LDL (LDL) 2021-02-24 Earnings Call Transcript

Good day, and welcome to the Lydall's Fourth Quarter 2020 Results Conference Call. [Operator Instructions] 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 ahead.

Hi, good morning. Thank you, Elisa. Good morning, everyone, and welcome to Lydall's Fourth Quarter 2020 Earnings Conference Call. Joining me on today's call are Sara Greenstein, President and Chief Executive Officer; 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 solidfy Lydall’s 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.lydall.com and can be used as reference for today's call along with the Q4 2020 earnings conference call presentation, which can be found at lydall.com in the Investor Relations section. As noted on Slide 2 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 Lydall's Form 10-K for further information. In addition, we will be referring to non-GAAP financial measures during this conference call. A reconciliation to GAAP financials can be found in the appendix of the presentation I just referenced. With that, let’s turn to Slide 3 and I'll turn the call over to Sara.

Thank you, Brendan. Good morning, everyone. And thanks for joining us today. For many of you the last time we spoke was in early December at our Investor Day, where we communicated Lydall’s 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. At a strong ending to a completely unprecedented year, Lydall delivered solid financial performance in the fourth quarter led by continued sales momentum in our targeted growth markets of Specialty Filtration and Advanced Materials Solutions. Thanks to the continued agility and decisive actions we took across our portfolio. We ended the year with fourth quarter sales up almost 9% and adjusted EBITDA up 42%. Strong cash management through the year enabled us to invest organically while growing our cash balance to $102 million up $51 million from the end of 2019. Turning to Slide 4, Performance Materials, continue to see strong specialty filtration sales. I am pleased to report that in late December we completed construction and installation on the first of three new fine fiber meltblown lines 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 the Investor Day, this line is sold out to satisfy long-term customer contracts for the foreseeable future. Our second and third fine fiber meltblown line will be installed in Rochester, New Hampshire and St. Rivalain, France respectively. They are both on schedule to be ready for full production by the beginning of the third quarter. Combined with our additional investment in our Specialty Filtration Center of Excellence, this collective $40 million investment more than triples Lydall’s meltblown production capacity. Solidifies our position as one of the largest global suppliers of fine fiber meltblown 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 continue to aggressively manage expenses and deliver operational efficiencies. Strong demand for our geosynthetic and medical product lines helped offset continued softness in the Industrial Filtration end markets In our Thermal Acoustical Solutions or TAS business, demands continue 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, where auto OEMs reported robust sales of light truck and SUV platform. Our strong sales in TAS were tempered a bit, but the reality is that COVID continued impact at our Hamptonville, North Carolina facility. In 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 gaps in staffing and ensuring our employees to remain safe and healthy while meeting the increased customer demand. We continue to see sustained improvement across the Hamptonville operation. Our fourth quarter results demonstrate that our focus on Specialty Filtration and Advanced Material Solutions, the 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 the fourth quarter results.

Thank you, Sara. And good morning, everyone. It's a pleasure to be with you today. Turning to Slide 5, 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'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. Fourth quarter 2020 net sales of $210.3 million increased 8.8% or $17 million from the same period in 2019. Net of FX and tooling, consolidated sales grew 8.9% led by very strong growth of 28.3% in Performance Materials and continued strength in Thermal Acoustical Solutions or TAS, which grew 6%, partially offset by a 6.6% decline in Technical Nonwovens. The weaker dollar was a tailwind on foreign sales, increasing consolidated revenue by $5.2 million or 2.7 percentage points, but was offset by tooling sales, which declined $5.3 million or 2.8 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 of filtration products partially offset by incremental labor costs in TAS. Adjusted EBITDA for the fourth quarter was up over 42% from last year at $17.7 million. Adjusted EBITDA margin was 8.4% 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 TAS 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 $0.07 compared to adjusted loss per share of $0.17 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 6, free cash flow in 2020 was $41 million. Lydall ended the year with a cash balance of $102.2 million even after a debt pay-down 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 2.5 and improvement of 0.3 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 meltblown 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 7, 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 N95 respirators and surgical masks as 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 one-time 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. And our Advanced Solutions saw stronger sales in high temperature and cryogenic specialty insulation products. The restructuring programs aimed at thickness 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 be expensed 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 8 covers our Technical Nonwoven segment. Overall fourth quarter sales was $54.4 million down 4.1% from prior year with industrial filtration sales down 4.5% due to COVID related softness in industrial end markets. Advanced Materials sales declined 3.6% with lower domestic sales partially offset by increased demand in our medical and geosynthetic 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 shipping capability to medical products, including the development and production of PPE for first responders, while also managing nonmedical 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 9. I'll discuss the results in our Thermal Acoustical Solutions or TAS Segment. Automotive demand in the fourth quarter was robust, especially in North America and Europe. Fourth quarter sales of $88.1 million were up 2.3% from prior year. Excluding the year-over-year decrease in tooling sales of $5 million, parts sales increased 9.4% from prior year. In our Hamptonville, 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 2.3% down 430 basis points from prior year. To reiterate Sara's earlier point, we continue to see sustained improvement across the Hamptonville 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.

