Q4 2020 Lydall Inc Earnings Call

Good day and welcome to the light on fourth quarter 2020 results conference call all participants will be in listen only mode.

Today's presentation, there will be an opportunity to ask questions should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. Please note. This event is being recorded I would now like to turn the conference over to Brendan Moynihan, Vice President Investor Relations. Please go.

Go ahead.

Hi, Good morning, Thank you Alyssa and good morning, everyone and welcome to Lydall fourth quarter 2020 earnings Conference call.

Joining me on today's call are Sara Greenstein, President and Chief Executive Officer and.

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

Sara will begin the call with a high level overview of the quarter, including the actions taken to solidify <unk> position as a world leader in specialty filtration.

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

Sara will then conclude the call with a brief discussion on our current outlook immediate priorities and how we are well positioned for long term growth.

At the end of their remarks, we'll open the line for questions.

Our quarterly earnings release was issued along with the filing of our annual form 10-K, both are available on our Investor Relations website, IR Dot light on dot com and can be used as reference for today's call along with the Q4 2020 earnings conference call presentation, which can.

We found it 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 light on form 10-K for further information.

In addition, we will be referring to non-GAAP financial measures. During this conference call are wrecking reconciliation to GAAP financials can be found in the appendix of the presentation I just referenced.

With that let's turn to slide three and I'll turn the call over to Sarah.

Thank you Brendan good morning, everyone and thanks for joining us today from many of you. The last time, we spoke with in early December at our Investor Day, where we communicated lydall long term strategy for those who joined US. Thank you for your engagement and positive feedback following.

The event with today's earnings release, you will see how our strategy is positioning lydall to deliver on our ambitious financial targets.

And a strong ending to a completely unprecedented year lydall delivered solid financial performance in the fourth quarter led by continued sales momentum and our targeted growth markets, especially filtration and advanced material solutions.

Thanks to the continued agility and decisive actions we took across our portfolio. We ended the year with fourth quarter sales up almost nine per se.

And adjusted EBITDA up 42 per cent.

Strong cash management through the year enabled us to invest organically, while growing our cash balance to $102 million.

$51 million from the end of 2019.

Turning to slide four performance materials continued to see strong, especially filtration sales.

I'm pleased to report that in late December we completed construction and installation on the first of three new find fiber local on mine on time and on budget.

Production on that line began just before the new year and as of mid January has been running at full capacity as you may recall from Investor Day. This line is sold out to satisfy long term customer contracts for the foreseeable future.

Our second and third assign fiber melt blown line will be installed in Rochester, New Hampshire, and St rebel on France respectfully respectively.

So it was on schedule to be ready for full production by the beginning of the third quarter cash.

On bind with our additional investment in our specialty filtration Center of excellence is collected 40 million dollar investment more than tripled lydall melt blown production capacity.

Solidifies our position as one of the largest global suppliers of fine paper notes on filtration media and ensures that we continue to innovate and actively position lydall to be a global leader in high performance solutions that address indoor and outdoor air quality.

Our technical Nonwovens business continued to aggressively manage expenses and deliver operational efficiencies and strong demand for our geo synthetic and medical product line helped offset continued softness in industrial filtration end market.

In our thermal acoustical solutions, our CAD business demand continued to climb in the fourth quarter with sales increasing further from an already strong third quarter and well above what we experienced in fourth quarter last year. This increase was driven largely by strong customer orders in North America.

<unk> or auto Oems reported robust sales of light truck and SUV platform.

Our strong sales on pads were tempered a bit but the reality that COVID-19 has continued impact at our Hampton, though North Carolina facility.

And our third quarter call, we shared our action plan to bridge anticipated labor shortages in the fourth quarter, we activated that plan successfully bridging our gathered from staffing and ensuring our employees remain safe and healthy while meeting the increased customer demand.

We continue to see sustained improvement across the Hampton go operation.

