Lydall, Inc.
Q3 2017 Earnings Call Transcript

Published: 1 Nov 2017

[Operator:]

Good day and welcome to the Lydall Third Quarter Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brandon Monahan, Vice President of Investor Relations. Please go ahead.

[Brendan Moynihan:]

Thank you, operator. Good morning, everyone, and welcome to Lydall's Third 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 and President, Thermal Acoustical Solutions. 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 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 press release and 10-Q report were released yesterday. So then you can follow along with today's call, please reference the Q3 2017 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 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, we'll 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, Brandon. Good morning, everyone, and thanks for joining us. On balance, I'm pleased to report a quarter with healthy sales growth and cash flow generation. Compared to a very strong third quarter last year, gross margins were largely as expected with unfavorable mix and higher labor and overhead costs. We did, though, face higher than expected commodity costs and reduced pricing in certain applications. We make good progress in executing our Technical Nonwovens integration activities and we are moving forward with the previously announced consolidation of our automotive segments into thermal acoustical solutions. Slide 3 outlines our recently published financial results for the third quarter of 2017. Total net sales for the quarter increased 15.6% to $180 million. This increase was driven primarily by the Gutsche acquisition, which contributed 13.9 or 8.9% of total growth. With higher tooling sales particularly in Thermal/Acoustic Metals drove 2.2% and favorable foreign currency translation drove another 1.7%. Organic growth was driven primarily by the Technical Nonwovens segment, which delivered double digit organic growth led by continued recovery in industrial filtration and improved engineering materials demand. On a volume basis, Lydall grew with or in excess of its applicable end markets in all segments. With respect to profitability, adjusted gross margin declined 320 basis points to 22.4% and adjusted operating margin declined 370 basis points over the same period last year to 9.4%. Compared to a very strong third quarter of 2016, margins were negatively impacted by pricing, mix, higher commodity costs, and increased labor and overhead expenses. Included in the adjusted operating margin is an incremental 30 basis points of intangibles, amortization - amortization from the Texel and Gutsche acquisitions. In addition, the corporate office expenses principally related to consulting expense increased $90,000 impacting operating margin by 50 basis points. This investment is focused on generating future organic growth from the Technical Nonwovens and Performance Materials businesses. Adjusted EPS was 61% per share, a decrease of 29.1% over the record third quarter of the prior year. Finally, we're proceeding with the previously announced formation of the new Thermal/Acoustical Solutions segment that will combine the existing Thermal/Acoustic Metals and Thermal/Acoustical Fibers businesses. The new segment will enable Lydall to better leverage our global assets and knowledge while generating synergies and providing a broader sweetest solutions to serve our customers globally. Financial results are expected to be reported under the new structure starting in 2018. Third quarter 2017 results include $1.2 million of expenses related to these consolidation activities and we expect in excess of $2 million and run rate cost savings from the consolidation. Turning to Slide 4, 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 integration efforts continue to be on track. Texel saw strong sales activity on seasonally higher demand in the third quarter. Gutsche's performance was in line with our expectations and the business continues to build a stable backlog. And in terms of new opportunities, we