Thanks Randy. So 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 and the high-return opportunities in both Specialty Filtration and Advanced Materials Solutions. Reshaping our portfolio to drive profitable growth, extracting full-value from our investments and sustaining our focus on employee health and safety. Turning to Slide 10, given the end markets where we compete and Lydall is positioning within. Our 2021 outlook is positive, while COVID vaccinations are now thankfully gaining momentum. The realities of the rollout have further highlighted the continued and heightened demand for PPE. New COVID variants are lengthening that tail and accelerating the need for next generation PPE for not just the medical community, but people everywhere. In January, the Biden administration put in place new mandate for increased PPE production and Buy American policy. This continued transformation of the global supply chain bolstered 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 for fine fiber meltblown 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 lines 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. The 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 Lydall’s Specialty Filtration Center of Excellence ensures that we build upon and expand an 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 in TNW 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’s TAS 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 continue to increase, underpinned by supporting policies in China, Europe and most recently in the United States, with President Biden's plan to electrify the federal fleet. Lydall continues 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 XC90, SUV hybrid NAV platform. Turning to Slide 11, on the ESG front Lydall continue 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 masks. Rapidly designed and delivered innovative nonwoven materials for first responder medical gowns in New York. Partnered with the United States and French government to greatly expand nonwoven production and provided PPE to the communities where we work and live. In 2021, we will sustain our focus on employee 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, I'm 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 every one of our employees and partners around the world. We are a moms that select 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 focused 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.

Thanks, Chris.

Good morning, John.

Great. Thanks, Sara. Thanks for taking my questions. I appreciate it.

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

[Operator Instructions] The first question is from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning guys.

Good morning, Chris.

Good morning, Chris.

Good morning

Just hoping to better understand the ramp that you're looking for on the specialty indoor filtration. I understand that, near-term the focus of the meltblown capacity is squarely on PPE. I guess what I'm trying to understand is, if you're missing out on opportunities now or this is a market that's really just still developing?

Sure, Chris, I'll take that. The answer is we are not missing out. The reality is our current portfolio, pre-COVID was focused on serving the higher efficiency specialty filtration market and we continue to. And as we bring on additional capacity, it allowed us to not only serve the PPE market that obviously has heightened and sustained demand, but also continue to supply the specialty filtration for IAQ use. And the product development work has continued throughout COVID working with our customers to develop what the next generation specialty filtration products will be.

Got it. That's helpful. With respect to the two additional meltblown lines coming online in Q3, have you started contracting out? Do you have any orders on those yet? Or how does that work?

We do Chris and I would say a fair estimate is that about 80% of that capacity is spoken for at this time across those two lines.

And last one for me, I'm just trying to get a reasonable range for TAS operating margins in 2021. I mean, could they be in that 4% to 5% range? Is that aggressive? Is that reasonable? Just any thoughts there?

So what I would say is we expect to see significant margin improvement in TAS in 2021. I guess Chris said it in a different way, when we look at 2021 across all three segments, I anticipate double digit growth in our top line from an enterprise perspective and we expect expansion in EBITDA margins across the enterprise in 2021 as well.

Got it. All right. I appreciate it. I'll jump back in line.

The next question is from John Franzreb with Sidoti & Company. Please go ahead.

Hi, good morning, Sara and Randy.

I'd like to start with the sealing product demand that you saw in the quarter. Can you talk about if you had any sense, how much of that was pent up demand and how sustainable it is into 2021? Because you certainly suggest that you expect some strong demand continue into this year?

Sure. John, I would say 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 have frankly remained healthier in general. And as the agriculture and construction or earth moving and those markets start to really come back we're seeing strong demand there. So, Q4, it might've been the restocking, but the ongoing demand that - and frankly what we see in the market is significant and balanced geographically.

