LDL (LDL) 2020-10-28 Earnings Call Transcript

Good morning and welcome to the Lydall Third Quarter 2020 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to 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 Lydall's third 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, detailing steps taken in the quarter to optimize our portfolio and how Lydall 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. Sara 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, we'll open the line for questions. Yesterday, we issued our quarterly earnings release and filed our quarterly report on Form 10-Q, both have been made available on our Investor Relations website at ir.lydall.com and can be referenced during today's call along with the Q3 2020 earnings conference call presentation, which can also 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 quarterly report on Form 10-Q for further information. In addition, we will be referring to non-GAAP financial measures during the 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. So I'll turn the call over to Sara.

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 sale. We expanded cash flow from operations by 28% year-over-year. We announced the intent to close or exit two facilities in Europe and the elimination of an 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 4, Performance Materials sales increased 13% driven by robust filtration sales, which were up 38% from last year. To better serve the EMEA region, Lydall announced an additional strategic investment to expand our fine fiber meltblown filtration media in our Saint-Rivalain, France facility. This new capacity will be operational late in the second quarter of 2021. The investment further solidified Lydall’s position as one of the largest global suppliers of fine fiber meltblown filtration media, the crucial component of N95 respirators and the European equivalent as well as surgical masks and MERV, HEPA and ULPA grade air filters. Lydall will receive up to 30% of funding from these investments through the support of France’s Ministry of Economy and Finance. The previously announced expansion of meltblown production capability at our Rochester, New Hampshire facility remained one of Lydall’s most exciting near-term organic growth opportunities. 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 meltblown production capacity. Furthermore, the new capacity is already fully committed to long-term customer contracts and will immediately contribute to 2021 results. Rochester, New Hampshire is also home to our Specialty Filtration Center of Excellence, where we are expanding our innovation capabilities and talent to rapidly develop high performance filtration media to serve the ever increasing standards for indoor air quality worldwide. And in addition, Lydall announced that we will be providing a fine fiber meltblown filtration media, technical expertise [Audio Dip] with the XPRIZE competition to develop the next-generation of consumer face masks. Ashish Diwanji, President of Performance Materials will serve as a judge on the panel, which will conclude later this year. So in addition to Lydall announcing that we're going to be providing the fine fiber meltblown filtration media, our technical expertise, and our testing capabilities to tend to my finalist teams in partnership with the XPRIZE competition. But it's all about developing the next-generation of consumer face masks. Together with the confidence that our customers have placed in Lydall 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 Lydall’s long-term growth and expansion. As we are addressing not only the immediate need for PPE, while simultaneously expanding and enhancing Lydall’s ability to protect places and 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 this in the third quarter, we announced actions to rationalize the production footprint and product lines in our Performance Materials business. These actions enable Lydall to redeploy and focus critical resources on opportunities like our fine fiber meltblown investments. In our Thermal Acoustical Solutions businesses, sales were up shortly in the third quarter compared to last quarter. This was felt most significantly in North America, where automotive OEMs reported robust sales of light-truck and SUV platforms, in which Lydall has significant content. Lydall’s North American part 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 Lydall’s largest facility by employee account also experienced increases in COVID-19 cases, resulting in higher absenteeism, labor shortages, and lost production shifts, all of which contributed to higher labor, over time and logistics costs. Given the recent upward trend in COVID cases nationally, we have mobilized additional internal resources, engaged external manufacturing and logistics experts, hired recruiting and temporary staffing agencies to help address the labor shortages and reinforced the safety measures and protocols to ensure that our employees remain safe 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, Sara, and good morning, everyone. Turning to Slide 5, 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 Sara mentioned, these actions focus on optimizing the portfolio and redeploying our critical resources to focus on higher returning opportunities. The company announced our intent to exit in underperforming Performance Materials facility in Germany, which consolidates production facilities in the Sealing & Advanced Solutions business from five facilities