Lydall, Inc.
Q1 2015 Earnings Call Transcript

Published: 3 May 2015

[Operator:]

Welcome to the Lydall, Inc First Quarter 2015 Financial Results Conference Call. [Operator Instructions]. Now I would like to turn the conference over to Mr. David Glenn, Vice President, Business Development and Investor Relation. Please go ahead.

[David Glenn:]

Thank you, Operator. Good morning everyone and welcome to our Lydall's First Quarter 2015 Earnings Conference Call. Joining me on today's call are Dale Barnhart, President and Chief Executive Officer, Robert Julian, Executive Vice President and Chief Financial Officer and James Laughlan, Vice President, Chief Accounting Officer & Treasurer. 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. Robert and Jim will follow with a summary of our financial performance and discuss the key drivers by business segment. At the end of our remarks we will open up the line for questions. As you may be aware our quarterly earnings press release and 10-Q quarterly report were released earlier today so you can follow on with today's call, please reference the PowerPoint presentation entitled, Q1 2015 Earnings Conference Call, 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 pursuing to the Safe Harbor provision for forward-looking statements as defined in the securities laws. Lydall businesses are subject to a number of risk factors that may cause actual results to differ materially from those anticipated in forward-looking statements. For information identifying some of these important risk factors, please refer to Lydall's report on Form 10-K under cautionary note concerning forward-looking statements. In addition, during this conference call, we will 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 morning to everyone and thanks for joining us today. I'm pleased to report that we had a good start to the year and I believe we remain on the right path to achieve our 2018 long term vision for profitable growth. Slide 3, outlines our recently financial results for net sales, operating margin and adjusted earnings per share. On adjusted earnings per share were $0.42 up 5% versus the first quarter of 2014 adjusted earnings per share of $0.40. On a GAAP basis first quarter 2015 diluted earnings per share were a $1.11 which included a $0.69 per share gain related to the sale of the Vital Fluid business which we announced earlier this year. Net sales grew approximately 2% to a 127.3 million, majority of the top line growth came from the acquisition of our industrial filtration business which increased sales by 12%. The growth excludes foreign currency translation and also reflects a full quarter results in the first quarter of 2015 compared to a partial quarter in the first quarter of 2014. This growth was mostly offset by unfavorable foreign currency translation, a 5.7% primarily attributed to the declining euro and 2.4% from the sale of the Vital Fluids business. Excluding these impacts as well as lower tooling revenue, the business grew 3/10ths of a percent organically versus the same period last year. With respect to the ongoing investigation related to the possible violations of German anti-trust laws we’re in the process of actively working with the German Federal Cartel office. Despite this continued communication we’re unfortunately still unable to estimate either the timing or the amount of the liability associated with this manner. 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. With respect to M&A we completed the acquisition of Industrial Filtration in the first quarter of 2014, operating margins in the segment reached 9.2% in the first quarter of 2015 which was ahead of the adjusted operating margin of 7.5% reported for this segment in the full year of 2014 despite the recent headwinds experienced in China for this business during the quarter. This demonstrates the earning power of the business under our lean initiatives, longer term we’re on track to generate more than 4 million of annual net cost savings by the end of 2016 as we originally communicated and should continue to see incremental operating margins improvement annually. Looking forward as I’ve previously communicated both from my financial and resource perspective we have the means, the wherewithal and the desire to execute additional deals primarily in the filtration and specialty engineering material spaces. Naturally we cannot predict the timing of these but we hope to put our strong balance sheet to good use through selective M&A. With respect to lean six sigma, we have already realized a significant improvement over the past few years and we continue to look at new ways to operate more efficiently to serve our customers. During the first quarter we continue to execute on this strategy and realize continued operating margin expansion over the prior year in both our Thermal/Acoustics metals and Thermal/Acoustics fibers businesses. However on a consolidated business such as margins decline by 110 basis points to 7.9% during the quarter which was primarily the result of lost leverage on lower sales and performance material segment and lower op remaining margin associated with Industrial Filtration segment related to the mix of product sales particularly in China. Turning to slide 5, with respect to business conditions. Overall, we believe underlying fundamentals of our businesses remain solid and consistent with prior years and we anticipate our typical seasonality and which the first half of the year is stronger than the second half. With our automotive business, the scheduled plan shut downs for our key customer have been completed and these plans should be at full product rate in May, which will support increased demand for our products for the balance of the year. Looking forward, current visibility suggest that the overall demand within the global automotive market remain stable. North America continues to remain strong and we continue to see an improving European market. In our Industrial Filtration business we’re seeing signs of continued strength in orders and backlog as well as some stability in China which as I mentioned earlier provided to be a challenging region for us in the first quarter. In our Performance Materials business, we expect some headwinds in North America filtration market and softness in demands for some of our insulation products to be persist. To wrap up my comments before turning it over to Robert, we’re pleased with our performance in the first quarter. We continue to operate well and look forward to delivering solid financial performance in 2015. Before I had things off I would like to take a moment to thank Robert, for his service and contribution to Lydall, his leadership and development of a deeply talented finance team has been instrumental in our success and he will be leaving us in good hands. On that note I would like to formally introduce James Laughlan in addition to the current role of Chief Accounting Officer and Treasurer, James will be taking on the role and responsivity of the company Principle Financial Officer until the CFO position is filled. James has a successful history with Lydall dating back to 2005 and will provide us with a seamless transition and continue to continuity within the finance organization. With that I now turn the call over to Robert.

