Lydall, Inc.
Q4 2018 Earnings Call Transcript

Published: 26 Feb 2019

[Operator:]

Good morning, and welcome to the Lydall Fourth Quarter 2018 and Year End Financials 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, FP&A and Investor Relations. Please go ahead, sir.

[Brendan Moynihan:]

Thank you, Laura. Good morning, everyone, and welcome to Lydall’s fourth quarter 2018 earnings conference call. Joining me on today’s call are Dale Barnhart, President and Chief Executive Officer; and Randy Gonzales, Executive Vice President and Chief Financial Officer. Dale will start the call with comments about the continued progress we’re making in executing our long-term strategy as well as provide an overview of current business conditions. Randy will follow with a review of our financial performance and discuss the key drivers by segment. At the end of our remarks, we’ll open the line for questions. Our quarterly earnings release was issued yesterday and this morning we filed our Form 10-K. So that you can follow along with today’s call, please reference the Q4 2018 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. Finally, 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, I’ll turn the call over to Dale.

[Dale Barnhart:]

Thank you, Brendan. Good morning, everyone, and thanks for joining us. I am pleased to report fourth quarter reported sales grew almost 18% compared to prior year led by the acquisition of Interface Performance Materials, which contributed $34 million of revenue in the quarter. On a consolidated basis, Lydall sales for the full year of 2018 were up 2.2% organically with growth across all segments. Compared to prior year, gross margin in the fourth quarter was down and continue to be negatively impacted by higher labor and overhead costs and to a lesser degree raw material inflation. However, we did see sequential gross margin expansion of 160 basis points from the third quarter 2018 led by strong gains in Performance Materials and Thermal Acoustic Solutions partially offset by lower gross margin in Technical Nonwovens, which saw end market soften in the fourth quarter, particularly in China. Adjusted earnings per share for the quarter were $0.52 compared to $0.67 in the fourth quarter of 2017 and included $0.13 of incremental amortization from acquisitions. Slide 3 outlines our recently published financial results for the fourth quarter and full year 2018. I will briefly cover key highlights and Randy will take you through the results in detail when he provides a summary of our financial performance. Fourth quarter 2018 net sales of $209.9 million, were a record for Lydall, increasing $31.9 million or 17.9% from the same period in 2017. Organically sales were down $800,000 or 0.4/10 of 1% impacted by softness in the China market in Technical Nonwovens and Thermal Acoustical Solutions. Filtration sales in Performance Materials and North American sales of Industrial Filtration and Technical Nonwovens were both up double digits while European part sales and Thermal Acoustic Solutions grew mid single digits. Inorganic growth added $35.5 million to the top line. Tooling sales were essentially flat and FX was a headwind of $2.9 million or 1.7%. Fourth quarter 2018 adjusted gross margin declined 200 basis points to 20.3% driven primarily by higher costs in the Thermal Acoustic Solutions and Technical Nonwovens segments. While commodity inflation on aluminum has eased in the final quarter of the year, we are still seeing higher costs for Midwest premium and conversion costs. In addition, incremental manufacturing costs in Thermal Acoustic Solutions negatively impacted margins. The Technical Nonwovens segment saw lower volumes in the quarter along with continued high costs for aramid fibers and competitive pricing pressures. Full year adjusted gross margin of 19.9% was down 380 basis points on higher material, labor and overhead costs. As a recap for the full year 2018 commodity and material increases impacted the business unfavorably by approximately $12 million or 150 basis points. Approximately $5 million of this headwind was reduced by material productivity and where possible pricing actions. The remaining headwinds of approximately $7 million was primarily in the Thermal Acoustic Solutions business, which experience significant increases in aluminum costs and to a lesser degree higher costs on stainless steel. These increases were driven by commodity, index, volatility and tariff related impacts including higher market premiums and conversion costs as well as incremental costs for resourcing material. The overall decline in gross margin was partially mitigated by continued discipline on SG&A expenses, adjusted for restructuring, strategic initiatives, amortization and the addition of Interface, SG&A expenses were down over $3 million principally on lower incentive and stock compensation expense related to lower achievement of financial targets. The resulting adjusted EBITDA margin for the fourth quarter was 12.1%, down 70 basis points from the prior period, but notably improved 130 basis points from the third quarter of 2018. Adjusted earnings were $0.52 per share, down $0.15 from the fourth quarter 2017, including $0.13 of incremental amortization expense and $3 million of incremental interest expense associated with the borrowings for the Interface acquisition. Turning to Slide 4. This is an overview over our long-term growth strategy, which includes four drivers; new product development, Lean Six Sigma, geographic expansion and M&A. With respect to acquisitions, the completion of the Interface Performance Materials in the third quarter was a major milestone for Lydall. Our short-term focus remains on successfully integrating the new business into our Performance Materials segment. Randy will cover additional financial details on the acquisition. But with four months behind us, I’m happy to report that the business performance