continue to actively pursue new prospects with a focus on the Performance Materials segment given the ongoing integration activities within Technical Nonwovens. With respect to new product development, a recent highlight within our Thermal/Acoustic Metals segment is the development of thermal shielding solutions for the motorized off-road sports market. We are in the process of launching solutions to manage thermal heat loads in these demanding applications. This product builds upon our current automotive heat shielding experience addressing a complimentary but traditionally unserved sectors. As it relates to Lean Six Sigma, I will focus on how we are utilizing and expanding our lean disciplines in Performance Materials business. Earlier this year, Performance Materials team launched an accelerated lean program across all functions called Lean Leaders. One initial area of focus is the converting process, which transforms large roll goods into specific customer requested configurations. Investments in this area has yielded reduced waste, higher quality and productivity, and enhanced flexibility. The team also completed joint customer projects focused on optimizing packaging and transportation costs. We look forward to these Lean Leaders continuing to spread lean thinking and practices across the organization. Moving on to geographic expansion, we have executed well on this component of our strategy with one-third of our sales now generated internationally. We are currently focused on the previously announced restructuring initiatives and Technical Nonwovens to optimize our footprint and capabilities in Europe and China. These initiatives will better position our business to be more efficient and further strengthen our scale and positioning in these markets. Consistent with our prior communications, we estimate the total Texel and Gutsche restructuring expense to be approximately $5 million with run rate synergy benefits of $5 million by 2019. Approximately $1.1 million of the expense is now anticipated in 2017 predominantly in the fourth quarter. The remainder will be seen largely in 2018 with limited spend in the first half of 2019. Turning to Slide 5, with respect to business conditions, overall we believe the underlying fundamentals of our business remain generally stable. On the supply side, we continue to see elevated price levels for certain raw materials, particularly aluminum. Market pricing for aluminum increased sequentially from second quarter of 2017 and is up over 20% from the third quarter of 2016. We expect to face these headwinds through the remainder of 2017. That said, we continue to mitigate the impact of raw material price increases with pass-through arrangements with our customers. Our Thermal/Acoustic Metals business in which aluminum is a primary raw material has passed through arrangements in place for approximately one half of the business with recovery typically three to six-month lag. On the demand side, while the automotive industry has seen a slight uptick in North America driven by vehicle replacement related to recent hurricane activity, we anticipate that this is a short-term boost and current visibility through our EDI and long-term forecast sources indicate that the overall demand for our applications remain generally stable. Given the favorability of the applications and the platforms in our product portfolio, we expect to slightly outpace the market on a volume basis as we did this last quarter. Looking to our filtration and engineering materials business, Performance Materials end markets continue to show stability across all region and subsectors. Finally, in our Technical Nonwovens segment we are experiencing stable demand for both our advance materials and filtration products. In North America and China, the power generation market continues to recover from the lowest experience in 2016 in line with our expectations. Given the strengths in the markets combined with the acquisitions, we exited the third quarter with a record backlog. With that, I will now turn the call over to Scott.

