Lydall, Inc.
Q1 2021 Earnings Call Transcript

Published: 1 May 2021

[Operator:]

Good morning, and welcome to the Lydall's First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. . After today’s presentation, there will be an opportunity to ask questions. . 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.

[Brendan Moynihan:]

Thank you. Good morning everyone and welcome to Lydall's first quarter 2021 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 Greenstein:]

Thank you, Brendan, and hello, everyone. I hope that you're all doing well, staying safe, and remaining diligent to protect yourselves and others as the world continues to battle this pandemic. I'm delighted to be here today to share another remarkably strong quarter for Lydall. We saw solid and sustaining sales growth across all three of our business segments this quarter and continued margin expansion, driven by our clear strategic focus and relentless commitment to operational excellence and our customer success. 2020 was undeniably the year of PPE and meltblown for Lydall. Last year, we supplied enough fine fiber meltblown filtration media for nearly 1 billion face masks. By mid-2021, we will have capacity to supply filtration media for over 6.5 billion masks annually. In January, our engineering team in Rochester, New Hampshire commissioned our newest meltblown asset. It is one of the largest fine fiber meltblown producing machines in the world, and it has been operating at full capacity since the beginning of this year, shipping products to customers as quickly as we are able to load the trucks in our shipping base.

[Randy Gonzales:]

Thank you, Sara. Turning to Slide 4. I'll briefly cover some key highlights for the first 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.

[Sara Greenstein:]

Thank you, Randy. Let's turn to Slide 9. As we complete the successful execution of our expanded specialty filtration investments, we have turned our focus and earnest towards the grow and differentiate phase of our strategy, including our innovation pipeline. In February, we were excited to share that Lydall's HEPA filtration product has successfully made it to Mars aboard the MOXIE module on NASA's Perseverance Rover. The MOXIE module powered in part by Lydall specialty filtration knowhow is working to extract enough oxygen out of the Mars atmosphere to enable future manned landings and exploration. Closer to home, we are continuing to solve this world’s most pressing challenges. Our strong innovation pipeline, which addresses key global megatrends, will support the post pandemic economic rebound. Stricter industrial emission regulations will drive continued demand for higher performance outdoor air quality solutions. Demand for high-performance sealing solutions across a myriad of end-use applications and ultra low-temperature insulation for cryogenic applications remains robust. Recent announcements related to domestic infrastructure investment are likely to continue to benefit our geosynthetics business, while accelerated EV adoption leverages Lydall's deep OEM customer partnerships and engineering expertise in vehicle lightweighting, thermal management, and acoustical abatement products.

[Operator:]

We will now begin the question-and-answer session. . The first question comes from Chris Moore with CJS Securities. Please go ahead.

[Chris Moore:]

Hi. Good morning, guys. Thanks for taking a few questions.

[Randy Gonzales:]

Good morning, Chris.

[Brendan Moynihan:]

Good morning, Chris.

[Chris Moore:]

Good morning. Maybe we could start with EBITDA. So, obviously, Q1 EBITDA very strong, 24.4 million. Very simplistically, if you annualize that, you're at 97.5 million. Can you kind of walk through the puts and takes as to why that 97 million number could be higher or low, things like seasonality, the new meltblown capacity in Q3, sealing strain, things like that?

[Sara Greenstein:]

Sure, Chris. This is Sara. I'll take a stab at it, and I'm sure Randy will weigh in if need be. So I think, again, reflecting on the first quarter, it reflects the strength of Lydall's portfolio as well as our ability to flex according to customers' needs. I think as you heard in the remarks, we have strong demand really across the portfolio, and we're realizing that. And also keep in mind the expanded installed base that we delivered here in 2021, starting at the very beginning of the year, and we have two new machines coming online here in the near future as well as the natural seasonality that would say that our second and third quarters are typically higher in general. So I hope that gives you enough perspective to think about it in a nonlinear way.

[Chris Moore:]

All right. That's a start, but I appreciate it. Maybe I'll just switch to TAS for a second. So again, TAS revenue very strong, up almost 12%. Adjusted EBITDA margins improved 290 basis points to 5.2%. What would it take to get back to the 10% EBITDA margins that you did in Q1 of '20?

