Lydall, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Good day, and welcome to the Lydall's Fourth Quarter 2020 Results Conference Call. 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:]

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.

[Sara Greenstein:]

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

[Randy Gonzales:]

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.

[Sara Greenstein:]

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.

[Operator:]

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

[Chris Moore:]

Hey, good morning guys.

[Sara Greenstein:]

Good morning, Chris.

[Brendan Moynihan:]

Good morning, Chris.

[Randy Gonzales:]

Good morning

[Chris Moore:]

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?

[Sara Greenstein:]

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.

[Chris Moore:]

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?

[Sara Greenstein:]

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.

[Chris Moore:]

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?

[Sara Greenstein:]

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.

[Chris Moore:]

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

[Sara Greenstein:]

Thanks, Chris.

[Operator:]

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

[John Franzreb:]

Hi, good morning, Sara and Randy.

[Sara Greenstein:]

Good morning, John.

[John Franzreb:]

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?

[Sara Greenstein:]

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.

[John Franzreb:]

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?

[Sara Greenstein:]

Multiple years.

[John Franzreb:]

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?

[Sara Greenstein:]

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.

[Randy Gonzales:]

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.

[John Franzreb:]

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?

[Sara Greenstein:]

Significantly less John.

[John Franzreb:]

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

[Randy Gonzales:]

Thanks, John.

[Operator:]

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

[Arvind Sanger:]

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?

[Sara Greenstein:]

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.

[Arvind Sanger:]

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?

[Sara Greenstein:]

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.

[Arvind Sanger:]

Okay. Thank you.

[Randy Gonzales:]

Thank you, Arvind.

[Operator:]

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

[John Franzreb:]

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?

[Sara Greenstein:]

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.

[John Franzreb:]

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?

[Randy Gonzales:]

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.

[John Franzreb:]

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

[Sara Greenstein:]

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.

[John Franzreb:]

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?

[Sara Greenstein:]

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.

[John Franzreb:]

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

[Sara Greenstein:]

Thank you. Thanks for asking us.

[Operator:]

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