[Scott Deakin:]

Thank you, Dale. Turning to Slide 6, I'll briefly cover our consolidated results and then provide an overview of our operating segment results. In the third quarter of 2017, the company achieved net sales of $180 million, an increase of 15.6% over the third quarter of 2016. This increase was driven principally by the acquisition of Gutsche and strong organic growth in the Technical Nonwovens segment of 11.7%. Organic growth for the quarter was 2.8% driven primarily by the Technical Nonwovens segment and improved demand from power generation customers in North America and China and increased sales of advanced materials for automotive and geosynthetic applications. Performance Materials organic sales were up modestly at 0.7%. When factoring in the exceptionally strong quarter last quarter - last year, which had over $0.5 million of non-recurring life science terminations buys, organic growth would have been up 2.7%. The Thermal/Acoustical Metals segment delivered organic growth of 1.7% led by strong growth in China and moderate growth in Europe and domestically. In addition, tooling sales in the metals segment were up $3.5 million or 7.4%. Organic growth in our Thermal/Acoustical Fibers segment was down 0.9% driven primarily by product design changes resulting reduced fiber content in correspondingly lower price. Gross margin in the third quarter was down 230 basis points to 22.2%. Excluding acquisition related inventory step-up and restructuring charges, adjusted gross margin of 22.4% was down 320 basis points versus prior year. As noted, gross margin was negatively impacted by pricing, mix, higher commodity costs, and increased labor and overhead expenses. Unfavorable mix impact of the quarter has driven principally by three factors including lower margins sales of Technical Nonwovens products for the power generation market, the absence of richer margin termination buy sales in Performance Materials, and the absence of high margin prototypes sales seen last year in the Thermal/Acoustical Metals business. The continued inefficiencies in the metals segment reduced Lydall's consolidated gross margin by approximately 30 basis points in the quarter. The North American business has demonstrated sustainable improvement in the equipment effectiveness and we are confident that our operational inefficiencies, which are now principally driven from our European operations, are improving. Consolidated operating margin for the third quarter was 8.4%, down 330 basis points from prior year. Included in these results were 30 basis points of incremental acquisition related intangible amortization from the recent acquisitions within Technical Nonwovens. Excluding inventory step-up, restructuring related expenses, and expenses related to strategic initiatives, adjusted operating margin was 9.4%, a decrease of 370 basis points over prior year. Higher market consulting spend in support of organic growth initiatives impacted these margins by 50 basis points. The company's effective tax rate was 24.2% compared to 29.7% in the third quarter of 2016. The effective tax rate in the third quarter of 2017 was positively impacted by approximately $1.4 million from the favorable resolution of a tax audit. For 2017, we continue to anticipate that our full-year effective rate will be in the high 20's. Third quarter 2017 earnings per diluted share were $0.62 compared to $0.75 of earnings in the prior year. After adjusting for strategic initiative expenses, inventory step-up, restructuring expenses, automotive segment consolidation expenses, and discrete tax items, adjusted earnings per share of $0.61 were down 29% compared to $0.86 delivered in the third quarter of 2016. Revaluation associated with foreign currency drove approximately $0.03 of the change versus prior year. As it relates to capital expenditures, Lydall spent $19.9 million through the first nine months of the year, up slightly from $19 million in the same period last year. For the full year 2017, we expect total capital expenditures to be approximately $30 million to $35 million as we continue to invest at a relatively higher rate in support of attractive growth, productivity, and restructuring. Cash flows from operations in the first nine months of 2017 were $46.2 million, compared with $47.4 million in the same period of 2016. Despite favorable performance on the accounts receivable and payable, this reduction is driven primarily by higher automotive tooling inventory to support new customer product launches. Finally, our liquidity remains very strong. At the end of the third quarter, cash was $64.7 million after reflecting a further pay down of $14 million on our debt for total pay down of $34 - excuse me, $34 million thus far in 2017. Total outstanding debt was $93.3 million for a net leverage ratio of approximately 0.3 times positioning us well for future acquisition growth. Turning to Slide 7, I'll note the progress we've made year-to-date. Through the first nine months, sales of $520.4 million are up organically by 6.5%. Our filtration and engineered materials businesses are up 14.6% and 3% respectively. In automotive, both businesses showed solid growth with Thermal/Acoustical Fibers up 7.8% and Thermal/Acoustical Metals up 5.2%. With respect to profitability, adjusted operating margin declined 180 basis points to 10.4% versus the adjusted operating margin for the