Our fourth quarter results demonstrate that our focus on specialty filtration and advanced material solutions.

Cornerstone of our long term strategy continues to be the right path for profitable sustainable growth across one lydall.

With that I will now turn the call over to Randy to cover fourth quarter results.

Thank you Sarah and good morning, everyone, everyone. It's a pleasure to be with you today turning to slide five I'll briefly cover some key highlights for the fourth quarter and then provide an overview of our operating segment results. As a reminder, we will be discussing adjusted financial metrics, including adjusted.

At EBITDA by segment are.

A complete reconciliation to comparable comparable GAAP numbers is provided in our press release and earnings presentation.

Fourth quarter 2020, net sales of $210 $3 million increased eight 8% or $17 million from the same period in 2019.

Net of FX and tooling consolidated sales grew eight 9% led by very strong growth of 28, 3% in performance materials and continued strength in thermal acoustical solutions or Taz, which grew 6% partially offset by a six 6%.

Decline in technical Nonwovens.

The weaker dollar was a tailwind on foreign sales, increasing consolidated revenue by $5 $2 million or $2 <unk>.

Seven percentage points, but was offset by tooling sales, which declined $5 $3 million or two eight percentage points.

Consolidated adjusted gross margin was 19, 1% an increase of 400 basis points from prior year led by increased volume and favorable mix on filtration products, partially offset by incremental labor costs and Taz.

Adjusted EBITDA for the fourth quarter was up over 42% from last year at $17 $7 million.

Adjusted EBITDA margin was eight 4% up 200 basis points from last year.

Performance materials adjusted EBITDA margin was particularly strong at 25, 5%, partially offset by margin compression in our past segment.

Fourth quarter interest expense of $4 1 million was down almost $1 million from last year on a lower debt balance.

For the full year interest expense was $16 million in line with prior guidance.

For the quarter adjusted earnings per share was <unk> seven.

Compared to adjusted loss per share of <unk> 17.

In the fourth quarter of 2019.

Before we discuss segment results I'd like to highlight our continued focus on cash and liquidity.

Turning to slide six free cash flow in 2020 was $41 million.

<unk> ended the year with a cash balance of $102 $2 million, even after a debt paydown of $12 $5 million in the fourth quarter.

This cash balance provides flexibility to opportunistically pay down debt and fund key organic growth investments consistent with our capital allocation strategy.

At year end, our net debt of $168 million improved by $53 million compared to 2019, resulting in a net debt leverage ratio of two and a half an improvement of <unk> three turns compared to prior year.

Capital spending in the fourth quarter was $12 $9 million and $33 $4 million for the full year net of $9 million of government funding related to our global melt blown capacity expansion.

To date, we have committed over $40 million for this expansion with approximately $6 million of capital net of government funding in 2021.

We project capital spending of $35 million to $40 million in 2021 net of approximately $8 million of government funding.

Moving to slide seven I'll cover our performance materials segment, which includes the filtration and sealing and advanced solutions sub segments.

Sales of $73 $1 million increased $17 3 million or 31% from fourth quarter of 2019 led by continued strong demand for specialty filtration used in in 95, respirators and surgical masks as <unk>.

Well as higher sales of sealing products.

Filtration sales expanded 51% from prior year with robust growth in both liquid and air applications.

Liquid filtration sales were up sharply driven by approximately $5 million of onetime purchases associated with the previously announced shutdown of our Netherlands facility.

Sales in sealing and advanced solutions were up 17, 9% or $6 million from prior year.

Our sealing product lines benefited from recovery in the agriculture construction and transportation end markets in our advanced solutions saw stronger sales and high temperature and cryogenic specialty insulation products.

The restructuring programs aimed at biggest fixing and focusing our portfolio announced in the third quarter of 2020 continue to move forward.

We idled, our low efficiency domestic filtration line.

We are fulfilling last time orders from customers of our Netherlands facility.

