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Lydall Inc. (NYSE:LDL)

Q2 2009 Earnings Call

August 3, 2009; 10:00 am ET

Executives

Thomas Smith - Chief Financial Officer

Dale Barnhart - President & Chief Executive Officer

Analysts

John Walthausen - Walthausen & Co.

Operator

Good day and welcome to the Lydall second quarter 2009, financial results conference call. Today’s call is being recorded. At this time, I’d like to turn the conference over to Chief Financial Officer, Mr. Thomas Smith, please go ahead sir.

Thomas Smith

Thank you. Good morning, everyone and thank you for joining us today. Dale Barnhart, Lydall’s President and Chief Executive Officer, will briefly review the company’s performance for the first quarter ended June 30, 2009. We will then open the lines for questions.

Participants should note that additional information, including a presentation outlining key financial data for the first quarter ended June 30, 2009, supporting today’s discussion can be found at 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 or 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 10-K and Form 10-Q in the MD&A section under Cautionary Note Concerning Factors That May Affect Future Results and also under Risk Factors. Also this call is fully accessible to interested investors and the media and is intended to comply with all the requirements of a public disclosure under Regulation FD.

I will now turn the call over to Dale Barnhart. Dale.

Dale Barnhart

Thank you, Tom and good morning everybody. In the second quarter of 2009, we continued to be impacted by the economic recession we’re seeing in the world. We reported net sales of $56 million compared to $84 million in the second quarter of 2008, down 33%.

Excluding the impact of foreign exchange, net sales were down $24.6 million or 29.3%. Compared to the first quarter of 2009, however, we had an increase of about 3.1% in our net sales. This was the first quarter-to-quarter increase, since the first quarter of 2008 in revenue for Lydall.

From an income standpoint, we recorded a net loss of $5.9 million or $0.36 per share compared to a net income of $2.9 million or $0.17 per share in Q2 ‘08. In the second quarter of ‘09, we recorded restructuring charges of $3 million or $0.12 per diluted share for our North American consolidation program.

Our gross margins were negatively impacted by the volume and we have reported a gross margin of 7.4% compared to a gross margin of 22.8% for the second quarter of 2008. All of our businesses were impacted by volume and therefore had a negative impact on gross margins compared to the prior quarter and the prior year, but our Thermal Acoustics market or our automotive was impacted most dramatically.

In that sector, we did record restructuring charges that impacted our gross margin by 540 basis points. Since we entered the recession, we continue to pay close attention to not only our operating costs, but our SG&A expenses. In the second quarter of 2009, we had SG&A expenses of $12.7 million compared to $14.7 million for the same period in 2008 or a reduction of 13.6%.

Again headcount reductions, salary and benefits, sales commissions all contributed to the savings we saw in the second quarter of 2009. Cash and liquidity continues to be strength for Lydall. In the second quarter of 2009, net cash provided by operations was $500,000 compared to net cash provided by operations in 2008, second quarter of $7.2 million.

In the second quarter of 2009, we did improve our operating net cash $4.2 million from the first quarter of 2009. The primary change for our operating cash in Q2 ‘09 versus Q2 ‘08 is the operating income loss.

We had cash payments related to our restructuring program of $3.4 million in the second quarter of 2009. Net cash receipts related to the termination of a SERP program and surrender of the insurance policies was $2.4 million. Excluding the restructuring cash expense and SERP termination, we generated $1.5 million cash from operations in the second quarter of 2009.

We continue to focus on working capital improvement and we significantly reduced inventory by $5.2 million since the end of the first quarter of 2009. We had no borrowings on the company's credit facilities as of June 30, 2009 and we had $8.9 million of cash on hand at the end of the quarter. The only debt we had on hand were some capital leases.

Now moving into the business segments; Performance Materials, which is made up of our filtration and industrial thermal insulation products. Net sales for this past quarter were $23.2 million, compared to $31.2 million for the second quarter of 2008, a reduction of 25.6%. Again compared to the first quarter of '09 however, we saw a slight increase of 3.6% in our revenue.

