Lydall Inc. Q4 2007 Earnings Call Transcript

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 |  About: Lydall, Inc. (LDL)
by: SA Transcripts

Lydall Inc. (NYSE:LDL)

Q4 2007 Earnings Call

February 20, 2008 10:00 am ET

Executives

Tom Smith - Vice President, CFO and Treasurer

Dale Barnhart - President and CEO

Analysts

John Franzreb - Sidoti & Company

Presentation

Operator

Good day and welcome to the Lydall Fourth Quarter ended December 31, 2007 Financial Results Conference Call. Today's call is being recorded. At this time I would like to turn the call over to the Vice President, Chief Financial Officer and Treasurer, Tom Smith.

Tom 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 fourth quarter and year ended December 31, 2007. We will then open the lines for questions.

Participants should note that additional information including a presentation outlining key financial data for the fourth quarter and year ended December 31, 2007 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 maybe 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 10-K and Forms 10-Q 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 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 everyone. As you read in our release this morning, we've closed the year with a solid fourth quarter, revenues and operating income both increased during the quarter and earnings per share grew by $0.05 or 38% versus the fourth quarter of 2006. Also from a balance sheet perspective, we ended 2007 in a very strong financial position. I'd like to just review some of the key businesses and what's really behind the performance improvement that you've seen out of Lydall on the past quarter and for the year.

I'll go through these talking about the different business segments, reporting segments we have. Starting with thermal/acoustics, in that we are reporting our automotive business, our passive thermal business and our active thermal business. Addressing one of the key businesses in that segment, automotive for the fourth quarter of '07, excluding the impact of exchange, we increased our revenue 2.4%.

We had an improvement in our gross margin, as a percent of sales and we had an increase in our operating income. We did benefit in the fourth quarter from the impact of $1.2 million we collected on a material pass-through with one of our OEMs, but reflecting on the year, net of FX, we had income increase of seven-tenths of a percent, gross margin improvement and an operating income increase of 2%. So given in tight economic conditions, relatively flat sales, we continue through our Lean Six Sigma, improving our operating -- our gross margins and our operating margins in our business.

Behind that was continuing gaining new applications, introducing new products, one significant one we have introduced this year was a needle punch wheel well that we are introducing in North America. We have already secured $6.5 million worth of applications an on annual basis, fully ramped up. We've introduced thermal management, where we are using our technology to really manage the thermal characteristics of component on a vehicle, instead of just shielding them and we believe going forward that will be a significant product line in addition to the automotive group.

We made significant investments in our business in North America. We invested in a high-loft process in our Hamptonville facility, to increase our capabilities in the molded fiber area which we believe will be a significant growth product line for us going forward, and we've already secured $9.3 million of applications that will run through that asset .

We've said in the past that significant to this business would be increasing our penetration and the transplants. We do have a strong presence with the European transplants in North America, because of our relationships with those OEMS in Europe and we've been successful in developing a strong relationship with Nissan, that will lead to some significant applications in the future.

The other things -- significant thing we accomplished, actually accomplished in '07, was continually looking at material sourcing and we have identified and are going through qualification of aluminum source from China, which should impact our material plans going forward.

Moving on to passive thermal, which was a business that was challenged this year, because many of their products go in to building products. We saw a revenue decline in the third quarter of 3.8%, but we saw an operating income improvement of 7%. So again, what we're doing in Lean Six Sigma operational improvement to improve margins in light of revenue decline.

For the year, our revenue was down 10.7%. Our operating income was down 7.6%, but we improved our operating margin by eight-tenths of a percent. As I stated earlier, this business was dramatically impacted by the building slowdown, principally in North America. We did improve our gross margin and our operating income margin through Lean Six Sigma efforts, and we are focusing on new applications going forward to expand our market penetration, principally in white goods appliance applications.

Active thermal business was a challenge for us in '07. It was a tale of two halves. In the first half, we lost money; in the second half we had earnings. In the fourth quarter, we had revenue increase of about 14% and we had an operating income increase of 90%. For the year, we had about an 8% increase in revenue and as I said we ended up with an operating loss on the full year, first half we lost; in the second half we had positive operating income.

The principle issue in that business has been our operational performance. In May of last year, we inserted a Lean Six Sigma S.W.A.T into the business and it had a significant impact in stabilizing the business and started to actually serve some positive returns. The focus going forward in '08 will be to continue to focus on the operational performance and getting consistency month-to-month and quarter-to-quarter out of that business.

Filtration and separation is made up of two key businesses, filtration and vital fluids. Filtration had an excellent quarter and excellent year. Our revenue in the fourth quarter of '07 was up 4% net of FX and our operating income was up about 19%. For the year, net of FX, revenue was up 8.5% and our operating income was up 21%.

