Lydall, Inc. Q2 2008 Earnings Call Transcript

Aug. 4.08 | About: Lydall, Inc. (LDL)

Lydall, Inc. (NYSE:LDL)

Q2 2008 Earnings Call

August 4, 2008 2:00 pm ET


Dale G. Barnhart - President, Chief Executive Officer, Director

Thomas P. Smith - Chief Financial Officer, Vice President and Treasurer


John E. Franzreb, IV - Sidoti & Company, LLC


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 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: Air and liquid filtration business and our industrial thermal insulation business. Compared to the second quarter of 2007 net sales for the performance material group was up $2.5 million or 9% versus the same period in 07. Gross margin percentage was down due to higher raw material and energy costs and product mix. Our operating income was essentially flat with Q207. Impacting the operating income was an additional $200,000 spent on a joint development project on an advanced product for our air filtration product line. In looking at filtration our air and liquid sales were up $1.7 million or 10%. The primary driver was clean room applications that we won in Asia principally for LCD flat panel production.

In our industrial and thermal insulation our sales were up $7.6 million in the period. In energy industrial we saw revenue up $1 million in cryotherm for L&G Storage and Transportation and specialty paper used in transformers which is being driven by an upgrade of infrastructure in North America. Our building and appliance material was down about $200,000 driven by the continued weakness in building, residential construction and commercial construction.

Actions taken by the business to help mitigate inflation we’re seeing was an announced price increase July 1 and as we go through the second half should mitigate some of the impact of the inflation we’re seeing in performance material.

Our thermal acoustics segment which is principally our automotive products compared to the second quarter of 2007 we saw net sales down $5.2 million excluding the impact of fx.

Gross margins in our overall business were down due to raw material costs primarily in Europe and severance-related costs throughout the business. Operating income was down $2.2 million and includes $800,000 increase in severance charges. Part sales for the period were down $4.2 million. We actually saw an increase in Europe of $1.2 million; however, in North America due to the reduction in OEM production we saw a decline of $5.4 million in part sales. Our North American business continues to be challenged by the weakness in the US automotive market production in North America in the second quarter of 08 versus the second quarter of 07 was down 16% and year-to-date it’s down 12%. Our revenue in our North American business was down 21% in Q208 versus Q207. In addition to the production reductions that are impacting our business we’re also seeing delay in new product platforms and cancellations of some new product platforms which we were counting on in the second half to mitigate some of the weakness in the market. We have adjusted our work force in level with our volume and it is amazing, I say amazing, it’s really a testament to our lean six sigma process that with a 21% reduction in volume in Q2 versus Q207 we maintained the gross margin level at the same percentage point.

In Europe we continue to see stability in our volume. However, we are experiencing higher raw material costs principally in aluminum that have impacted our gross margins in the second quarter. In addition we have adjusted our work force principally in our French location as the result of some of our lean six sigma initiatives. From a global automotive aspect we did announce late in June that we have reorganized our business into a global platform. It will be led by Mr. Joe Wilsted who is the new addition to the company that we’re very pleased to have on board. And overall the global automotive business in the quarter incurred $900,000 of severance-related charges.

Looking forward the second half demand will continue to be challenging for the North American automotive business. In Europe we expect the demand to remain stable and we should start seeing the value of a global integrated business.

Going on to our other products and services which are made up of vital fluids, affinity, our temperature control unit for the semiconductor business, and transport. Net sales were down $900,000 or 6.2% in the second quarter of 08 compared to the second quarter of 07 and we had an operating loss of $100,000 compared to an operating loss of $300,000 in Q207.

Specifically, vital fluids saw net sales up $400,000 or 9.1%. We continue to benefit from the performance improvement initiatives that started actually back in 06 with the new management team’s accelerated use of lean six sigma. Operating income was down in the period however due to increased SG&A spend to support an organic growth initiative we have in the bio disposable market.

Affinity sales declined by $1.5 million or 28% in the second quarter 08 versus the second quarter of 07. We had an operating loss of $500,000 in Q208 compared to $800,000 in Q207. We were significantly impacted by the slowdown in capital spending in the semiconductor industry and industry reports indicate that capital spending in that space is down anywhere between 22% and 30% this year versus last year.

We announced at the end of the first quarter that we were planning a reduction in force in April. We did take out 20% or 27 of the employees with an annual savings of $1.4 million. Part of that was obviously in context to the reduced volume but it also improved productivity as it relates to our lean six sigma initiative.

In the transport business net sales were up $300,000 in Q208 or 5.2%. This is primarily driven by a focused effort to capture new warehousing business after losing some pulp and paper business in 07.

In summary, the North American automotive business will continue to be challenged in the second half from volume reduction. We should see integration value from the global automotive structure we’ve recently put in place. Our pricing actions in performance material should mitigate some of the material and energy inflation we experienced in the second quarter. Vital fluids is being transformed into a growth business. And lean six sigma is creating value across (3) 03:54.2].

That concludes my formal comments. Now Tom and I would be glad to answer any questions you may have.

Question-and-Answer Session


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

John E. Franzreb, IV - Sidoti & Company, LLC

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 - Sidoti & Company, LLC

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 - Sidoti & Company, LLC

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 - Sidoti & Company, LLC

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 - Sidoti & Company, LLC

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 - Sidoti & Company, LLC

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 - Sidoti & Company, LLC

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.


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.

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