same period of 2016. Included in these results is an incremental 50 basis points of intangible amortization from acquired companies versus the same period last year. In addition to this, the decline of the consolidated levels driven primarily by unfavorable mix, increased raw material commodity costs and $2.3 million or 40 basis points of operating inefficiencies from the Thermal/Acoustical Metals business. Moving to Slide 8, I'll cover our segment results. I'll start with our Thermal/Acoustical Metals business. This is our global automotive segment, which specializes in providing underwood and underbody engineered thermal solutions for vehicles. This business delivered organic sales growth of 1.7% during the third quarter. Net parts sales were up $1.7 million to $41.5 million compared to last year, while tooling sales were up $3.5 million supporting future product launches. Favorable foreign exchange, primarily the stronger euro, added two and a half points to sales growth. Adjusted operating margin declined 660 basis points quarter-on-quarter to 5.6%. The business saw unfavorable mix driven by higher sales of lower margin tooling in the absence of high margin prototype sales seen in the prior year. Continued commodity headwinds also impacted performance in the quarter. In addition, persistent operating inefficiencies in Europe primarily due to higher labor overhead and outsourcing impacted the business. We saw a marked improvement in this location over the last couple of months and remain encouraged by our ability to further stabilize our operations there. Slide 9 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 third quarter were $35.6 million, down 0.9% on an organic basis. Volume increases above market rates were offset by certain platform transitions and select price downs due principally to product redesign. Sales of our molded flooring solution that was launched in the third quarter of 2016 remain strong driven by continued growth of North American pick-up truck sales, while offsetting declines in other platforms. Adjusted operating margin in the third quarter decreased 260 basis points to 24.9% on lower pricing and to a lesser extent higher margin, excuse me, higher material costs. Moving to Slide 10, 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 third quarter of $29.5 million were up 0.7% on an organic basis. Filtration sales were up over 10% on strong demand for both air and fluid applications. Specialty insulation sales grew 2.9% led by gains in low temperature cryogenic insulation products. Life Sciences sales declined by 37.4% impacted by product terminations buys that we saw in the third quarter of 2016. Excluding the impact of the termination sales, organic growth in the quarter for Performance Materials would have been approximately 2.7%. Foreign currency translation favorably impacted sales by 1.8%. Third quarter adjusted operating margin of 10.4% declined by 100 basis points versus the same period in the prior year. The decline in margin was principally driven by the non-occurrence of the previously mentioned high margin life sciences termination buys in 2016 coupled with continued trial activity associated with new product development. Slide 11 covers our Technical Nonwovens segment. This business 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 third quarter of 2017, sales of $73.3 million were up $21 million, of which $13.9 million was due to the Gutsche acquisition. On an organic basis, sales were up 11.7% on the recovery of the US power generation replacement market coupled with strong demand for our advanced materials products particularly within automotive and geosynthetics. Foreign currency translations favorably impacted sales by 1.9%. From a profitability perspective, adjusted operating margin for the third quarter decreased by 190 basis points to 12% compared to the same period in 2016. As a reminder, our adjusted results exclude expenses related to ongoing restructuring activities, which cost $0.2 million in the quarter, but do include 70 basis points or $0.5 million of incremental acquisition related intangibles amortization versus the same period last year. In addition to this, the decrease in adjusted operating margin was due to unfavorable product mix given increased sales of lower margin, 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 and integration of both businesses continues to be on track and we remain confident in the strategic leverage to be gained by the industry leading market position that we now enjoy. That concludes our review of the third quarter results. Top line growth exceeds 15% driven by generally healthy demand in the end markets we serve. Strong cash flow generation allowed us to pay down $14 million in debt from our credit facility. Addressing the remaining operational issues in metals executing flawlessly on our planned immigration related restructuring and Technical Nonwovens and consolidating our automotive segments continue to be our most significant near-term operational priorities. Leveraging this improvement on continued strength in our end markets positioned us to deliver solid year-over-year improvements in both sales and profits in 2017. With that, I will now turn the call back to the operator to begin our question-and-answer session.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Matt Koranda of Roth Capital. Please go ahead.