We had double-digit growth in some key product lines that we've introduced in '07, principally in the liquid filtration line. We made significant investments in St. Rivalain and in Rochester to improve our operating performance. We did see a significant improvement in gross margin as a result of that investment in St. Rivalain. Investment was made a little later in our Rochester facility and we hope to see that improvement as we go forward in '08.

We continue to invest in new products. We are looking at extending our liquid filtration product line. We are looking at offering new high-end air filtration product lines and we continue to invest in R&D programs with advanced materials for the life science market.

Moving on to vital fluids, also known as Charter Med. In the fourth quarter of '07, we increased our revenue about 12%. We had a significant improvement in our operating income versus the prior year and we improved our operating margin by 13 points. For the year, revenue increased slightly 3.2%. We had a dramatic turnaround in our operating income from a significant loss in '06 to positive in '07, increasing the operating margins by 16.4%. We did stabilize the business in '07. We have a whole new management team, significant focus on quality and execution. The good news is the recall of '05 is behind us. I believe there is no negative impact in the marketplace and any other financial impact has been absorbed and is behind us in the business. Going forward this business will focus on profitable growth.

Other products and services which is principally our transport business was a challenge in '07. We had significant decrease in revenue and we have more than double-digit decrease in operating income. It's really driven by the difficulty seen in the pulp and paper industry, that’s the segment we focus this business on; negatively impacted the transport business.

We are focusing on gaining business both back in the pulp and paper and in other markets and we have been successful in picking up some applications with some food manufacturers in the South East and we have signed an agreement and starting in the first quarter of '08 with a major paper producer in the South East which will go through our warehouse facility at the Virginia Port Authority. So, all in all, a decent year for us in '07; a strong fourth quarter. Underpinning all of this is our Lean Six Sigma program. It is very significant to us. It will become a core competency at Lydall. It's one of the elements of our strategy that we are putting together.

You can see through the comments I have made earlier on our business segment, which had a significant contribution to the performance of our business this year. It's going to give us the ability to sustain our automotive performance going forward in a very competitive market. It gives the ability to improve our active thermal business substantially and it has facilitated the turnaround of our vital fluids. All in all, executing that Lean Six Sigma process throughout our organization, gives us stability to create value for ourselves and our customers, improve our overall service to the customers and quality.

With that, I'll be glad to open up to any questions from the group.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is here from John Franzreb from Sidoti & Company.

John Franzreb - Sidoti & Company

Good Morning Dale.

Dale Barnhart

Hi John, how are you?

Tom Smith

Hey John, how are you?

John Franzreb - Sidoti & Company

Hi Tom. My first question is really regarding the $1.2 million reimbursement that you booked in the fourth quarter. You said it is renegotiated. I wonder if that includes terms for 2008, or should we be thinking about this as a one time benefit that may occur again in the fourth quarter of 08. How should we kind of view that?

Dale Barnhart

We should view it as it will be in our ongoing business process in '08.

John Franzreb - Sidoti & Company

Okay

Dale Barnhart

It was a matter of establishing this process with the given OEM and going forward, it will be on our regular price discussions with the OEM.

John Franzreb - Sidoti & Company

Okay, that brings me to my second question which is regarding customer concentration. At the end of 2007, can you kind of share with us what your customer concentration looks like?

Dale Barnhart

Well, obviously well, I mean, obviously, Daimler & Chrysler used to be our biggest customer but now it has split back into two companies, but Daimler & Chrysler are still significant to us. It really hasn't changed much, I mean, Ford is still significant, BMW, Audi, Volkswagen. There hasn't really been a significant shift.

John Franzreb - Sidoti & Company

Is any of the three above the 10% threshold?

Dale Barnhart

Just Chrysler.

John Franzreb - Sidoti & Company

Just Chrysler?

Dale Barnhart

Yes.

John Franzreb - Sidoti & Company

Could you talk a little bit -- you mentioned in your prepared remarks about Nissan and potential transparent revenues, can you kind of share with us your thoughts of how much incremental transparent revenues we should be expecting from you guys over the next say, two years?

Dale Barnhart

No. I don't have that number right now. I know we have a significant application that we're working on Nissan, and we're working at the other Asian manufacturers too. But Nissan is farthest along and we haven't won the one application yet. So I just don't want to give an indication until we know we have it for sure. But our engineering process and facility has been certified by Nissan. They have sampled parts and they are very happy with everything they see. So we anticipate it, but until we have it, I don't want to speak to it.

John Franzreb - Sidoti & Company

All right. Last question, I'll get back into queue. You've mentioned in the liquid filtration market, it was specifically driving sales in filtration/separation. What's driving those sales on liquid filtration; can you show what was there?