is meeting our expectations. Moving on to product development activities, I’d like to highlight two innovative engineering materials products, applications in Performance Materials and Technical Nonwovens. First is a ceiling product application in our new Interface Performance Materials business. bonded spacer plates or multilayer gasket assemblies used to seal metal surfaces in automatic transmissions. Interface has developed a high performance material to be used in this demanding application, which are used by all major OEM equipment manufacturers globally. The materials provided in a roll form or finished gaskets and has been very positively received in the market. We expect bonded spacer plates sales to grow at double digit rates in 2019 through both market growth and share gains. In Technical Nonwovens, we have developed an innovative new application of nonwoven felts in architectural acoustical applications. Ceiling and wall panels constructed of nonwoven felts can provide significant acoustical reduction in open environment such as offices and other commercial and public spaces. Panels can be tailored by architects to provide high quality aesthetics, stiffness, durability, chemical resistance and even designed to meet the latest fire protection standards. They can be molded and precision cut into various shapes providing customers a flexible, simple and cost effective solution compared to traditional materials. We continue to receive strong market interest and we’ll be investing to support this high growth application in 2019 and beyond. The previously announced restructuring initiatives in Technical Nonwovens focused on the consolidation of the China manufacturing sites. As you recall, we reached a milestone in the third quarter with a reduction of our footprint from four locations to three and remaining activity will focus on further consolidation to two facilities in China. Site rationalization activities in Europe’s are well underway with the consolidation of felt making operations in the UK and Germany, expected to be completed mid 2019. These initiatives will better leverage our business to be more efficient and further strengthen our scale and positioning in these markets. As we near the completion of the program, we are revising our estimate on the total restructuring expense to approximately $4.2 million, down from our prior estimate of $5 million. We continue to expect run rate synergy benefits of $5 million by the end of 2019. To date, approximately $3 million have been invested in this program with the remaining spend of approximately $1.2 million to be incurred largely in the first half of 2019. Turning to Slide 5. With respect to business conditions, overall, we believe the underlying fundamentals of our business remains steady, but we will continue to monitor government actions that impact global trade relations. On the supply side, we continue to see movement in the aluminum market after a significant volatility in the first half of 2018, LME prices for aluminum eased in the second half of the year. With fourth quarter average settling at approximately $0.89 a pound, down approximately $0.06 from the third quarter of 2018. While the index price is down from the fourth quarter of 2017, we continue to see year-over-year upward pressure on local premiums, duties and tariffs and conversion costs for aluminum sheet products used in the Thermal Acoustic Solutions business. As a reminder, Lydall does have pass-through arrangements based on the LME index in place for approximately one-half of the effective business volumes, but there is typically a three to six months lag on recovery. In addition, we are closely monitoring polyester fiber pricing, a key input across all Lydall business units and continue to see supply constraints and higher prices on meta aramid prices and input for certain specialty Technical Nonwoven applications and certain gasket applications in Performance Materials. Finally, we are continuing to work on our alternate supply arrangements for all key raw material inputs impacted by the most recent round of 10% tariffs as a countermeasure to the higher 25% tariffs that could be implemented in March 2019, pending the outcome of the ongoing trade discussions. On the demand side, the domestic automotive market continue to show favorable results in the fourth quarter of 2018. With U.S. light vehicle seasonal adjusted annual rates ending 2018 at 17.3 million units for the year. Current forecast for 2019 indicate, domestic light vehicle production levels slightly down at 16.9 million units and Western European automotive volumes are forecasted to be flat. China volumes are expected to grow modestly despite contracting each month in the second half of 2018. Given this global outlook and the mix of applications and platforms in our product portfolio, we expect to slightly outpace the market on a volume basis. Looking into our Filtration and Engineering Materials business, Performance Materials and markets continue to show stability in Europe and domestically and are offset by softness in China. Strong demand for filtration products in the first half of 2018 continue to trend positively in the fourth quarter and we expect that to continue in 2019. Sales of specialty cryogenic installation softened in the third quarter but stabilized in the fourth quarter. Finally, in our Technical Nonwovens segments, we are experiencing stable demand for industrial filtration products but are closely monitoring demand in China that softened in the fourth quarter. North America demand for industrial filtration markets remain healthy and European demand is stable but could be impacted by the outcome of Brexit negotiations. The advanced material and markets outside of the automotive applications also remain healthy. Global Technical Nonwovens has a robust backlog entering into 2019. With that, I will now turn the call over to Randy.

