Albany International Corporation

This conference is being recorded. Ladies and gentlemen, thank you for standing by and welcome to the Albany International Third Quarter Earnings Call. At this time, parties are in a listen-only mode. We will conduct a question and answer session later. Instructions will be given at that time. If you should require assistance during the call, you can press star and then zero. And as a reminder, this conference is being recorded. I'd now like to turn the call over to our host, Director of Investor Relations, Mr. John Hobbs. Please go ahead, sir.

Thank you, Brad, and good morning, everyone. Welcome to Alderney International's third quarter 2021 conference call. As a reminder for those listening on the call, please refer to our press release issued yesterday afternoon detailing our quarterly financial results. Contained in that text is a notice regarding 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. Today, 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 of October 25th, 2021, as well as our SEC filings, including our 10-K. Now I'll turn the call over to Bill Higgins, our President and Chief Executive Officer, who will provide opening remarks. Bill?

Thank you, John. Good morning. Welcome, everyone. Thank you for joining our third quarter earnings call. We're pleased to report another good quarter of results. We executed well, and we continue to do a great job for our customers on many fronts in quality, delivery, service, and our technology partnerships. Our supply chain teams work 24-7 to overcome unprecedented logistics challenges and material shortages to keep our factories supplied. And I'm most pleased that we achieved a record level of performance in safety, something our teams have been working hard at in all of our plants around the world. As a company, we delivered GAAP EPS of 95 cents, 83 cents on an adjusted basis, on $232 million in revenue, an increase of nearly 10% from Q3 last year. Our machine clothing segment continues to fire on all cylinders and grew sales by 11% compared to Q3 last year, with excellent profitability and free cash flow generation. Engineered composites delivered top-line growth of nearly 7% and performed well as we worked toward the upturn in commercial aerospace. Our profitability was solid with gross margins of 40%, operating margins of 19%, and adjusted EBITDA margins of 26%. And we continued our strong free cash flow generation, over $40 million in the quarter. We have low debt and a healthy balance sheet, and we look forward to continuing solid performance from our machine clothing segment and gradual recovery in commercial aerospace. As we mentioned last quarter, long-term secular trends are favorable. and Albany's market positions, global footprint, and product development take advantage of these trends. In our engineered composite segment, we expect commercial aerospace to gradually improve, with narrow-body aircraft demand improving before wide-body demand. Consequently, we're hiring employees and planning for a ramp-up in lead production, driven by Airbus A320neo and Boeing 737 MAX growth. We're coordinating with Safran to expand production in our three lead facilities in the U.S., France, and Mexico. We see positive signs in international travel bookings as borders reopen and people have begun to travel internationally, although we don't expect any near-term pickup in wide-body production demand, such as for our Boeing 787 composite frames line, as there's still inventory in the system and international travel has been slow to recover. Our AEC businesses continue to perform well on our military platforms, Sikorsky's CH-53K helicopter, Lockheed Martin's F-35 joint strike fighter, and JASA missile programs. We're fortunate to be on excellent programs and our teams are executing well. We also continued our pursuit of new customers and new applications for advanced composites. During the quarter, we announced our technology collaboration with Spirit Aerosystems to apply our advanced 3D woven composite technology to hypersonic vehicles and take advantage of our proprietary 3D woven composites in a high temperature environment, providing both structural robustness and thermal protection. and build in on our proven ability to industrialize 3D woven composites at high volumes. This is an example of the intense collaboration our teams are good at, working closely with our technology partners in the design, development, and commercialization of the most advanced composite applications. In addition to working on engine component applications with our partner, Safran, we continue development of wing applications with Airbus Wing of Tomorrow program and other composite programs and commercial and defense applications. Our machine clothing segment continued to perform exceptionally well. Our engineers and sales and service teams in MC work closely with key customers to develop the next generation of belt materials for improved operational efficiency, performance, and durability. And customers value our service, technical expertise, and innovation. We saw good demand in the quarter for new products in all product lines. Demand in MC's end markets has been resilient and particularly strong in packaging in the Americas. Tissue markets have held up, although demand is mixed and flat overall, as tissue machine utilization is below long-term averages and tissue producers are working through distortions caused by the pandemic's effect on away-from-home paper markets. This should improve as workers go back to offices and students are back in school. In other end markets, demand was strong in the quarter for corrugators, nonwovens, and building products. Even publication was better this quarter, likely a pause in the longer-term secular decline of printing and writing grades of paper. We're seeing significant logistics challenges in price inflation on various raw materials and wages. So far, supply chain management and operations teams have done an excellent job. They've been able to secure the materials we need to run our operations at only moderate increases in cost. In general, we strive to offset inflationary costs through productivity savings, but this time may be different as we don't see inflationary pressures abating anytime soon. If anything, conditions grew more challenging during the third quarter. Let me make a few comments on corporate governance and capital allocation before turning the call over to Stephen. In early August, the company moved closer to a single-class share structure following the secondary offering of nearly all of the Standish family's ownership in the company with their few remaining shares converted to Class A common stock. As a result, today there are more than 32.3 million shares of Class A common stock outstanding and less than 1,200 shares of Class B stock outstanding, which are held by two former employees. The transaction effectively created a conventional single-class governance structure for our shareholders. Regarding capital allocation, as we mentioned in the past, Our priority is to use our balance sheet first for organic growth investments, where we can add value for our customers, and then acquisitions that fit our strategy enable us to build on our technology leadership and market positions in both segments. Adding to these options, Albany's Board of Directors has authorized a $200 million share repurchase program, expanding the set of capital allocation alternatives we have at our disposal. We continue to look for acquisitions that advance our technology and market position at a fair price, and we're focused on value creation from both an organic and inorganic investment perspective. In summary, we had another good quarter. Our businesses are executing well. We continue to push the envelope in our technology development with new products in both segments, and secular trends in our end markets are favorable. So with that, I'll hand the call over to Stephen for more detail on the financials. Stephen? Thank you, Bill.

