Lydall (LDL) Q1 2020 Earnings Call Transcript

Lydall (LDL)
Q1 2020 Earnings Call
May 12, 2020, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Lydall Q1 2020 earnings call. [Operator instructions] Please note, the event is being recorded. Now, I'd like to turn the conference over to Mr. Brendan Moynihan, vice president of investor relations.

Please go ahead.

Brendan Moynihan -- Vice President of Investor Relations

Good morning. Thank you, Nick. Good morning, everyone, and welcome to Lydall's first-quarter 2020 earnings conference call. Joining me on today's call are Sara Greenstein, president and chief executive officer, and Randy Gonzales, executive vice president and chief financial officer.

Sara will begin the call with a high-level overview of the quarter and how Lydall is addressing the dramatic impacts of the COVID-19 pandemic. Randy will follow with a review of our financial performance and discuss the key business drivers by segment. Sara will then conclude the call with a brief discussion of the state of the business as we see it midway through the second quarter. At the end of their remarks, we'll open the line for questions.

Please note that we are conducting the call remotely. So, when we do open the line, please address your questions directly to Sara or Randy, so they can respond accordingly. Our quarterly earnings release was issued along with the filing of our quarterly Form 10-Q. Both are available on our investor relations website and can be used as reference for today's call, along with the Q1 2020 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 the securities laws. Please also refer to the cautionary note concerning forward-looking statements within Lydall's Form 10-Q for further information. In addition, we will be referring to non-GAAP financial measures during the conference call. A reconciliation to GAAP financials can be found in the appendix of the presentation I just referenced.

With that, I'll turn the call over to Sara.

Sara Greenstein -- President and Chief Executive Officer

Thank you, Brendan. Good morning, everyone, and thank you for joining us. In late February, during my first earnings call as Lydall's new CEO, I talked about what attracted me to Lydall and the qualities that I believed would position us for a success. I mentioned Lydall's unmatched ability to develop value-added engineered materials and specialty filtration solutions capable of adapting and scaling to meet customers' specific business demands.

And I highlighted the great community of Lydall employees throughout the world, all of whom share an unparalleled commitment to our customers. During the two and a half months since, as the world has changed in previously unimaginable ways, my view of Lydall has not changed. In fact, I am even more convinced that these qualities differentiate Lydall from our competitors. As the novel coronavirus, COVID-19, escalated into a global pandemic in March, its impact was deeply felt across virtually every industry throughout the world, and Lydall is no exception.

When it first became apparent that COVID-19 would have a significant impact on the global economy, we acted quickly and decisively to safeguard the health and well-being of our global workforce and the sustainability of our business. By taking a number of precautionary measures, we ensured that all employees who needed to come to work could do so, and they did, in a safe work environment, with new policies and procedures to keep them protected. At the same time, we aggressively created new opportunities in response to the current environment, opportunities that have enabled us to accelerate the strategic transformation that is necessary for Lydall to compete, innovate and thrive over the long term. Turning to Slide 3.

As a technical market leader of value-added engineered materials and specialty filtration solutions, Lydall is in an extraordinary position during this unprecedented time. We are one of only a handful of companies in North America and Europe capable of producing the critical filtration layer of N95 respirator masks that helps safeguard our healthcare workers and first responders from COVID-19. In addition, we manufacture the filtration materials for other medical, surgical and general-use masks, the HEPA- and ULPA-grade filtration media used by machine-powered respirators, ventilators and hospital HVAC systems, and the needlepunch felt in medical bathing wipes, absorbent pads and medical gowns. As trusted experts in specialty filtration with proven technical and production capabilities, we have been in regular contact with the highest levels of the US government as well as leaders in Canada, Europe and the United Kingdom to offer our solutions, expertise and support in the fight against COVID-19.

As governments around the world recognized that availability and certainty of supply for these products are essential to their national interests, they are mandating that these products be manufactured and sourced locally. Our global footprint is a strategic advantage in this regard, with facilities across the United States, Canada, Europe and China. Our team has worked tirelessly to meet the large unmet need and global shortage of these products by forging new contracts, reallocating our resources and repurposing our production facilities. We secured a major long-term agreement with Honeywell to supply melt blown filtration media for their N95 mask production facilities.

As a result, we have committed additional capital to acquire a new melt blown production line to satisfy this and related demand. In our technical nonwovens segment, we developed a new application for nonwoven materials used in medical gowns, and in so doing, secured an order from New York City's COVID-19 emergency services. The strong demand for specialty filtration and PPE products in our performance materials and technical nonwovens segment is especially important as other end markets we serve prove to be more susceptible to COVID-19's impact on the global economy. The automotive industry shutdown triggered by COVID-19 has had a significant effect on our thermal acoustical solutions business.

Moving to Slide 4. As many of our automotive OEM customers shut down operations late in the first quarter, we quickly ceased production at our TAS facilities in the United States and Europe. We also ramped down select production lines in our technical nonwovens and performance materials facilities that serve the automotive end market. In total, this impacted more than 1,000 Lydall employees, approximately 30% of our total workforce.