[Sara Greenstein:]

Sure. So we've talked a lot about TAS, right. And we know what happened in 2020 and what actions we took and have signaled that we're doing what's within our control to not only stabilize, but continue to transform that business back to where it should be and indeed will be. The first quarter improvement reflects that. And what I would say is it's less about what it's going to take. We're doing what is required to get it there. It's about making sure that we remain flexible to a still tumultuous supply chain and flex accordingly to the demand of our customers, Chris. So I have no concerns about our ability to get there. When we do, I think is, to some extent, outside of our control based on what's happening in that supply chain right now. But my expectation is with the actions that we've taken and with what we continue to do and the improvement we see in the overall operations, broadly, that we will certainly get there as demand and the supply chain start to even out.

[Chris Moore:]

Got it. I appreciate that. And last one for me, just talking about meltblown a little bit. So you're expanding the meltblown capacity. It should be at full capacity probably sometime in second half of this year. So if you match that against the COVID backdrop, is it reasonable to assume that PP&E sales would peak in 2022? First of all, is that a fair statement? And secondly, does that dovetail with when you would expect to really be ramping on the higher end commercial and residential filtration that's being driven by the enhanced air quality requirements?

[Sara Greenstein:]

Sure, Chris. So let me dissect that a little bit. First, in terms of when this capacity comes online. I think I mentioned in our remarks that the first of the three machines was up running and at full capacity very, very early this year. And the knowledge and experience that we now have in that gives us great confidence that the second and third machine will come online no later than the very beginning of the third quarter with the expectation that they're running at full capacity theretofore, that's the timing.

[Chris Moore:]

Got it.

[Sara Greenstein:]

The second piece is, we have said and it holds that we have customer contracts in place for much of that capacity across the three machines and are purposely keeping some of that capacity open so that we can ramp up the production of the IAQ material coming off of this expanded capacity. And, yes, the expectation is that we are doing so in 2022 and at finding a more natural equilibrium at the point that it settled out 2022 and beyond, really 2023. The pipeline and the customer development work is well under way and it will -- we will deploy the capacity that we have according to the demand and opportunity thereof.

[Chris Moore:]

Extremely helpful. I'll jump back in line. Thank you very much.

[Sara Greenstein:]

Thanks, Chris.

[Randy Gonzales:]

Thanks, Chris.

[Operator:]

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

[John Franzreb:]

Good morning, Sara and Randy. Great quarter.

[Sara Greenstein:]

Thanks, John.

[John Franzreb:]

So a little bit on your last comments, I'm curious if there are any start-up inefficiencies when you bought the new meltblown production line up in the first quarter? And if so, can you quantify what it was?

[Sara Greenstein:]

So as I mentioned, we stood that machine up really under budget and faster than we anticipated. And we're running at greater than kind of business case OEEs far in advance of what the expectation was. And it's why I have the confidence that I do in our execution here on the second and third line.

[John Franzreb:]

Okay. So this is pretty much the max or the anticipated margin contribution from that business what we're seeing right now. Is that a fair assessment?

[Randy Gonzales:]

No.

[Sara Greenstein:]

No. I would -- yes, I would say no. Because I think in the Performance Materials business, there are multiple businesses and applications that we deliver there. And we see strengths across that entire portfolio, both in terms of demand and mix. And I think that you can expect to see further margin expansion from that business in the ensuing quarters.

[John Franzreb:]

Got it. Could you just remind me what businesses are a drag for PM?

[Sara Greenstein:]

What businesses are what, say that?

[John Franzreb:]

Are dragging down for Performance Materials?

[Randy Gonzales:]

What are dragging it down?

[John Franzreb:]

Correct.

[Randy Gonzales:]

So, if we start from a base of what the EBITDA margins were last year in this business, John, so in Q1 of 2020 they were at 16%. So now we're at 26.5%. So what I would tell you is a combination of factors is driving that increased margin, including the volume we're getting and the leverage on the fixed cost base for the sealing products. Remember that we'll see even more expansion given the backlog and the demand we're seeing in that business because we just exited one of the German facilities that was a facility that manufactured those sealing products as well as what we talked about the cryo and the meltblown. So I don't think it's a matter of what's a drag. I think it's a matter of what's increased the margin substantially, and we'll continue to do so, based on the demand we're seeing in all of those key markets.