Excellent. And maybe just on the previous question about capacity and when the two new lines come on board, you said 80%, how long is that 80% visible to?

Multiple years.

Okay. And can we just switch to maybe some of the core side of the equation here? Can you just update us on some of the cost cutting efforts and the timeline to realize some of the cost savings you put out in 3Q and update us on that?

Sure. I'm sure Randy, you'll modify it maybe. 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. The second is the facility in 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 2021. And finally the site in Germany we fully expect to have complete within the first half of 2021. All of that, as you know we retained the business from that site and yet made the decision to exit it just from a pure footprint consolidation and cost optimization opportunities.

Yes. So John, let me give a little bit more detail. So in Q3, what we announced regarding the restructuring actions on those three specifics that Sara 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 has pushed some to the right. The restructuring costs in Q4 was actually $1 million and so therefore the remainder of that $20 million is now in 2021 and most of which is in the first half. The annualized savings associated with the restructuring actions are in the $5 million to $6 million range.

Okay. And just, Sara something you just said, otherwise I would've jumped back in the queue. The one-time purchases you said that persists into the first half of 2021, a little bit the same $5 million magnitude that we saw in the fourth quarter. Are they going to be significantly less?

Significantly less John.

Okay. All right. Thanks. I'll jump back in the queue. Thank you for taking my questions.

Thanks, John.

[Operator Instructions] The next question is from Arvind Sanger with Geosphere Capital. Please go ahead.

Thank you. Good morning and nice quarter. Sara, 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 end of this year. So my question, follow-up from your strategic review 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 are 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 type of opportunities?

Sure. Arvind. 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. We worked really hard in 2020 to shore up our cash balance and put best practices in place, around all aspect of cash. And I'm proud of the results and it also afforded us the ability to make the organic investments that we did that 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 with prioritizing the organic investments to further solidify the position that we have found ourselves in after decades of work. And high efficiency in 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, just to kind of summarize from my understanding, the balance sheet is a sort of very much on the glide path of where you want to be. So should we assume that 2021 will be the year where we should look for some M&A from the company and would it be - would it be tuck-in type of stuff or could there be a bigger strategic months?

Sure. So just reiterating what we said at Investor Day, in the order that we prioritized, that could be a consideration, but again, it would be longer term more tuck-in acquisitions.

Okay. Thank you.

Thank you, Arvind.

The next question is a follow-up from John Franzreb with Sidoti & Company. Please go ahead.

Similar question to Arvind’s. What are your thoughts about accelerated debt repurchase with the excess cash that you have and how much cash do you need for 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 that, when we believe it's prudent to do so. Admittedly, John, we have stayed very focused in having a healthy cash balance just because the reality is COVID is still here, and we want to make sure that we've got the liquidity and ability to make investments as we've done throughout 2020. And we want to also get ourselves to the leverage ratio that we've targeted at 2.5 times, which we're certainly there, if you will or close to it. And thereafter we'll use the cash as we've defined in the IR Day in December in order of priority, organic growth, debt pay down, opportunistic share repurchases and then long-term tuck-in acquisitions.

Okay. And it seems like there was an inventory build in the fourth quarter that was - I think is contributed to your operating cash flow, let’s say be neutral in the December quarter. What was that inventory build around? Anything specific?

No. So the inventory build John was, it increased primarily coming into our TAS 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 normalizing Q4 as the operation has stabilized to a more normal level. So yes, it's a build from Q3, but it's at a normal level historically at Q4 for where we are now.

Okay. And all the disruptive operating expenses related to TAS, are they behind you at this point or they bleed into the first quarter?

So I would say we're working our way through that. They're largely behind us and yet, we are being very purposeful in the TAS 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 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. And I'll sneak one last question, if I may just. Just across the whole portfolio can you talk a little bit about cost you expect to come back in 2021 that would defer in 2020? And also your thoughts about raw material costs and the potential impact on the margin profile of 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 in 2021. So at the highest level that, I hope helps answer your question. We certainly are seeing some raw material price increases 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 businesses. And yet have mitigating efforts in place. I would say the other thing is, as you well know, there are continued supply chain disruption, whether because of COVID or actually the weather or the global logistics. I mean, we have certainly encountered all of that in the seven or eight weeks of 2021. The good or bad news is we encountered it every day in 2020 as well, so I think the organization has become very good at navigating the ongoing turmoil that exist within the both the supply chain and value chains in which we operate. So, yes we are experiencing that, but we're also, I think skilled at navigating it, John.

Thank you. Thanks for asking us.