This was not a decision that we made lightly. We realized the economic burden this action places on our employees, and we have strived to help them take advantage of the social programs available to them in the countries in which they reside. Additionally, we have taken action to minimize operational expenses by eliminating all nonessential travel, reducing temporary and contract workers, instituting furloughs for many of our salaried employees, and just last week, completed a permanent reduction in force in our TAS business. In this challenging environment, we bolstered our liquidity in the first quarter by taking additional measures to preserve cash, including drawing down $20 million from our existing credit facility and reducing all noncritical capital spending.

We are also deferring our pension and 401(k) company matching contributions to our US employees and deferring domestic employer payroll taxes in the US through the CARES Act. All of these decisions were enacted quickly and with the intent of emerging from this crisis strong, healthy and viable for the long term. With that, I will now turn the call over to Randy to cover first-quarter results.

Randy Gonzales -- Executive Vice President and Chief Financial Officer

Thank you, Sara. Turning to Slide 5. I'll briefly cover some key highlights for the first quarter and then provide an overview of our operating segment results. As a reminder, we will be discussing adjusted financial metrics, including adjusted EBITDA by segment.

A complete reconciliation to comparable GAAP numbers is provided in the press release and earnings presentation. Before we continue, I'd like to address the non-cash impairment charge of $61.1 million included in the first-quarter results in the performance materials segment. Given the sharp downturn in the overall economy driven by COVID-19, we reassessed our goodwill and long-lived assets. While the performance materials segment performed well in the first quarter, the COVID-19 pandemic negatively impacted the outlook in automotive, sealing and other industrial end markets, requiring an impairment charge.

Goodwill was impaired by $48.7 million and long-lived assets were impaired by $12.4 million. First-quarter 2020 net sales of $200.5 million decreased 8% or $17.5 million from the same period in 2019. Organically, sales decreased 5.7% or $12.5 million, driven by the COVID-19 pandemic, principally in our thermal acoustical solutions business, and to a lesser extent, in our thermal technical nonwovens business. The strong dollar was a headwind on foreign sales, reducing consolidated revenue by $2.2 million or one percentage point.

And tooling sales were down $3.2 million or 1.5%. Net acquisitions and divestitures contributed $0.5 million with the H&V acquisition and performance materials offset by the divestiture of the Geosol business in the technical nonwovens business. Sales were up 1% in performance materials, with filtration sales growing 8.2%, offset by a 3.2% decline in sealing and advanced solutions. Adjusted EBITDA for the first quarter of $20 million decreased by $1.8 million or 8.2% from the same period in 2019.

Adjusted EBITDA margin in PM was 16%, up 420 basis points from the first quarter of 2019. With compressed margins in TAS and TNW due to COVID-19, consolidated adjusted EBITDA margin was 10%, flat to the first quarter of 2019. Compared to fourth quarter of 2019, adjusted EBITDA improved $7.6 million, up 61% despite headwinds related to COVID-19. Sequentially, consolidated EBITDA margin expanded 360 basis points, driven by productivity gains in TAS, benefits from reductions in force actions completed in fourth quarter of 2019 and accretive incremental volumes in performance materials.

The first-quarter effective tax rate of 3.5% was impacted by the goodwill impairment charge that is not tax deductible. Adjusted for this and other non-GAAP items, the first-quarter tax rate was 29.5%, driven higher by losses in jurisdictions where a tax benefit cannot be recognized. We expect the 2020 tax rate to be in the range of 25 to 27%. Adjusted earnings were $0.20 per share, down $0.08 from the first quarter of 2019 and up $0.37 sequentially from fourth quarter of 2019.

Finally, cash flow from operations of $26.7 million was very robust in the quarter, up $12.4 million from the same period last year and improved sequentially by $2.8 million from fourth-quarter 2019. Moving to Slide 6, I'll discuss our segment results, starting with our thermal acoustical solutions segment. This is our global automotive business that specializes in providing innovative engineered thermal and acoustical solutions for vehicle underhood, underbody, powertrain and exhaust applications. First-quarter sales in this business were $83.8 million, with parts sales down $7.3 million compared to the prior year period or down 6.9% organically.

While domestic and European sales started strong with parts sales up over 5% through February, COVID-19 related OEM shutdowns impacted sales in these regions in March. Tooling sales of $6.4 million were down $3.3 million compared to prior year, impacting reported sales growth by 340 basis points. Foreign exchange, primarily the euro, reduced segment sales growth by $800,000 or 90 basis points. EBITDA in the thermal acoustical solutions segment was impacted negatively by lost volume from factory ramp-downs due to COVID-19.