Our filtration net sales were lower by about $3 million primarily related to lower demand for air filtration products. Also there was substantially less building of clean rooms in Asia. Our industrial thermal insulation product net sales were lower by $4 million in the quarter. Our energy and industrial sales were lower by $2.2 million due to lower demand in the electrical and cryogenic markets.

Then our building and appliance insulation products were down $1.8 million due to lower demand in U.S. home and commercial building markets. The operating income for Performance Materials in the second quarter of 2009 was $1.1 million, compared to an operating income of $4.9 million in Q2 2008, again principally driven by reduction in revenue due to the weaker markets.

Our Thermal Acoustics or automotive business, net sales for Q2 ’09 were $27.5 million, compared to net sales of $45 million in the second quarter of 2008, a drop of 39%. Again as in other businesses, Q1 2009 sales were slightly lower than Q2. Better said, Q2 improved 2.1% versus Q1 '09.

In Q2 '09 the net sales were lower by $15 million excluding the impacts of foreign currency. We saw a decline in automotive parts of 15.8% or 38.4% and tooling was slightly up about $800,000, compared to the same quarter in the prior year. Significant lower production in the U.S. and Europe, the CSM data estimates for production were down about 48% in North America and 27% in Europe, compared to the second quarter of 2008.

Overall, production was down 35%. Obviously, the severe drop in volume had an impact on our operating income. Second quarter of 2009 we reported an operating loss of $5.8 million, compared to an operating income of $2.9 million in the second quarter of 2008.

We did, however, accelerate our restructuring of the North American business. We pulled everything. The original plan was to complete the restructuring in the third quarter of 2009. We accelerated that and completed that restructuring in the second quarter had an impact of $3 million on our operating income. Year-to-date we have spent $5.1 million or charges of $5.1 million for the restructuring.

As everybody is aware on the call, General Motors and Chrysler did go through a bankruptcy proceeding in the second quarter of this year and it's important to note that we had minimal AR impact as it related to those bankruptcies. We were selected as a key suppliers going forward by both of the OEMs and therefore we were pretty much protected through that process.

In the quarter was also important to note that GM and Chrysler virtually produced no cars in the second quarter of 2009. Both companies now are back in production. Obviously, the consumer and the market will determine ultimately, how many vehicles they produce, but it should have a positive impact for us as we go forward. The consolidation is completed and the savings of approximately $3.5 million to $4 million on an annualized basis will start to be realized in the third quarter of 2009.

Our Other products and services segment, which is made up of our vital fluids and affinitive temperature control businesses, vital fluids reported net sales of $3.8 million in the second quarter of ‘09, compared to $4.2 million for the second quarter of 2008. Again, quarter-to-quarter from Q1 ‘09 to Q2 ‘09, we recorded a sales increase of about $700,000 or 22% for the business.

From an operating income standpoint, Q2 ‘09 was relatively flat compared to Q2 ‘08, reflecting some efficiency gains we’ve picked up in the business, given the fact that the revenue was down quarter-to-quarter. We continue to invest in this business.

Our biodisposable market continues to be a key focus for us and the growth opportunity and we have invested about $1 million so far this year on the capital equipment to automate that line and further expenses in investments will be made in the third quarter of ‘09. Affinity continues to be negatively impacted by the collapse of the capital goods market for the semiconductor industry.

In Q2 ’09 we reported net sales of $1.4 million compared to Q2 ‘08 of $3.9 million, a change of 64%, this is the only business segment that did not showing a quarter-to-quarter increase in revenue in our portfolio in the second quarter of 2009, it continue to show further decline of about 39% compared to first quarter of ‘09.

From an operating income standpoint, we reported a loss of $1 million, compared to a loss of $0.5 million in the second quarter of 2008. The business is continually focused on leaning out the process, reducing our cost structure, lowering our breakeven point and we are seeing right now an actual increase in our quote activity, but still too early to tell, how that business will shape up for the year.

