Lydall's (LDL) CEO Dale Barnhart on Q4 2016 Results - Earnings Call Transcript

| About: Lydall, Inc. (LDL)
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Lydall, Inc. (NYSE:LDL) Q4 2016 Earnings Conference Call February 23, 2017 10:00 AM ET

Executives

David Glenn – Vice President, Corporate Development and Investor Relations

Dale Barnhart – President and Chief Executive Officer

Scott Deakin – Executive Vice President and Chief Financial Officer

Analysts

Robert Majek – CJS Securities

Edward Marshall – Sidoti

Matt Koranda – Roth Capital

Operator

Good morning and welcome to the Lydall Fourth Quarter and Year End 2016 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to David Glenn, Vice President, Corporate Development and Investor Relations. Please go ahead, sir.

David Glenn

Thank you, Daniel. Good morning, everyone, and welcome to Lydall’s fourth quarter 2016 earnings conference call. Joining me on today’s call are Dale Barnhart, President and Chief Executive Officer; and Scott Deakin, Executive Vice President and Chief Financial Officer. Dale will start the call with comments about the continued progress we are making in executing our long-term strategy as well as provide an overview of current business conditions. Scott will follow with a review of our financial performance and discuss the key drivers by business segment. At the end of our remarks, we’ll open the line for questions.

As you may be aware, our quarterly earnings press release and 10-K reports were released yesterday, so that you can follow along with today’s call. Please reference to 2016 Q4 earnings conference call presentation, which can be found at lydall.com in the Investor Relations section.

As noted on Slide 2 of this presentation, any comments made on this conference call that may constitute forward-looking statements are made available pursuant to the Safe Harbor provision as defined in securities laws. Please also refer to the cautionary note concerning forward-looking statements within Lydall’s reports on Form 10-K and Form 10-Q for further information. In addition, during this conference call, we will be making reference to non-GAAP financial measures, including adjustments related to acquisition purchase accounting. 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

Good morning, everyone, and thanks for joining us today. Aside from continuing operational issues in our Thermal/Acoustical Metals segment and prolonged soft energy markets and Technical Nonwovens, we had a good quarter with solid organic growth in three of four segments. While we had challenges in the fourth quarter, I am pleased with our 2016 full-year performance in which we delivered record adjusted earnings and added two attractive acquisitions to our portfolio.

The consistent year-over-year result demonstrates our progress towards our 2018 long-term vision for profitable growth that includes a target of $800 million in revenue and 15% in operating margin, which is equivalent to an EBITDA margin of approximately 19%. Slide 3 outlines key takeaways for both the year and the quarter. I will cover the key points for 2016 and Scott will take you through the fourth quarter results in detail when he provides a summary of our financial performance.

Total net sales year-over-year increased 8.1% to $566.9 million. This increase was driven by our acquisition of Texel, which closed on July 8th and contributed $40.9 million in sales. Organic growth of 1.5% was tempered due to the challenging year in our Technical Nonwovens segment that was down approximately 15% due to the continued weakness from domestic power generation customers and general softness in China. That said all other segments experienced very strong year-over-year organic growth ranging from 6% to 10%.

With respect to profitability, gross margin increased by 100 basis points to 24.4% and adjusted operating margin improved by 100 basis points to 11.3% over the prior period. Consolidated adjusted EBITDA in 2016 increased 130 basis points to 15% versus prior year results. This performance reflects strong contribution from three of our segments due to favorable product mix, lower raw material cost and continuous improvement through Lean Six Sigma. The operational efficiencies at our Thermal/Acoustical Metals segment impacted 2016 full-year consolidated gross profit by approximately 90 basis points. For the full-year, adjusted EPS was a record $2.61 per share, an increase of 24% over prior year.

Lastly as we discussed in December, we have agreed in principle with the German Federal Cartel Office to conclude the matter associated with violations of German anti-trust laws at our Lydall Gerhardi operation, which we first disclosed in the summer of 2014. As part of this settlement, we agreed to pay a one-time amount of EUR3.3 million, which we recorded in the fourth quarter results. We anticipate making the one-time payment in March 2017.