to four. The sealing products at this facility will be resourced internally to existing manufacturing locations. And we plan to exit the remaining non-core product lines. Lydall also announced the closure of our Netherlands facility and we'll cease production of a low volume niche membrane filtration product. Finally, we idled an 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 of $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 $5.5 million in non-cash charges. The remaining $5 million will be incurred in Q4 this year and into early next year. The cash outflows of approximately $15 million for the severance and related closure costs of the European operations will largely be incurred in early 2021 when these operations are exited. Turning to Slide 6, 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 0.9% or $1.8 million from the same period in 2019. Organically, sales grew 0.3% led by strong organic sales growth of 11.4% in Performance Materials, offset by lower sales in Technical Nonwovens and Thermal Acoustical Solutions. The weaker dollar was a tailwind on foreign sales, increasing consolidated revenue by $3 million, or 1.5 percentage points, which was largely offset by tooling sales, which declined $1.8 million or 0.9 percentage points. We continue to see very strong results in our Performance Materials, filtration sub segment, where sales grew by 38% from prior year driven by robust demand for specialty filtration products, including media for N95 respirators and surgical masks to support the fight against COVID-19. 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 in technical nonwovens. Adjusted EBITDA for the quarter was $17.6 million or 8.5% 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 $4.5 million 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. For the quarter adjusted loss per share was $0.02 compared to adjusted earnings per share of $0.19 cents in the third quarter of 2019. Before we discussed segment results, I'd like to highlight our continued focus on cash and liquidity. Turning to Slide 7, 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 2020 free cash flow expanded to $69 million, compared to $55 million from the same period last year. Our focus on working capital and discipline capital spending resulted in increasing our cash balance by $29.5 million in the quarter and we ended the quarter with a consolidated cash balance of $122 million. We view this elevated cash balance as prudent in the current economic environment, while also providing flexibility to fund our key organic growth investments, such as the performance material meltblown expansion projects and restructuring programs. Capital spending in the third quarter was $5.1 million and $20.5 million year-to-date, including approximately $12 million related to the domestic meltblown capacity expansion. With the recently announced meltblown expansion in Europe, we are increasing our full year 2020 outlook for gross capital spend be in the range of $40 million to $45 million offset by approximately $9 million of previously announced U.S. and French government commitments. We continue to forecast debt repayment of at least $12 million in 2020. Moving to Slide 8, 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 $85.5 million more than doubling from second quarter sales of $37.4 million with parts sales down less than 1% from third quarter 2019. 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 light truck in SUV platforms. European volumes were also up sparkly as production resumed, but not as significantly as North America. In China were 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 Lydall was also awarded significant acoustical content on the new Cadillac Lyriq, 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 key content in this small but rapidly growing segment to accelerate future growth. In our Hamptonville North Carolina facility, the rapid increase in volume combined with COVID related labor shortages and absenteeism resulted in loss production shifts, driving incremental overtime, temporary labor costs and logistics costs, which impacted segment margins by approximately 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 up 4.8% down 400 basis points from prior year Moving to Slide 9, I'll cover our Performance Material segment, which includes the filtration and healing and advanced solutions 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 N95 respirators and surgical masks. Filtration sales were $30.9 million with 37.8% or $8.5 million. Sales in Sealing and Advanced Solutions were $36.9 million, down 1.7% or $700,000 from prior year with modest growth in ceiling and markets offset by lower sales of thermal insulation products. Sealing and Advanced 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 previous announced production enforced actions. Slide 10 covers our Technical Nonwovens segment. Third quarter sales were $58.5 million, down $5.4 million or 8.4% from prior year. Industrial Filtration sale 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 TNW China team delivered a large order of industrial filtration bags for the Manjung power plant in Malaysia incorporating a especially engineered blend of Teflon and polyphenyl sulfide fibers to provide additional durability and performance in demanding operating conditions. Advanced material sales declined $2.1 million, including $800,000 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 in 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.

