Thanks.
Huh.
Our next question comes from Chris Moore with CJS Securities. Please go ahead.
Hey, good morning, guys yeah.
Yeah, I just wanted to make sure that I understand the kind of the cadence on on the Meltblown kinda progression. So currently.
Capacity is about 20 to 30 million that will and increase perhaps double with the new Meltblown line that comes on at the end of December.
Then there is that the video D. line that should be operational in say June of 2021 that adds another.
Potentially 20 to 30 million in capacity and then you have the the French line that is that's mid 21 or late 21.
Yes second half of 2021.
Got it and just like flare up I'm sorry.
The clarify you said the deal do you so both the new the two new domestic lines going in now are being being executed now.
They are our assets the U.S. Department of Defense has provided a commitment so offset though those funds. So it's our asset.
It's it's not it's not a designated the line we are.
Litle is free to sell to to our customers and that's not dictated by the U.S. government.
Okay understood appreciate that.
And in terms of those lines capability. So initially it's the focus is on PPD is can you also do the inventory filtration from those lines and does that require additional you know kind of retooling.
So yes, we can produce Uh huh.
Ah portfolio filtration media from those lines and no. It does not require any retooling.
So it increases not only our capacity, but also our capability across our footprint.
Got it okay.
And in terms of a quite a while.
Expanding our center of excellence and adding the talent there to drive the current product development and future innovation.
And the testing.
Got it and.
And in terms of.
The actual cash too to pay for these line so.
The first one in new Hampshire, Thatll be done at the end of the year.
That's roughly it's good talked about costs associated there I know that somebody up the other is after that you know you've got some offsets from the D.O.D. and 30% from from France, I'm, just trying to understand kind of the additional.
Cash outlays in 2021 associated with with the increased capacity Randy had talked about you know the the the capex for this year already.
Yeah. So so Chris in the prepared remarks in terms of the capital spend year to date in total for White always 2020, and a half million dollars of which 12 of that was related to the melphalan capacity expansion.
In total between the all these assets that were talking about that three incremental assets.
It's $40 million in aggregate and sales.
Half of that is expected to be in expenditure in 2020. The other half is expected to be an expenditure in 2021.
And that's on a gross basis the <unk> the the government commitments from both the U.S. and France.
We'll offset that capital spend.
Got it very helpful. Thank you.
Performance materials Martin is very strong Q3.
Given.
The restructuring the improve costs, there and kind of the strengthened specialty filtration.
Is that is that a level that that's you know kind of that you can stay at and 2021.
Yes, we expect the we expect the margins that we've seen for the last couple of quarters.
To sustain going forward.
Got it and just a couple more in terms of.
Yeah, the the cobot issues in Hamptonville.
And nothing else in terms from a performance materials. It tech nonwoven, they weren't impacted from for many cobot issues in Q3.
That's correct, Chris we we've been hold serve thankfully the world over until until our recent issue here in North Carolina, but where we're doing just fine everywhere else.
Got it and the last one just in terms of.
It has management changes.
You know kind of where where that process stands.
Sure, so and as we announced in the quarter I made a leadership change and put a new business unit President in place and in turn we are adding talent at multiple levels within the organization across the North Carolina.
Silly.
And in some instances we've already completed that and then others were in the process but.
It will be a new set of folks with the necessary talents and skills required to help us do without business is capable of doing and what I intend to see it through to do.
Got it I appreciate it I'll jump back in line. Thanks, guys.
Thank you Chris.
Our next question comes from Christopher Hillary with Roubaix capital. Please go ahead.
Hi, good morning.
Yes.
Great.
That by the day, we get more evidence the better.
Her filtration makes a big difference in terms of mitigating the spread of.
Viruses influenza et cetera, and a further.
Just the overall.
Auction the air pollution is just so beneficial for health I can't recall, a time, where there's been so much focus on it you can use this opportunity to help us frame the size of your filtration media business currently and as you're doing these expansions no how much of that is going towards these types of solutions.
And applications.
Sure. So you know what when we think about that.
The size of it.
As you described.
My view is that we really are in the midst of a structural shift.
That will be here for a while and that shift is really from.
