Albany International Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Albany International Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you wish to ask a question during the call, please press 1 and then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you are using a speakerphone, please pick up the handset before pressing the numbers. If you should require assistance during the call, please press star, then zero. As a reminder, this conference is being recorded. Our knowledge in the conference over to our host, John Hobbs, Director of Investor Relations. Please go ahead.

Thank you, Grace, and good morning, everyone. As a reminder, for those listening on the call, please refer to our detailed press release issued last night regarding our quarterly financial results. with particular reference to the notice contained in the text of the release about our forward-looking statements and the use of certain non-GAAP financial measures and associated reconciliation to GAAP. For purposes of this conference call, those same statements also apply to our verbal remarks this morning. For a full discussion, including a reconciliation of non-GAAP measures, we may use on this call to their most comparable gap measures, please refer to both that earnings release as well as our SEC filings, including our 10-K. Now I turn the call over to Bill Higgins, Chief Executive Officer, who will provide opening remarks. Bill?

Thank you, John. Good morning. Welcome, everyone, and thank you for joining our fourth quarter earnings call. I'm happy to be here on my first earnings call as CEO of Albany, as I'm sure you saw in last night's press release. We delivered another strong quarter, capping a great year. While I let Stephen go through the details, let me point out a few highlights from the quarter and then give my perspective on our strategy and my priorities. The company delivered strong results in the fourth quarter and met or exceeded all the revenue and profitability guidance we had issued in our third quarter earnings announcement. I'm particularly pleased with the adjusted EBITDA margins in both segments. In the fourth quarter, We delivered margins of 35.1% in machine clothing and 22.6% in engineered composites. I'm also proud of the company's cash performance this year. The company generated over $130 million in free cash flow, and for the first time since beginning on our growth trajectory several years ago, the engineered composite segment delivered positive free cash flow for the year. I'd like to thank our employees across the globe for their contribution to the growth and success of the company. And while on the board, I've had the opportunity to visit our operations around the world, and I've been impressed with the talent and dedication I've seen. I'd also like to thank my predecessor, Olivier Jarreau, for his pursuit of operational excellence and contributions. As you may know, I've been on the Albany board since 2016 and was appointed chairman last year. I appreciate the trust the board has now placed in me, and I'm honored to be responsible for the success of this great company. In parallel with my transition and to ensure continuity and consistency at the board level, my predecessor, Herky Kilbourne, is stepping back into the role of chairman. I've known Albany for a long time. In fact, when I completed engineering school, what is now way too many years ago, I had a job interview with Albany in upstate New York. Preferring aerospace at the time, I went to work as a jet engine engineer at Pratt & Whitney Aircraft in their advanced technology group. Since then, I held a variety of technical, manufacturing, and business roles within Allied Sigla and Honeywell. And after Honeywell, I was privileged to serve as CEO and Chairman of Surcore International, a public company that is similar size to Albany, and like Albany, has global manufacturing businesses that serve both aerospace and industrial end markets. So I bring to this role not only prior experience as a public company CEO and as a director on multiple public company boards, but also considerable experience with our markets, technology, and operational excellence. With the full support of the board, I intend to continue executing on the two-pronged strategy that was first established by the company several years ago. First, we'll continue to focus on growing our engineering composites business. While there are obviously near-term challenges driven by the ongoing grounding of the Boeing 737 MAX fleet, our longer-term vision and objectives have not changed. Most important, we need to continue to perform on our LEAP contract with Saffron to support both the continued ramp on the LEAP-1A engine for the Airbus A320 NEO family and the return to future ramp that will be required for the LEAP-1B engine once the Boeing 737 MAX returns to production. Saffron is a critical customer of ours with whom we've had almost a 20-year history. We deeply value the relationship with Saffron and look forward to strengthening it further over time. We'll also continue to grow the balance of our engineered composites business by ramping with our existing platforms, by winning new competitions, and by finding new applications for our industry-leading composite technologies across addressable market segments, including the next generation of commercial aircraft. The recent announcement of Albany's participation in the Airbus Wing of Tomorrow collaborative development effort is testament to the value that our technologies offer additional customers in the future. This proven strategy remains sound, and we believe it will deliver strong long-term returns to our shareholders. Second, we'll continue to solidify and build upon our leadership position in the machine clothing segment. We're the clear leader based on our technology and the strength of our offerings to our customers in the paper machine clothing market. That said, we're not resting on our laurels. In order to maintain our PMC leadership position, we're constantly investing in this business, leading to new product solutions to meet our customers' changing needs, to new manufacturing processes, and to improve support for our customers. We expect to continue investing in machine clothing consistent with past investment levels to maintain our leadership position and profitability. This two-pronged strategy has served our shareholders well. Today we have two strong, profitable businesses – In 2019, our machine clothing segment performed extraordinarily well, delivering even higher-level EBITDA than we had expected after a very strong 2018. The engineered composites business, even with the challenges caused by the 737 MAX situation in the back half of the year, delivered over $100 million of EBITDA and, for the first time ever, delivered positive free cash flows. We continue to believe that at this time, given the technology overlap and resource sharing of people, ideas, and funding between the two businesses, we're stronger as one Albany. So with that continuation of our existing strategies in my backdrop, my priorities for the business are threefold. First, I'll continue to focus on operational improvement across both segments that has helped drive the improvement in our financial results over the last few years. I'm fortunate to have two strong operational leaders who themselves are supported by strong teams. Daniel Heftermeyer has a long history of driving continuous improvement across the machine clothing segment. The strong margins that the segment has delivered demonstrate our commitment to delivering shareholder value. Leading the engineer composite segment, we're now fortunate to have Greg Harwell, who joined us late last year. Greg brings extensive experience managing and operating global aerospace businesses. Second, we'll continue to focus on growth with a renewed focus on winning new business in the engineered composite segment. Not too long ago, we were in a position where we had won so much business on LEAP, on the F-35, on the 787, on the CH-53K, that we had to demonstrate to our customers our ability to ramp and execute on those programs before expecting them to trust us with additional work. We've accomplished a lot, are tracking well on existing programs, and are actively pursuing and winning new opportunities in aerospace. Third, I firmly believe in our long-term vision to advance the state-of-the-art in composite technologies and find new applications in aerospace and beyond, as well as to maintain our leadership position in machine clothing. I believe that successfully executing on our vision represents a tremendous opportunity for our shareholders. We'll continue to deploy return-seeking capital to maintain our leadership positions and to drive organic growth. We've achieved strong returns for our shareholders from the investments we've made in working capital and capital expenditures across both of our segments. At the same time, we've got the balance sheet and wherewithal to complete acquisitions that extend our capabilities and support our strategy. In fact, we've recently completed a small high-tech acquisition in Germany, Surcon, which brings us new technologies and capabilities. However, our strategy doesn't depend on completing acquisitions, and we're not prepared to chase some of the pricing we've seen in the M&A market. we do not believe that it would be a prudent use of our shareholders' capital to overpay for assets. Looking forward to 2020, our strategy is continuing to bear fruit. We expect another strong year with continued high margins for our machine clothing business, and but for the current production health in the 737 MAX, we would be expecting to provide guidance for the AEC segment that meets, in the case of revenue, or even exceeds, in the case of margin, the long-term 2020 objectives we established and published for that segment several years ago. However, the continued grounding in the recent suspension and production of the Boeing 737 MAX will obviously have an impact on our 2020 financial results. The 737 MAX, through the work we perform on LEAP-1B engine components, is a very important program for Albany. While we're heartened by the public reports of Boeing's progress toward safely returning the 737 MAX platform into service, there continues to be a significant lack of clarity into the return-to-service timeline and the subsequent production ramp for the aircraft. While I do not have any additional insight into the status of the program beyond public reports, we believe that our guidance for 2020 reflects a realistic approach with respect to the demand for the LEAP 1B components in 2020. In 2019, we were able to overcome the impact of a 737 MAX grounding through a combination of overperformance elsewhere in AEC, build ahead of LEAP finished goods inventory, and the structure of the LEAP contract with Saffron. However, in 2020, the magnitude of the impact of the 737 MAX will be too large for us to overcome, resulting in a material reduction of AEC revenues in 2020 compared to the long-term 2020 objectives we established several years ago. It's important to note that notwithstanding this impact, the balance of AEC is continuing on its growth trajectory, and also the guidance for 2020 reflects adjusted EBITDA margins for the segment higher than than those that had been reflected in our long-term 2020 objectives. These are both strong indicators that our strategy for AEC remains sound, that the revenue reduction in our 2020 guidance is only because of the 737 MAX grounding, and that the long-term outlook for the business remains strong. On a separate note, we're, of course, monitoring the coronavirus situation in China. As you may be aware, we have two large machine clothing manufacturing locations in China. Our first priority is the safety and well-being of our employees at those facilities, and we've taken actions that we felt were appropriate to help mitigate the risk to our employees. Both of our facilities have been significantly impacted by the ongoing situation, so we're seeing a real-time impact of the situation on our machine clothing segment's performance. If the travel and work restrictions were to continue for a meaningful period, not only would that significantly exacerbate the impact on machine clothing and force us to execute contingency plans, but we would also likely see an impact on the aerospace industry demand and global supply chain, which could start to impact the energy and composite segment. At this time, it's too early and there are too many unanswered questions for us to size the full potential impact on the company's 2020 results. However, we have incorporated that the guidance Stephen will provide, the direct impact we're seeing on the current disruption. With that, I'd like to turn the call over to Stephen, who will provide more details on the quarter and our initial guidance for 2020.