Turning the Slide 4, this is an overview of our long-term growth strategy, which includes four key drivers: new product development, Lean Six Sigma, geographic expansion and M&A. First with respect to M&A, the acquisition of Texel and Gutsche, last year, were excellent additions to our portfolio as they significantly improve our strategic position and very attractive adjacent markets. With respect to Gutsche, we closed the deal on December 31st and the net assets are included on our balance sheet with no income statement activity.

The business finished 2016 with a healthy backlog and has positioned well to start the year. Integration of both acquisitions continues to be on track and we have a dedicated team deployed to execute the previously announced restructuring initiatives in Europe and China for Technical Nonwovens. As I have mentioned before even with our ongoing integration from a financial and organizational resource perspective, we continue to have the means, the wherewithal and the desire to execute additional acquisitions and we continue to actively pursue new opportunities.

With respect to new product development all of our segments are focused on developing solutions to better serve our customers. One excellent example of this comes from our recent acquisition of Gutsche. The team has developed and qualified a unique and proprietary blend of multiple fibers for acoustic paneling for use in commercial and residential buildings. We are in the process of commercializing some products with one of the world’s leading brands. We’re very excited about the opportunity as we believe we are the only company in the market that can meet challenging specifications for the product that encompasses acoustical dampening, weight, flame retardancy and the aesthetic appeal.

As it relates to Lydall Lean Six Sigma, we are continually focused on driving operational efficiencies and ways to better serve our customers. While we have many highlights throughout the organization that I could share with you, I think it is most important that we discuss in more detail the challenges we have seen in our Thermal/Acoustical Metals business. Since the second quarter of 2016, these operational issues have had a significant impact on our results. While resolving these matters and affecting the necessary changes taking longer than expected, we have identified the root cause and are taking a disciplined approach in implementing corrective actions. We expect this work to continue into the first half of 2017.

Specifically in North America we are focused on reducing scrap and improving uptime and labor utilization. Today, we have increased the operational efficiency on many of our critical assets that have supported new product launches. In addition, we did experienced short-term material shortages in the fourth quarter due to a flood at a supplier, which in turn resulted in significant expediting charges on our behalf. We have fully mitigated this issue and have modified our process to allow us to be more flexible.

In Europe, we are continuing in the process of executing a restructuring program in order to align the workforce to better accommodate the changing volume and product mix and are hopeful that these actions will be completed in the second quarter of 2017. While the amount cannot be finalized at this point, we estimate a non-recurring restructuring charge up to $2 million to be incurred in the first half of 2017. At full run rate, we estimate the recurring savings from this to be approximately $1.5 million annually.

Moving on to geographic expansion, as you may recall, we have been working to ramp up volume in our Thermal/Acoustical Metals facility in China. While this new facility was a drain on profitability in 2015, for the full-year 2016 the business was profitable as we were able to begin to leverage our scale based on the assess of recent product launches. Year-over-year revenues in this business increased nearly 150%. Consistent with our general operating philosophy, we will continue to be judicious with our capital investment and grow the China business in a measured rate to meet or exceed our operating margin expectation of 15%.

Turning to Slide 5 with respect to business conditions, I will start with the supply side. We are seeing early instances of price increases for some of our raw materials and are monitoring this closely. For most of our businesses, we either have passed through arrangements or supply agreements in place where we have exposure due to spot buys, we are taking the appropriate actions and working with our customers to help mitigate any unfavorable impact to the business. Additionally, we continue to believe that we will realize the raw material savings we originally expected from our recent acquisitions.

On the demand side, although it is early in the year, we have seen continued strengthen in our end markets today. With our automotive business, current visibility suggests that overall demand in the global automotive markets remains healthy. The 2017 light vehicle production in North America is expected to be in line with last year’s results and we anticipated low single-digit growth out of Western Europe. Given our participation on attractive platforms coupled with recent and planned new product launches throughout the year, I am confident that we remain very well positioned. With respect to China, we continue to ramp up our operations and are excited to build scale in the largest automotive market in the world.