[James Laughlan:]

Thanks, Dale, for the kind words and good morning everyone. Today I will briefly cover the results of the quarter and then Jim will give you an overview of the operating results for each of the operating segments. Turning to slide 6, in the first quarter 2015 the company achieved net sales of $127.3 million, an increase of 1.7% over the prior year. There were several discreet items affecting this growth which I will take you through. First the acquisition of Industrial Filtration was completed on February 20th, 2014 due to the partial period of reported sales in Q1, 2014 for this segment our quarter on quarter net sales comparison benefited by 12.0% net of foreign exchange. Conversely the sale of our Vital Fluids business which occurred on January 30, 2015 had an unfavorable impact on the quarter on quarter sales comparison of 2.4%. Second, we achieved 3/10ths of a percent of organic growth during the period. This was driven by strong growth in our Thermal/Acoustics metals and fibers businesses primarily offset by a reduction in demand for our cryogenic insulation products and to a lesser extent lower air filtration demand in North America in our performance material segment. Third, foreign currency translation had a large impact on our top line in the quarter. Total sales decreased by 5.7% as a result of the sharp rise in the value of the U.S. dollar. Finally, tooling revenue which is dependent upon the timing of platform awards and new product launches pressured our top line by 2.5% in Q1 2015. Our adjusted operating margin for the quarter was 7.9% compared to 9.0% in Q1 of 2014. This decline was mostly related to higher absorption of fixed cost in our performance material segment and higher corporate office expenses, partially offset by a margin expansion from our lean initiatives in the Thermal/Acoustics metals and fibers businesses. The effective tax rate for the quarter was 35.9% compared to 49.5% in the first quarter of 2014. The tax rate in the current period was slightly higher than what we would consider to be normal for 2015 primarily due to the tax burden associated with the sale of our Vital Fluids business. Looking at the full year, we anticipate that our effective rate going forward will fall somewhere in the range of mid to low-30s. Adjusted diluted earnings per share excluding onetime items were $0.42 compared to adjusted earnings of $0.40 in the prior year. GAAP diluted EPS was $1.11 in the first quarter of 2015 which reflected the gain on the sale of Vital Fluids of $0.69 per diluted share. EPS reported in the first quarter of 2014 was $0.22 which included acquisition related expenses. Moving to the balance sheet, our liquidity remains very strong. At the end of the quarter cash was 72.1 million and total debt was 40.7 million. During the quarter we used cash of 7.1 million to purchase shares under our share repurchase program, in an April we closed this initiative out by purchasing the remaining shares authorized under our approved share repurchase program. Cumulatively since 2012 we have purchased 1 million shares under this program for a total average price of $18.20 per share. Additionally in the quarter cash flow was positively impacted by the net proceeds received from the sale of the Vital Fluids business of $28.4 million. Finally as it relates to capital expenditures, we spent approximately $7.4 million through the first three months of the year compared to 2.8 million in the prior year. For the full year in 2015, we expect total capital expenditures to be in the range of $28 million to $25 million. That concludes the financial review of our consolidated results for the first quarter and I will now turn the call over to Jim.

[James Laughlan:]

