Lydall, Inc.
Q1 2017 Earnings Call Transcript

Published: 3 May 2017

[Operator:]

Good day and welcome to the Lydall Incorporated First Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. And now, I would like to turn the conference over to David Glenn. Please go ahead.

[David Glenn:]

Thank you. Good afternoon, everyone, and welcome to Lydall’s first quarter 2017 earnings conference call. Joining me on today’s call are Dale Barnhart, President and Chief Executive Officer; and Scott Deakin, Executive Vice President and Chief Financial Officer. Dale will start the call with comments about the continued progress we are making in executing our long-term strategy as well as provide an overview of current business conditions. Scott will follow with the 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. As you may be aware, our quarterly earnings press release and 10-Q report were released yesterday, so you can follow along with today’s call. Please reference the first quarter 2017 earnings conference call presentation, which can be found at lydall.com in the Investor Relations section. As noted on slide two 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 reports on Form 10-Q for further information. In addition, during this conference call, we’ll be making reference to non-GAAP financial measures. A reconciliation to GAAP financials can be found in the appendix of the presentation I just referenced. With that, I’d now like to turn the call over to Dale.

[Dale Barnhart:]

Thank you, David. Good afternoon, everyone and thanks for joining us today. I am pleased to report that we had a good start to the year, delivering excellent organic growth across all four segments, yielding expansion in adjusted EPS of 32%. We continue to make progress towards our 2018 long-term vision for profitable growth that includes a target of $800 million in revenue and 15% in operating margin, which is equivalent to an EBITDA margin of approximately 19%. Slide three outlines our recently published financial results. Total net sales for the first quarter increased 27.6% to $165.5 million. This increase was driven primarily by the acquisitions of Texel and Gutsche, which contributed $26.3 million or 20.3%. This said, organic growth of 11.1% was very strong across all four segments delivered year-over-year growth ranging from 9% to 15%. With respect to profitability, adjusted gross margin was flat at 25% and adjusted operating margin declined by 100 basis points to 10% over the same period in the prior year. Improving but continued operating inefficiencies in our Thermal/Acoustical Metals segment, higher SG&A from the inclusion of the acquisitions and a non-cash impairment charge unfavorably impacted consolidated margins. Additionally, masking the comparison included in these results is 60 basis points of intangible amortization from the acquired companies. Consolidated adjusted EBITDA in the first quarter was down 60 basis points to 13.8%. This decrease is primarily the result of a 50 basis-point impact due to the previously mentioned inefficiencies in Thermal/Acoustical Metals and a 50 basis-point reduction due to the one-time impairment charge in Performance Materials. Adjusted EPS was $0.74 per share, an increase of 32.1% over the prior year. Turning to slide four. This is an overview of our long-term growth strategy, which includes four drivers, new product development; lean six sigma; geographic expansion; and M&A. First, with respect to M&A. Both Texel and Gutsche started the year with strong demand and exceeded our expectations. We continue to have a very healthy backlog and are positioned well to start the year as we begin to enter the warm weather months that traditionally drive increased demand for our products. Integration of both acquisitions continue to be on track and we expect to realize $5 million of run-rate synergies by 2019, as previously communicated. Consistent with what we have said in the past, we continue to actively pursue new acquisitions and continue to take a disciplined approach towards M&A. With respect to new product development, all of our segments are focused on developing solutions to better serve our customers. More recently, Performance Materials expanded its new product development activity in the air filtration space to address demand for products that assist in prevention of viral infection of livestock in the food chain. Due to our unique ability to tailor products to specific OEM performance levels, we now have products in various phases of acceptance and commercial use at each of the major OEMs serving this growing and attractive niche sector. As it relates to lean six sigma, similar to last quarter, I will focus on how we are leveraging our tool kits to improve execution in our Thermal/Acoustical Metals segment. While operational inefficiencies did persist into the first quarter as expected at approximately $800,000, the magnitude was significantly lower versus the fourth quarter of 2016. Specifically, in North America, we saw a marked improvement versus prior quarters in our uptime and labor utilization, but still had some progress to make and reducing spreads. In Europe, while we are seeing scrap and labor inefficiencies, we did execute the reduction in force we announced last quarter in order to align our labor with the changing volume and product mix. The total non-recurring charges we experienced in the first quarter related to this initiative were $700,000 and we expect another $200,000 in the second quarter in order to complete the program. We estimate the recurring savings from this to be approximately $1 million annually. While we expect these operating efficiencies to be substantially behind us as we enter the second half of the year, continuing changes in volume in mix as we launch new products will inevitably drive some degrees of continued execution inefficiency. This notwithstanding, given both the organic growth and operational improvements, we fully expect the second half of 2017 to be stronger than prior year. Moving on to geographic expansion, as you may be aware, we have done a good job in executing on this component of our strategy, from the start-up of our Thermal/Acoustics Metal facilities in China through the successful completion of four acquisitions. Given this, our current focus to right size and effectively scale our operational capabilities with certain geographies. As such, we are executing the previously announced restructuring initiative in Europe and in China for Technical Nonwovens to better position our business to be more efficient and further strengthen our scale and positioning. Consistent with our prior communications, we estimate the total restructuring expense to be approximately $5 million and run rate synergy benefit to be $3 million by 2019. Approximately $2.5 million of the expense is anticipated in 2017, predominantly occurring in the fourth quarter. Turning to slide five, I’ll take you through our [ph] business conditions. On the supply side, at the consolidated level, we are seeing pockets of raw material favorability in some businesses being offset by pockets of pressures and other. Specifically in Thermal/Acoustical Metals, we are seeing price increases in our raw materials, which continue to mitigate -- which we continue to mitigate when we can. Approximately 60% of this business has pass-through through arrangements in place with recovery typically on a three to six months lag. On the demand side, we continue to see strength in our end markets and at this point have no reasons to believe that this will change in the near-term. With our automotive business, current visibility through our EDI and long-term forecast sources indicate that the overall demand in the global automotive market remains healthy. Given our participation on attractive platforms coupled with recent and planned new product launches throughout the year, I’m confident that we’ll remain very well-positioned. Looking into our filtration engineering materials business Performance Materials end markets continue to show stability across all regions. In our specialty insulation business, we are seeing encouraging order activity for our cryogenic products, which were at historical lows during 2016 due to the softness in the energy-related markets. While demand for our filtration products has remained strong, in North America, we’re seeing select price pressures for certain applications. In certain instances, we’re leveraging our supply side to help us remain competitive on an opportunistic basis. As a reminder, in 2016, we had approximately $2.5 million of sales related to our life science termination buys that will not reoccur this year. After adjusting for his reduction, the business is positioned to deliver low to mid single digit organic growth for the year. Finally, to our Technical Nonwovens segment. We benefited from the stable demand of advanced materials and filtration products. In North America while it’s too early to declare full victory, we’re encouraged with the demand and order activity from the power generation customers as the market seems to be picking up in line with our earlier expectations. With respect to China, we have not yet seen the favorable developments that we have in North America but we continue to work to drive share gains on attractive applications. With that, I will now turn the call over to Scott.