[Brad Noss:]

Hi, guys. This is Brad Noss on for Matt Koranda here.

[Dale Barnhart:]

Good morning, Brad.

[Brad Noss:]

Good morning. I just wanted to start off by looking at the cost savings. I believe you said 2 million and potential synergies for combining the Thermal/Acoustical segments. But can you just help us sort of bracket out the different cost savings areas that you expect to see making up that 2 million, as well as just sort of give us a rough cadence in 2018 in achieving those synergies?

[Dale Barnhart:]

Yeah, Brad. Also it's principally SG&A you will see a little bit of that savings start to emerge in the fourth quarter and I'd say ballpark 80% of that $2 million you'll see in 2018 really starting to ramp up after the first quarter and then you'll see incrementally a little bit more into 2019.

[Brad Noss:]

Okay. Thanks. That's helpful. And then also just touching on the combination in terms of potential top line synergies or incremental growth that you expect to see from having the - essentially in the single segment there, can you help us just think about the magnitude of that incremental growth and sort of what you expect to see from them working as a combined unit?

[Dale Barnhart:]

Yes. We're not quantifying that at this time, but we do see opportunities from this consolidation both on top line, as well as - we believe driving some further operational efficiency in the cost of sales as well. It's still to be sort of flushed out. Clearly we have gotten a positive response both from our sales and engineering groups internally, as well as from customers. We really have had cases where customers have reached out to us where they have a stronger relationship on one side of the house. They promised and want to talk to us about bringing the other side of the house's products onto their full, but it's early days on that. As you know, the automotive cycles are longer in duration. It takes a few years to be able to start to demonstrate that capability on some of the newer platforms. But what I can tell you is, the initial response has been very favorable.

[Brad Noss:]

Okay. Got it. And then with your prior long-term targets here, I think they're previously sort of 2018 targets when you had been referring to a 15% operating margin, I just want to see sort of what your thoughts are as they are approaching 2018 and reaching that 15% operating margin sort of what you see is the timing whether it's 2018 or further out and sort of what the main drivers that you would like to see to reach that level?

[Scott Deakin:]

As far as the 15% operating margin, the stretch goal we put for ourselves for the end of 2018, we probably won't achieve that. You'll see improvement over this year as we go into 2018. We really haven't set another target when we would reach that. We're in the process now. We're in the process now. We're going through our strategic planning process. And in early 2018 we will put out our stretch goals for 2020, which we would pursue. By then we expect to be at 15% operating. What drives that? Our new product launches are critical. As I mentioned on the call, we invested about $900,000 in consulting fees in the third quarter, specifically looking at markets in adjacencies where we can drive organic growth. And one of the key attributes of a market segment that we're looking at is not just top line, but margin enhancement. So, particularly in Technical Nonwovens and in Performance Materials, they both identified some key adjacencies that we will be pursuing that if we're successful, not only drive top line, but have a significant impact on the gross margins in both of those businesses. In addition, our lean - as you heard on the call, it is a continuous improvement process and we were very excited that Performance Materials sort of took a reboot and to reenergize their efforts was what they've done with their Lean Leader concept to really get it to expand beyond just our operating performance but into our administrative side. So, we expect more improvement operationally from all of our businesses from our lean and then top line growth, leveraging our fixed costs will really help us get to or exceed the 15% operating margin.

[Brad Noss:]

All right, thanks for that color. And just one more for me here looking at the TA Metals, you sort of mentioned the inefficiencies in Europe and how you're improving that. It looks like you improved a few hundred thousand I think in Q3 versus Q2 even, but should we sort of see or expect sort of that steady improvement over the next couple of quarters before it's completely resolved or what should we see there?

[Scott Deakin:]

Well, there is several dynamics or two key dynamics that are going on within our operations in Europe. One is, as you mentioned, the operational inefficiencies and we've been focused on that since we exited from the beginning of this year and we've seen quarter-to-quarter improvement when we were looking at the operational performance. One of the other significant driver though, for the challenges we have in Europe is that it is horizon mix. Our European business is still significantly single wall product, which is a lower gross margin than our higher value dual wall product. We've won new applications in Europe and dual wall and we're migrating that business to a richer mix by geographic region, but that really doesn't have a big impact until mid-2018 going into 2019 where we've won significant applications. And what's compounded the problem this year is on those dual wall applications, several of them were originally planned going into this year to go out of production, but the OEMs have continued to run those platforms. So, we have operations in Europe that have struggled with just operational inefficiencies that we're addressing. A higher mix of lower margin product, a higher volume than we planned going into the year and the combination of those three things have created the issue of where we're outsourcing some of the product. We're working more overtime to make sure we stay up with the demand.

[Dale Barnhart:]

Brad, I would just add to that. Remember as you start to look, think about Q4, that Q4 was by far our worst from an operational inefficiencies standpoint. We had over $2.5 million of inefficiencies across over three facilities in that quarter and relative to the fraction of that that we saw in Q3, you can expect that Q4 is going to be much more consistent with Q3 and we hope even better, so a significant improvement versus where we were last year.

[Brad Noss:]

Okay. So, you would expect sort of the sequential improvement there. And then if we strip out the inefficiencies relative to Q4 last year, would it still - would you still expect to see that benefit on top of adjusting those inefficiencies out?