Thank you, Randy. As we move into the last quarter of the year and reflect on the year ahead, we remained focused on meeting the needs of our customers, driving more value for our shareholders and the safety and wellbeing of every single one of our employees. 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, especially filtration products, driven by localized supply chains and the structural market shift underway to higher efficiency filtration for indoor air quality applications. In addition to significant capacity expansion in both North America and Europe, Lydall is expanding our innovation capabilities and talent through our investments and our specialty filtration center of excellence and partnering with our largest customers to co-develop the next generation of innovative filtration solutions to address the ever increasing standards for indoor air quality to 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 Hamptonville is rapidly addressing the labor cost issues to ensure that business is positioned for success in 2021. Reflecting on my first three quarters at Lydall, 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 Lydall portfolio will continue to be driven by deliberate decisions to allocate capital where our decades of experience, organizational agility and innovative nature provide us with a clear competitive advantage. These actions will improve margins, drive capital efficiency and increase cash flows. Lydall 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.

Right. Thanks, John.

Thank you, John.

Thank you, Chris.

Perfect. Thanks guys for taking my follow-ups.

This concludes our question-and-answer session as well as today’s conference. Thank you for attending today’s presentation. You may now disconnect.

[Operator Instructions] Our first question comes from John Franzreb with Sidoti & Company. Please go ahead.

Good morning, Sara and Randy.

Good morning, John.

I’d like to start with the costs that hit the TAS segment. Can you talk about the timing of when those cost hit and what are your expectations for how long they'll last into the fourth quarter?

Yes, John, so the costs were incurred throughout the quarter. I would say they were more acute definitely later in the third quarter, especially with regards to the logistics costs, the expedited freight costs in the month of September. So those - the expedited freight costs will have tapered off significantly where we sit here in the fourth quarter - early in the fourth quarter. But we'll see additional incremental costs continue in the near-term in Q4 with related to the temporary staffing and additional overtime costs. So in summary seeing good progress on expedited freights, but what you see in other overhead type costs 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, so we are working vigorously to get the adequate staffing in that facility. We’re making significant progress every day we're adding the staffing not only on the production labor side, but on the talent in support functions. And so it will continue in Q4 and hopefully we see some improvement as we go into next year.

John, Sara here. What I would say is really through July, even into August the world over, we had been successfully navigating and managing everything related to COVID and the impact on our business. What happened frankly, late August into September is that in Hamptonville, North Carolina specifically in that area, we really started to see a significant uptick in terms of COVID in the area and on us and our operation. We are doing all of the things that we described, which others are doing as well in terms of how to navigate it, especially if you're operating in an area that has been hit in a challenging way with COVID. I think that the reason we have the uncertainty that we do is because we really don't know how to - what the over-under is on the COVID impact. So to Randy's point, we know that we are actively managing the expedited cost piece in a better way now, but what will be unknown is the continued effect and impact of COVID and the labor impacts and navigating that.

Hopefully that stays in my core climate type issue. Sara, in your prepared remarks, you said something about reaching something like equilibrium in TAS, as far as supply demand and restocking depleted automotive inventories. Is that the case that I understand you properly and how you’re preparing for 2021 against the restocking, the resetting of the environment next year?

So in the third quarter we saw significant surge of demand, especially as it relates to what was going on in the second quarter, right. And we’re working seriously in order to be able to ensure that we could meet that surging demand. The comments that I made in the prepared remarks is that if you look forward to the fourth quarter, there is a natural cyclicality that comes with the automotive demand and we are anticipating that to occur this year i.e., less demand in the fourth quarter than we would historically see in the third and perhaps even the second albeit 2020 being an anomaly. So my forward comments were around that, that we are predicting the automotive demand to mirror the natural cyclicality of it, therefore, the Q4 demand being moderately less than what the Q3 demand was.

Okay. Fair enough. And one last question, I'll get back into queue. Regarding the cost saving actions, Sara, would you characterize this as a low hanging fruit and there is more to come and - can you talk a little bit about the tempo of realizing those costs savings in the next couple of quarters? A little bit clarity, that'd be great. Thank you.

Sure. To be sure, we have taken actions late 2019, early 2020 to make sure that the cost structure where it had room 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, and you can see that in that area. Specific to cost overall, the actions that we took in this quarter and just announced around identifying underperforming assets and - 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, talent, time, money is put in areas that we know are going to not only deliver our near-term, but long-term value. And purposely get out of areas where that - it doesn't make sense for us. So when I think about the cost piece of that, I think about all of that, right, not just the where do we have opportunity to decrease costs, but also how do we adjust the footprint and the portfolio such that our overall cost basis improves and we can focus the resources in the areas that drive real value.

Yes. I'll just add John. I think you were asking about the profile of when 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 the expense right now, $2 million in first quarter of 2021 and of that total $20 million, $5.5 million is non-cash. The cash outlay of that is expected in right now the first quarter of 2020 - 2021, I’m sorry.

And [indiscernible] realized in the cost benefits, does that line up with the expense layout or was it different?