Looking to our filtration and engineering materials business, performance materials and markets are showing positive signs across all regions. In our specialty insulation business, we are seeing encouraging order activity in our cryogenic products, which were at historical lows during 2016 due to softness in the energy related markets. Consistent with what we saw last year, demand for filtration products in North America and Europe has been solid. And Asia despite being highly competitive environment has shown pockets of increased activity.

Finally to our Technical Nonwovens segment. While we continue to benefit from stable demand of advanced materials products, we are encouraged by the increased order activity for industrial filtration products and backlog associated with domestic power generation customers as this market seems to be picking up. With regard to Texel, we expect demand in the first quarter to be consistent sequentially with the fourth quarter given normal seasonality. For Gutsche, the quarter will be our first under ownership, but the business has a strong backlog and we anticipate revenue to generally follow a similar pattern as our industrial filtration business within Technical Nonwovens segment.

With that I will now turn the call over to Scott.

Scott Deakin

Thank you, Dale, and good morning. Today, I’ll briefly cover our consolidated results and then provide an overview of our operating segment results. Turning to Slide 6, in the fourth quarter of 2016, the company achieved net sales of $144.2 million, an increase of 9.7% over the fourth quarter of 2015. This increase was driven principally by the addition of Texel.

Organic growth for the quarter was 0.8% with strength in three of our segments being offset by a significant decline in the fourth. Thermal/Acoustical Metals, Performance Materials and Thermal/Acoustical Fibers were up 11.1%, 8.9% and 5.1% respectively, but these were offset by a nearly 20% decline in our Thermal Nonwovens segment. The organic growth in our Thermal/Acoustical Metals and Fibers segments was driven by platform share gains on products launched earlier this year.

For Performance Materials, organic growth was primarily due to continued recovery in filtration markets, regional share gains and a slight increase in our thermal insulation business. As we’ve seen all year Industrial Filtration products and our Technical Nonwovens segments experienced continued weakness from domestic power generation customers and general softness in China. Despite the strong top-line growth, gross margin in the quarter was flat versus the fourth quarter of 2015, a 22.2% is favorable mix and lower net raw material costs were offset by persistent operational inefficiencies in our Thermal/Acoustical Metals segment.

These inefficiencies contributed to reducing Lydall’s consolidated gross margin by approximately 120 basis points in the quarter. Excluding the inventory step up associated with the Texel acquisition, adjusted gross margin improved 20 basis points to 22.4%. Consolidated operating margin for the fourth quarter decreased 290 basis points to 5.1%. Excluding acquisition expenses, inventory step up into the German cartel settlement adjusted operating margin was 8.4%, a decrease of 60 basis points over prior year. Again, this performance was principally impacted by the significant inefficiencies in the Thermal/Acoustical Metals segment. All factors considered adjusted EBITDA margin of 12.5% was up 20 basis points year-over-year.

The effective tax rate for the fourth quarter was 38.9%, which was negatively impacted by 12.6% due to the nondeductible settlement of the German cartel matter. For the full-year 2016, the effective rate was 32.4%. Excluding the German matter, the effective rate for the full-year 2016 would have been approximately 30% on an adjusted basis. For 2017, we anticipate that our full-year effective rate will be consistent with this adjusted rate. Fourth quarter 2016 earnings per diluted share were $0.26 compared to $0.31 of earnings in the prior year.

When adjusting for the one-time impact of the German cartel matter, acquisition related expenses and inventory step up, adjusted earnings per share rose by 13% to $0.52 compared to the prior year. As it relates to capital expenditures, we spent approximately $25.5 million in 2016 compared to $20.6 million the prior year. For 2017, we expect total capital expenditures to be approximately $35 million as we continue to invest to the higher rate than usual in support of attractive growth and productivity opportunities.

Cash generated from operating activities was $69.7 million in 2016 compared to $36.1 million in the prior year with the increase driven by improvements in operating performance, tighter working capital management and cash flows from the acquisition of Texel. Finally, our liquidity remains very strong even after increasing our total borrowings in order to partially fund the two acquisitions. Cash at year end was $71.9 million compared to $75.9 million at year-end 2015 while debt increased to $128.8 million from $20.5 million in 2015. On a net basis, this puts our leverage ratio at approximately 0.8.