[Scott Deakin:]

Thank you, Dale, and good afternoon. Today, I’ll briefly cover our consolidated results and then provide an overview of our operating segment results. Turning to slide six. In the first quarter of 2017, the Company achieved net sales of $165.5 million, an increase of 27.6% over the first quarter of 2016. This increase was driven principally by the acquisitions of Texel and Gutsche in the Technical Nonwovens segment. Organic growth for the quarter of 11.1% was broad-based with expansion across all four segments, the Thermal/Acoustical Fibers, Thermal/Acoustical Metals and Performance Materials segments delivered 14.8%, 13.6% and 10.4% growth respectively and strong market demand and favorable positioning. Reversing trends in prior quarters, t he Technical Nonwovens segment delivered 8.5% organic growth. The organic growth in our Thermal/Acoustical Metals and Fibers segments was driven by platform share gains on products launched earlier last year. Performance Materials’ organic growth was primarily due to continued recovery in filtration markets, regional share gains and a slight increase in our thermal insulation business. In our Technical Nonwovens segment we delivered increased sales of advanced materials and saw improved demand from power generation customers in the U.S. Despite a very strong top-line growth, gross margin in the first quarter was down 60 basis points to 24.4% due to acquisition-related inventory step-up and severance charges. Excluding these items, adjusted gross margin of 25% was flat to the prior year. Favorable mix and absorption in the Thermal/Acoustical Fibers and Performance Materials segments was offset by unfavorable mix in the Technical Nonwovens and Thermal/Acoustical Metals segments. The metals segment also continued to be impacted by operating inefficiencies and increased raw material commodity costs. These inefficiencies contributed to reducing Lydall’s consolidated gross margin by approximately 50 basis points in the quarter. Consolidated operating margin for the first quarter decreased 150 basis points to 9%. Included in these results are 60 basis points of incremental acquisition-related intangibles amortization from a recent acquisitions within Technical Nonwovens and 50 basis points due to an asset impairment charge in the Performance Materials segment. Excluding strategic initiative expenses, inventory step-up and severance related expenses in Thermal/Acoustical Metals and Technical Nonwovens segments, adjusted operating margin was 10%, a decrease of 100 basis points over the prior year. Again, this performance continued to be impacted by the inefficiencies in Thermal/Acoustical Metals segment. Adjusted EBITDA margin of 13.8% was down 60 basis points year-over-year. The Company’s effective tax rate was 17.6% compared to 33.1% in the first quarter of 2016. The effective tax rate in the first quarter of 2017 was positively impacted by 11.4% due to stock compensation tax benefits with the remainder driven by a favorable mix of income in lower taxed jurisdictions. For 2017, while we may experience some variability on a quarterly basis, we now anticipate that our full year effective rate will be in the high 20s. First quarter 2017 earnings per diluted share were $0.68 compared to $0.54 of earnings in the prior year. When adjusting for the inventory step-up and expenses related to strategic initiatives and severance, adjusted earnings per share rose by 32.1% to $0.74 compared to the prior year. As it relates to capital expenditures, we spent $9.6 million through the first three months of year, flat with prior year. For the full year 2017, we expect total capital expenditures to be approximately $35 million as we continue to invest at a higher rate than usual in support of attractive growth and productivity initiatives. Cash flows from operations in the first three months of 2017 were $12.4 million compared with $12.8 million in the first three months of 2016. And increase in cash generated from improved net income was offset primarily by increases in tooling inventory in preparation of new automotive platform launches. Finally, our liquidity remains very strong. At the end of the first quarter, cash was $62.5 margin after reflecting a further paydown of $10 million on our debt during the quarter. At the end of the quarter, our outstanding debt was $118.3 million and on a net basis this puts our leverage ratio at approximately 0.7 times. Moving to slide seven, I’ll discuss our segment results. I’ll start with our Thermal/Acoustical Metals business. This is our global automotive segment which specializes in providing under hood and under body engineered thermal solutions for vehicles. This business delivered very strong organic growth of nearly 14% during the first quarter. Total sales were $44.3 million or an increase of 5.4% including lower tooling