[Randy Gonzales:]

Thank you, Dale. Turning to Slide 6. I’ll briefly cover our consolidated results and then provide an overview of our operating segment results. Before I start discussing financial results, I’d like to point out that we began reporting segment EBITDA for Q4 results and we’ll continue to do so moving forward. Segment EBITDA is a non-GAAP measure for each business segment and is defined as operating income plus depreciation, amortization and equity method income for that segment. We have adopted this approach, as we believe it provides a basis to evaluate core operating performance of each segment and provides an indication of the segments ability to generate cash. There was no change, the EBITDA reporting of consolidated Lydall results, which is reconciled from net income by adding back interest taxes, other income and expense and income from equity method. In addition, consistent with our current reporting practice that provides adjusted gross margin and adjusted operating margin, we will also report adjusted segment EBITDA, which adjust financial results for non-recurring, unique or one-time items such as strategic initiatives, restructuring and purchase accounting adjustments related to inventory step up. The details on these important metrics are provided in the press release and 10-K. Moving on to financial results. Sales in the fourth quarter of 2018 were $209.9 million, up $31.9 million or 17.9% from fourth quarter 2017. Acquisitions in the Performance Materials segment contributed $35.5 million or 20 percentage points of this growth. Foreign exchange was a headwind of 1.7 points, primarily on a weaker Euro and Canadian dollar. And tooling sales of $6.3 million, where flat compared to fourth quarter 2017. The resulting organic growth was down 0.4% driven primarily by Technical Nonwovens, which saw software sales in China and lower inner company sales to Thermal Acoustical Solutions. Year-to-date, sales of $785.9 million was up 12.5% or 2.2% organically with acquisitions, adding seven points of growth, in FX and tooling adding 1.5 points and 1.8 points respectively. All segments showed organic growth for the full year. Note that our year-to-date sales includes $4.3 million, related to the new accounting standard that impacts the timing of revenue recognition primarily for recognition of tooling sales and Thermal Acoustical Solutions and certain customer orders in Technical Nonwovens. As a reminder, under the new standard, Lydall predominantly recognizes tooling sales as costs are incurred over time in contrast to the prior practice of recognizing tooling revenues upon acceptance and delivery to the customer. The net impact to gross profit was $1.3 million. Reported fourth quarter gross margin of 19.9% was down 230 basis points from prior year. Excluding $600,000 of inventory step-up related to the Interface acquisition and restructuring and severance charges in both periods, adjusted gross margin of 20.3% was down 200 basis points. The primary drivers of this reduction were in Thermal Acoustical Solutions where higher labor and overhead costs drove 130 basis points of consolidated gross margin erosion and higher commodity costs and unfavorable mix in Technical Nonwovens. Consolidated operating margin for the fourth quarter was 6.3%, including $600,000 of expenses related to corporate strategic initiatives, $600,000 of inventory step-up and $400,000 of expenses related to restructuring activities. Adjusting for these items, operating margin in the fourth quarter 2018 was 7%, down 240 basis points from prior year, including 130 basis points of higher intangibles amortization expense. Adjusted SG&A expense was up $5 million, impacted by $2.9 million higher amortization, an incremental SG&A from Interface acquisition, offset by $2.8 million lower spending on incentive compensation pay resulting from lower achievement of target financial metrics. Adjusted EBITDA for the quarter was $25.4 million or 12.1% of sales compared with 12.8% in the fourth quarter 2017 period and up 130 basis points sequentially from the third quarter of 2018. Year-to-date adjusted EBITDA is $90.2 million or 11.5% of sales. We reported effective tax rate for the fourth quarter 2018 was 26.6%. The rate was negatively impacted by 5.3 percentage points of discrete tax items in the quarter, primarily from clarification of new tax regulations related to the 2017 Tax Reform