Moving to Slide 7, I’ll discuss our segment results. I’ll start with our Thermal/Acoustical Metals business. This is our global automotive segment that specializes in providing under hood and underbody engineered thermal solutions for vehicle. During the fourth quarter 2016, total sales were $43.1 million, an increase of 4% compared to the fourth quarter 2015. Adjusting for a decrease in tooling sales and unfavorable foreign currency translation, organic sales growth was very strong at 11.1% in the quarter.

For the full-year, sales increased organically by 9.7%. The increase in part of sales for both the quarter as well as the full-year was driven by platform share gains in North America as well as continued ramp up at our facility in China. Despite sales being up significantly, adjusted operating margin declined 320 basis points quarter-on-quarter to 4.5%. Higher labor, overhead and material expenses due to persistent operating inefficiencies in North America and Europe drove the erosion in margin.

Slide 8 refers to our Thermal/Acoustical Fibers business. This business also serves the automotive industry and provides molded polyester acoustical solutions primarily for underbody applications for vehicles in North America. Sales in the fourth quarter were $37 million up 1.3% versus the same period in the prior year, with the timing of tooling sales meeting overall growth.

On an organic basis, sales increased 5.1%. Quarter-on-quarter growth was driven primarily by the ramp up of our new molded flooring solution as well as sustained demand for all products. This despite plans facility shutdowns of our key customer. For the full-year 2016, part sales increased 6.5% to $144.3 million compared to the same period in the prior year mainly driven by strong demand for our products. Operating margin in the fourth quarter increased 260 basis points to 28.3% and for the full-year increased 100 basis points to 27.7%. For both the fourth quarter and full-year margin improvement was primarily due to lower raw material sourcing costs and a favorable mix of product sales. During the fourth quarter increased volumes also contributed to favorable fixed cost absorption.

Moving to Slide 9, I’ll cover our Performance Materials segment. This business provides specialty filtration and insulation solutions to a variety of end markets globally. Sales in the fourth quarter were $25.9 million or an 8.9% organic increase versus the same period last year. For the full-year, sales increased 9.5% organically to $111.1 million. The increase in sales for both the quarter and the year is attributable to gains in air as well as fluid power and transport hydraulic filtration products in North America and Europe.

In addition, the full-year results for the business also benefited by $2.4 million of life sciences termination buys by certain customers, given a discontinuation of raw materials used in the production process. Operating margin in the fourth quarter was essentially flat versus adjusted prior year at 8.6% given unfavorable product mix on the incremental sales as well as increased SG&A. For the full-year 2016, operating margin increased 310 basis points to 11.1% versus adjusted full-year 2015. The improvement was driven by leverage on the increased sales and favorable mix from the life sciences buys and other targeted sales.

Slide 10 covers our Technical Nonwovens segment. This business produces air and liquid filtration media as well as other products for use in various commercial applications such as geosynthetic, automotive, industrial and medical among others. In the fourth quarter of 2016, sales of $44.2 million were up approximately 27% due to Texel’s contribution of $17.7 million. Foreign currency translation primarily related to the weakening of the British Pound unfavorably impacted sales by 4.2%. Netting through this, on an organic basis, sales were down nearly 20% as weakness from domestic power generation customers and general softness in China persisted despite order activity and backlog increasing.

For the full-year, sales were up nearly 12% due to the acquisition of Texel in July 2016 while our organic growth was down nearly 15%. From a profitability perspective, adjusted operating margin for the fourth quarter of 2016 increased by 30 basis points to 7.1% compared to the same period in 2015. For the full-year adjusted operating margin increased by 160 basis points to 11.3%. Including these results are 40 basis points of acquisition related intangible amortization in the fourth quarter and 20 basis points for the full-year. The increase in adjusted operating margin was due to favorable product mix.

Well the business did see lower material costs in the quarter. They were largely offset by reductions in customer pricing. With respect to Texel, the performance of the business in the fourth quarter fully met our expectations and integration continues to be on track. That concludes our review of the fourth quarter results. To wrap up our comments, I’ll echo Dale’s earlier remarks.