sales and unfavorable foreign currency translation. The increase in parts sales for the quarter was driven by platform share gains in North America as well as continued ramp up at our facility in China. Despite organic sales being up significantly, adjusted operating margin, which excludes the severance related charges we took in Europe, declined 140 basis points quarter-on-quarter to 7.1%. Higher labor, scrap and overhead due to persistent operating inefficiencies resulted in an approximately 180 basis-point reduction in margin. In addition, as Dale mentioned before, the business saw increased raw material price pressure of approximately 100 basis points due to the rising price of aluminum. Regionally, we are encouraged by our ability to execute on planned continuous improvements in the U.S. and are working to extend that progress into our European operations. Slide eight refers to our Thermal/Acoustical Fibers business. This business also serves the automotive industry and provides molded polyester acoustical solutions, primarily for underbody applications for vehicles in North America. Sales in the first quarter were $41.4 million, up nearly 15% on an organic basis. Quarter-on-quarter growth was driven primarily by the incremental sales of our new molded flooring solution that was launched in the third quarter of 2016, as well as sustained demand for all products. Operating margin in the first quarter increased 90 basis points to 29.7%, as margin improvement was primarily due to favorable mix and leverage on SG&A expenses, which remains flat on the increased volume. Moving to slide nine, I’ll cover our Performance Materials segment. This business provides specialty filtration and insulation solutions to a variety of end markets globally. Sales in the first quarter of $28.8 million increased 10.4% on an organic basis. The increase was attributable to sustained demand and share gains, principally in air but in fluid power and transport hydraulic filtration products. We also saw increased demand for our insulation products. Operating margin of 5.5% in the first quarter was significantly impacted by the asset impairment charge of $0.8 million or 270 basis points. This impairment charge relates to a chronically underutilized legacy line in North America. By outsourcing the less than $1 million of annual revenue on this asset, we will be able to improve profitability and asset returns. This will have no unfavorable impact to our customers or our ability to achieve the growth or margin expectations for this business. Outside of the impact of the impairment, margin performance was essentially flat versus prior year, as improved gross margin due to favorable mix and lower raw material costs were offset by investments, increased SG&A. Slide 10 covers our Technical Nonwovens segment. This business produces air and liquid filtration media as well as other products for use in various commercial applications such as geosynthetics, automotive, industrial and medical among others. For the first quarter of 2017, sales of $58.9 million were up approximately 90%, primarily due to $26.3 million of sales from Texel and Gutsche. Foreign currency translation primarily related to the weakening of the British pound unfavorably impacted sales by 4%. On an organic basis, however, sales were up 8.5% as we delivered increased sales of rolled goods driven by improve demand from power generation customers in the U.S. and increased automotive rolled goods. Order activity and backlog continue to increase, giving us further confidence that the industrial filtration market is beginning to turn around after nearly a year of declining sales. From a profitability perspective, adjusted operating margin for the first quarter decreased by 330 basis points to 9.3% compared to the same period in 2016. This said, included in these results are 180 basis points of incremental acquisition related intangibles amortization. The decrease in adjusted operating margin was due to unfavorable mix on increased sales of power generation related products and a higher percentage of SG&A from the inclusion of the acquisitions. As Dale noted earlier, with respect to the acquisitions, the performance in both businesses exceeded our expectations in the first quarter and integration continues to be on track. That concludes our review of the first quarter results. Overall, we had a good quarter with excellent top-line growth and significant EPS expansion. Addressing the operational executions in Metals and executing flawlessly on our planned restructuring in Technical Nonwovens continues to be our most significant near-term priorities. Leveraging this improvement and assuming that the strength in our end markets continues, we are well-positioned to deliver a great 2017. With that, I’ll turn the call back to the operator to begin our question-and-answer session.

