Albany International Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Albany International Third Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If you should require assistance during the call, please press star followed by the zero. As a reminder, today's conference is being recorded. I would now like to turn the conference over to the Director of Investor Relations, John Hobbs. Please go ahead, sir.

Thank you, Brad, and good morning, everyone. Welcome to Albany's third quarter conference call. 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 their associated reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning. We will make statements that are forward-looking that contain a number of risks and uncertainties, among which are the potential effects of the COVID-19 pandemic on our operations, the markets we serve, and our financial results. For a full discussion, including a reconciliation of non-GAAP measures we may use on this call to their most comparable GAAP measures, please refer to both our earnings release as well as our SEC filings, including our 10-K. Now I'll turn the call over to Bill Higgins, President and Chief Executive Officer. He'll provide opening remarks. Bill?

Thanks, John. Good morning and welcome, everyone. Thank you for joining our third quarter earnings call. We delivered another solid quarter. Our Q3 revenues were as expected, and our profitability was better than expected. A little bit of echo there echo there. All right, I'll continue continue. We're especially pleased with our operational performance doing a great job for our customers and our ability to drive profit to the bottom line. Before going into more detail, let me say a few words about the COVID pandemic environment. Our employees health, safety and well being remains our top priority. We continue to adopt adapt our operations and offices to ensure our employees are as safe as possible, commend our leadership teams and our employees who have remained disciplined and created safe environments inside our facilities, and have also provided support, advice, and supplies to our employees at their homes to encourage safe behaviors in their communities. In spite of these challenges, our management teams have done a remarkable job delivering commendable Q3 results. In Q3, we delivered adjusted EPS of 96 cents, better than expected with both segments contributing to the solid performance. Our customer performance is outstanding in both segments. We offer a range of value-adding products, strong customer technical support, and best-in-class on-time delivery performance. In the quarter, we continue to adjust our operations to right-size production levels to new levels of expected demand. We work closely with our customers to be prepared for demand shifts. This intense focus on the customer, complemented by our strong operational excellence programs, technology development, and productivity have resulted in our ability to continue to execute well and to deliver historically attractive margins despite the effects of the pandemic on our top line. Now, let me talk about the segments. Our machine clothing segment continues to deliver exceptional operational performance with gross margins over 50% and adjusted EBITDA margin of nearly 38% while revenue declined about 10% year-over-year due to the global economic slowdown. Machine clothing continues to execute well in all of our plants around the world, navigating the ups and downs in various end market segments. As expected, demand for writing and printing grades of paper is declining worldwide, according to some estimates by over 20%, driven by the acceleration of digital technologies with many people working and schooling from home. Consequently, a number of publication grade machines around the world have been titled, some permanently. Tissue and packaging are mixed markets. At home tissue demand for residential consumption is very strong. with tissue machines running at full capacity and new machines coming online. On the other hand, away-from-home tissue is weak because of the drop-off in consumption at restaurants, bars, schools, hotels, airports, office buildings, et cetera. And some custom machines for these grades are temporarily idled. While there are tissue machines being converted to at-home production from away-from-home, it is time-consuming and expensive for capabilities to switch from one type of grade to the other. In summary, the net effect for Albany is a slight decline in tissue revenues, with growth in at-home tissue demand being more than offset by the decline in away-from-home demand, as well as other factors. Packaging is also a mixed picture. We're likely experiencing the negative effects of the lockdowns and production slowdowns earlier this year, as our orders lag the cycles of paper demand by several quarters. The good news for the longer term is that the market is reporting stronger year-over-year packaging demand throughout the summer months. Another positive trend is the demand pickup in our engineered fabrics business. While engineered fabrics is a small part of our revenues, we've seen strong orders for our consumable belts used in the manufacture of sanitizing wipes, medical PPE products such as gowns and gloves, and for the construction materials as home construction rebounded after the initial slowdown earlier this year. In general, we're very pleased with the performance of our machine clothing business. It continues to perform well and provide a strong foundation of recurring cash flow that complements our aerospace composites portfolio in these volatile times. We expect the machine clothing segment to report a solid year of performance despite the pandemic, with adjusted EBITDA to be $200 million or more in 2020. Our Albany engineering composite segment also performed well this quarter and delivered a healthy adjusted EBITDA margin of 26.6% in the quarter. As planned, our Albany Safran composites business worked closely with our partner Safran to successfully reopen our LEAP production facilities and gradually restart production in the quarter. Our manufacturing focus in ASC will be mostly on the LEAP 1A engine blade and fan case production since demand for the Airbus A320neo engine is expected to increase more quickly as production of the Airbus A320neo aircraft recovers. LEAP-1B production will take longer to recover while the Boeing 737 MAX gets certified and existing aircraft are brought into service. In addition to great safety and customer on-time delivery performance, I was favorably impressed with the number of lean Kaizen for the AEC business executed during the quarter, using video and other creative tools to conduct Kaizen safely. This lean mindset and leadership persistence is critical for us to continue to drive process improvements, better quality and productivity. all of which lead to improved profitability and enhanced growth opportunities as we pursue new content on existing platforms or new production programs. AEC continues to work with a number of customers on new growth opportunities in both commercial and military applications. We continue to invest in R&D to advance the next generation of composite materials and develop efficient manufacturing process to bring these materials to market. We look at the downturn in commercial aerospace as a time to develop a broader portfolio of technology and product applications for advanced composites, so we're well-positioned with key customers when the market comes back. The good news is that our elite production supplies narrow-body aircraft, which are expected to recover first as domestic travel resumes before international travel. It's been reported, in fact, that Airbus A320MIA aircraft are being flown at a rate approaching levels similar to a year ago. In general, we're very pleased with both segments, how they performed in Q3, and expect to end the year with solid results, despite the challenges of the pandemic globally. Financially, we're in great shape. We continue to generate free cash flow, have a strong balance sheet with low leverage and excellent liquidity, all of which allow us to continue to invest in organic growth opportunities, such as the next generation of machine clothing belts for our tissue and packaging customers, and longer-term applications for the next generation of 3D composite structures. And now Stephen will provide more detail on a quarter of financials and outlook. Stephen?