And finally, our planned mid year exit of one of our German facilities is on track.

Charges for these activities in the fourth quarter were approximately $1 million and we expect the remaining $3 million to $5 million to the expense in 2021.

Adjusted segment EBITDA margin in the fourth quarter was 25, 5% up sharply from prior year on increased volumes in both sealing and filtration products and favorable mix on filtration products.

Of note. This represents a sequential margin expansion of 500 basis points from the third quarter, which was driven primarily by high margin one time purchases from our Netherlands facility.

Slide eight covers our technical Nonwovens segment.

Overall fourth quarter sales were $54 4 million down four 1% from prior year with industrial filtration sales down four 5% due to COVID-19 related softness in industrial end markets.

Advanced materials sales declined three 6% with lower domestic sales, partially offset by increased demand in our medical and Geo synthetic products.

In terms of profitability adjusted segment EBITDA margin remained relatively flat from prior year at 11, 8%.

Over the course of 2020. This business has delivered consistent margins by shifting capability to medical products, including the development and production of PPE for first responders, while also managing non medical product mix and driving operational and cost productivity.

For the full year, while segment sales declined 12, 9% adjusted EBITDA margin of 14, 1% was down only 30 basis points.

Turning to slide nine I'll discuss the results in our thermal acoustical solutions or <unk> segment.

Automotive demand in the fourth quarter was robust, especially in North America and Europe.

Fourth quarter sales of $88 $1 million were up two 3% from prior year.

Excluding the year over year decrease in tooling sales of $5 million part sales increased nine 4% from prior year.

In our Hampton Hill, North Carolina facility growing demand combined with Covid related labor challenges drove a higher cost transitory temporary workforce to meet customer needs impacting segment margins by 350 basis points compared to prior year.

Operational productivity from higher volumes was largely offset by increased raw material costs.

The resulting adjusted segment EBITDA was down $3 $6 million from last year with margins of two 3% down 430 basis points from prior year.

To reiterate <unk> earlier point, we continue to see sustained improvement across the Hampton Mill operation.

That concludes our review of the fourth quarter segment results. So with that I'll now turn it back to Sara for her closing comments.

Randy.

As we close out 2020 and move into 2021, we have greater clarity and confidence in our path forward. We remain laser focused on strategically deploying capital into high return opportunities on both specialty filtration and advanced material solutions.

Reshaping our portfolio to drive profitable growth extracting full value from our investment and sustaining our focus on employee health and safety.

Turning to slide 10.

Given the end market, where we compete and lydall positioning within our 2021 outlook is positive.

While COVID-19 vaccinations are now thankfully gaining momentum the realities of their rollout have further highlighted the continued and heightened demand for PPE.

New Covid variance are lengthening that payoff and accelerating the need for next generation PPE.

Not just the medical community that people everywhere.

In January the Biden administration put in place new mandate for increased PPE production and by American policies.

This continued transformation of the global supply chain.

Holstered by plans to replenish strategic national stockpile around the world.

We will endure well into 2022, driving sustained and now longer than we initially expected demand profile fiber melt blown filtration products.

We remain well positioned to address this ongoing demand with our capacity expansion in both North America, and Europe and expect each of our three new line to add approximately $20 million to $25 million in annualized sales.

The PPE is really just the tip of the iceberg when it comes to the demand for specialty filtration products, given the ever expanding indoor air quality market.

This structural shift towards higher efficiency filtration continues to accelerate as governments around the world implement new stricter standards and regulations to drive better indoor air quality.

Our investment in light of specialty filtration center of excellence ensures that we build upon and expand and attractive industry, leading portfolio of innovative high performance filtration solutions to address customer needs at every stage of this market transformation.

As industrial end markets recover we are experiencing strong order activity and PNW early in the year and remain cautiously optimistic for overall growth in this segment in 2021 with a particular focus on China.