[Operator:]

And I will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Edward Marshall with Sidoti & Company. Please go ahead.

[Edward Marshall:]

Listen, I’m curious, there were several breakouts reconciling the one-time charges in the quarter. And just a point of clarity, it looks like there was an asset impairment of the $800,000 in the quarter that ran through Performance Materials. Was that included in the breakout and the reconciliation to non-GAAP?

[Dale Barnhart:]

No.

[Edward Marshall:]

Okay. And I’m curious as to why you chose not to include that number in the reconciliation. And is that about $0.03 in the charge there, post tax?

[Scott Deakin:]

Yes, I’ll take that. There is really two things we didn’t breakout. One was the change in taxes, and the other was this asset impairment charge. And we debated it, but ultimately -- obviously there are large one-time items and I emphasize the one-time with regard to both. But ultimately, we decided that they were normal course of operations and accordingly didn’t fit our past practices for adjustments.

[Edward Marshall:]

Got it. Secondly, I kind of wanted to talk about production versus sales and this comes from kind of just dissecting some of the data yesterday that came out from one of your large customers. And I look at the trucks and I look at the truck data units at year end or month end were down about 5,000 yet days of supply went up. Does that indicate that there is kind of a slowdown in production as they’re bleeding inventories from deal or lots? [Ph] And have you seen that in the results as of yet as it runs through most importantly I guess fibers?

[Dale Barnhart:]

We have not, when we looked at our latest EDR releases last week, we still have not seen any significant reductions from our primary truck platform that we’re on. And in fact that particular platform, when you look at their first quarter sales, were up almost double-digit over prior year. So, right now, the fiber business has continued to benefit from that. We have seen some slight adjustments from our Thermal/Acoustical platforms because in that business we have more diversified OEMs and more diversified applications across SUVs, pickups and passenger vehicles. Most of the softness that you’re seeing in the industry today is around passenger vehicles.

[Edward Marshall:]

Right. And you said Thermal/Acoustical, you meant Metals, I guess.

[Dale Barnhart:]

Yes. Thermal/Acoustical Metals has more diverse applications, both on vehicles and OEMs.

[Edward Marshall:]

And you -- just another point of clarification, when you talk about the F-150, rather that particular truck program, 2017 versus 2018, is there any material change in the content for that vehicle?

[Dale Barnhart:]

Well, on the F series, there is with the flooring platform that started in fall of last year. So, we’ll have a full year run rate of that which is incremental.

[Edward Marshall:]

And then, in your prepared remarks you talked about Technical Nonwovens and you talked about backlog being up year-over-year. And I am curious if you put some numbers to that so we can get a sense as to what that looks like. And if you had that on organic basis that will be fantastic.

[Dale Barnhart:]

We don’t share that information but it is up significantly and it is in North America and in China, in all regions. So, it is a healthy increase over prior year.

[Edward Marshall:]

And the $5 million in restructuring in that division, can you give a breakdown between cash and non-cash adjustments there? Meaning how much of that is going to be cash related -- color on that?