Overall 2016 was a great year with excellent financial results and substantial progress on advancing our strategic vision. As we enter 2017, our end market demand appears to be stable and we continue to deliver on our integration plans for the two attractive acquisitions that we completed in 2016. Operationally addressing the execution issues in metals is our most significant near-term priority. Leveraging this improvement and assuming that the strength in our end markets continue, we are very well positioned to deliver another great year in 2017.

With that I’ll turn the call back to the operator and begin our question-and-answer session.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Robert Majek of CJS Securities. Please go ahead.

Robert Majek

Good morning gentlemen.

Dale Barnhart

Good morning, Rob.

Scott Deakin

Good morning, Rob.

Robert Majek

Relative to my model there was roughly a $3.5 million shortfall in Thermal/Acoustical Metals e-bid in the corner. You obviously touched on the issues you faced in your prepared remarks, but I was just hoping you could kind of break it down for us and give us a little more detail and maybe quantify the various buckets, so how much did the North American flood cost, how much was due to inefficiencies in Europe and so on to kind of help to bridge the gap there.

Dale Barnhart

Yeah, I can take that one, Rob. So it really is number of different items, you know, just to give you some rough orders of magnitude specifically related to the flood. About 600 grand was associated with expedited freight involved with that in addition to just the general inefficiencies that we see elsewhere with from outsourcing activity totaling in about $700,000, about $900,000 related to labor and variable overhead and other $400,000 in fixed overhead and a couple $100,000 related to scrap. All-in that gives the rough buckets that we faced and that’s really across the three main facilities in the U.S. and Europe.

Robert Majek

Got it. So that adds up to about, I think, $3 million or so.

Scott Deakin

Yes. In that work.

Robert Majek

And then can you clarify where we stand resolving all these issues and maybe quantify there’ll be great impact on near-term results?

Dale Barnhart

As we stated we clearly understand the root cause of the problems. Some of them in North America were startup of some of the new assets we put in place with new product designs those issues tend to be behind us right now. So we feel pretty good that we’re moving forward with that. In our European operations we’re going through a transition from single wall to dual wall different product mix and some new assets going in place. And as I stated part of the remedy there is some restructuring we’re doing because of the lean programs we’re putting in place we expect to be more efficient there.

So those are the – it’s primarily operational efficiencies and throughput on the different assets and the reduction of scrap that is generated by some of the inefficiencies. So we’re clearly identified in each of the sites what we need to do, we have teams deployed and we’re working on that. You just don’t flip the switch and solve that overnight we’re anticipating those issues to be pretty much behind us by the end of the first half of 2017.

Robert Majek

Thank you. So these issues sound generally one-time in nature. I assume it doesn’t change your view on overall earnings power in 2018 and beyond.

Dale Barnhart

We are very – I shouldn’t say very bullish, we’re very comfortable about the demand side for 2017 as we look at the early start. We see nothing in any of our businesses that say we have a top line issue at this point. And our track record shows as we’ve done in other businesses that we know how to deal with these operational issues and we will focus on that.

So yes we are very comfotable with our long-term outlook for the business and very bullish about it.

Robert Majek

Thank you. That sounds great. And just lastly from me can you breakout the EBIT contribution from textile, how that came in versus your internal expectations and how we stand on the integration so far overall?

Scott Deakin

Yes so we haven’t broken it out specifically Rob. I can tell you that relative to the expectations that we shared with you at the time we did the deal back in June, remember we talked about a really solid third quarter. Fourth quarter was consistent with our expectations. Third quarter was ultimately ahead. So I’d say overall we are very, very positive about how we did relative to the expectations so far.

Robert Majek

Thank you again guys for the clarification and the answers.

Operator

[Operator Instructions] The next question comes from Edward Marshall of Sidoti. Please go ahead.

Edward Marshall

Hey good morning guys. How are you?

Dale Barnhart

Good morning Ed. How are you?

Edward Marshall

I’m okay. So within metals I just – you talked about several buckets. I wanted to get a sense from you the waiting towards say the legacy products and the dual-wall products. Where did the bulk of this – these dollars fall on the product line?