Good morning to everyone. I'll talk first about the results for the quarter and then comment on the outlook for our business for the balance of the year. For the third quarter, total company net sales were 232.4 million, an increase of 9.6% compared to the 212 million delivered in the same quarter last year. Adjusting for currency translation effects, net sales rose by 8.8% year over year in the quarter. In machine clothing, also adjusting for currency translation effects, net sales were up 9.9% year-over-year. All major grades of product, led by engineered fabrics and packaging grades, contributed to the year-over-year increase in net sales. Engineered composites net sales, again after adjusting for currency translation effects, grew by 6.7%, primarily driven by growth on LEAP and CH53K, partially offset by expected declines on the 787 and S35 platforms. During the quarter, the ASE LEAP program generated about $25 million in revenue, comparable to the first two quarters of this year, but up about $9 million from the third quarter of last year. We are pleased with the reduction in our inventory of LEAP 1B finished goods. During the most recent quarter, we reduced that inventory by over 30 engine shipsets, down to about 140 engine shipsets on hand. Given the current rates of inventory consumption on that program, we would not plan to have that inventory level drop below about 100 engine shipsets, so we can see the light at the end of the tunnel in terms of inventory destocking. I'm looking forward to an earnings call when I no longer have to discuss LEAP-1B inventory at all. We hope to return to a more normal level of production on Leap 1B, on par with the current production rates for Leap 1A early in 2022. However, we do have some concern with the rate at which Boeing is destocking its inventory of finished 737 MAX aircraft, so there is still some lack of clarity around 2022 build rates. We will hopefully have better insight for you on our fourth quarter call. Also during the quarter, We generated under $3 million of revenue on the 787 program, down slightly from the second quarter, but down from almost 9 million in the same quarter last year. Third quarter gross profit for the company was 92 million, an increase of over 5% from the comparable period last year. The overall gross margin decreased by 160 basis points, from 41.2% to 39.5% of net sales. Within the MC segment, gross margin was flat at 51.5% of net sales, as the benefit from improved absorption was offset by the impact of year-over-year foreign currency changes and rising input costs. For the AEC segment, the gross margin declined from 21.6% to 16.1% of net sales, caused by a smaller impact from changes in the estimated profitability of long-term contracts. a change in program mix and lower fixed cost absorption due to the lower 787 and F-35 revenues, and the impact of sharing with our customer base a portion of the Aviation Manufacturing Jobs Protection Grant received during the quarter. The $5.8 million benefit of this grant appears in the corporate portion of the results. while the reduced profitability caused by sharing a portion of the grant with our customer base is reported in the segment results. During the quarter, we recognized a net favorable change in the estimated profitability of AEC's long-term contracts of about $2 million, but this compares to a net favorable change of about $3.5 million in the same quarter last year. Third quarter selling, technical, general, and research expenses were 47.4 million in the current quarter, down slightly from 47.8 million in the prior year quarter, and were down as a percentage of net sales from 22.6% to 20.4%. While R&D was up over 1 million this quarter, and while we also incurred higher travel expenses, these were more than offset by a foreign currency revaluation gain this quarter compared to a foreign currency revaluation loss in the same quarter last year. Total operating income for the company was $44.5 million, up from $38.8 million in the prior year quarter. Machine clothing operating income rose by $9.8 million, driven by higher gross profit and lower STG&R expense. and AEC operating income fell by $3.9 million, caused by lower gross profit and higher STG&R expense, partially offset by lower restructuring expense. The income tax rate for this quarter was 29.4%, compared to 24.7% in the same quarter last year. The higher rate this year was caused by the generation of a higher share of our global profits in jurisdictions with higher tax rates and by less favorable discrete income tax adjustments. We reported over $2 million in expense under other income expense this quarter, primarily due to a true-up of indirect taxes in a foreign jurisdiction. Net income attributable to the company for the quarter was 30.9 million, an increase of over 1 million