So on the annualized savings you will see that - 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'll see that full run rate. So I would anticipate half of that the $5 million to $6 million, half of that you’ll see in the second half of 2021.

Perfect. Thank you guys, I'm going to get back into queue.

Our next comes from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning guys. Yes, I just want to make sure that I understand the kind of the cadence on the meltblown kind of progression. So currently capacity is about $20 million to $30 million that will increase perhaps double with the new meltblown line that comes on at the end of December. Then there is the DOD line that should be operational in say June of 2021, that adds another potentially $20 million to $30 million in capacity. And then you have the French line that is - that's mid-2021 or late-2021?

Yes, second half of 2021.

Got it. And these lines, I'm sorry...

To clarify, you said the DOD line, so both the new - the two new domestic lines going in now are being executed now. They are our assets, the U.S. Department of Defense has provided a commitment to offset those funds. So it's our asset, it’s not a designated DOD line. We are - Lydall is free to sell to our customers and that's not dictated by the U.S. government.

Understood, appreciate that. And in terms of those lines capabilities, so initially the focuses on PPE is - can you also do the inventory filtration from those lines and does that require additional kind of retooling?

Yes. We can produce a vast portfolio of 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 - go ahead.

We're expanding our center of excellence and adding the talent there to drive the current product development and future innovation and a testing lab.

Got it. And in terms of the actual cash to pay for these lines. So the first one in New Hampshire that'll be done at the end of the year, that's roughly - you talked about cost associated there, I know that some - the others after that, you've got some offsets from the DOD and 30% from France. Just trying to understand kind of the additional cash outlays in 2021 associated with the increased capacity. Randy had talked about the CapEx for this year already.

Yes. So Chris, in the prepared remarks in terms of the capital spend year-to-date in total for Lydall was $20.5 million of which $12 million of that was related to the meltblown capacity expansion. In total between the - all these assets that we're talking about, the three incremental assets, it's $40 million in aggregate and half of that is expected to be an expenditure in 2020. The other half is expected to be an expenditure in 2021. And that's on a gross basis, the government commitments from both the U.S. and France will offset that capital spend.

Got it. That's very helpful. Thank you. Performance materials margin is very strong Q3, given the restructuring, the improved cost there and kind of the strength in specialty filtration, is that a level that's kind of that you can stay at in 2021?

Yes. 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 - you had the COVID issues in Hamptonville, nothing else from a performance materials nonwovens, they weren't impacted from any COVID issues in Q3.

That's correct, Chris. We've been hold serve thankfully the world over until our issue here in North Carolina, but we're doing just fine everywhere else.

Got it. And the last one, just in terms of the TAS management changes kind of where that process stands?

Sure. So 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 facilities. And in some instances we've already completed that in others, we're in the process, but it'll be a new set of folks with the necessary talents and skills required to help us do what that 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.

Our next question comes from Christopher Hillary with Roubaix Capital. Please go ahead.

Hi, good morning.

Good morning, Chris.

Good morning.

Great. It just seems that by the day we get more evidence that better filtration makes a big difference in terms of mitigating the spread of viruses, influenza, et cetera, and further just the overall reduction in air pollution is just so beneficial for health. I can't recall a time where there is been so much focus on it. Can you use this opportunity to help us frame the size of your filtration media business currently and as you're doing these expansions, how much of that is going towards these types of solutions and applications?

Sure. So when we think about kind of the size of the market 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 a more readily available filtration media that's like MERV 8 or below to requiring a more specialty filtration media, it would be something like a MERV 13 or above. And Lydall already makes those products, have made those products and are uniquely positioned to not only serve the need today, but the evolving needs both growing in size, as well as efficacy. And so, if you look at the industry association kind of numbers, they speak to a market that's projected to grow at least 15% in 2020 and have a 6% CAGR over the course of the next five years. And there aren't very many players who can make the quality of the filtration media required to go into those higher efficacy filtration filters. And because Lydall has the position that we do within the supply chain, which is we make the media, but not the filters. We work with all of the global filter OEMs in terms of designing and developing the product for today as well as tomorrow. So that business for us is and has been a healthy business with the new capacity that we're bringing on those in France, in the United States, as well as the investment that we're making in the center of excellence and its expansion positions us well to be a critical player in how this evolves the world over.

Okay. Thank you. Sure, it seems compelling. Appreciate it.