Oh more readily available filtration media, that's like Merv eight or below two requiring a more specialty filtration media it would be something like a merck start in or above.
And as you know litle is already baked those products.
Made those products and are uniquely positioned to not only serves the needs today, but be evolving need both growing in size as well as efficacy.
And so you know if you look at the.
Industry Association kind of numbers you know they they speaks to a market that's projected to grow it at least 15% and 2020 and and have a 6% CAGR you know if over the course of the next five years.
And and you know there aren't very many players who can make the quality of the filtration media required to go into those higher efficacy and filtration filters and because litle. How is the position that we do within the supply chain what should we make the media.
But not the filters, we work with all of the global filter OEM in terms of designing and developing you know.
The products for today as well as tomorrow.
So that business for us it is and has been a healthy business with the new capacity that we're bringing on those in France, and the United States as well as the investment that we're making in the center of excellence in its expansion positions.
Positions us well to be a critical player in how this evolves the world over.
Okay. Thank you sure seems compelling I appreciate it.
No problem.
And it and its good right at the end of the day it now.
Not only that capability, but we're all going to be better off right wherever we are in the world because of it which is also meaningful coming in Florida.
Yes, absolutely.
Our next question is a follow up from John Franzreb Sidoti and company. Please go ahead.
Yeah Baby just stood there Oh boy.
Build on Christmas question.
I'm curious if any other countries or regions have that's true too go vocalize meltblown medical filtration facilities and their areas to ensure that their their first online have they approached you and it's not maybe why not.
So the answer is yes, John and and throughout this pandemic Islands had.
Conversation, which with governments around the world.
France is an example of a a country that has decided to do exactly that and why we you know we have decided to expand there in our Saint Revlon facility and and I would say you know that the government around the world are continuing.
To work through what they're going to do on a country by country basis to ensure that they have a committed source a P. P going forward and recognizing the filtration media is the critical component to that and you know those top.
Thanks to ensue I would take on that.
That's actually great news can can you tease me some more and tell me, which region be North America, South America you're.
<unk> age or is the mix like likely opportunity.
I would say that.
You know that.
Each of those regions have conversation.
In the U.S. as an example, you know it's.
As a country and the government I think they're trying to figure out how big the demand is going to be how much. They they want we want to make sure in this country that we've got.
And I would tell you in your at each of the developed countries is still working through their answer France was the first to to make a decision, but those conversations are continuing I think the other phenomenon that's happening.
Now that this awareness is where it's at the efficacy of the filtration media and the P. that's coming from.
Other regions.
In the world, namely China are passing you write the standards that that exist and so now there's a heightened awareness around making sure that not only do you have access to the pp and the filtration media required but that it actually comply with whatever the local.
Require our so you know that heightened awareness and and you know our engineers.
In materials scientists are typically the ones, helping them navigate you know why that material is doing what it needs to do I think really speaks to the quality of light oil and and we we held everybody right.
Upping anybody that needs the help to to understand why what they're getting might not be doing what it needs to do and and how to get there, which only helps litle and our brand and our reputation in the world apart.
Great.
And just shifting for a second revenue you mentioned that the targeted debt reduction for this year is about $20 million.
Cash is building handsomely on the balance sheet.
Could you just talk to me about.
Your thoughts about debt repayment, it's a 2021.
Compared to the cash outlays that you're looking at and also on top of the fact that as you mentioned in your prepared remarks, working capital management has been really great. So you'd be cash flow positive through the first nine months.
No can you kind of talk about all three of those nope.
Oh pieces, and what we should be thinking about as the balance sheet and progressive in 2021.
Sure sure John Locke, there I'll try to answer in the order that you asked so first of all.
We anticipate paying down at least $12 million of debt this year. So.
With our credit agreement, we have a minimum repayments on our term loan that's required of two and a half million dollars per quarter.
And so at a minimum you know that's what you'll see in Q4.
And so.
Based on the continued strong cash flow generation.
And.
The confidence that we have with the overall business and continued ability to generate cash based on the investments will wait making now we anticipate that we'll be able to make significant strides in debt pay down next year.
In fact, we've referenced in terms of our target net debt leverage ratio of two and a half times or below.
We anticipate to be there.
In the second half of next year.