Act, adjusted for this and other discrete items, the tax rate would have been in the range of 21% compared to the fourth quarter 2017 reported effective tax of 5.3% which was favorably impacted by a one-time benefit related to the 2017 Tax Reform Act Entering 2019, we anticipate the consolidated ordinary tax rate to be in the range of 20% to 22%. Fourth quarter 2018 earnings per diluted share were $0.42, compared to $0.80 of earnings in the prior year, when adjusting for strategic initiatives expenses, inventory step-up, restructuring and severance expenses and discrete tax items, adjusted earnings per share of $0.52 cents where down $0.15 compared to adjusted EPS of $0.67 delivered in the fourth quarter of 2017 with higher acquisition related amortization, contributing $0.13 of this difference. For the full year, adjusted EPS of $2.43 is down $0.37, including $0.21 of incremental amortization expenses. Cash flows provided by operations in the fourth quarter were strong at $30.2 million, driven primarily by reductions in accounts receivable. For the full year 2018, cash flow from operations totaled $44.7 million. This compares with cash flow of $62.9 million in 2017 with the decrease driven by lower net income and higher working capital. Our liquidity remained strong. At the end of the fourth quarter of 2018, cash was $49.2 million. Total outstanding debt from their credit facility at year-end was $324.8 million for a net debt ratio of approximately 2.8 times adjusted EBITDA down from approximately 2.9 times in third quarter 2018. Entering 2019, cash generation and working capital reduction will be key focus areas as we look to accelerate debt paydown. As it relates to capital expenditures, Lydall spent $11.2 million in the fourth quarter 2018, up from $7.1 million spent in the fourth quarter of 2017. Full year 2018 spending of $31.3 million is consistent with our prior guidance of $30 million and $35 million. For 2019, we anticipate capital spend to increase to $40 million to $45 million, driven by the full year impact of the Interface acquisition and discrete investments to support organic growth in all segments. Finally, during the fourth quarter of 2018, Lydall authorize termination of the U.S. Lydall Pension Plan, which with completion anticipated in 2019. As a result, we currently estimate incurring pension expense of approximately $29 million to $33 million. These charges will consist primarily of non-cash charges with an estimated $2 million to $4 million cash contribution. Further detail on the plan is also provided in the 10-K under footnote 10. Moving to Slide 7, I’ll discuss our segment results. I’ll start with our Thermal Acoustical Solutions segment. This is our global automotive business that specializes in providing innovative-engineered Thermal and Acoustical Solutions for vehicle under hood, underbody, power train and exhaust applications. Fourth quarter sales in this business, we’re $85.6 million, down 0.5% organically. Net part sales of $79.3 million were down $1.3 million with lower acoustical shielding sales domestically and 17% lower thermal shielding sales in China, partially offset by higher part sales in Europe. Tooling sales of $6.3 million were flat and foreign exchange, primarily the Euro reduced sales growth by one points. For the full year, sales grew 6.8% on a reported basis and 1.6% organically. Adjusted segment EBITDA margin of 13% declined 420 basis points from fourth quarter 2017. Higher labor and overhead costs continued in the quarter, impacting margins by 290 basis points compared to prior year, but we have seen improvement from third quarter 2018. While commodity index pricing for aluminum was down marginally year-over-year. The total costs for aluminum including higher domestic premiums and conversion costs impacted margins unfavorably by 50 basis points. We continue to actively monitor commodity pricing given the dynamic context of current global trade discussions. Finally consistent with prior periods, customer price reductions impacted margin by 90 basis points, compared to prior year. Of note, segment EBITDA margin expanded by 150 basis points compared with third quarter of 2018. For the full year, segment EBITDA margin was 12.9%. Moving to Slide 8, I will cover our Performance Materials segment. This business provides specialty filtration in insulation solutions to a variety of end markets globally, and the addition of interface