Wrapping up, I’m pleased to say that from an organization standpoint, we achieved all of our critical objectives in the quarter, albeit we would have loved to have seen our revenue higher and the resulting operating income, but in the current economic climate, we can only focus on what we can control that being our expenses, managing our cash and working capital.

Lean Six Sigma continues to gain traction throughout our organization, and all of our business units are seeing productivity gain and improving their working capital position. We made significant improvement in working capital. We reduced inventory by over $5 million in the quarter.

We continue to focus on productivity gains and efficiencies and in addition, just right-sizing our businesses with the volume. Since December 31 of 2008, we have reduced our headcount 16.5%. We generated cash in the quarter and we were able to internally fund a significant restructuring program and continue to invest in capital improvements for growth.

While we have been focused internally and had to make sure that we were maintaining liquidity in the business and keeping our cost structure in line, we are not ignoring growth opportunities and taking advantage of opportunities to grow our share on key businesses. In our filtration markets, we have had significant share gain, which will pay dividends as we go forward.

In our Thermal Acoustic automotive market, we’ve done an excellent job and continuing to penetrate and increase our participation with Ford. We continue to grow our approval basis with the transplants in North America and the strength of our European business particularly with the German OEMs, continue to provide growth opportunities as we go forward.

All of our businesses except Affinity stabilized in revenue in the second quarter of 2009. Our North American automotive restructuring is complete. We will start realizing the benefit of that in the second half and we expect our operating cash performance to continue to improve as we move forward throughout the year. Bottom line as we position the company very well, to take advantage of revenue increases as we start climbing out of this recession with better operating performance

With that, I’ll open it up to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Walthausen - Walthausen & Co.

John Walthausen - Walthausen & Co.

When we look at the North American automotive business, you’ve completed the consolidation ahead of schedule; that’s great, but should we expect the few quarters where we’re starting to actually gain the efficiency from that or does it seems like we should hit the ground running?

Dale Barnhart

Well will see obviously the fixed cost reduction as a result of the restructuring immediately. Well will start, the efficiency will ramp up as we go forward. Right now, all the manufacturing equipment has been relocated to Hamptonville from St. Johnsbury. All of the parts that have to go through PPAP or requalification with the OEMs have been completed. As of two weeks ago, when I was in Hamptonville, we were actually producing some products for GM off the equipment. So it is starting to ramp up.

John Walthausen - Walthausen & Co.

The third quarter is often a quarter where we have some new product launches. Do we have any significant ones that will challenge as Hamptonville? Then I guess the other part of the question is, you were somewhat ambiguous about the way you talked about Ford having some new product launches and you’re seeing more approvals from the transplant, but I didn’t know whether that meant that was translating into some actual new production parts in the close-in future.

Thomas Smith

Ford will actually have a positive benefit in ‘09. There is some pickup in the transplants in ‘09, but most of that’s coming out past ‘09. The key, John, is we are now qualified as a Tier one supplier at all the key Asian transplants and we are starting to ship products. We want some significant applications at all of them starting in 2010 and 2011.

John Walthausen - Walthausen & Co.

Finally, is there any update on the membrane business?

Dale Barnhart

Membrane business is going pretty much as planned. We’ve put our people in from North America. We have the General Manager running that business now. Our target was to have four air filtration membranes qualified and ready for sale. Three of those four have been developed.

We are now going through all of the detailed application work with the air filter manufacturers to get the product qualified. So it’s got to be in excess of 15 customers right now sampling the product. So we’re very comfortable with how that’s progressing at this time.

John Walthausen - Walthausen & Co.

From a P&L, we have to understand that that’s a cost rather than a benefit for the it’s in the next few quarters.

Dale Barnhart

Correct.

Operator

(Operator Instructions) Thank you. Mr. Smith. There are no further questions by phone. I’ll turn the conference back over to you, sir.

Thomas Smith

Okay, well thank you for joining us today and we look forward to talking with you again in the future.

Operator

That concludes today’s conference call. We thank you for your participation.

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