In addition, pricing and unfavorable product mix, specifically lower volumes of higher-margin acoustical products were partially offset by lower commodity costs and material productivity. More importantly, despite COVID-19 related shutdowns, this segment saw a sequential margin expansion of 340 basis points compared to the fourth quarter of 2019, with improvements at every operating site led by improved efficiencies in North America. Moving to Slide 7. I will cover our performance materials segment, which provides specialty filtration and engineered sealing solutions to a variety of end markets and industries globally.

Sales of $65.2 million were up $600,000 or 1% compared to first quarter of 2019, led by filtration sales, which grew 8.2%, partially offset by a 3.2% decline in sealing and advanced solutions, which had a difficult comparison to a very strong top line in the first quarter of 2019. As discussed in our year-end call, we expected that fourth-quarter sales of $33.6 million would be the trough for sealing and advanced solutions, and we saw a rebound with sales expanding 17.1% sequentially to $39.3 million. Filtration sales were also up sequentially from last quarter posting top line growth of 16.5% on strong demand for specialty air filtration products, including media used for N95 respirator, surgical and medical masks first quarter segment adjusted EBITDA margin of 16% was up 600 basis points sequentially and up 420 basis points from the prior year period. The fourth quarter of 2019 reduction in force, material productivity and favorable mix on higher-margin specialty filtration products, all contributed to this result.

The sequential improvement in volume drove incremental EBITDA margins of over 50%. Slide 8 covers our technical nonwovens segment. This segment produces air and liquid filtration media as well as other value-added engineered products and specialty filtration for use in various commercial applications such as geosynthetics, automotive, industrial and medical, among others. Sales in the first quarter of 2020 were $57.4 million, down 12.5% from prior year.

Adjusting for FX headwinds of 120 basis points and 30 basis points for the Geosol divestiture, organic sales were down 11% compared to prior year. Industrial filtration sales were down $11 million or 26%, impacted by lower demand across all regions, but most notably in China, which was down over 50%, driven by COVID-19 related shutdowns. Advanced materials sales grew $2.8 million or 12% despite a $0.5 million of lower intercompany sales to thermal acoustical solutions and lower sales due to the Geosol divestiture. Adjusted for these items, advanced materials sales were up $3.5 million or 13.4%, driven by healthy demand for nonwoven medical applications, such as wipes and absorbent bed pads.

In terms of profitability, adjusted segment EBITDA margin of 11.9% was down 60 basis points from the first quarter of 2019, driven by 150 basis point headwind for flood related losses in our U.K. facilities for which we are currently pursuing insurance recovery and will likely offset the loss when received. That concludes our review of the first-quarter results. Despite the impacts of the COVID-19 pandemic on our global operations, we delivered adjusted EBITDA growth of $7.6 million sequentially from fourth-quarter 2019 and adjusted EBITDA margins of 10%, flat compared to the first quarter of 2019.

Turning to Slide 9. We've highlighted the company's strong cash flow and improvement in working capital for several quarters now, with 2019 showing significant improvement in accounts receivable. Late in fourth quarter last year, before the pandemic, we kicked off a companywide initiative focused on improving accounts payable, and these efforts paid dividends in the first quarter. On a trailing 12-month basis, free cash flow expanded dramatically from $30 million in first quarter of 2019 to $63 million in first quarter of 2020.

Adjusting for $18 million of factoring of select trade accounts receivable in first quarter, free cash flow expanded 50% in this prime period. So, we are clearly seeing the results from these efforts. Along with the $20 million drawdown, Sara referenced earlier, Lydall's cash balance has grown to $87.8 million at the end of the first quarter compared to $51.3 million at the end of fourth-quarter 2019. As of April 30, 2020, the company's cash balance was $98.2 million.

In terms of capital allocation, while debt reduction continues to be one of our top capital allocation priorities longer term, in the short term, we have taken actions to maximize our liquidity position, and we are forecasting debt repayment of $12 million in 2020. We have reprioritized capital expenditures to business-critical investments, which we anticipate will be in the range of $18 million to $22 million for 2020, exclusive of the investment in new meltblown capacity to meet the exceptional demand in our filtration markets. This is down from our prior guidance of 25 to $30 million. As a result of the COVID-19 pandemic and subsequent economic slowdown, the company expected to be out of compliance with at least one of its financial covenants in the second quarter of 2020.

As a result, we amended our credit agreement with the support of our entire banking syndicate. The amended agreement consists of a term loan of $144 million with a revolving facility of $170 million. The maximum net debt leverage ratio is six and a half through the period ending March 31, 2021, and steps down thereafter. The fixed charge ratio is adjusted to 1.1 for the period ending June 30, 2020.

The applicable rate margin above LIBOR increases to a maximum of 4.25%. The amendment required a fee of 0.25%. There's no change to the maturity date of the facility, which is August 2023. At the end of March, including $4.5 million of repayments and the $20 million drawdown in the quarter, total outstanding debt on the company's credit facility was $288 million for a net leverage ratio of approximately 2.9 times adjusted EBITDA as defined in the credit agreement.