[Dale Barnhart:]

Scott, do you want to give some color on that?

[Scott Deakin:]

Yes. So that’s truly expense side; it is going to be cash related. We have always spent a couple of hundred thousand of that so far, so there’s still a lot of activity to go with that. And you will really start to see that meter in over the course of the back part of this year and into 2018. But that is cash expense and then we also have some capital investment associated with that as well.

[Operator:]

Our next question today comes from Matt Koranda with Roth Capital. Please go ahead.

[Brad Noss:]

Hey, guys. This Brad Noss on for Matt Koranda. Congrats on the strong quarter. I wanted to dig into fibers a little bit more, just in regards to the content per vehicle. Opportunity obviously has improved from the flooring line, like you mentioned that was rolled out at the end of 2017. But on a go forward basis, can you just talk about where your content per vehicle stands today and how you can see that increase as their future growth going to be through contemporary vehicle, gains or from incremental platforms, what are your thoughts on that?

[Dale Barnhart:]

So, we have a new line that’s going -- actually it was installed towards the end of last year that’s ramping up and will be going on a new SUV platform for us in the fall of this year. So, we continue to win applications and ramp up through the next couple of years. So that business has a very healthy pipeline of new application and continues to win.

[Brad Noss:]

And then, just in regards to the margins in fibers, I know that the expectation is for them to begin to mix down over the next few years, obviously this is a very strong quarter for the margin. But, given your visibility into the releases coming out over the coming months, how do you see margins shaking out for this segment for the next quarter as well as for the back half of 2017?

[Dale Barnhart:]

I think for 2017, you can expect -- way we see demand coming in right now, you can see the margins to be comparable to what we had in 2016.

[Brad Noss:]

Okay. And will that sort of seasonality be similar to what we have seen in 2016 as well?

[Dale Barnhart:]

Yes, we will see a little bit uptick in the back half as that new SUV platform comes and ramps up.

[Brad Noss:]

Okay, perfect. And then, just looking at Thermal/Acoustical Metals, you’d highlighted the commodity cost inputs as a headwind. We are in the expectation that your margins will ramp through the end of the year and we have you I think at around double digits towards the end of the year as you achieve the production efficiencies and sort of get up to learning curve on some of those production issues. But, how do these cost input headwinds affect your expectations in reaching those types of margin improvements? And can you just give us some of the puts and takes on the margin improvement through the year?

[Dale Barnhart:]

Well, again, what we can control through operational efficiencies, we saw improvements sequentially in the first quarter versus the fourth, we expect that to continue through the balance of the year. And while we don’t give the actual operating margins projections for that business that should be significantly better than what we’ve seen in the first quarter.

[Brad Noss:]

And do you see that…

[Dale Barnhart:]

And there is nothing -- excuse me, and there is nothing at this point that we would say should derail our longer term goals of seeing that business to exceed 15%.

[Scott Deakin:]

I’ll just add to that. In the first quarter, our commodity cost impact was probably the highest we will see for a couple of reasons. One is that market seems to be -- the commodity market seems to stabilizing a bit and the second piece is that we’re catching up on our ability to pass through those costs to the OEMs. As you’ve heard in the past, we aren’t able to pass it all on, probably in the bulk part of 60%, but there definitely is that lag effect and that lag impact was unfavorable to us in the first quarter.

[Brad Noss:]

That’s really helpful. And then, finally, for the -- I believe that the presentation and in your prepared remarks you mentioned improved growth margins due to favorable mix in Performance Materials. It looked like the life sciences division, sub segment of Performance Materials was less of the mix in this quarter than in Q1 2016. Can you just speak about what that beneficial mix was and if you expect that sort of normal seasonality to progress through the year in Performance Materials with the step=up in margins through Q2 and Q3?

[Dale Barnhart:]

The difference in mix in life science was principally driven by the terminal buy we had last year. Total revenue of the terminal buy was little in excess of $2.5 million and we really saw that that beginning in March of 2016. So, that was some of the unfavorable mix compared to prior year that we had in Performance Materials. The other thing on Performance Materials when you look at the operating margin is, the drop in operating margin was principally due to no trial runs; we’re making additional trial runs, which hits our SG&A market for some pretty exciting new products launches we hope to have in the fourth quarter of the year.

[Brad Noss:]

Okay, perfect. And just to the seasonality, it seems as though recently Q1 has sort of been softer quarter with the middle of the year being stronger in margins. Is that typical way to think about seasonality and how we should be looking at it for 2017?