from 29.6 million last year. The increase was caused primarily by the higher operating profit, partially offset by higher interest expense and the higher tax rate. Earnings per share were 95 cents in this quarter compared to 92 cents last year. In addition to the normal non-GAAP adjustments we typically make to cover the impact of foreign currency revaluation gains and losses, restructuring expenses, and expenses associated with the SERCOMP acquisition and integration, this quarter we are also adjusting out the impact of the Aviation Manufacturing Jobs Protection Grant, as we do not believe it is reflective of ongoing profitability. After making these non-GAAP adjustments, Adjusted earnings per share was $0.83 this quarter compared to $0.96 last year. Adjusted EBITDA declined by 2.6% to $60.2 million for the most recent quarter compared to the same period last year. Machine clothing adjusted EBITDA was $59.2 million or 38.4% of net sales, up from $52.6 million or 37.9% of net sales in the prior year quarter. AEC adjusted EBITDA was 16.3 million or 20.8% of net sales down from last year's 19.5 million or 26.6% of net sales. Turning to our debt position, total debt, which consists of amounts reported on our balance sheet as long-term debt or current maturities of long-term debt remain steady at $350 million. We have a floating fixed interest rate swap in place at that level for the life of the current credit agreement, and currently we do not intend to pay down total debt below that level. Cash increased by about $33 million during the quarter, resulting in a reduction in net debt by the same $33 million. Capital expenditures in the quarter of about $9 million were roughly the same as incurred in the same quarter last year. From a capital employment perspective, as Bill mentioned, our priorities are unchanged. The first priority is organic investments, followed by disciplined and targeted acquisitions, followed by returning capital to shareholders. Our fundamental strategy has not changed. However, given our modest leverage and strong free cash flow outlook, the Board of Directors has authorized a $200 million share repurchase program. We believe that such a program will be the most efficient, effective and value additive approach to returning additional capital to our shareholders. While there is no guarantee that we will execute all or even any of this authorization, it is the company's intention to make use of this authorization subject to prevailing market conditions and while recognizing the inherent limitations on how quickly we can execute such a significant program. Fully executed, the share repurchase program would increase our net leverage a little under one turn of EBITDA, leaving us with sufficient dry powder for additional strategic actions. As we look forward to the balance of 2021, the outlook for the machine clothing segment remains strong. Q3 revenues were up over 11% compared to last year, partially aided by some currency tailwinds to revenue, primarily due to strong euro. Packaging and tissue grades remain the primary drivers of long-term growth. While we also saw a nice recovery in publication revenue in the third quarter, driven by a return to offices and schools, a continuation of this recovery is in jeopardy as a result of the Delta variant surge, which has paused some return to office efforts. Also, after we get through the pandemic effects, we do not expect any change in the long-term secular decline in the publication market. I would also like to note that the growth rate for the MC segment this quarter was unusually high, driven by timing of customer needs. Segment orders year to date are up about 6% compared to last year. and backlog entering Q4 is only modestly higher than at the same time last year. We typically generate about 23 to 25% of the segment's revenue in the fourth quarter, and we expect this year to be broadly similar to that. As a result, we are raising our previously issued guidance of revenue for the segment to be between 600 and 610 million, up from the prior range of 585 to 600 million. From a margin perspective in machine clothing, we delivered another strong quarter which adjusted EBITDA margins of almost 39%. We are seeing increased pressure from input expenses of all types, particularly logistics, and expect these pressures to continue to increase through the balance of the year. However, as previously discussed, many of these cost increases, which began in Q2 and accelerated in Q3, have yet to materially impact our results due to both the terms of our supply agreements and the roughly six-month lag between procuring raw materials at a higher cost and those costs being reflected in the segment's cost of goods sold. We will see more impact from these cost pressures in Q4, but will not see the full impact until 2022. In