In closing, I'll address our current thinking on end markets that we serve and how they are impacted by the current crisis. In performance materials, we are seeing significantly higher demand in the filtrations sub segment, driven by media for N95 respirators and other critical applications as well as stronger demand for the higher-grade HEPA and ULPA filtration products. The Sealing and Advanced Solutions business will likely be unfavorably impacted by lower automotive volumes and softer demand in the agriculture and construction markets. In our technical nonwovens business, we see upside in advanced materials, driven by increased demand for medical related applications and geosynthetics, tempered by lower automotive demand.

We anticipate slower global growth will likely lead to softer industrial activity, impacting demand for industrial filtration applications as companies look to curtail capital investment in the short term. Finally, in thermal acoustical solutions, the global auto industry will be down significantly in 2020. In China, we saw a relatively quick ramp-up after shutdowns in February, with production increasing over several weeks. We expect to see a measured ramp-up of production in North America and Europe in the remainder of the second quarter, with operations stabilizing in the third quarter, but likely at levels below pre-COVID forecasts.

As a result, in the second quarter, we performed a reduction in force in our thermal acoustical solutions North American operations to better align our fixed cost structure with the lower short-term volumes, while providing flexibility to leverage our cost base as production levels grow. I'll now turn it back to Sara for her closing comments.

Sara Greenstein -- President and Chief Executive Officer

Thanks, Randy. To reiterate, despite facing strong headwinds this quarter, we were able to respond to the demand surges created by COVID-19 while simultaneously managing a significant downturn in automotive demand. We did all of this while growing our profitability from last quarter and enhancing our liquidity and cash position. We are optimistic that Lydall will come out of this crisis stronger and more viable over the mid- and long-term than we were before COVID-19.

And the rapid adaptation to the needs of the market has accelerated the strategic transformation that we had embarked on earlier this year. As we transition from crisis response to normal operations, Slide 10 outlines what a new normal may look like for us. First and foremost, we remain committed to upholding enhanced safety standards for all of our employees. And we are starting to see light at the end of the tunnel in our thermal acoustical solutions business.

Our China sites are back to normal operations, and our European factories have started to slowly ramp up as OEM customers come back online. In North America, Ford, GM and Fiat Chrysler have announced plans to restart production on May 18. We are ready to support them as their strategic partner and with a leaner, more agile cost structure. We continue to see very strong demand for specialty filtration products.

In fact, in April, volumes in our performance materials filtration sub segment increased 20% compared to the previous year. Lydall's mission is and has been for the past 150 years to create a cleaner, quieter and safer world. We could not have imagined three months ago the significance of what creating a safer world would mean for Lydall. Our products protect people from the COVID-19 disease and save lives.

We do not take this responsibility lightly, and we are up for the task. When I joined Lydall back in November, one of my first priorities was to break down operational barriers and foster communication among our three business units. A situation that you cannot ever fully prepare for, like a global pandemic, can expose your weaknesses, but it can also show you what you're made of. Over the past several months, I have seen a level of intensity, collaboration, impact and most important, outcomes, from my colleagues that have far surpassed my expectations.

Our teams are coming up with new ways of working together, combining resources and sharing knowledge to create new and innovative solutions to the world's biggest challenges. Our drive to become One Lydall is moving forward at full steam. The spirit and tenacity of our employees makes me so proud, and I'm looking forward to the day when I can, once again, visit them and thank everyone at our facilities across the globe. With that, let's open the call for questions.

Questions & Answers:

Operator

[Operator instructions] First question comes from Chris Moore, CJS. Please go ahead.

Chris Moore -- CJS Securities -- Analyst

Hey, good morning guys. Yeah. Maybe the first question would be for Sara. So, obviously, ramp-down production in all three businesses that serve the auto end markets.

Just trying to get a sense as to whether they -- kind of whether they would be ramped up at different times? And then kind of looking out into, say, the first half of 2021, which one of those will look the most different in terms of size, employees, cost structure, things of that nature? Trying to get a sense of how this likely will evolve.

Sara Greenstein -- President and Chief Executive Officer

Sure. Let me kind of take that piece by piece. So, first of all, we ramped down quickly in response to the automotive end markets ceasing operations. And we did that on a country-by-country basis, directly related to our demand signal in each of those countries.

As you well know, the automotive end market came down very quickly in Europe and the US in March. And our sites that serve those customers came down very quickly. And I think in our prepared remarks, we said, it was about 1,000 employees that we furloughed in very short order in direct response to the automotive end market ceasing operations across Europe and the US Now when you think about ramping up, I'm sure you hear the news as we do. But there is a slow ramp-up beginning in Europe.

And as a result, we bring our workforce back to match the demand that we have from the customers. And in the US, the current signal is that the large OEMs will come back on May 18. And again, we will match our workforce to the demands of our customers and work to keep that in sync. In terms of what do I see into 2021? I would argue, as you probably know, if anybody has a crystal ball, we would -- the world over would be working to see into it.