Globally automotive markets rebounded in the second half of 2020, and we fully expect strong demand to continue in 2021, barring any significant OEM shutdowns related to current supply chain challenges.

Global production volumes in 2021 are forecasted to be up approximately 10% from 2020 with growth across all regions.

We anticipate lydall has segment will grow at or slightly better than regional Saar rate given the continued popularity of light truck and SUV models.

Demand for electric vehicles continues to increase on.

Underpinned by supporting policies in China, Europe, and most recently in the United States with President guidance plan to electrify the federal fleet.

<unk> will continue to successfully support our customers as they transition from internal combustion to hybrid and electric vehicles with our unique material science expertise.

And with recently awarded new business for the next generation Volvo XC 90, SUV hybrid and EV platforms.

Turning to slide 11.

On the ESG front lydall continues to make gains with a product portfolio that focuses on addressing the global sustainability mega trends driving demand for specialty filtration products localized supply chains and vehicle electrification.

In 2020, Lydall supplied our customers with filtration media for the production of nearly $1 billion face mask.

Rapid lead designed and delivered innovative non woven materials for first responder medical gowns and New York.

<unk> partnered with the United States and French government to greatly expand notable on production.

And provided PPE to the communities, where we work and live.

In 2021, we will sustain our focus unemployed safety engagement and driving diversity and inclusion throughout the organization, while providing innovative products that promote a cleaner quieter and safer world.

Reflecting on my first full year at Lydall and incredibly proud of how this company has navigated each and every challenge thrown our way throughout 2020, and I'd like to take a moment to acknowledge the tireless efforts of each and everyone of our employees and partners around the world.

<unk>.

We are among a collect number of companies who have emerged from 2020 stronger than we went in and we did so because of the tremendous collaboration engagement and support of our lydall colleagues customers and Investor community.

With your support we have become a more disciplined resilient profitable and growing business focus on specialty applications designed to address the world's most pressing challenges.

We are confident in our ambitious target and our plan to get there and we are squarely focused on delivering higher shareholder returns.

With that let's open the call for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on you touched on from.

If you are using a speakerphone please pick up your handset before pressing the keys.

Jay Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

The first question is from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning, guys.

Good morning, Chris Good morning.

So hoping to better understand the.

The ramp that debt debt.

Debt, you're looking for on the specialty.

<unk> filtration I understand that near term the focus of the melt blown capacities.

Squarely on PP&E.

What I'm, what I'm trying to understand is if youre missing out on opportunities now or this is a market that's really just still developing.

Sure, Chris I I'll take that.

The answer is.

We are not missing out the reality is our current portfolio.

Pre COVID-19 was focused on serving the higher efficiency specialty filtration market.

And we continue to.

And as we bring on additional capacity it allows us to not only serve the PPE market that obviously has heightened and sustained demand, but also continue to supply the specialty filtration for IAA Q youth.

On the product development work has.

It has continued.

Throughout COVID-19 working with our customers.

To develop the next generation, especially filtration products will be.

Got it that's helpful.

With respect to the.

The two additional multiple mines coming online in Q3.

Have you started on.

Tracking now.

Do you have any orders on those yet or how does how does that work.

We do Chris and and I would say a fair estimate is that about 80 per tonne of that capacity is spoken for at this time across.

Across it.

Those two line.

Uh huh.

And last one from me I'm, just trying to get a reasonable range for has operating margins in 2021.

Good day.

In that 4% to 5% range is that aggressive is that reasonable.

Any thoughts there.

So.

What I would say is we expect to see significant.

Margin improvement in cash in 2021.

I guess Chris.

A different way.

When we look at 2021.

Across all three segments.

We anticipate double digit growth in our top line from a from an enterprise perspective, and we expect to expand EBITDA margins across the enterprise in 2021 as well.

Got it alright, I appreciate it I'll jump back in line.

Thanks, Chris.

The next question is from John <unk> with Sidoti <unk> Company. Please go ahead.