[John Franzreb:]

Got it. And then on TAS, are all the labor cost issues behind you? Because Sara, it kind of sounded like you said you just need volume leverage going forward, and that may suggest at least to me that the labor cost issues are something in the rearview mirror.

[Sara Greenstein:]

Yes. So, John, as I mentioned in the remarks, right, the high cost temporary staffing measures that we had to take in 2020 as we recovered from the Q2 shutdown and all that came thereafter is concluded.

[John Franzreb:]

Okay. Because for the 10-Q there was mention there was still some in the quarter, but that's the way I thought I read it, but maybe I'm wrong.

[Sara Greenstein:]

Right. But I would -- yes, I would say that we're sitting here, the quarter has concluded and I'm answering in real time and, yes, it is behind us.

[John Franzreb:]

Okay. That's what I’m asking, so exactly, it's behind you. Perfect. And I also hear you suggest that the large project works coming back across all three segments or two segments, and that's benefiting you. Is that also the case?

[Sara Greenstein:]

Two large project works, yes, we mentioned in like the TNW business is the industrial filtration requirements increase and the demand for ever-improving technology and capability is there. We're seeing that in our backlog across our businesses that do that work or contribute to that work, whether it's outdoor or indoor air quality applications.

[John Franzreb:]

Great. And one last question I guess for Randy. The interest expense savings that you mentioned in your comments, I guess there's two questions here. Was the 4 million savings for the balance of the year or is that versus a year ago? And secondly, I know you had a hedge in place that kind of helped you with the euro-dollar rate. Is that no longer part of the mix?

[Randy Gonzales:]

So yes, John, in answer to the first question. So the $4 million in interest expense savings is in here, it's in 2021. So what we had previously guided with regards to full year interest expense was $14 million. So that puts us at around $10 million. And the specifics around that are in our old credit agreement. We had a LIBOR floor of 1% that is now eliminated, plus the pricing going forward, currently we're on the pricing grid, there'll be a savings of an additional 125 basis points. So the combination of those two will generate savings of more than 200 basis points from where we were before. That's how you get to the $4 million of savings in 2021. With regards to -- I think you were asking about the cross-currency swap. We do have currently a cross-currency swap in place between the U.S. dollar and the euro. We also have an interest rate hedge in place. So I don't know if your question was asking about the interest rate hedge or the cross-currency swap, but we have both.

[John Franzreb:]

I was actually asking about the interest rate hedge since you redid the debt, I was curious if that's still in place.

[Randy Gonzales:]

It's still in place. Yes, that's correct.

[John Franzreb:]

Okay, all right. I'll follow up with you . Thanks for taking my questions. Again, great quarter.

[Randy Gonzales:]

Sure. Thank you, John.

[Operator:]

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

[Arvind Sanger:]

Thank you. Good morning. Great quarter, guys, and glad to see you guys buying your shares back, although I guess I'm a little bit concerned with the liquidity being somewhat limited, share buyback will not help that. So how are you thinking about that in terms of cash return to shareholders, balancing the different factors at play here?

[Sara Greenstein:]

Sure, Arvind. Thanks. I'll take that, and I'm sure Randy will comment if he wants to as well. I think how the share repurchase announcement is intended is, it reflects the confidence that we have and the strategy that we've laid out in our execution roadmap thereof. It reflects the balance sheet and the ever strengthening position of the balance sheet. And it's consistent with our capital allocation strategy in terms of where, how we would deploy capital and, frankly, gives us the optionality that if we see that opportunity exists, given the volatility that’s innate in our stock price and the stock market that we would be able to opportunistically exercise that. And it, again, is just consistent with the strategy, our confidence in it, our ability to execute what we've done, where the balance sheet is, and what we've articulated the capital allocation strategy to be.

[Randy Gonzales:]

Yes. The other thing I'll add, Arvind, is with liquidity, cash on the balance sheet, where we stand now, $88.7 million in addition to the credit facility, we've expanded the capacity from 304 million to 346 million. That gives us available liquidity under the revolver. It expands that significantly, practically double from $42 million of available liquidity on the revolver under our old credit agreement to now $84 million of available liquidity on the revolver.