But our expectation is that assuming the current pandemic is able to sustain the course that we're currently on and our customers come back to work and produce against what the current SARs numbers reflect, that it will be a slow ramp-up between now and the end of the year, all coming back at a lower level than anyone was anticipating, and probably stay at that lower level for the foreseeable future. What we have done is we worked very hard to manage our cost structure so that we can flex it according to our customers' demands and needs as they ramp up to meet their demand.

Chris Moore -- CJS Securities -- Analyst

Got it. That's helpful. Maybe just switch gears to the -- in terms of some of the opportunities that you're talking about on the N95 and other respirators. Any kind of sense in terms of what the total addressable market might be for filtration media in that -- in the N95 side and the respirators, even maybe some of the other more ancillary uses there? Just trying to get a feel for what that might look like.

Sara Greenstein -- President and Chief Executive Officer

Fully understand, Chris. And what I will tell you is the demand right now outweighs the supply. And the expectation is that there is a structural demand shift under way when it comes to specialty filtration, in general, first and foremost, used to protect people, but evolving to protect places and the environment in which we live and work. In addition to that structural demand shift, there's also a significant shift in supply chain, where countries, in some instances, regions, but even more particularly countries are forcing the localization of those supply chains because as a result of what's occurred, PPE is viewed as a national security need.

So, the combination of the supply chain shifts that are occurring, the structural demand shifts that are occurring and the ongoing need, demand and changed behaviors that are under way give us great confidence that our ability to supply the market in the regions and countries that we work are strong. And in terms of size of the market on a global basis, supply is less than what the demand is, and even more so, when you take that on a country-by-country, region-by-region basis.

Chris Moore -- CJS Securities -- Analyst

Got it. And in terms of specifics, there's no number that you guys target? I don't have a sense of what the demand number is at this point in time. Obviously, it's outstripping supply, but any -- no other specifics on that front?

Sara Greenstein -- President and Chief Executive Officer

It's a multiple, more right now. And part of it is, I'm not trying to be vague, part of it is the demand is so strong to try to put guardrails around that right now. It's not something that -- all I know is I would be wrong. So, it's just fair -- yes, it's just fair to say that imbalance exists and the reality is, this isn't just a short term.

This is a changed behavior. But also part of what we are doing to make sure that we're well positioned here, not just today but into the future is signing up the long-term agreements that enable us to supply the people that intend to be in this for the long term.

Chris Moore -- CJS Securities -- Analyst

Got it. I appreciate that. A last one for me is just to Randy, actually. On the amended credit facility.

So, it looks like leverage could go as high as 6.5 times in the agreement. But I mean, what would have to happen to even approach that level?

Randy Gonzales -- Executive Vice President and Chief Financial Officer

Chris, yes, so the financial covenant in terms of net debt leverage ratio, now the max is 6.5 times. So, the forecast shows that we're not going to be approaching that. But as you can imagine, based on the events, our forecast has been modified and adjusted downwards. But there's been lots of pressure testing in the forecast and discussion with the banks for us all to be comfortable that we're not going to breach those covenants.

Chris Moore -- CJS Securities -- Analyst

Got you. All right. I'll leave it there. Thanks, guys.

Operator

[Operator instructions] Our next question comes from Edward Marshall, Sidoti & Company. Please go ahead.

Ed Marshall -- Sidoti and Company -- Analyst

Good morning, Sara, Randy and Brendan, how are you guys? I trust you're healthy and well.

Randy Gonzales -- Executive Vice President and Chief Financial Officer

Good morning, Ed, yeah. Thank you. Same to you.

Ed Marshall -- Sidoti and Company -- Analyst

So I look at the -- I want to discuss the PPE, and if maybe you can size what the impact was in 1Q? And secondly, I guess, when I hear demand outweighs supply, my general first thought is price. If you could just comment on each of those, I'd appreciate it. And that size -- I mean, how much of it -- how much did you sell in Q1?

Randy Gonzales -- Executive Vice President and Chief Financial Officer

So Ed, based on the numbers in Q1, we specified by sub segment within performance materials and the increase year over year for the filtrations sub segment. Some of that impact is reflected in there. And at that time, we were seeing large orders from Asian customers. Now it's shifted.

As Sara just discussed, now it shifted more toward North America and US-based customers. So, I think what you saw in Q1 and the increase year over year and the reference to the April results year over year is reflective of what we anticipate to see going forward, especially with the supply demand equation and the fact that we are securing long-term agreements with customers.

Ed Marshall -- Sidoti and Company -- Analyst

So how much was it in the quarter?

Brendan Moynihan -- Vice President of Investor Relations

Yes. So, Ed, just to put some color around what Randy said. In the quarter, the filtration sub segment within performance materials was up 8% year over year, which is about $2 million. And another data point to triangulate that is quarter to quarter.

So, Q4 to Q1, we were up 16.5% or about $3.7 million. So, the bulk of that increase was driven by what we're talking about here.