Dale Barnhart

Are you talking about the inefficiencies?

Edward Marshall

Inefficiencies, that’s correct.

Dale Barnhart

I mean it’s spread all over. I mean, part of as I said the inefficiencies in North America was ramping up a new asset high volume asset that actually had more volume than we anticipated on it. So we were going through the learning curve there.

Secondly, and in the fourth quarter, we have the material supply issue due to one of our aluminum suppliers in South Carolina was impacted by the flood. And we consumed our inventory during that process and by the time we got material back we were air freighting product to our customers. So those were the principal issues that we had in North America. In Europe we had some failure of equipment in one of our sites, so we had to outsource the production of that material until we got that line up and running again. That comes at a healthy cost premium to us.

And then one of our other European operations, as I mentioned, we’re really going through a transition there from single-wall to dual-wall, putting in new product, new process. We’re generating a little more scrap than we normally do, that’s part of the learning curve as we ramp it up.

And then finally, because of what we’re doing in lean particularly in our German operation, you will be seeing restructuring from us in the first half where we get our direct labor, or variable and fixed overhead in line with the type of volume we’ll be doing consistent with the throughput improvements we’re making.

So you really can’t point to one or other. The good news from a revenue standpoint, we continue to enrich the mix with more dual-wall sales. So once we get through these inefficiency issues as we will, that’s when the promise of margin enhancement comes in this business.

Edward Marshall

Right. So did I hear you correct that it’s mostly on legacy product in us and some on the learning curve on the dual-wall, I just wanted to be clear on that?

Dale Barnhart

I would say it’s probably fifty-fifty. It’s – when I say on the new dual-wall it’s one particular line, okay. We have other dual-wall products that are running well. And we’re not having the issue. So we put in a high-speed automated line. At the start of 2016 the volume wasn’t there as anticipated from the OEMs. Then it came on and we had an additional application to it which actually exceeded the capacity of the line and we were running seven days a week. We could – and the line wasn’t running very efficiently. Now the line is running efficiently we’ve eliminated overtime and we’re comfortable with where we are in that one particular line.

So there’s no simple answer, it’s all dual-wall, it’s all single-wall, it’s a complex business.

Edward Marshall

And both businesses would – I mean both lines will recover. You mentioned first half of 2017, so do they – are they staggered recoveries or do you see kind of one little bit further down the road than the other, I’m just kind of curious, I think.

Dale Barnhart

I think our North American operation is a little further down the line than our European operations. That’s the way I would look at it.

Edward Marshall

Okay. And restructuring in Germany, is that relatively difficult especially when it comes to personnel?

Dale Barnhart

We’ve worked well with the Works Council, we have everything established and actually we have already initiated some of it. So we have a well-defined plan, our HR department has done an excellent job of making sure we’re complying with all regulatory requirements. And the workforce has been identified, individuals have been identified on the actions we will be taking.

Edward Marshall

Got it. I wanted to switch gears a little bit, talk about technical nonwovens and the demand and the backlog improvement that you’ve seeing there. I’m curious is that concurrent with new install of bag houses as new installations of power generation plants are being put in place or is this aftermarket sales that you can kind of seen a pickup in?

Dale Barnhart

In North America what we’ll see from now on Ed is, just the replacement market. I mean you’re not going to see very many new install backhouses. As we know over the next several years the amount of electric power generated from coal power plants is going to be flat if not declining. So you’ll see those assets coming off line. So what we’re seeing now in the first quarter we’re seeing some signs of pick up and bid activity for replacement material in North America.

In China it’s a different story, in China we are still seeing new coal fired plants being commissioned, we are still seeing some new installs of backhouses. So that market benefits from both new installs and replacement.

Edward Marshall

Got it. The seasonality that you see in textile, I’m curious is that normal seasonality or is that just something that happened with the timing of the acquisition that the third quarter was a little bit too soon and the remainder of the year? And as I kind of look forward and model that out is there’s something specific to the summer months versus the bookends? Maybe help me with that?