addition, late in the third quarter and early in the fourth quarter, we have seen some relaxation of travel restrictions in certain regions and are beginning to see our level of visits to customers increase, which will result in somewhat higher SG&A in the fourth quarter. Driven primarily by the strong revenue performance, we are increasing our adjusted EBITDA guidance for the segment, to a range of 215 to 225 million, up from the prior range of 210 to 220 million. Turning to engineered composites, we delivered a strong quarter, very much in line with expectations. Last quarter, we indicated that we expected Q3 profitability to be similar to that delivered in Q1, and it was within a few hundred thousand dollars of that level. We were very pleased to be awarded an aviation manufacturing jobs protection grant during the quarter of 5.8 million, which recognizes the challenges that we, along with the rest of the industry, have experienced due to the COVID pandemic. However, as I already noted, we have adjusted the effects out of both Q3 adjusted results and segment guidance for the year, as it is not reflective of continuing operational performance. While unlikely to have any material impact on the balance of 2021, we are concerned about the slow recovery of the Boeing 787 program, where Boeing has indicated that they will continue to produce at a low rate for the foreseeable future. As of the end of the third quarter, we had the equivalent of about five shipsets of 787 product in either finished goods or with, which is not unusually high. However, significant quantities of our finished goods exist in Boeing's overall supply chain, which, combined with Boeing's low level of production, will likely lead to very low levels of production for us for the foreseeable future and may even lead to significant production gaps. Any impact on 2021 would be modest, as we are not anticipating any significant recovery on the program this year, but it will likely delay any meaningful recovery on the program until beyond 2022. As you know, our production levels on the F-35 have been uncertain this year as our customer has dealt with issues elsewhere in the supply chain over the last 18 months and with lower depot consumption of aftermarket parts. We are confident in our outlook for the balance of the year But I will note that Lockheed Martin and its government customer have established a new outlook for program production that plateaus at 156 aircraft in 2023, a lower rate and an earlier date than the previously planned plateau. The F-35 remains a very good and profitable program force. This programmatic change has no impact on this year, but it will likely temper the revenue upside and the program force in future years. Overall, for the AEC segment, the year is progressing largely as we expected when we last issued guidance, although we are now less concerned about downside risk. Therefore, we are raising the lower end of our guidance range for segment revenues, resulting in a range of between $300 and $310 million, up from the previous range of $290 million. 310 million. From a profitability perspective, given the years progressing large as expected, we are maintaining the previously issued guidance range for AEC-adjusted EBITDA of between 65 and 70 million. We are also updating our previously issued guidance ranges for company-level performance, including revenue of between 900 and 920 million increased from prior guidance, of 880 to 910 million. Effective income tax rate of 28 to 30%, unchanged from prior guidance. Depreciation and amortization of about 75 million, unchanged from prior guidance. Capital expenditures in the range of 40 to 50 million, also unchanged from prior guidance. Gap earnings per share of between $3.23 cents and $3.38 increased from prior guidance of 284 to 314. Adjusted earnings per share of between 315 and 330 increased from prior guidance of 290 to 320. And adjusted EBITDA of between 230 and 240 million increased from prior guidance of 225 to 240 million. Overall, while the pandemic is not yet behind us and risks still remain across our business, we are very pleased to be able to raise guidance yet again, reflecting the hard work and dedication of our teams across the globe. The coming years will continue to be a challenge as we and the rest of the industry slowly recover from the severe downturn in commercial aviation and as the machine clothing market searches for its new post-pandemic normal. We also recognize that there are risks ahead in terms of supply chain constraints and inflationary pressures should the recent and current increases be more than transitory. However, our track record of operational excellence and continuous improvement positions us well to address these challenges. With that, I would like to open the call for questions. Brad?