Ed Marshall -- Sidoti and Company -- Analyst

Right, right. OK. Will the declines then offset that in other business segments, or are we trying to say that this is less than $5 million opportunity today with the meltblown machine that we have, and then ultimately, we see that growing to as we add additional machines? I'm just trying to get size, scale and, ultimately, timing as to what this could be for Lydall?

Randy Gonzales -- Executive Vice President and Chief Financial Officer

Well, I think, in general, yes, it will partially offset, I mean -- and I think, with regards to Q2, particularly where the automotive operations, with the exception of the China facility, have been shut down for all of April and for the first part of May, that's certainly the increased filtration sales, and PPE is not going to completely offset that. But starting in Q3, as we start to see automotive come back online, it is going to be a slower ramp than we anticipate, but the filtration and the PPE -- specialty filtration and the PPE sales will definitely partially offset the lost volume and demand in automotive. So, it's certainly a tailwind that is going to partially offset what we're seeing on the automotive end market exposure.

Ed Marshall -- Sidoti and Company -- Analyst

So are you unable to talk about the size of the N95 sales within your business for any reason due to the contracts that you're kind of setting up, or are there other reasons that we can't get kind of a clearer picture of that number? Just curious.

Randy Gonzales -- Executive Vice President and Chief Financial Officer

I think we've tried to define it. So, we also mentioned in April, in the filtrations sub segment of performance materials, the increase year over year was 20%. So, --

Ed Marshall -- Sidoti and Company -- Analyst

OK. What's the base number to work from? That's what I'm trying to get to.

Randy Gonzales -- Executive Vice President and Chief Financial Officer

The base number for April itself?

Ed Marshall -- Sidoti and Company -- Analyst

Well, for the -- you're saying it's up 20% year over year. What was the number it's based off? What was the last year's number for N95?

Randy Gonzales -- Executive Vice President and Chief Financial Officer

Yes. I don't have that number directly in front of me, but we're at a run rate. I mean, Q1 filtration sales, Ed, were $26 million. So, if you divide that out, that would be about $8 million, a little over $8 million per month, and we're up 20% on that.

Ed Marshall -- Sidoti and Company -- Analyst

Got it, got it. OK, so when I think about the meltblown machine, the capex associated with, I think, Randy, you said 18 to 20 million, exclusive of the project for N95. So, can you kind of maybe talk about, is it one line that you're adding? Is it multiple lines? What could be the project and what may we see there? And secondly, there was a point of clarification I'm looking for. I guess, in the deck, you said you're securing the contract with Honeywell.

And in the press release, you said you secured. That probably is just a timing thing, but I just want to make sure.

Randy Gonzales -- Executive Vice President and Chief Financial Officer

So the contract with Honeywell has been executed. With regards to the amount of the capital and the timing. So, yes, we have ordered an additional production line that we anticipate will be online and commissioned by the end of this year. So, it will be incremental, but -- of capex from that range we specified, but the payback period will be very short.

Ed Marshall -- Sidoti and Company -- Analyst

How much more are you going to spend for the project?

Randy Gonzales -- Executive Vice President and Chief Financial Officer

At this point, Ed, I don't think we're going to disclose publicly what the amount of the capex is.

Ed Marshall -- Sidoti and Company -- Analyst

Got it. If I think of -- switching gears just to thermal acoustical solutions. The margin performance increased on a sequential basis. Can you talk maybe about increased volume, lower tooling.

How much of that is revised cost structure, maybe the acceleration of a cost structure that you were previously planning and maybe reduced start-up costs? I'm just trying to get a sense as to that improvement on a sequential basis.

Randy Gonzales -- Executive Vice President and Chief Financial Officer

Yes. So, Ed, you're -- so just to be clear, you're looking on a go-forward basis for the rest of the year?

Ed Marshall -- Sidoti and Company -- Analyst

I'm looking about Q1 to Q4, the comparison there. Q1 to Q4, and then ultimately, what drove that improvement on a margin, Q1 from Q4? I called out severance cost. I called out increased volume. I called out the lower tooling, and then also maybe a revised cost structure.

I'm just trying to get a sense as to those buckets there, if you don't mind.

Randy Gonzales -- Executive Vice President and Chief Financial Officer

Yes. So, sequentially from Q4 to Q1, right, we did have, obviously, the last two weeks of the quarter in Europe and North America were impacted in Q1 by COVID-19. And earlier in the quarter, we had some impact on sales within China. I think if you remove those, the quarter would be roughly -- would have been roughly flat in terms of top line.

But what we're seeing, overall, is a nice pickup in terms of efficiency in North America within the quarter. And also the actions that we took in Q4 last year, related to the reduction in force, specifically in TAS, helped. It helped all the other business units as well. But certainly, in TAS, that was a key driver in terms of lower fixed overhead and labor costs.

Ed Marshall -- Sidoti and Company -- Analyst

Got it. Got it. OK. Thanks very much.