Hi, good morning, Sarah.

Good morning, guys.

I'd like to start with.

Sealing product demand so on.

Can you talk about if you have any sense, how much of that was pent up demand.

Sustainability is into 2021.

So it would suggest that you expect some strong demand continue into this year.

Sure John I would tell you that I fully expect the demand to sustain in 2021.

What I can tell you is the demand is.

Significant and balanced we've got a lot of demand coming out of Asia.

As those markets.

Has frankly remained healthier in general.

And as the agriculture.

And <unk>.

And construction and Earth, moving in and those or those markets start to really come back.

Seeing strong demand there so.

Q4 <unk>.

Might have been the restocking, but beyond going demand debt.

And frankly, what we see in the market.

Is is significant and balance geographically.

Excellent and maybe just on.

The previous question about.

Paucity of when the two new ones come on Board, you said 80 per se.

How long is that 80% visible too.

Multiple years.

Okay.

Okay.

And can we just switch to maybe some of the cost side of the equation here.

Could you just update us on some of the cost cutting efforts at the time line to realize from the cost savings.

Put out re queue.

And update us on that.

Sure and I am sure Randy on you'll you'll modify if need be I think.

What we tried to state pretty clearly is the three restructuring actions that we announced last year.

The first is complete.

We have idled the line that we said we would.

On the second is the facility and the Netherlands, and that is well underway and will be complete as soon as we have finished producing the kind of last time buys that the customers have needed and we expect that to be the first half of 'twenty one.

And finally the.

Tight.

In Germany.

We fully expect to have complete within the first half of 'twenty one.

All of that as you know.

We retain the business from that site and yet.

<unk> made the decision to exit it.

Just from a pure footprint consolidation and.

Cost optimization opportunities.

So John let me, let me give a little bit more detail. So in Q3, what we announced regarding the restructuring actions on those three three specifics that Sarah just mentioned.

We said the total investment on that program was $20 million over several quarters $15 million of which we took a charge in Q3.

So in Q3, we said Q4 was going to be about $3 million that is pushed some to the right. The restructuring cost in Q4 was actually $1 million and so therefore, the remainder of that $20 million is now.

In 2021.

<unk>.

Most of which is in the is in the first half.

The annualized savings associated with the restructuring actions are in the $5 million to $6 million range.

Okay.

Just something you just said that otherwise would have.

Ill jump back on the Q, the one time purchases.

Persist into the first half 'twenty, one that could be the same 5 million dollar magnitude that we saw on the fourth quarter or are they going to be significantly less.

Typically last John.

Okay, all right. Thanks, I'll jump back into queue. Thank you for taking my questions.

Thank you Jonathan reminder.

If you do have a question. Please press Star then one.

The next question is from Arvind Sanger with Geosphere capital. Please go ahead.

Thank you good morning, and nice quarter.

On your.

Your cash is.

Building fast free cash flow should continue to be pretty strong. This year. So it's possible you'll be close to net debt neutral by the.

By the end of this year.

So my question.

A follow up from you.

T J could view presentation.

In December is.

What are the kind of opportunities you're looking at to deploy now that you've strengthened the balance sheet. The stock price was on obviously done reasonably well. So that's the currency that can be used to how you're thinking about.

2021 in terms of strategic M&A.

M&A type of opportunities.

Sure <unk>.

So as you duly noted we laid out the capital deployment strategy in December as part of our Investor day and that is.

What we are actively working against and we worked really hard in 2020 to shore up our cash balance and put best practices in place around all aspects of cash and I'm proud of the result, and it also afforded us the ability to make the organic.

Investments that we did that it really helped position us to where we are today.

I'm sure you also saw in the quarter that we did a bit of an additional debt repay in the fourth quarter consistent with our capital deployment strategy and what I would say is we are staying true to what we communicated in December around capital deployment.