[Arvind Sanger:]

Great. The second question is more kind of trying to understand the strategic imperatives for the company. One of the strongest themes we're seeing in the industrial space is the whole energy transition/green tech opportunity. Now Lydall is unique in having this filtration opportunity, which is a unique strength to have and is likely to last for a while. But in terms of that energy transition, Sara, I know you mentioned and you've mentioned in the past about EVs and you're being positioned there. But I would assume that the amount of noise abatement or filtration needed in electric car is significantly less than in a conventional internal combustion engine. So how are you seeing the opportunity set, whether its carbon capture or LNG or renewable gas and renewable diesel or hydrogen, that whole space? Is that something where you have technology that gives you a long-term perspective on that or is that something that you would look at as an area to opportunistically get further into?

[Sara Greenstein:]

Yes, Arvind, good question. So there's a lot there, right? And so rather than speak off the cuff, let me take a few components of it to answer that. So let's start with the EV, electric vehicle conversation. I've stated and will restate that when you look at the transition from internal combustion engines to hybrid vehicles to electric vehicles, Lydall is very well positioned to support our global OEMs through that transition. And we believe that for Lydall, that transition will be a tailwind for us because of the engineering challenges that exist and the nature of the products that we make and the material expertise that we have coming to bear as they work to solve those problems. And acoustical abatement is but one. But really, when you think about the protections required in an electric vehicle different than an internal combustion engine and the need for ever-increasing lightweighting, fibers based products are a wonderful solution to those. And the combination of our knowhow in that space combined with the materials, that kind of experience that can go into the manufacturing of those parts, we believe and are seeing that there being some real strengths there. Beyond EV, you talked about the cryogenic and/or different sources of energy. And what I would say and I touched on it in the remarks, but we are certainly seeing significant demand for solutions and applications around temperature, high temperature, extreme temperature environments, and we have a solution today. And even more important I think is a continuing pipeline of solutions to address those kind of extreme applications and whether it's LNG, whether it's ethylene, whether it's hydrogen transport as an example, that’s work that we do today and a pipeline that we are actively working on with customers in that space.

[Arvind Sanger:]

Great. Thank you.

[Randy Gonzales:]

Thank you, Arvind.

[Operator:]

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

[Rand Gesing:]

Hi, guys.

[Sara Greenstein:]

Hi, Rand.

[Randy Gonzales:]

Good morning, Rand.

[Rand Gesing:]

in filtration where the mask opportunity sort of holds in there and the industrial opportunity sort of accelerates such that we may actually need to bring on additional capacity. Is that just way too optimistic, or is that something that you guys might feel like you need to be pulling the trigger on in the next maybe 12 months from now, that's sort of like a decision point?

[Sara Greenstein:]

So Rand, it is a good question and I will answer it by saying, any further investments that we make would be consistent with the strategy that we have and the portfolio focus that we have as well as the financial expectations that we have for any capital deployed. Where I sit today and looking at the pipeline that we have, the capacity that we have, and the engineering and application capability, I am very comfortable with the footprint decisions that we've made. And yet, when you ask a question a year from now, right, as we know a lot can change, and we would make decisions consistent with the strategy that we've articulated and the expectations thereof, if we were to need that. What I would say is we are bringing on manufacturing capacity this year in 2021 that we have strong customer demand for both current products and innovative products coming through the portfolio, and we continue to strengthen that innovation portfolio, which would inform any further capacity decisions and organic investments that we might make.

[Rand Gesing:]

I guess ask another way, is the PP&E opportunity, level of demand proving a little more sustainable/maybe growing, growth orientation versus what you would have expected maybe six months ago? Because I know we've been bullish on it, but I'm wondering what

[Sara Greenstein:]

Yes, Rand. What I would say is the fact that we've got long-term customer contracts for that capacity that we're still bringing online speaks to the strength and sustainability of that demand and the innovation pipeline that we have in parallel all toward or primarily focused towards the IAQ portfolio speaks to strong demand all around.

[Rand Gesing:]

Okay, great. Thank you.

[Randy Gonzales:]

Thanks, Rand.

[Operator:]

This concludes our question-and-answer session and Lydall’s first quarter 2021 earnings conference call. Thank you for attending today's presentation. You may now disconnect.