Appreciate it.

Operator

Thank you. Our next question comes from Rand Gesing, Neuberger. Please go ahead.

Rand Gesing -- Neuberger Berman Intrinsic Value -- Analyst

Welcome to the micro-cap company, who could be helpful in solving the SARS-CoV-2 debacle club. Obviously, we're getting a lot of questions on it. People are trying to figure out how big it could be? How important a driver it could be for you guys? So obviously, it's early days, and we're looking forward to hearing you guys flush out the opportunity more fully. In essence, are you sort of doubling the capacity, or is it -- I'm not really sure if you have one production line, and this is sort of doubling of that, or how should we think about what you're really sort of doing here in the near term?

Sara Greenstein -- President and Chief Executive Officer

So let me start, and I'm sure the team will kick in here. So, again, right, it hit. We reacted quickly almost in a completely bifurcated way. We had a significant demand surge to meet the needs of the pandemic, while the automotive market shutdown in a matter of days.

So, we took the capacity and capability that we have that's capable of making critical specialty filtration product and stood that up everywhere we could. Some of it is geared and able to make the N95. And all of it is able to make EFE-rated filtration material to go into masks. What we have done is keep everybody healthy, keep everybody coming to work, keep the machines that we have capable of running, just running, and serving the demand of as many as we can, while securing long-term contracts, like we mentioned with Honeywell; and adding capacity as we have high confidence in the enduring nature of that demand.

So, Randy mentioned the additional machine that we are getting and putting in place and will be in place by the end of the year. And our current capacity that we have is less than the demand that we have, and we will continue to manage the supply demand equation very tightly, understanding the environment that we're in, in order to continue to ramp up our capability in a profitable, cash-smart way. And the reason I'm not able to tell you what that demand is, is it 3x, is it 6x, is it 10x, is because the most honest answer right now is, there is far greater demand than supply for these specialty filtration products. We are absolutely being viewed as the technical experts and informing countries and leaders on how to go about doing what they need to do, even when resources are scarce, and you have to make adaptations.

And our products are all part of that consideration. That, in addition to the local supply chain reality and moving away from importing all of this and setting up real, viable, sustainable supply chains in countries and/or regions is all contributing toward any market sizing right now being premature. I'll pause there.

Rand Gesing -- Neuberger Berman Intrinsic Value -- Analyst

OK, great. Yes, I know -- it seems like the position and the foundation is there. And I just -- one of the things I wonder, and obviously, it's super early days, but do you think that there's the risk of Honeywell, while securing what they can -- Honeywell and others like that up -- downstream, securing capacity from people that are in this space. But I do agree that this is going to be a long-term -- very long-term critical industry for all nations.

And I wonder if there's a risk that a lot of capital is going to, over time, flow into the whole supply chain and whether other competitors will get stood up. How do you feel -- I know it's super early, and it's sort of a silly question, but how do you -- how sustainable do you feel your position here is, given the fact that there's a chance that a lot of capital could sort of come out of this state?

Sara Greenstein -- President and Chief Executive Officer

So hey, I agree with you, right. I mean, it's supply and demand is economics 101. And we are very attuned to all of that. So, do I think other capacity will come on? Yes.

Do I think that there's room for that? Yes. Do I think that we are well positioned, and that this is a sustainable play for us? Absolutely. The reason why is, it's more complicated than just putting a new machine in. There's material science that goes along with this.

There's application engineering that goes along with this. There's decades of experience that we have in technical nonwovens and specialty filtration products that goes into this. And we're just talking right now about PPE. But it's going to extend beyond PPE into our environment, and that is at the core of who Lydall is and how it always has been.

So, I firmly believe that our position, because of our know-how, because of our legacy, because of who's called us and how we've responded in the past five weeks, puts us in a position to sustain this and why we have required long-term agreements with customers. Because that in and of itself gives us the continuity to continue to invest and innovate with good partners.

Randy Gonzales -- Executive Vice President and Chief Financial Officer

I'll also add, Rand, that it's important to understand what the engineering capabilities are of the manufacturers of this equipment. And as such, for a meltblown asset to make this fine-fiber meltblown product that goes into N95 respirators, there's only a few companies across the world that can make that that have the technical capabilities. And as you can imagine, they have a backlog as well. Lydall has secured a place in line and with the order that we made to be able to get that asset in the near term, which the supply and-demand equation works for the manufacturers of this equipment as well.

Rand Gesing -- Neuberger Berman Intrinsic Value -- Analyst

Remind me where you guys have the capacity globally, which locations?

Randy Gonzales -- Executive Vice President and Chief Financial Officer

So we have in Rochester, New Hampshire, our performance materials facility. We also produce meltblown in Saint-Rivalain, France.

Rand Gesing -- Neuberger Berman Intrinsic Value -- Analyst

OK. So, there's no meltblown in China, but you have other filtration, obviously, capacity there to serve the broader need?