Dale Barnhart

Yes, so that’s normal seasonality, their peak demand starts towards the end of the first quarter into the second and third quarter. If you think about geo synthetics, and a lot of road construction, and so on, it happens in good climate. And that’s when you see that. And the same as with the industrial filtration and part of technical nonwovens, when they’re going to change out their filters is when power demand is at the lowest point which is in early spring. And also in infrastructure asphalt cement, all that happens early in the spring before they really start producing at that peak during the peak demand period.

Edward Marshall

Got it. I also wanted to talk about fibers for a second. We’ve talked a lot about somewhere down the road you’re going to see a margin contraction and that you can operate at 28%, 29% yet you continue to do that. So I’m curious what’s the timeline there as far as you see? And more importantly, I guess, what causes that compression to the margin that you anticipate?

Dale Barnhart

I mean it’s probably on a two-year to three-year glide path as it starts going down. What impacts that a couple things, one the products are becoming more mature, we lost are lot more mature now than what they were two or three years ago. We’re seeing more competition, so you get price pressure when you’re bidding on new projects. And so that’s the principal reason why we’ll see some margin compression over time because of competition.

Edward Marshall

What can you do to offset some of that price compression? I mean, how much can you offset with some of your efficiencies and things like that?

Dale Barnhart

Well efficiencies and the other things were challenging the businesses as certain there’s still a lot of growth opportunity in material substitution, on automotive vehicles going from different materials to the molded fiber products because they’re lighter in weight. And they have an acoustic benefit. So we need to focus on, continue to focus on the higher margin products. So if dual-walls become a commodity, let’s go look at other areas. So the team is really focused on making sure that we’re pursuing the newer value-added products while maintaining the volume we need to maintain the base in that business.

Edward Marshall

Got it. And is there anything that you can differentiate yourself besides from a product line perspective?

Dale Barnhart

Sure.

Edward Marshall

With the current and existing application?

Dale Barnhart

Now we’ve been one of the leaders in product development and adapting different fibers, different binders, different layers of material, whether it’s aluminum or another film that’s laminated to it to, to provide the acoustical performance in lighter weight. The flooring project is a great example of innovation that we’ve come up with TPO flooring. That’s in the super duty vehicles now on Ford as an option and it’s going to be $12 million to $14 million just on that platform. We’re seeing interest on police vehicles and other commercial vehicles for that. So those are examples of things that we’ve been very good at taking our molded fiber capabilities and developing value for our customers.

Edward Marshall

And then finally I want to ask about you mentioned in the prepared remarks about raw material price increases. And I’m curious about what product lines are material that you’re seeing that and the negative contribution margin that you’re seeing in either this quarter if you can define or what you anticipate for 2017?

Scott Deakin

We’re still trying to get our arms around it for 2017 going forward. There’s too many in bucket to raw materials that we talk about. One is, either aluminum or aluminized metal, and the second is more on the fiber side and polyester-related. Overall, that has been pretty solid for us. I think we’ve talked in prior quarters tail end of 2015 going into 2016 really has been accretive for us, the market has started to catch up for that in terms of – catch up with that on pricing. In some of the markets, I would say just most recently the metal side has started to tick up a little bit more than we’ve seen on the polyester side.

Polyester side tends to be more tied towards fuel and oil related markets. So that’s a leading indicator for what ultimately makes it into the fibers. And I think it’s probably a little too early to sort of call what the impact of that is for 2017. But as I say net off price really was a pretty solid benefit for us in a lot of 2016 that’s started to reverse a little bit in the fourth quarter. And we’ll see really work goes from here in terms of what’s going on with the commodities because there’s a lot of inter-period movement going on.

Edward Marshall

And you feel those effects from fibers and polyester even though you internally source, I guess at this point a large portion of your sourcing?

Scott Deakin

Well that’s the value, I mean obviously we have a value-add going from the technical – technical nonwovens business into the fibers. But we still have the underlying base commodity that is a factor from a raw material standpoint for us.

Edward Marshall

Okay, got it. Thanks for the detail.