No problem. And it's good, right, at the end of the day, it's not only the capability, but we're all going to be better off, right. Wherever we are in the world because of it, which is also meaningful - it’s a meaningful impact.

Yes, absolutely.

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

Maybe just to build on Chris's question, I'm curious if any other countries, regions have asked you to build localized meltblown medical filtration facilities in their areas to ensure that they're first online, have they approached you? And if not, maybe why not?

So the answer is yes, John and throughout this pandemic, I have had conversations with governments around the world. France is an example of a country that has decided to do exactly that. And why we have decided to expand there in our Saint-Rivalain facility. And I would say, the governments 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 of PPE going forward and recognizing the filtration media is the critical component to that. And those talks ensue, I would tell you, John,

That's actually great news. Can you tease me some more and tell me which region the North America, South America, Europe or Asia is the next likely opportunity?

I would say that each of those regions have conversations, in the U.S. as an example, as a country, as a government, I think they're trying to figure out how big the demand is going to be and how much they want. We want to make sure in this country that we've got. And I would say in Europe, each of the developed countries is still working through their answer. France was the first to make a decision. But those conversations are continuing. I think the other phenomenon that's happening, John is now that this awareness is where it's at, the efficacy of the filtration media and the PPE that's coming from other regions in the world, mainly China are aren't passing, right, the standards that exist. And so now there's a heightened awareness around making sure that not only do you have access to the PPE and the filtration media required, but that it actually complies with whatever the local requirements are. So that heightened awareness and our engineers and material scientists are typically the ones helping them navigate, why that material isn't doing what it needs to do. I think really speaks to the quality of Lydall and we help everybody, right. We're helping anybody that needs the help to understand why, what they're getting might not be doing what it needs to do and how to get there, which only helps Lydall and our brand and our reputation in the world.

Great. And just shifting for a second, Randy, 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 into 2021 compared to the cash outlays that you're looking at? And also on top of the fact that, as you mentioned in the prepared remarks, working capital management has been really great. So you've been cash flow positive through the first nine months. Can you kind of talk about all three of those pieces and what we should be thinking about as the balance sheet progresses in 2021?

Sure, John. A lot 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 repayment on our term loan that's required of $2.5 million per quarter. And so at a minimum, 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 we're 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 facility constructions, how does that kind of - just could you help me with that?

I'm sorry, I missed the last part of the question...

Yes, the government reimbursement, yes.

So with the U.S. government funds, it's a total of $13.5 million. We get payments from the government on agreed upon - on an agreed upon schedule on a monthly basis that is going on now. So we'll receive a total of about $8 million out of that $13.5 million this year. And on French government reimbursement, the 30% - up 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.

Sure, John.

Our next question comes from Arvind Sanger with Geosphere Capital. Please go ahead.

Thank you. Good morning.

Good morning.

I'm trying to understand the two things. One is, what is the - how do we think about the short-term dynamic in the filtration business with the COVID-related scramble for PPE versus the long-term opportunity once COVID passes, whether it's middle of next year or early next year or late next year, once we have either vaccine or widespread herd immunity or whichever or combination. Will this math 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 both from a revenue standpoint and from a pricing, therefore margin standpoint, how much are you benefiting from this short-term versus what the long-term opportunities and risks are?

Sure. So let me take your first question first, which is how long do we see this kind of surge that we're seeing as it relates to PPE demand? A lot of that is based in how long we're all navigating this pandemic and yet, how we have managed to ensure that, we have stability is through signing long-term multi-year commitments for volumes 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 ensue long after this pandemic is behind us. So, yes, in the short-term, there is a lot of focus on PPE and yet, we are simultaneously producing for 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 this 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 we're reshaping this portfolio around specialty products, technologies, and applications, and making the investments necessary to win there. So my view is that how this sustains itself beyond PPE, first and foremost, the demand for PPE will remain not at the levels that we're seeing today, because we're in the middle of a pandemic, but there will be ongoing demand for PPE that is domestically sourced and a stockpile that is going to need to be finished 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 is going to contribute to increasing our product portfolio. The other piece is there are opportunities that we're continuing to work on beyond the portfolio reshaping to drive productivity. That's also going to improve overall margin growth. And then really, Arvind, beyond that, I would say, tune in for the Investor Day in December, where we talk about the other areas, 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 $120 million business this year, give or take whatever the fourth quarter exactly turns out to be. And your overall margins, you don't break it out between filtration and Sealing & Advanced Solutions but Performance Materials is running at 20% plus margin this quarter. If we 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 as kind of item, if one can call it normalized, but with all the new capacity in place. Do you think that business, that filtration business could be 1.5x on top line, 2x on top line, given what all of the investments already announced. I'm not talking about any future opportunities that come about and what happens to margins with both these new lines, I assume being higher margins as well as some of the cost reductions, how do we think about that part of the business on a slightly more longer term basis, sustainable basis?