performance materials broadens the portfolio with engineered ceiling solutions across myriad industries. As a reminder, Lydall reports sales data under two product categories. Filtration consists of sales for air and liquid filtration applications, including filtration applications previously reported under the legacy Life Sciences segment. Ceiling and Advanced Solutions segment encompasses the new interface performance materials, gasketing and ceiling applications as well as sales previously reported under the Thermal Insulation, which consisted of specialty insulation for high temperature and ultra-low temperature or cryogenic applications. Sales of $65.6 million were up $36.5 million or 126% compared to prior year, including $35.5 million of sales from the Interface and Precision Filtration acquisitions. FX was a slight headwind in the quarter, with resulting organic growth of 4.2%, primarily on higher filtration sales. Full year sales of $169.2 million included $48.9 million from acquisitions and $2 million of favorable foreign exchange netting organic growth of 1.4%. Fourth quarter segment EBITDA margin adjusted for $600,000 of inventory step-up, was essentially flat from prior year at 15.7%, with modest gross margin expansion offset by slightly higher SG&A expenses associated with the Interface integration. For the full year adjusted segment EBITDA margin grew by 40 basis points to 14.4%. Interface Performance Materials business is off to a solid start, contributing over $45 million in sales in 2018 with EBITDA margins in line with our expectations and accretive to the portfolio. As a recap, in 2018, purchase accounting adjustments for inventory step-up were $2 million and incremental intangibles amortization was $3.4 million. Moving into 2019, we do not expect any further adjustments for inventory step-up. But as previously discussed, we estimate amortization related expenses to total $16.2 million, an increase of $12.8 million from 2018. As a result, while we continue to expect the deal to be cash accretive in 2019, it will be minimally accretive to reported EPS in 2019. Slide 9 covers our Technical Nonwovens segment. This segment produces air and liquid filtration media as well as other engineered products for use in various commercial applications such as geosynthetics, automotive, industrial and medical, among others. For the fourth quarter of 2018, sales of $64.7 million were down organically 4.7% or $3.3 million net of unfavorable foreign exchange of 2.5%. Globally, Industrial Filtration sales were down 2.5%, with a 35% decline in China driven by software demand and timing of orders, partially offset by healthy gains in North America. Sales in Advanced Materials were down 12.9%, primarily in North America on lower sales of needle felts to Thermal Acoustical Segment and lower sales in Canada, which were impacted by a shorter construction period compared to fourth quarter 2017 in a weaker Canadian dollar. Backlog for all regions remained solid, but we are closely monitoring China. From a profitability perspective, adjusted segment EBITDA margin of 11.7% was down 210 basis points, driven by higher material costs, particularly for meta-aramid fibers net of increased customer pricing. Higher labor costs, unfavorable mix and lower absorption also contributed. As a reminder, adjusted segment EBITDA excludes $400,000 or 50 basis points of expenses related to ongoing restructuring activities in the quarter, compared to $200,000 or 30 basis points in the same period last year. For the full year, Technical Nonwovens adjusted segment EBITDA was 13.6% down 150 basis points from full year 2017, driven principally on higher materials costs that were partially, but not fully offset by pricing actions and unfavorable product mix. That concludes our review of the fourth quarter and full year results. Year-to-date top line growth was favorable driven by generally healthy demand in the end markets we serve. As we enter 2019, we remain focused on the operational items that we can control, integrating the Interface acquisition into the Performance Materials portfolio, completing restructuring and Technical Nonwovens and continued improvement and operational performance and cash flow generation. Leveraging these improvements on continued strength in our end markets position us to deliver solid performance in 2019. With that, we will begin our question-and-answer session.