Great and I guess, just one quick follow up as far as the government reimbursements for the Sony constructions. How does the timing. We're just could you help me with that.
I'm I'm, sorry, I missed the last part of the question.
The government weren't burst yeah yeah.
Yeah, so with the U.S. government funds, it's a total of 13 and a half million dollars, we get payments from the government on agreed upon on an agreed upon schedule on a monthly basis.
That's going on now so we'll receive a total of about 8 million out of that 13, and a half million this year and on French government reimbursement, the 30% to 30% of co funding, we anticipate we'll see.
A portion of that.
In Q4 with the remainder coming in 2021.
And how it shows up is it literally reduces our capital spend on a dollar for dollar basis.
Perfect. Thanks, guys for taking my follow ups.
Sure John.
Our next question comes from Arvind, saying or would you see your capital. Please go ahead.
Hi, Thank you good morning.
Morning, Sarah I'm trying to I'm trying to understand two things one is what is the.
How do we think about the short term dynamic.
And the filtration business with the covert related scramble for BP.
Versus the long term opportunity once cobot passes whether it's you know.
Middle of next year early next year late next year once we have either vaccine a widespread herd immunity or whichever or a combination.
Well this mad scramble a bit and how should we think about.
The long term revenue opportunity with all these investments that you're making for the long term.
How do you see that sustaining beyond the current.
Well, both from a revenue standpoint, and from a pricing, but from a margin standpoint, how much are you are benefiting from the short term versus what the long term opportunities and risks.
Sure.
You know let me take your first question first which is how you know how long do we see this kind of surge that we're seeing as it relates to P.P.E. demand.
A lot of that is you know based and how long.
We were all navigating the pandemic and yet how we have managed to ensure that we have stability is through signing long term multiyear commitment.
For volume.
While simultaneously investing in the product development and innovation capabilities to focus on the go forward indoor air quality applications and technologies that will certainly into long. After this pandemic is behind us.
So yes in the short term there is a lot of focus on pp and yet we are simultaneously producing four and expanding our capability around indoor air quality.
In terms of how do we sustain.
The earnings power that we are focused on creating it's really about the choices that we make across the portfolio of lydall.
And we will roll out the strategy in a more fulsome way in early December but we've already demonstrated that specialty filtration will be one of those areas that we focus on to ensure that were.
Reshaping this portfolio around specialty.
Product technologies, and applications and making the investments necessary to win there so.
So my my view is that.
How this sustains itself beyond P. P first and foremost the demand for pp will remain.
Not at the level that we're seeing today because we're in the middle of the pandemic, but there will be ongoing demand for P. P. E that is domestically sourced and a stockpile you know that is going to need to be punished.
At the point that we get through.
This pandemic.
In addition, the long term contracts that we've got.
And the investments that we're making and the innovation and technological work it is going to contribute to increasing our product portfolio.
The other piece as you know there are opportunities that we're continuing to work on beyond the portfolio reshaping to drive productivity. It's also going to improve overall margin growth and then really urban you know beyond that I would say.
Tune in for the for the Investor Day in December where we talk about the other area. You know, we're we're going to start investing to ensure that.
We maintain the earnings power that we're creating.
So just to.
Ask a little bit of a more numbers based question, if I see filtration within performance materials.
That's about a $120 million business this year give or take whatever the fourth quarter exactly turns out to be.
And Oh and your overall margins you don't break it out between filtration and Oh, feeling about solutions, but performance materials is running up.
You know.
20% plus margin this quarter, if you think about 2021 as a transition year, where you've got obviously.
Some new lines coming on at different points in time, and you've got the cost savings from some of your recent measures showing up in the second half and we think about 2022, that's kinda for I.
I don't know if one can color normalize, but with all the new capacity in place.
Do you think that business that filtration business could be.
A one and a half fix on topline two works on topline given what all of the investment already announced I'm not talking about any future opportunities that come about and.
What happens to margins.
Both.
Yeah. Good these new lines I assume being higher margins.
As well as some of the cost reductions how do we think about that.
Oh, that's part of the business on.
No on a slightly more longer term basis sustainable basis.
So our van.
So I think rough order of magnitude I mean the.
The way.
The way we've guided previously was the increase in filtration sales that that you've seen throughout the year.
