Lydall, Inc.
Q2 2008 Earnings Call Transcript

Published: 4 Aug 2008

[Operator:]

Welcome to the Lydall second quarter 2008 earnings results conference call. (Operator Instructions) At this time I’d like to turn the conference over to Tom Smith, Chief Financial Officer, Vice President and Treasurer.

[Thomas P. Smith:]

Dale Barnhart, President and Chief Executive Officer, will briefly review Lydall’s performance for the second quarter ended June 30, 2008. We will then open the lines for questions. Participants should note that additional information including a presentation outlining key financial data for the second quarter ended June 30, 2008 supporting today’s discussion can be found at www.lydall.com in the Investor Relations section. Before we begin I want to inform our listeners that any information discussed in this call which may be forward looking in nature is made available pursuant to the Safe Harbor provision for forward-looking statements as defined in the Securities laws. Lydall’s businesses are subject to a number of risk factors which may cause actual results to differ materially from those anticipated in the forward-looking statements. For information identifying some of these important risk factors I refer you to Lydall’s annual report on Form 10K and Forms 10Q in the MD&A section under Cautionary Note Concerning Factors That May Affect Future Results and also Risk Factors. Also, this call is fully accessible to interested investors and the media and is intended to comply with all requirements about public disclosure under Regulation FD. I will now turn the call over to Dale Barnhart.

[Dale G. Barnhart:]

As you read in our release today I am relatively pleased with our second quarter results given the weak economic conditions in the United States. In comparisons to the second quarter of 2007 our net sales were down $3.3 million or 3.7% excluding the impact of exchange rate. Our gross margins in the second quarter of 2008 were 22.6% versus 23.2% in the second quarter 07. Severance-related charges greater in Q208 versus Q207 were greater by $300,000 or 40 basis points. Also we saw a slight impact of raw material and energy costs impacting our gross margin percentage. Operating income in the quarter was down $1.4 million excluding the impact of fx. Operating income includes severance-related charges of $1 million in Q2 2008 an increase of $900,000 or $0.03 per diluted share from Q2 2007. The result was an EPS of $0.17 in the quarter versus $0.21 in the second quarter of 2007. If we included the severance expenses, our earnings would have been $0.20 versus the prior year of $0.21. For the first half of 2008 our EPS was $0.37 compared to $0.29 in 2007. A key strength of the company continues to be our balance sheet. We generated $7.1 million in cash from operations in the second quarter and $15.3 million year-to-date. We ended the quarter with $26 million of cash on our balance sheet and today the only debt we have is capital leases of about $10 million. The strong cash flow as a result of our focus on lean six sigma and improving working capital and strength of our balance sheet will continue to enable us to invest in our businesses to support our growth initiatives. Looking at each of the businesses and their performance in the second quarter, our performance material segment as you know is made up of two key businesses

[Operator:]

(Operator Instructions) Our first question comes from John E. Franzreb, IV - Sidoti & Company, LLC.

[John E. Franzreb, IV:]

Could you talk a little bit about the cancellations that you referenced that are going to take place in the second half and what kind of impact we should expect to see from them?

[Dale G. Barnhart:]

We had several significant programs that we won on the Ford F150 pickup truck, the new truck coming out. So obviously that program’s going to go forward. They’ll still be producing Ford F150s but the volume has been reduced dramatically. We really don’t know the full impact yet John because every day they keep changing what’s going to go on with that program. And that’s just one of them. There are a couple of others that are just like that.

[John E. Franzreb, IV:]

Do you have a sense of what your mix deal is on the SUV versus automotive? How big of a buy share on one versus the other?

[Dale G. Barnhart:]

Our North American business, not our European business, is strongly weighted to SUV and pickups because that’s been the high volume units being produced in North America. So we do have automotive platforms but our highest revenue right now on volume comes from SUV and pickups because up until six months ago that’s what was being produced in North America.

[John E. Franzreb, IV:]

I recall the French facility is a relatively new facility but it sounded like you are doing some cutbacks over there. I’m curious, what kind of capacity utilization are you doing over there and are you bringing some of that work back to Germany or why the cutbacks are now needed in the French facility?

[Dale G. Barnhart:]

What we’re doing is, again as I mentioned this is a little different, these are lean six sigma initiatives. As we got into looking at the business we felt that we had our fixed overhead was out of line, we built a structure that we shouldn’t have had in place, and so we’re just doing what we’re learning from lean six sigma in getting the proper structure for that business. Overall capacity utilization is probably in excess of 50% right now because we only have one line operating there, so we’ve never fully invested the full set of volume capacity that was originally planned for that facility. The overall French market has been soft for us compared to the German market.

[John E. Franzreb, IV:]

The SG&A you said was up due in part to a bio initiative that you have. Could you provide us a little bit of color of what’s going on there?

[Dale G. Barnhart:]

We make storage and collection devices in our vital fluids, which are predominantly bags and accessories. What’s been evolving in a space that we’re not really a key player in yet is the use of bags in the biopharmaceutical market in all phases of production. It reduces the production set up costs, the cleaning the tanks in between materials, it allows storage of the material, it minimizes contamination issues, and that space right now is growing anywhere between 20% and 30% a year. As we strengthen our organization and fix our business processes, we now have the confidence that we have an opportunity to grow quite substantially in a high growth market. So what we’re doing right now is building the sales and marketing and application team which will be followed by investment and capital equipment to enable us to penetrate that market segment.

[John E. Franzreb, IV:]

How much of the incremental spend was that in the quarter?

[Dale G. Barnhart:]

I don’t know off the top of my head but again it’s a small business so significant enough to impact the performance of vital fluids.

[John E. Franzreb, IV:]

Can you talk a little bit about the cash as you’re starting to build it up? What are your priorities for use of that cash?

[Dale G. Barnhart:]

Well the first priority will be as we’re developing these organic growth opportunities to make sure we’re investing properly in those. I touched on the bio disposable market and we will be making a capital investment for equipment to really have a world class facility and product line and capability. So that’ll be one use of our cash. And then we’ll continue to look at other organic investments and possible acquisitions that could complement some of the areas that we really want to grow.

[John E. Franzreb, IV:]

With your stock down 16% today any thoughts about maybe buying back some stock or no?

[Dale G. Barnhart:]

Not at this point. I think we can get better returns by investing in some good markets that will give us good growth. As you commented at the beginning, we’re really starting to demonstrate what we can do with lean with the ability to hold gross margins in a significant portion of our business with volume down 21%. So our growth strategies will not only help us to grow in revenue but to make sure we take that operational excellence throughout all our business.

[Operator:]

It appears we have no further questions at this time. I’d like to turn the call back to our speakers for any additional or closing remarks.

[Dale G. Barnhart:]

I want to thank everybody for participating and from a shareholder’s perspective as we demonstrated with our automotive business this year in the second quarter we will continue to focus on operational excellence to maximize the return for our shareholders despite what’s going on in the market place. Thank you.