[Operator:]

[Operator Instructions] And our first question comes from Matt Koranda of ROTH Capital Partners.

[Matt Koranda:]

Good morning. I wanted to start out with TAS. So I know you guys referenced in your prepared remarks the aluminum and sort of other indices showing kind of flattish or even decent declines year-to-date, which should be a tailwind, I assume, for 2019. But you referenced conversion costs are still elevated and some of the premiums as well. So are we factoring in a net tailwind or headwind from TAS in 2019 in terms of how it kind of fits into the overall outlook for consolidated EBITDA margin expansion for the full year?

[Brendan Moynihan:]

Yes, Matt, overall, obviously, it will depend on what happens with the LME. Which to your point, so far and in Q4, actually it was a tailwind, it was a benefit. The remaining pieces for the Midwest premium and conversion costs, as we’ve talked about in some prior calls, a lot of that capacity had to be locked in, in 2018 to secure it for 2019. So those components will be flat to slightly up. Essentially a headwind, if you will. So we’re really going to see how it pans out through the whole year. Hopefully, if aluminum pricing continues to soften and we can pick up that benefit, it will help us. But right now, I’d say it’s probably net flat to a headwind.

[Matt Koranda:]

Okay. That’s helpful. And then in that segment, just sticking with it for the quarter at least, I think you guys referenced 130 bps of higher labor and overhead as a headwind to margins in the quarter, and also I think higher commodities were like 50 basis points. What accounts for sort of the remaining bucket in terms of headwinds to margin in Q4?

[Brendan Moynihan:]

You’re talking specifically in the TAS segment, Matt, are you talking the Lydall consolidated?

[Matt Koranda:]

TAS specifically.

[Randy Gonzales:]

Yes. So Matt, another big piece of that is the price-downs that we see on an annual basis. So you captured two out of three. So it’s labor and overhead increases, commodity cost increases, and then it’s the price-downs that affect the gross margin as well.

[Matt Koranda:]

Okay. That’s helpful. And then just in terms of the pricing environment in TAS. I mean, are you seeing any additional pressure on that front? Or is it pretty steady in terms of the kind of the normal range that you see on the price-downs?

[Dale Barnhart:]

In the fiber product line, probably a little more aggressive pricing pressure. In the metals product line, it’s the traditional 1% to 2% down each year.

[Matt Koranda:]

Okay, great. That’s helpful. And then just in terms of, like, when I kind of do the back of the envelope math on cash flow for 2019, it looks promising. Any – and I know you guys highlighted sort of the intent to repay sort of the debt associated with Interface. Anything – any additional color you can share on sort of plans for debt paydown for the year and sort of how you’re thinking about that?

[Randy Gonzales:]

I mean, Matt, we’re – I don’t think we’re going to give any guidance in terms of a particular number on debt paydown. But we’re targeting by end of 2019 to be at about a 2.5 net debt leverage ratio.

[Matt Koranda:]

Okay. All right. That’s helpful guys. I’ll turn back in the queue.

[Randy Gonzales:]

From where we stand today, have about 2.8.

[Matt Koranda:]

Got it.

[Operator:]

The next question comes from Edward Marshall of Sidoti & Company.

[Edward Marshall:]

Good morning guys, how are you?

[Dale Barnhart:]

I guess, fine. Good morning, Ed.

[Edward Marshall:]

So looking at the overhead, the labor, the freight that incurred in the quarter, it did drop from Q3, but probably not as much as I would’ve anticipated following up on the Q3 call. I’m curious, as we look into 2019, the cadence of that decline, is it still – that overhead, that labor, is it still associated with the new product or new product qualifications?

[Dale Barnhart:]

Yes, product launches still have a slight impact, but not near the impact that it had in 2018. For a point of reference, in 2018, TAS launched 163 new tools. In 2019, we’re anticipating it to be around 50. So a lot of the launch activity is behind us. We saw in the fourth quarter over a 20% improvement in our operational efficiency metrics, which includes scrap over time, outsourcing. And so we did see a significant improvement. We expect that to continue. The one thing that we will have some overhang through probably the third quarter of 2019 is we will still incur some outsourcing expense on a couple items, where we’re waiting for some new assets to come in place to provide the capacity to handle that.

[Edward Marshall:]

Got it. So if we could look at maybe the consolidated grouping of these costs in 2018 and think about what they might do in 2019, can you kind of frame – give a frame of reference as to the impact that you expect versus the impact that you felt? Quantify, if you could.

