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Lydall (NYSE:LDL)

Q1 2013 Earnings Call

May 01, 2013 11:00 am ET

Executives

Robert K. Julian - Chief Financial Officer and Executive Vice President

Dale G. Barnhart - Chief Executive Officer, President, Director and President of Global Automotive Business

Operator

Good day, ladies and gentlemen, and welcome to the Lydall First Quarter 2013 Financial Results Conference. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the call over to your host for today, Mr. Robert Julian, Executive Vice President and Chief Financial Officer. Sir, you may begin.

Robert K. Julian

Thank you, Ben, and welcome, everybody, to our first quarter 2013 earnings conference call. I will start off by taking you through the financial highlights for the quarter, and then we'll turn it over to Dale Barnhart, Lydall's President and Chief Executive Officer, to talk about our operational results by business.

So that you can follow along, I'll be referring to the PowerPoint presentation titled Q1 2013 Earnings Conference Call, which you can find at lydall.com in the Investor Relations section.

On Page 1 of the presentation is a reminder about forward-looking statements. Please note that any information discussed in this presentation 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 material -- materially from those anticipated in the forward-looking statements. For information identifying some of these important risk factors, please refer to Lydall's annual report on Form 10-K and Form 10-Q under cautionary note concerning factors that may affect future results, as well as risk factors.

With that, I'll turn to Page 2 of the presentation to cover the Q1 2013 financial highlights.

Q1 2013 net sales were $99.0 million, an increase of 2.4% versus Q1 2012, when net sales were $96.8 million. This increase was primarily due to higher sales volumes and, to a lesser extent, a completed pricing negotiation. Net sales from a Q1 2013 non-recurring customer project were essentially offset by lower net sales of electrical paper products due to the sale of that product line in a prior year.

Operating income for the quarter was $6.5 million or 6.6% of net sales compared to operating income of $5.4 million or 5.6% of net sales in Q1 2012. The improved performance was primarily driven by the Thermal/Acoustical Fibers segment that reported an increase of $3.9 million, partially offset by a reduction in Thermal/Acoustical Metals of $2.0 million and a reduction in Performance Materials of $0.8 million.

Net income for the quarter was $4.5 million or $0.26 per share compared to $3.9 million or $0.23 per share in Q1 2012. The current quarter includes a discrete tax benefit of $0.03 per share related to the release of a reserve due to the conclusion of certain tax matters through the year end 2009, while Q1 2012 included a tax benefit of $0.05 per share, which was attributed to the reversal of valuation allowance on foreign tax credit carryovers.

Lastly, we are very excited to announce that Lydall continues to execute upon its stated strategy for growth through geographic expansion. And as such, we will be establishing a new manufacturing facility outside of Shanghai, China for the Thermal/Acoustical Metals segment. Dale will speak to this initiative in more detail later on in the presentation when covering the results by segment.

Turning to Page 3 of the presentation, I'll cover our summary statement of operations for Q1 2013 versus Q1 2012. Again, net sales increased 2.4% quarter-over-quarter despite continued soft demand for our products in Europe. Increased sales in the Thermal/Acoustical Fibers segment were due to higher customer demand on Lydall's existing platforms and new platform awards, a non-recurring customer project, as well as a completed pricing negotiation with a customer, related to material cost recovery. Lower sales for the Thermal/Acoustical Metals segment were due to lower demand from the European operations due to challenging market conditions. Lower sales for the Performance Materials segment were primarily driven by an unfavorable comparison to prior period given that Q1 2012 included revenue for the electrical paper product line, which we have since divested, as well as the impact from volatile economic conditions in Europe.

Gross margin of 21.6% improved 170 basis points when compared to Q1 2012. This improvement was primarily driven by continued operational improvements within the Thermal/Acoustical Fibers segment, as well as the non-recurring items mentioned earlier for this segment. The increase in selling, product development and administrative expenses of 30 basis points quarter-over-quarter was primarily attributed to higher new product development costs and increases in salaries and accrued incentive compensation expense. As noted earlier, diluted earnings were $0.26 per share versus $0.23 per share in Q1 2012.

Turning to Page 4 of the presentation, you'll see our summary balance sheets as of March 31, 2013, and December 31, 2012. I won't take you through all the information in detail, but we'd like to highlight our continued strong cash position of $57.5 million, as of March 31, 2013. The decline in cash versus year end is primarily due to changes in working capital and capital expenditures. The changes in working capital relate to increased inventory levels, primarily driven by an increase in tooling, as our automotive businesses prepare to support future production and also in accounts receivable as net sales in the later part of Q1 2013 were higher than net sales in the later part of Q4 2012.

Lastly, as you can see based on the chart on the right-hand side of the page, Q1 2013 inventory days increased slightly and receivable days performance improved over the first quarter and full year 2012 results.