Scott Deakin

Even with that we do try to lock in some long-term contracts. We’ve got an active supply chain team that’s working this and trying to anticipate these things and where we see things going in a different direction, we try to lock that in and try to protect ourselves as much as possible in part of the business too particularly on the mental side we do a pass-through agreements that allow us to, after a bit of a lag, pass some of that on to the customer. And even if we don’t have those our sales team is actively working to manage that with the customers, as well.

So there’s lots of different levers that we can pull to try to manage the dynamic.

Edward Marshall

Is it right to think by the way that it’s fragmented supply market, I mean there’s a lot of distributors is that what we should be thinking about?

Scott Deakin

Sure, that’s a pretty way to think about it.

Edward Marshall

Okay. Thanks very much.

Dale Barnhart

Last thing I would just say on that front too is with the two acquisitions we did we got a lot more leverage on our technical nonwovens business to really be able to have a heavier influence in some of those negotiations and some of that is still really bearing out as we understand the supply footprint.

Edward Marshall

Got it. Great guys thanks.

Scott Deakin

Thank you.

Operator

The next question comes from Matt Koranda of Roth Capital. Please go ahead.

Matt Koranda

Hey guys, I jumping between calls here, so I apologize if anything has been asked but I’ll try to avoid the obvious stuff.

Scott Deakin

Good morning Matt.

Matt Koranda

Good morning guys. The CapEx target, I think, for 2017 look materially higher than 2016, so maybe you could just kind of talk about specific programs or capacity you’re looking to add either by segment or originally, however, you like to do it?

Scott Deakin

Well remember in there you’ve got the two acquisitions on the capital associated with that and particular related to goods share [ph] you’ve got some capital spending associated with some other restructuring that we talked about. And then beyond that you really see focus in the metal business to fund some of the growth programs that are going on there. That’s really the main drivers associated with that. I’d say I have the total about half of it actually closer two-thirds of it is more on the automotive side of the house with the majority that being funding the metals growth that we have.

Our Performance Materials business is pretty consistent with prior year, technical nonwovens is up quite a bit versus the prior year, but a lot of that is acquisition-related. And we have little bit of spending on a more cross business side related to some mighty projects that we’re working on. But beyond that pretty consistent with prior years.

Matt Koranda

Got it, that’s helpful. And then just cash flow from operations looks like it’s benefiting quite a bit from kind of the decrease in working capital. So any thoughts on kind of the sustainability into 2017 and how that shapes out?

Scott Deakin

Yes thank you. We talked Matt the last year we put in place a change in our metric around, incentive metrics around working capital to focus as one of the key elements on working capital percent of sales. I think that had the benefit that we wanted in terms of drawing greater attention to it. And we expect that to continue going forward our expectation of the businesses that we want to about a 5% improvement year-over-year and the momentum from a working capital percent of sales standpoint. On a base standpoint we’re always going to have some noise back and forth related to tooling programs and things like that, but generally we do expect that for 2017, as well.

And then the last point I would just offer is as we’ve talked about, I think in the past both textile and good share [ph] came in with pretty high working capital as a percent of sales, relative to their business and relative to our underlying legacy businesses. And a key part of the synergy program is applying our Lean concepts to drive down those balances particularly on the inventory side of the house.

Matt Koranda

Got it. That’s helpful. Maybe last one here. Just in the TA fiber segment, wanted to get an update on progress in driving business internationally and sort of the outlook for expansion in 2017 and may be even into 2018.

Scott Deakin

Right now we’re actively pursuing opportunities in Europe. As we stated last year, we have a sales representative in place in Europe and we’re bidding on projects. We haven’t won anything yet but we’re actively pursuing it. So we’re hoping to win some in 2017. If we do, we won’t see really any revenue impact of that till either 2019 or 2020.

Matt Koranda

Okay, got it guys. So I’ll cover the rest offline with you.

Scott Deakin

Thanks Matt.

Dale Barnhart

Matt, thank you.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Dale Barnhart for closing remarks.

Dale Barnhart

Again, thanks for joining the call today. We had another good year in 2016 and although it’s still very early we are well-positioned to extend that momentum into 2017. I’m confident we reign on the right track to achieve our 2018 long-term vision for profitable growth. We look forward to speaking with you at the end of the first quarter.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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