[Dale Barnhart:]

I think so, yes.

[Brad Noss:]

Okay. Perfect. Thanks for the color, guys. That's all for me.

[Dale Barnhart:]

Thank you, Brad.

[Operator:]

[Operator Instructions] Our next question comes from Edward Marshall of Sidoti & Company. Please go ahead.

[Edward Marshall:]

Good morning, Dale, Scott, Brendan, how are you?

[Dale Barnhart:]

Just fine, good morning, Ed.

[Scott Deakin:]

Good morning.

[Edward Marshall:]

Okay. So, I wanted to, I guess dive into probably overall just may be further deep in the consolidation of these two businesses. And, I just wanted to get a sense of the cost actions that we saw today, are they the initial cost actions that we see. What's the opportunity do you see with the consolidation in this business and I am speaking more to the cost side overall than the top line. Can you tell me what you might think of from the cost side of the businesses as we move forward? Is this $2 million is the initial kind of announcement?

[Scott Deakin:]

Yeah, so again think about it in phases, this first piece was about getting the organization, the sort of managerial level actions put in place, we've done that. I'm really pleased with how quickly everybody has responded to it, how quickly we are moving towards operating within our new roles, starting to drive process improvements within that. So, that really is what you saw in this initial cost action that we took, the restructuring charges and the $2 million run rate savings that we expect to realize from that. Obviously from there then it's about those teams starting to operate more effectively, trying to take the best practice, excuse me not trying, but taking the best practices of each respective business. The Fibers business was very strong operationally, we'll inject some of that into the Metal side, the metals business was very strong, on the growth side and we'll inject some of that into the Fiber's side. That's going to take a little time for those teams to start to ramp up, and execute in that way, but, I think we got the right people on the right places and the right approach to how we are going to bring that all together.

[Edward Marshall:]

Got it, so, were we start initial cost and restructuring the next phase seems to be operational, and just operational efficiency so to speak into the business, is that fair?

[Scott Deakin:]

That's fair and you won't see that restructuring related, but it will just be driving better execution from us from an operational execution stand form.

[Edward Marshall:]

Got it, and just I guess, initially speaking are there any niche for a capital infusion into the businesses for footprint etcetera?

[Scott Deakin:]

Not at this point in time, we are always looking strategically our footprint relative to the kind of business we are going after. But, I think we've been clear that we've been spending a lot on capital for both of these businesses and the ball park of 80% of our third quarter capital spend was focused on the Metals and Fibers business and just executing on that. The new presses, some of the robotics we are putting in etcetera that's our prime focus at this point, but as we pursue new pieces of the business, and try to position ourselves relative to the customer's needs majestically etcetera, we may consider some things, but, right now it's not a priority.

[Edward Marshall:]

Okay, so switching gears for a second, in the prepared remark you talked about - around the price discussion on Fibers and more importantly I guess with model changes. And it almost sounds like there's lower content of Light house Fibers within some of the materials. First, is that what you said and secondly are you leased to share or is it less fiber content or is it a substitute product or is it just - we're burning back to the older type models? Help me out with what you're seeing with fibers?

[Scott Deakin:]

The specific instance in the third quarter was two things. One, just typical LPA price reductions that we always see, but then the piece sellers at a higher rate this last quarter, was for a particular program that as we did our material cost reduction efforts as we always do with our customers, that's led to a de-contenting on that particular application. I wouldn't say that is something that's pervasive across the business, but that particular application had some material cost reduction, de-contenting that we categorized for this purposes prize.

[Edward Marshall:]

Okay, and what was that impact in the quarter, may be on an annual basis?

[Scott Deakin:]

For the quarter, in the ball park of a $0.50 million and we'll see that for the subsequent quarters going forward into Q2 2018.

[Edward Marshall:]

Okay, so, that's the programme right through 500, 000 in the quarter.

[Scott Deakin:]

No.

[Edward Marshall:]

Okay, was that substitute with a different product, or was that substituted with a competitor?