So Arvind, I think rough order of magnitude, I mean the way we've guided previously was the increase in filtration sales that you've seen throughout the year is an indicator that it's mostly driven by the fine fiber meltblown demands. So if you can scope that with the additional meltblown investments that are coming online then I think it gives you a pretty good idea probably consistent with, I mean, generally consistent with what you've outlined. We're saying that tremendous uplift, as the capacity comes online, when the first line comes with full production early next year, it will double our capacity. And so the margin profile going forward is sustainable on a consolidated basis for Performance Materials as the additional capacity comes online.

Okay. And last question for me, the TAS business, you announced something on an EV line for, I think it was GM. Is there anything unique about their offering or it's just that as more and more companies roll out EV lines, you're going to get your share of the auto market and therefore there's nothing particularly different between you and your competitors in terms of one of you will get one, somebody else will get somebody else and so on?

Sure. I'll take that. I think when you look at our business and the products that we make for the automotive OEM, they're very highly engineered kind of specialty products. And so as the automotive OEMs in Germany, as well as in the United States are redefining their platforms, we're working with through that development. And so it isn't something that we are very differentiated, Arvind, I would say. And as they're looking at how to solve problems or issues that they're seeing relative to their new designs, we certainly work closely with them because of our materials background is really helpful in terms of how to solve for some of the unique problems that come with EV platforms.

Okay. Thank you.

Thank you.

Our next question comes from Rand Gesing with Neuberger. Please go ahead.

Hey, good morning. I know we're running late. Just looking for just a little bit of clarification on TAS, I mean, we're not seeing COVID disease generation within the facility. It's just more in the community and that's wreaking havoc with folks calling in with your protocols, not to come in and also probably there's a little bit of folks that are spooked and scared to come in with the disease in the community. Is that a fair way to characterize it?

I would say we've got, all of the above, Rand. I mean, yes, the community has been hit. And yes, there are people who make personal choices based on what's going on around them. And we follow strict protocols around how to handle situations when we have [indiscernible] and all of that has contributed to the situation.

Can you give us a sense for, are you running 10% light on a given shift type of thing? Is that number moving around or becoming more stable or can you give us a sense for just the magnitude of the impact?

Well, I mean, it isn't consistent on any given day or shift. I would tell you that we've got two of the three facilities, back to running just fine. Our Hamptonville facility, which is our largest by just employee count, is the one that had the most challenges. And we're working to make sure that we shore up whatever shortages we have through all the levers available to us. Just like others have had to do and are doing depending on how and where they operate. We certainly aren't alone in this. And yet, everybody's trying to pull from the same pool of workers to try to shore up whatever might be happening in that kind of local domain. So it really is about doing everything we can to make sure that everybody that comes to work is COVID-free. And we certainly know how to keep them that way while at work. But we've got to make sure that we've got a stable workforce every shift, every day to be able to hit the production targets that we have. And that's what we're focused on.

Is there - are you able to - obviously, we've been doing a lot of work on the North Carolina facility in the last year plus to improve the operating performance. Are you able to see through the COVID disruptions to see that stuff has taken hold and is there as a benefit or is it just so murky with what's going on with the interruption that you can't see how the business is turning? Because we've all would've expected with improved volume on that, on a supposedly improved operating structure that we would see margin lift. So just wondering if you're confident that that's there below the surface of COVID?

I mean, I think in order to see that margin lift, you got to - you have to have the stable operating environment to deliver on that. And that certainly isn't what we got in the midst of a COVID surge in the area. What I would say, Rand is, we're doing the right things, the profitability will improve, but things need to settle down a bit. And I don't have the crystal ball to tell you when that will be, 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. Yes, I understand.