[Dale Barnhart:]

For 2018.

[Edward Marshall:]

2018 versus – yes, I mean, if you can quantify it for 2018?

[Dale Barnhart:]

Yes, for 2018 versus what we anticipated, there was probably about – now this is excluding the material inflation that we experienced, it was probably about $5 million.

[Edward Marshall:]

In total for overhead, additional labor, outsourcing?

[Dale Barnhart:]

Yes, outsourcing and everything. And then you add to that the raw material impact of about $7 million.

[Edward Marshall:]

And your anticipation for 2019 on the – of that $5 million, how much will recur – reoccur?

[Dale Barnhart:]

There’ll be a significant reduction. I mean, we saw, so far in the first two months, very, very good improvement. But we’ll have to see as some of the new platforms go into production volume, how well we run those assets. But we’re anticipating a significant improvement in 2018 versus 2019.

[Edward Marshall:]

Got it. And a lot of the metal programs, if I could, are centered around some European production. My understanding is that some of the new introductions for 2019 have been delayed or kind of a wait-and-see. Stuff that was supposed to be released in Q1 might take until Q3. Have you seen that disruption in your manufacturing process? Or are those unique to specific applications that you’re not producing?

[Dale Barnhart:]

Well, we have seen – and really, most of our new launches are in the United States this year, okay? We are seeing increases in Europe, but the high volume of the new metal volume will come in the United States. We have seen some delays from both GM and Mercedes on the launches of their new products that are consuming some of our new metal shields. They’re saying right – what we’re hearing from them is that they expect full year recovery but just a delay in the start.

[Edward Marshall:]

Got it. Midway through this year, there was a fire at one of your suppliers. I just want to be certain that – and I think your expectation was that you wouldn’t make up the lost production, at least that was your comment coming out of Q3 in the fourth quarter that, that customer had. Did you see an uptick from that customer as it would relate to recover some of those lost vehicles or lost production? No? Okay.

[Dale Barnhart:]

No. No, we have not. They did not increase the volume. They’ve told us they would when the incident occurred. So no, that did not happen.

[Edward Marshall:]

You’ve given some good color on the top line for Interface and I’m curious if you could kindly talk about maybe the expectations or if you could give us a profile and the contribution to profits, either in – whether in Q4 or maybe what your expectations are for 2019.

[Randy Gonzales:]

So Ed, when we announced Interface, what we talked about was annual revenues in the $150 million range and an annual EBITDA in the $29 million range. So other than that, that’s the – that continues to be our expectation and I don’t think we are prepared to give any additional guidance beyond that. Our initial…

[Edward Marshall:]

Did you give the step-up of intent – I’m sorry.

[Randy Gonzales:]

Sorry, go ahead.

[Edward Marshall:]

Did you give up – did you give the step-up in the amortization that you anticipate for 2019?

[Randy Gonzales:]

Yes. So step-up, we’re – it’s complete for 2018. It was a total of $2 million. Don’t anticipate any additional expense related to that in 2019. For full year amortization, we expect it to be a little more than $21 million. The majority of that is going to be related to the Interface acquisition.

[Edward Marshall:]

$21 million step-up or $21 million total for the year?

[Randy Gonzales:]

Yes, $21 million of amortization in 2019.

[Edward Marshall:]

Is that an increase from 2019? Or are you saying $20 million increase or $21 million in total?

[Randy Gonzales:]

No, absolute number of almost $21.5 million of amortization, that’s on a consolidated basis, that’s for everything in 2019 versus full year of $9.4 million in 2018.

[Dale Barnhart:]

Right. So Ed, just to be clear, incremental, almost $13 million amortization year-over-year.

[Edward Marshall:]

$13 million incremental. Great. Thanks. That’s what I was looking for. And then, finally, I just – I wanted to look for a – I wanted to ask somewhat of a strategic question about your tooling and kind of new product initiations. And with the change in the accounting, I’m kind of thinking through maybe some of the changes that you can make to – kind of recognition of that tooling in that revenue. Is there anything that you can kind of do that we don’t find ourselves in a 2018 event in the future, having a pretty hefty rollout in product introduction and the recognition of that revenue and the profit impact as well?