Page 5 details our statement of cash flows. As with the previous slide, I won't take you through all the figures here but most notable is the use of cash in the quarter driven by the inventory build and accounts receivable increase I just discussed. Capital expenditure for the first quarter 2013 was $2.5 million, and I anticipate that this should increase slightly over this level in the coming quarters. We anticipate full year capital expenditures to be approximately $14 million to $15 million.

And with that, I would like to turn it over to Dale Barnhart, Lydall's President and CEO, to discuss our operational results by segment in more detail. Dale?

Dale G. Barnhart

Thank you, Robert, and good morning, everyone. First, I will start by taking you through the results of our Performance Materials segment on Page 6. Sales declined 5.5% in Q1 2013 compared to Q1 2012, primarily due to a reduction in Industrial Filtration product sales given soft demand and economic volatility in Europe. Sales for Industrial Thermal Insulation products were lower due to the completion of a contract manufacturing agreement with a customer of electrical paper products that ended in the first half of 2012, partially offset by increased demand for our cryogenic products in Q1 2013. The sales increase in Life Science filtration in the current quarter compared to the first quarter of 2012 was primarily due to a greater demand for our water application products.

The decline in operating income in Q1 2013 compared to Q1 2012 was primarily due to the reduced revenues and that Q1 2012 included a $400,000 gain from services provided to the buyer of electrical paper product line in accordance with our license agreement. Adjusting Q1 2012 to exclude all the benefit from the electrical papers product line, operating income margin quarter-over-quarter was essentially flat. Q1 2013 also included an increased spending associated with new product development trials.

From a product perspective, I am pleased to report that during March, we fulfilled the largest order to date of our Arioso membrane media for gas turbine air intake filtration used in power generation application. As evidenced by this order, our product continues to perform well and we look forward to its continued success.

Turning to Page 7, to look at our Thermal/Acoustics Metals segment, part sales decreased 12.4% in Q1 2013 compared to Q1 2012. Demand for our products from our European operations declined in Q1 2013 given the generally weak automotive market due to the instability within the European economy. The decrease in operating margin in the segment in Q1 2013 compared to the same period in 2012 was attributed to lower demand, unfavorable mix in sales between parts and tooling, as well as higher selling, general and administrative expenses. While increased tooling negatively impact margins, it is a leading indicator of new product awards.

Continuing on to Page 8, as Robert highlighted earlier, we are very excited to announce our geographic expansion into China. The Thermal/Acoustics Metals business will be establishing a wholly owned foreign enterprise outside of Shanghai, China, in order to serve the local automotive market. Our existing customers have consistently been requesting that we expand our global presence, and we are very optimistic about participating in one of the largest and fastest-growing automotive markets in the world. We anticipate that this manufacturing facility will be fully operational in the first half of 2014. We have already been awarded contracts for part production with major OEMs, as well as leading Tier 1 suppliers. Although we believe this facility will provide significant contributions to the Thermal/Acoustic Metals segment long-term, we are undertaking a measured approach to this investment and plan to profitably grow the business over time.

On Page 9, our Thermal/Acoustical Fibers business. Fibers part sales grew 25.5% in Q1 2013 compared to Q1 2012, driven by higher consumer demand for vehicles on Lydall's existing platforms and from sales of parts on new platform awards, as mentioned earlier. A non-recurring customer project, as well as completed pricing negotiation with a customer related to material cost recovery. The significant increase in operating income is attributed to higher net sales and improved gross margins realized from the mix of sales and reductions in scrap material usage, labor costs and, to a lesser extent, $1.8 million related to non-recurring items I previously mentioned.

Turning to Page 10 to look at our Other Products and Services, which comprises the Life Sciences Vital Fluids business. Sales were up slightly at 1.8% in Q1 2013 compared to Q1 2012. And 100 basis point improvement in operating income was primarily related to increased sales. As I highlighted last quarter, Charter Medical, our Life Sciences Vital Fluids business, is the exclusive distributor for solution, biotech, bioreactors and fermenter products in North America and Europe, as well as exclusive provider of single-use bags. We continue to be very excited about this opportunity as it allows us to provide a more complete offering to our existing bio-processing customer and provides us with an excellent venue to help drive sales of our single-use bags.

Including with our summary on Page 11, overall, we had good results in the first quarter of 2013. Softness in Europe could be seen in both our Thermal/Acoustics Metals as well as our Performance Materials business, but we are beginning to see signs of improved demand in early Q2 2013. The business continues to benefit from strong demand for vehicles in North America. We remain cautiously optimistic for 2013 despite the continued uncertainty in the macroeconomic environment. Remain focused on increasing margins in all of our businesses through our Lean Six Sigma continuous improvement program and remain committed to funding organic growth programs, capital investments and pursuing strategic growth opportunities.

With that, we will be glad to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] And I'm showing no questions from the phone lines.

Dale G. Barnhart

All right, Ben. Thanks, everyone, for listening in.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.

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