[Dale Barnhart:]

Yes. Those for Technical Nonwovens and Performance Materials to make sure a lot of the replacements product that goes in that drives are base material occurs in the second and third quarter.

[Operator:]

[Operator Instruction] Next we have a question from Robert Majek with CJS Securities. Please go ahead.

[Robert Majek:]

Following up on a previous question, as you know, there is a lot of investor agile [ph] right now around potential peak industry auto sales. Looking out a year or two, can you just kind of talk about the various growth opportunities you have, even in a potentially flat car environment?

[Dale Barnhart:]

Well, again, we don’t specifically talk about the platforms we have won. But, we won several new platforms in the Thermal/Acoustical Metals business. One that we have discussed is the Chrysler Pacifica, which started in the middle of the second quarter last year. So, we are benefiting from that incremental sales in the first quarter and part of the second quarter. And we have other vehicles -- other platforms we won with other U.S. OEMs that will be ramping up in the fourth quarter of this year. So, given, if factory production goes down, obviously our base goes down, but we have those incremental new platforms in the metals business to support that or to offset that to mitigate that as it relates to our total revenue. With regard to the fibers business, as you know, the flooring platform started on the S series in late third quarter, fourth quarter of last year. So, we have the benefit of all that incremental sales that we didn’t have into the first, second and part of the third quarter last year, which will help mitigate any softness in that area. And then, we have some new launches on some other SUV products that are going into production in the third and fourth quarter.

[Robert Majek:]

Thank you. And you’ve previously mentioned about $5 million or so with total synergy potential between your last two acquisitions. And I know your goal is to hit that by 2019, but maybe if you could just gives us an idea of whether there is any low hanging fruit in that bucket that might be achieved this year?

[Dale Barnhart:]

Scott, do you want to give some color on that?

[Scott Deakin:]

Yes. I would say, as we have talked about, we did take a little bit of action here in this quarter, couple hundred thousand dollars of restructuring expense to see some of that benefit. But the remainder, we’re already driving lean projects, we’re driving sourcing opportunities. I would say, those are things that we can expect in the near-term without restructuring. But the majority of the expense and a lot of the savings we are going to be getting are from some of the restructuring programs are going to be driving on the business to really rationalized footprint and drive better scale across the operations. And that’s all a bit more protracted and take a little bit longer. I would say we are encouraged by the team’s activities on a lean and sourcing front. But we haven’t seen any significant bottom-line impact on that just yet.

[Operator:]

And next, we have a follow-up from Edward Marshall with Sidoti & Company. Please go ahead.

[Edward Marshall:]

Hey, I missed it if you said it, maybe you did, maybe you didn’t, I don’t know. But the commodity cost impact in metals, did you quantify that?

[Scott Deakin:]

It was in the ballpark of about 400 to 500 grand, in that zone.

[Edward Marshall:]

400,000 to 500,000? Okay. And you think that you are going to recapture that by -- when did you say?

[Scott Deakin:]

We’ll start to see -- the cost of sales will continue and we are starting to see some stabilization there, but we are able to start to pass some of that back. So, you’ll start to see that benefit as early as the second quarter here.

[Edward Marshall:]

Okay. And then, secondly, I guess as we talk to the target of 800 and 15%, and I think your goal has been in 2018, you mentioned earlier that you’re confident to getting to that goal. Does that assume and maybe I’m not asking for specific numbers, but does that assume that you’re going to be existing or you anticipate exiting the business, each one of the segments at over 10% or in double digit by the end of this year? Help me think that through.

[Dale Barnhart:]

Ye. We’ll be very close to that. Right now, our -- obviously the fibers business is above that. Technical Nonwovens and Performance Materials on a full year run-rate as we exit the year should be nearing that. The Thermal/Acoustical Fibers business may take a little bit into 2018, the end of 2018 before we achieve that level.

[Edward Marshall:]

Okay. And you mean exiting on a run-rate, not but the full year consolidated?

[Dale Barnhart:]

Correct.

[Operator:]

[Operator Instructions] And currently showing no further questions, so I would like to turn the conference back over to Dale Barnhart for any closing remarks.

[Dale Barnhart:]

Thank you all for joining us today. We had a good first quarter. And although it is still early, we’re well-positioned to extend our momentum throughout 2017. I’m confident we remain on the right path to achieve our 2018 long-term vision for profitable growth. We look forward to speaking to you again soon. Thank you.

[Operator:]

Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.