Prioritizing the organic investment to further solidify the position that we have found ourselves in after decades of work and high efficiency specialty filtration and very unique critical applications of advanced materials.

Ensuring we get our leverage ratio to the target level.

And then looking for opportunistic share repurchases and long term tuck in acquisitions thereafter.

So the balance sheet is there just just to kind of summarize from mining the balance sheet.

Uh huh.

Sort of very much on the glide path of where you wanted to be so should we assume that 2021 little bit here, where we should look for.

From.

M&A from the company on would it be.

Would it be tuck in type of stuff, where could there be a bigger strategic moves.

Sure. So just reiterating what we said at Investor day, and they order that we prioritized.

That could be a consideration, but again it would be longer term more tuck on acquisitions.

Okay. Thank you.

Thank you Arvind.

The next question is a follow up from John Transact with Sidoti and company. Please go ahead.

Similar question to organs.

What are your thoughts about accelerated debt repurchase with the excess cash that you have and how much cash do you need the two new facilities.

Sure. So good question and I think we've demonstrated and we've said all along that we will opportunistically pay down debt.

Sure.

When we believe it's prudent to do so admittedly Jon we have stayed very focused and having a healthy cash balance.

Because the reality is COVID-19 is still here and we want to make sure that we've got other liquidity and ability to make investments as we've done.

Throughout 2020 and yet.

We want to also get ourselves to the.

Leverage ratio that we've targeted at two five times, which we are we're certainly there if you will or close to it.

And thereafter, we will.

Use the cash as we've defined in the IR.

<unk> day in December in order of priority organic growth debt.

Debt Paydown and opportunistic share repurchases and then long term tuck on acquisitions.

Okay.

It seems like there was an inventory build in the fourth quarter.

That was the biggest contributor.

Contributed.

To your operating.

Operating cash flow.

Neutral in the December quarter.

What was the inventory build around them or anything specific.

No.

On the inventory build John was.

An increase primarily coming into our <unk> business, so with the operational issues that we faced in Q3, we had drained the inventory levels on both the.

Work in progress and finished goods inventory. So that's that's normalized in Q4 as the operations stable stabilized to a more normal level. So yes, it's a build from Q3, but it's at a normal level historically at Q4, where we are now.

Okay.

Or the.

Disruptive.

Operating expenses related to jazz are they behind you at this point or are they bleed into the first quarter.

So I would say, we're working our way through that.

Aye.

They are largely behind us and yet.

We're being very purposeful and the cash business to put sustainable fixes into that business. So that it gets back to what it should be by way of.

Margin and so I I.

I with the new leadership, there have committed to restoring that business to what it should be.

And taking the time necessary and the actions required for us to be able to do that.

Okay.

I'll sneak one last question if I may just.

Across the whole portfolio.

Can you talk a little bit about.

Of course, you expect to come back from 2021 that was deferred in 'twenty and also.

Your thoughts about raw material costs.

The potential impact on the margin profile this year.

Sure. So again I'll reiterate what I said, we fully expect double digit growth on the top line.

And expanded EBITDA margins across the enterprise on 2021, so at the highest level that I hope helps answer. Your question. We certainly are seeing some raw material <unk>.

Rice increases and and we are working hard to mitigate that and or ensure that we've got the right pass throughs in place that is part and parcel with how we run.

The business is.

And yet.

Have the mitigating efforts in place.

I would tell you the other thing as you well know there are continued supply chain disruption, whether because of COVID-19 or actually the weather or the.

Global logistics I mean, we have we certainly encountered all of that.

In the seven or eight weeks of 2021, the good or bad news is we encountered at every day in 2020 as well so I think the organization has become.

Gary.

Good at navigating the ongoing total debt that exist within the food.

Supply chain and value chains in which we operate.

So yes, we are experiencing that but were also.

You know I think skilled at navigating it John.

Great great. Thanks, Sir Thanks for taking my questions I appreciate it.

Thank you thanks for asking.

This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.