Is it an indicator that it's it's mostly driven by the fine fiber meltblown demands.
So you know if you can if you can scope that with the additional meltblown about investments that are coming online.
Then I think it gives you a pretty good idea probably consist that were I mean generally consistent with what you've outlined more work.
We are saying that you know tremendous uplift, which as the capacity comes online when the first line.
Commons a full.
Production early next year, it will double our capacity.
And and so the margin profile going forward.
Is is sustainable on a consolidated basis for performance materials as the additional capacity comes online.
Okay and last question for me are you know the tops business you announce something on the Ebyline for I think it was Jim.
Is there anything unique about your offering or it's just that as more and more companies roll out.
TV lines you have.
Gonna get your share of the you know if the auto market and therefore, there's nothing particularly.
Different between you and your competitors in terms of you know one of your dad wanted somebody else, we've got somebody else and so on.
Sure I'll take that I think you know when you look at our <unk> and the products that we make for the automotive.
They're very highly engineered specialty products and so as we as the automotive OEM in Germany as well as in the United States.
Our redefining their platform, we're working with.
With that development.
And so you know it isn't that something that you know.
We are very differentiated our I would say and and as as they're looking at how to solve problems or issues that they're seeing relative to their new design. We certainly work closely with them because of our material background is really.
Helpful in terms of how to solve for some of the unique problems that come with EDI platforms.
Okay. Thank you.
All right. Thank you.
Our next question comes from ran guessing with Neuberger. Please go ahead.
Hey, good morning, I know, we're running late I just I'm just looking for is a little bit of clarification on on Taz.
Yeah, we're not seeing a coverage disease generation within the facility. It's just more of the community and that's.
That's wreaking havoc with folks calling.
Calling it with your protocols not to come in and the and also probably there's a little bit of folks that are spooked and scared to come in with.
ER with the disease and the community is a fair way to characterize it.
I would say we've got all of the above I mean, yes. The community has been hit.
And.
Yes, there are people, who make personal choices based on what's going on around.
And you know, we we follow strict protocols around how to handle situations when we eat.
He says and all of that has contributed to the situation.
Can you give us a sense for you know.
Are you running 10% a light on a on a on a given shift type of thing is that <unk> number moving around are becoming.
More.
A more stable or.
Give us a sense for just the magnitude of.
Of the impact.
Well I mean it it is okay.
Systemic on any given day or shift I would tell you that we got two of the three facilities.
Back to running just fine our our Hamptonville facility, which is our largest by employee count is the one that that has had the most the most colleges.
Well, we're working to make sure that we shore up whatever shortage that we have through all the levers available to us.
Just like you know others have had to do and are doing depending upon where they operate well.
We certainly are alone in the us and yet you know everybody's trying to pull from the same pool.
Of workers to try to shore up whatever might be happening and.
I've local domain. So it really is about doing everything we can to make sure that everybody that comes to work, it's cold it free and we certainly know how to keep them that way while at work.
But we got to make sure that we've got a stable workforce. Every every shift every day to be able to hit the production targets that we have and that's what we're focused on.
It is there are you able to sort of you know we obviously, we've been doing a lot of work on the Oh, The North Carolina facility in the last year, plus or so to improve.
Improve the operating performance are you able to see.
Through the cobot disruptions to see that that's that stuff has taken hold and is there.
As a as a benefit or is it just so murky with.
What's going on with you know with the interruption that you can't see how the business is turning because we've all would have expected.
With the improved volume on a on a suppose it improved operating a structure that we would see a margin lift. So just wondering if you if you're confident that that's that are below the surface.
Of Covance.
Yeah, I think in order to see that margin you got to you have to have the a stable operating environment to deliver on that and that certainly isn't what we got in the midst of a co that surge in the area what I would say Ryan as you know we're doing the right thing.
The profitability will improve things need to settle down.
And.
Yeah, I don't have the crystal ball to tell you when that will be but I, but I know we're doing the right thing.
And I know, it's there it's just we need the world to settle down a little bit to see it.
Okay, great. Thank you.
Yeah I understand.
This concludes our question and answer session as well as today's conference. Thank you for attending today's presentation. You may now disconnect.
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