Dale Barnhart

New product development, we're focusing on hydraulic filtration. The product was lunched about a year ago. It has been going through several qualification processes at many of the major hydraulic filter manufactures and we've come up with some performance enhancements and selection and efficiency and we're starting to win applications.

John Franzreb - Sidoti & Company

Does that mean you're taking share?

Dale Barnhart

Absolutely.

John Franzreb - Sidoti & Company

From -- who would that be?

Dale Barnhart

Just general market. I mean, the major players in that industry or H&V.

John Franzreb - Sidoti & Company

Okay, thank you. I'll get back in to queue.

Dale Barnhart

Okay, thank you, John.

Operator

(Operator Instructions). And we will take a follow-up from John Franzreb with Sidoti & Company.

John Franzreb - Sidoti & Company

Okay.

Dale Barnhart

Hey, John. Welcome back.

John Franzreb - Sidoti & Company

Thank you. Questions get tougher this time around.

Dale Barnhart

That is okay.

John Franzreb - Sidoti & Company

Dale, looking back in to 2001, which I guess, is the last coal industrial recessionary environment that we had, okay. And looking at the revenue profit profile that you posted in 2007, on a comparative basis, revenue is up roughly 50%. But your EPS are essentially with what they were back in that recessionary time. Could you talk a little bit about why you have been able to generate significant revenue growth, but your profit margins just haven't been able to keep up the speed?

Dale Barnhart

Well. I can't, I mean there is no way I could give a comparison to what this business was doing in 2001. I mean, I would rather look at where we are and what we plan to do going forward. I mean, I just can’t make that comparison, John.

John Franzreb - Sidoti & Company

Okay, then if that's the way we should think about it, then can you share with us some of your initial thoughts on the company since you have been there. Your assessments of the manufacturing, the sales profile. Could you give us at least an initial assessment?

Dale Barnhart

Sure. Sure. First of all I think we are competing in some pretty attractive space. Filtration is an exciting marketplace to be in, and we are looking at developing new product lines, as we demonstrated with the liquid filtration product. We are looking at developing different product lines for the air filtration, which has been our principal market and we see that as an exciting opportunity. We see an opportunity in Asia for several of our businesses that we have not yet exploited.

The biomed space or lifescience is an interesting one for us and we've got some stability in that business now and maybe one that we want to grow going forward.

Automotive, while a competitive market, is still a large global market. And the way we participate, we can make decent returns and we'll be judicious in how we continue our focus in that business.

From an operating standpoint, I think good news is we still have a lot of room through the Lean Six Sigma process to improve our fundamental operating performance. One of the significant changes that happened -- events that happened in '07, was more traction of the Lean Six Sigma, focusing on operational improvement in some of our key underperforming businesses, vital fluids and the active thermal and that's one of the -- two of the items that has contributed significantly to our year-over-year earnings improvement. I believe that will continue going forward, there is no reason why we don't have significant headroom within our own operating process to improve the bottom line of the business.

Okay. Then as far as range of operations, I mean, it goes from one to 10. We have some facilities that excel in operation performance and key metrics as it relates to customer performance, on-time delivery, quality, lead times and those facilities, by the way, happen to be the ones that are the most efficient in their overall process. And it's really driven by fundamental execution on operations.

John Franzreb - Sidoti & Company

Okay. One last question. Could you talk a little bit about the competitive landscape, pretty much across the major business lines if you will, and how can you differentiate yourself especially in maybe some of the more commoditized type products or product lines that have a significant amount of competitive pressure?

Dale Barnhart

The key -- and this goes across principally -- practically to all of our businesses. The key differentiation we have in this business, and its going to sound easy to replicate, but hopefully its not. Is that all of our businesses have an intense customer focus. We have capabilities through our application engineering to provide an engineered solution to our problem, and that spans from the grades and blends of filtration material we produce. We have a broader sophistication and proliferation of blends in our filtration to customize for each filtration application in our building products group.

The ability to -- again customize materials for specific application, even in the automotive, where you may think it's a simple stamped part, it's really the application knowledge and to be able to convert quickly from an issue to a solution.

One example is an opportunity that came to us from an OEM in Europe, who had a difficulty, presented the problem to us in December. We have designed, tooled and we're actually producing that part today. And having an organization that has a passion about dealing with customer issues and solutions is one that you just can't say we're going to change. It has to be ingrained in the culture and that's one of the inherent strengths of Lydall.

John Franzreb - Sidoti & Company

Great. Thanks a lot, Dale. Good luck.

Dale Barnhart

All right.

Tom Smith

Thanks John.

Operator

And we have no further questions at this time.

Dale Barnhart

Well, thank you very much everybody.

Operator

That will conclude today's call. We thank you for your participation.

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