Yes, thank you. And ladies and gentlemen, if you do wish to ask a question, please press 1. and then zero on your telephone keypad. You may withdraw your question at any time by repeating the one zero command. And if you're using a speakerphone, please pick up the handset before pressing the numbers. And we'll first go to the line of Peter Arment with Baird. Please go ahead.

Hi, good morning. You actually have Eric Rudin on the line for Peter today. If I could start maybe just at AEC in terms of the max D-Stock there. Just thinking through this, it actually looks like you grew contract assets by about $3 million, which compares to the $16 million and $10 million burndowns in the first half of the year here. How does that actually tie to this D stock? I know you mentioned the 30 ship sets decrease. I would have expected the cash piece to be a bit higher there. Can you just help us think through the puts and takes on revenue and cash recognition there?

Sure. Look, your general premise is correct, that with burning through that inventory of finished goods, those are in contract assets on which we have already recognized revenue and profit, and we just collect cash as we ship them. So in general, that does lead to better cash flow conversion. I think it's important to understand that within contract assets, it's far more than just LEAP 1B. In particular, the F-35 and the CH-53K programs are also in there. 787 is in there. And those programs, you know, they're lumpy. CH53K, in particular, is a lumpy program where in certain quarters, we go grow contract assets significantly. In other quarters, we collect cash based on, you know, deliveries of our product. So those parts, particularly the very large parts of CH53K, the sponsors, and the vertical rotor pylon, they're very large parts, take a long time to produce. So we build a lot of contract assets as we go through those production processes, which we then liquidate when we ship an invoice after part delivery. So it's really driving that contract assets growth is other programs other than LEAP 1B.

Okay, thank you. That's pretty helpful. And then just in terms of thinking through the rest of this year, can you just provide some commentary around how we could end up actually seeing the bottom end of the EBITDA guidance range coming into play? Or is it safe to say you should be trending much closer above or to the top of the end here? Especially at MC, I think if I run the math for the fourth quarter implied margin would be below 30% on the bottom end, which would be a pretty dramatic fall off from the levels we've been seeing in recent memory here.