[Dale Barnhart:]

Yes. I mean, Ed, I don’t think there’s anything we can do as far as changing the regulation. It is what it is. It is an accounting practice and we will continue to adhere to it. It’s just a matter of the volume of tooling that we have. We will have to continue to report the revenue and income as per the latest accounting standard.

[Randy Gonzales:]

Yes, Ed, it really kind of comes down to each contract and each customer, and there are several criteria that could be evaluated in terms of when and how to properly recognize the revenue. So yes, it’s – we’ll continue to follow the appointed guidance and go from there.

[Edward Marshall:]

Okay. I appreciate the comments. Thanks.

[Dale Barnhart:]

Thank you, Ed.

[Operator:]

And next, we have a question from Chris Moore of CJS Securities.

[Chris Moore:]

Hey, good morning guys.

[Dale Barnhart:]

Good morning, Chris.

[Chris Moore:]

Good morning. Maybe we can just start kind of big picture. I know you walked through kind of the broad prospects of each segment. And obviously, you don’t give specific guidance. But I mean, if you were to rank the three segments from where you’re sitting today, likely highest to lowest in terms of organic revenue growth in 2019, what would be that order?

[Dale Barnhart:]

I think Technical Nonwovens and Performance Materials are going to be very close to each other in organic growth in 2019, followed then by TAS. But all should have organic growth in 2019 versus 2018. One of our biggest disappointments in the fourth quarter was how TNW’s business in China sort of evaporated. But as we sit here today, we’re looking at almost a 15% increase in our backlog today versus what we had at the end of December. So we’re seeing a resurgence of the order patterns in China and across all Technical Nonwovens.

[Chris Moore:]

Got it. On the Performance Materials side, you had said that the cryogenic sales had kind of revitalized in Q4, is that something you expect to continue as well?

[Dale Barnhart:]

Yes.

[Chris Moore:]

Got it. If I’m looking at the TAS to EBITDA margins in the future, what’s a reasonable expectation to get to that kind of mid-teen level? Is that still a couple of years out? Is – just – what’s the kind of progression that you guys expect?

[Dale Barnhart:]

It’s still probably a couple of years. I mean, our EBITDA margins are close to 14% now, I believe, for TAS. The key items – the key drivers there are successful ramp-ups of all these new metal products we won and the pain we went through in 2017 and getting through the PPAP process. We should start seeing that – some relief from the commodity pressure that we saw in 2017 – rather 2018, over $7 million of headwind just in commodity prices on the material we buy. So a combination of those two will help us get there. And we’ll continue to see price pressure on the fiber product lines in that business.

[Chris Moore:]

Got it. And last thing from me. You talked about some price increases gaining traction in Performance Materials, where specifically is that referring to?

[Dale Barnhart:]

Both the Technical Nonwovens and Performance Materials teams are actively working with all of our customers. When we see commodity inflation, we try to pass that through to our end markets. So sometimes, we’re successful, sometimes we’re not. But clearly focused on it. And in 2018, we got partial recovery through pricing and not full recovery. As that pressure continues, we’re still out there working with the end markets to drive it. And it’s a competitive dynamic. If our competitors don’t support pricing in the marketplace, we don’t want to lose share.

[Chris Moore:]

Got it. I appreciate it guys.

[Dale Barnhart:]

Thank you.

[Operator:]

[Operator Instructions] This will conclude our question-and-answer session. I would like to turn the conference back over to Dale Barnhart for any closing remarks.

[Dale Barnhart:]

Thank you, again, for joining the call today. As we look forward to 2019, Lydall will be celebrating some key milestones. While Lydall was formally incorporated 50 years ago in 1969, the company traces its beginning to 1869 when the Lydall & Foulds families began manufacturing paper and knitting needles in Manchester, Connecticut, not far from our current corporate headquarters. This year will be Lydall’s 150th anniversary, an accomplishment which is a testament to our employees’ commitment to satisfy our customers with excellent service and quality products. Thank you and we will open up – thank you and look forward to talking to you again at the end of the first quarter.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.