[Scott Deakin:]

No, different product from us, let's say different approach to the application.

[Edward Marshall t:]

Got it, is that a new application or an older application just curious.

[Scott Deakin:]

An older application, yeah.

[Edward Marshall:]

Okay, on metals, yeah you called out I guess effectively three buckets, raw materials, pricing and mix. Mix I'm assuming is that 3.5 million of tooling sales that's impacted in the quarter. Can you quantify raw materials and pricing, how much of that was driving the quarter, metals?

[Scott Deakin:]

Just to clarify that the mix was twofold, it was the higher tooling, but was also we had a very profitable one time prototype part in Q3 of '16, we didn't have them in Q3 of '17. So, the removal of that was a factor and I would say from a material price standpoint we'll talk in a ballpark, that would be $850, 000 impact versus the prior year, just on the metal side.

[Edward Marshall:]

Got it, it almost sounds like the issues you're having in metals might almost be too much top line and, I know that high price problems to have, but, first is that somewhat accurate? And, then I know last quarter we talked about the conversion from single lobbying to dual lobbying, kind of a slower transition, is that continuing when you see that alleviate?

[Scott Deakin:]

Well, that's more geographic, were we do have higher sales or lower margin product is in Europe. So, our footprint in Europe, our product fortune in Europe is still predominantly single one. You know, our strategy is to move to the higher value and we want good applications that start going into production in 2018. So, that's really were we have I would say, lower adoption right now, versus North America which is significantly higher than 50%. Our total sales mix today in the Metals business on parts, over 50% today is dual wall and so in North America it's much higher than that. So, the adoption in North America is going well, and Europe it's going well as we focused on it, but it starts really in 2018. And there we've had too much top line, you're right, some of the single low product that we thought was going to out of production in Europe has not gone out of production, which has put demand, stress on our operations in Europe, which along with the inefficiencies we've had, has driven the excess over time and actually outsourcing some of the manufacturing of the product obviously at higher cost to ensure that we keep the production lines right.

[Edward Marshall:]

Got it, I think this will be useful for investors to understand and maybe can help share it, I don't know if you have the data or not. But, when I look into North America Metals versus Europe Metals, and I know it's getting granular, can you talk about may be what North America is earning versus what may be on a percentage basis, what Europe is earning. Presumably you've got two ratios in Europe; you've got the older product which is lower margin, and then the cost side. But, I'm curious if North America is kind of fixed, I'm curious to see what those margins might look like relative to the European margin.

[Scott Deakin:]

You know I'll just give you a rough figure, North America is our volume concern and as we go forward with the product mix we have, the North America and Automotive business should be achieving our target of 15% operating margin. We've seen marks of it this year, where they were very close, not higher than 15%. Europe is till significantly below 10%, so, that's the order of magnitude of the differences.

[Edward Marshall:]

Got it and last question I guess when we look at with guidance and I know you don't provide it. But you telegraph kind of this quarter and in the third quarter earnings, second quarter call, you gave some analytical information as to what was going to happen. Obviously, their onus is on us, we mis-modeled this, because it looks like the top line performances there. I'm curious if you could kind of get a little bit more granular with us, to talk about what you anticipate for the fourth quarter. It doesn't sound like it's going to get worse, it sounds like you hit the base right. First on that, and then any kind of additional information's you can help us with that model would probably be appropriate.

[Scott Deakin:]

You're right, we do not think the fourth quarter is still deteriorate any form the third quarter. And, the top line will be the fine for the fourth quarter in our businesses. As far as the actual gross margins and operating margins, again we don't expect going to be any lower than what we have. The key headwinds that we have in the fourth quarter are going to be the continued metal pricing issues we have in the Metals business.

[Edward Marshall:]

Got it, okay. Thanks very much.

[Scott Deakin:]

Thank you, Ed.

[Operator:]

This concludes our question and answer session. I'd like to turn the conference back over to Dale Barnhart for any closing remarks.

[Dale Barnhart:]

Again thank you for joining the call today and we look forward to speaking again shortly.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.