Thank you, Robert and good morning everyone. Turning to slide 7, I will start with Thermal/Acoustics metals business. This is our global automotive segment which specializes in providing underhood and underbody engineered thermal solutions. Overall this business performed well during the quarter despite unfavorable foreign currency translation. Excluding this part sales increased $2.2 million or approximately 5% compared to the prior year. Tooling service were lower in the first quarter of 2015 due to the timing of new product launches, we continued our efforts to get our China facility back on track and to meet our expectations for business performance. We have solved our material sourcing issues and expect the negative impact [indiscernible] by the second half of 2015 as we work through our existing inventory. As we have communicated in the past we expect this facility to be breakeven sometime in the second half of 2015. The drag from the China facility negatively impacted segment operating margin in the quarter by approximately 200 basis points. Even with this drag and headwinds from foreign currency translation, segment operating margin improved 80 basis points over the prior year to 9.4%. Slide 8 refers to our Thermal/Acoustics fibers business, this business also suffers the automotive industry and provides molded polyester and acoustical solutions primarily for underbody application for vehicles in North America. Segment sales were $31.1 million in the quarter which was a slight reduction from 32.5 million in the prior year. Lower sales were attributed to reduced tooling or approximately 1.5 million partially offset by a modest growth in part sales. Operating margin in the quarter increased 20 basis points over the prior year to 22.8% reflecting a continuation of our lean initiatives during the quarter. Moving to slide 9, I will cover our performance material segment which provides specialty filtration and insulations through a variety of end markets globally. Net sales in the first quarter declined 13.2% quarter-on-quarter to 25.1 million. This decline was primarily due to lower demand for cryogenic insulation products given the sharp decline in the price of oil and lower filtration product net sales primarily as a result of foreign currency translation which reduced net sales by 6.6%. Excluding the impact of foreign currency, increase in demand for filtration products in Europe was offset by softness in North America. Segment level operating margin also declined a 130 basis points to 5.2% during the quarter as a result of lost leverage on lower sales volume. Slide 10 covers the Industrial Filtration business acquired in February of 2014. This business focuses on providing on needle felt filtration solutions primarily for the industrial air segment globally. For the first quarter of 2015 sales were $34.2 million and operating margin was 9.2%, on adjusted basis the quarter-on-quarter operating margin decrease was due to timing and the mix of product sales particularly associated with our China operation. We continue to focus on achieving cost savings from our synergy programs and lean initiatives implemented in the segment which we believe are on track to be achieved by 2016 as Dale mentioned earlier. Turning to slide 11, our Vital Fluids business was sold on January 30, given the sale on the partial period contribution to our financials I won't spend any time going through the financials other than highlighting our after-tax gain of 11.8 million or $0.69 per diluted share. This concludes my comments on the financial performance of our segments for the quarter. I will return the call again back to Dale.

[Dale Barnhart:]

Thank you, Jim. To summarize we had another strong quarter. Our end markets are stable and we continue to remain focused on executing new product development implementing Lydall lean six sigma and putting our very strong balance sheet to good use. With that I will now turn the call back over to the operator to begin our question and answer session.

[Operator:]

[Operator Instructions]. The first question comes from Mr. Robert Magic from CJS Securities. Please go ahead.

[Robert Magic:]

Can you give a more specific update on your 2018 financial goals and if your confidence level has changed?

[James Laughlan:]

Not at all, we still are on our trajectory to achieve that goal, the currency impact has had an impact on revenue but as we continue to show in our automotive space we continue to win new platforms, we continue to improve our operating margins through lean and key will be putting that balance sheet to good use on organic growth and acquisitions which we’re clearly focused on.

[Robert Magic:]

And could you give us any more color on the headwinds you were seeing in the North America filtration market?

[Dale Barnhart:]

Sure. Couple of things are really behind that, it's not a customer specific issue. We have been looking at all of our revenue from our customers in the first quarter and it's really been across the board. Part of it we believe was attributed to, we had announced pricing action in the fourth quarter that would go in effect January 1st and we probably had some pull ahead from the North America customers on that and then just a general softness in the marketplace.

[Robert Magic:]

Okay, and you mentioned that you expect increased demand from a key customer in fibers, who I will assume is forward. Can you quantify the impact or give us any more detail around that?

[Dale Barnhart:]

Well we won't quantify the actual impact by the end of May they have two facilities that produce that vehicle which we have significant content on. By the end of May they will be at full production rates and that will have a significant increase in the parse [indiscernible] volume that we will be supplying to those two facilities. So as we mentioned in the call as we go forward we expect to see revenue rebound in that sector.

[Robert Magic:]

Okay, and how is the current acquisition environment, what kind of companies are you looking at?

[Dale Barnhart:]

Well again we are focused on the specialty materials filtration area, specialty insulation. We have a very robust pipeline that we are pursuing and obviously we can't disclose much more than that at this time.

[Operator:]

The next question is from Mr. [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Just wanted to follow-up on prior question regarding the [indiscernible] product implementation, I wanted to see on the top line you guys had a negative impact of 2.5%. Is that expected to fall-off in 2Q?

[Dale Barnhart:]

It will improve. I mean we don’t guidance, we don’t give specific forecast but we will be expecting and are seeing an improvement in the Q2 order rate as it relates to that platform and all-in-all the North America automotive market is still very robust and is showing slight year-over-year increases of factory production which we benefit from.

[Operator:]

[Operator Instructions]. Gentlemen, there are no more questions at this time.

[David Glenn:]

Okay, well we appreciate your participation in the call and we look forward to sharing with you our second quarter results in July. Thank you.

[Operator:]

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