Randy Gonzales -- Executive Vice President and Chief Financial Officer

Correct.

Sara Greenstein -- President and Chief Executive Officer

Correct.

Rand Gesing -- Neuberger Berman Intrinsic Value -- Analyst

Got you. OK, guys. Great. Thank you.

We'll talk soon.

Randy Gonzales -- Executive Vice President and Chief Financial Officer

Thanks, Rand.

Operator

Thank you. Next, we have a follow-up question from Edward Marshall of Sidoti & Company. Please go ahead.

Ed Marshall -- Sidoti and Company -- Analyst

Hi, Sara, I just want to -- I'm just curious, following on what Rand just was touching on. Can you talk about maybe lead times with -- if you were to place an order for a new meltblown machine today, when do you think you'd get in the order book for your supplier?

Sara Greenstein -- President and Chief Executive Officer

So that is something that I'd prefer to not disclose publicly. I can tell you that the lead times are expensive, but I can also assure you that we've worked with these folks for a long, long time and have a long-standing relationship. And I think we would be able to navigate accordingly as we needed to, and as demand dictated, we needed to. That's something we look at every day.

Ed Marshall -- Sidoti and Company -- Analyst

Got it. And that goes to the second part of the question. When we talked earlier about demand outweighing supply, and you talked about the dynamics in the market. I'm curious, are you only making decisions to back these capex and new machineries if you have a purchase order or supply contract in hand, or will you take the approach of if we build it, they will come?

Sara Greenstein -- President and Chief Executive Officer

So to date, in this environment, we have been very purposeful about how we've deployed cash and the long-term agreements that we have and the demand signal that we have would dictate that it was a very risk-mitigated decision. As each day unfolds, literally, each day unfolds, we are evaluating that decision in terms of additional demand, and we will make decisions in an appropriate manner based on the environment that we're in to make sure we drive the most value for Lydall and our investors.

Ed Marshall -- Sidoti and Company -- Analyst

That's fair. That's fair. It sounds like you have a competitive advantage on, I guess, getting at least the machinery and then, of course, the technical know-how as well that would make you a wide supplier of choice for any such N95 manufacturer?

Sara Greenstein -- President and Chief Executive Officer

And if we're doing it now, I mean, I think the reality -- I don't think, I know the reality is we have done this, we are doing it, and we're rising to the occasion every day. And that's how we have the contracts that we have and the partners that we have and are continuing to develop and grow. So, yes, I would agree with what you said. There will certainly be new entrants, and yet it isn't as straightforward as putting in a machine.

There are certifications that are required. There's stricter regulations that are in place today than weren't before all of this, and it doesn't come easy. So, I think that as more people get into this, that is quickly realized. So, I do believe Lydall -- again, it goes to the cornerstone of who we are.

I mean we have done specialty filtration for decades, and it's -- this pandemic is highlighting the need for that and our expertise in it.

Ed Marshall -- Sidoti and Company -- Analyst

Got it. And with the available footprint, and I'm assuming sticks and mortar is really not going to be a limiting factor, but with the existing footprint, if I look to your capacity today, how quickly, how fast, if you were to get the machinery, how fast and how quick could you get everything in place and operating optimally to benefit both the margin and, ultimately, your customer?

Sara Greenstein -- President and Chief Executive Officer

Yes. So, as Randy -- yes, we're -- go ahead.

Randy Gonzales -- Executive Vice President and Chief Financial Officer

I'll take that. Ed, we anticipate that it's going to be very quick. Remember, we just added meltblown capacity, significant meltblown capacity in Rochester last April, so just over a year ago. And so, that capital deployment was executed very, very well, on time, on budget.

And the business case is being exceeded.

Ed Marshall -- Sidoti and Company -- Analyst

And is that running at 100% utilization, by the way, Rochester, or more?

Randy Gonzales -- Executive Vice President and Chief Financial Officer

It is.

Ed Marshall -- Sidoti and Company -- Analyst

And the square footage there, that's kind of where I was getting at. The square footage there, I mean, how fast -- what's the -- as there are additional rooms or additional floor space, do you have the people in Rochester or other, who will be able to kind of meet the certifications, meet the customers' needs. That's kind of what I'm trying to understand as well.

Sara Greenstein -- President and Chief Executive Officer

Yes. That is not a limiting factor for us.

Ed Marshall -- Sidoti and Company -- Analyst

Great. Great. Thank you very much, guys.

Randy Gonzales -- Executive Vice President and Chief Financial Officer

Thank you, Ed. Thanks, Ed.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Brendan Moynihan -- Vice President of Investor Relations

Sara Greenstein -- President and Chief Executive Officer

Randy Gonzales -- Executive Vice President and Chief Financial Officer

Chris Moore -- CJS Securities -- Analyst

Ed Marshall -- Sidoti and Company -- Analyst

Rand Gesing -- Neuberger Berman Intrinsic Value -- Analyst

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