It's certainly true that we're trending, based on recent experience, we're trending towards the upper end of our guidance range. And we certainly hope to deliver in the upper half of our guides range. But it's early in the quarter. There's still a lot that has to get done to deliver on that. So I'm not prepared to tighten the range at this stage. But certainly your basic premise is correct. But based on recent experience, we should be trending toward the upper half of that range.

Yeah, and I might add just some color. The EMC business, we had customers that took delivery of material from which helped with our sales growth in q3 and you know i think there's a lot of concern out there in the supply chain logistics and people not able to acquire materials they need there's probably some behavior out there of bringing material in early we did that a little bit we add a little bit to our inventory so that we're protecting our ability to produce um so that could slow down if things get better so we're just going to look at the the cyclicality and the lumpiness of the businesses okay that's helpful and then

Just looking to 2022 at MC, I know obviously no guidance here, but just is there anything you can give us in terms of sizing the actual margin impacts you're thinking about in terms of the supply chain headwinds, given that there is that six-month lag for the rising input costs to actually flow through? Just anything you can give us there would be helpful.

You know, it's a little early to tell for the fall of 2022, given we don't know when these increases are going to end. So, you know, the increases we've seen to date, you know, have certainly been in the, you know, few hundred basis points, let's say, but those increases are continuing. and it's premature of us right now to talk about what the impact might be for the full year of 2022. When you get around to issuing guidance in February, hopefully by then we'll have more clarity into whether this inflationary spike was transitory or sustained, and if sustained, we'll be better able to project what the impact will be in the fall 2022. But it's a little early to project that at this stage.

Okay. Thank you. I appreciate the color. I'll hop back in queue.

Thank you.

And next we'll go to the line of Michael Cernali with Truist Securities. Please go ahead.

Hey, good morning, guys. Thanks for taking the questions. Nice results here. I kind of wanted to stay on both of those lines of questioning, but maybe just thinking about the mechanisms you guys have in place to pass through some of these costs. Maybe we start with the engineered components first. I know you have a cost plus agreement with Safran. Does that cover some of the raw material increases or just, you know, naturally under master contracting agreements, you know, assuming, you know, Hexel is raising prices or other chemical components or, you know, seeing significant inflation? Are you able to pass all of this through or what can you kind of say on the aerospace AEC side first with the pricing environment?

Yeah, so look, we have two types of contracts. Under the cost plus contract at Safran, all of those cost increases get passed through, whether they're increases in raw materials or increases in labor costs or increases in logistics, all of that gets passed through. So we are protected there from price increases. On the bulk of the rest of our business, which is primarily fixed price contract, some of it government business, some of it commercial business, On the commercial business, we will typically have entered into some multi-year contract at a firm fixed price. There will be some protection on the raw materials, particularly with the fiber and the resins, which are typically specified by our customers. We purchase it under an enabled material supply contract from our customer, and typically we will get to pass along some of those materials. if not all, of those price increases in the core raw materials. There are a lot of raw materials that don't end up in the finished product, if you like, non-end item stuff that's used within our factory, whether it's vacuum bags or gloves or anything else. On those sorts of contracts, those sorts of increases we will not have protection for, nor will we have protection for increases in labor costs in those sorts of contracts. On government contracts, You know, it's kind of a hybrid in the middle, and it depends on the specific contract. But the way a lot of our government contracts work is they're negotiated fixed-price contracts, where each time we get a new award, we disclose all of our prior cost and pricing data and establish a new baseline that will allow for profit margins. If there are those price increases that occur in the system, we do get to pass those along in the next go-round of negotiation of the next phase of that contract. How long that is before we get to negotiate that next phase really depends on the individual contract. In some cases, we're pricing a new buy every year or 18 months. In others, it could be three or four years in between negotiations. So that's why it's a hybrid somewhere in the middle. There is some protection, but certainly not as much as on the Safran contract. So overall, on AEC, we have certainly some exposure, particularly to the labor cost. But on the core raw materials, we're largely protected.

Okay, got it. And then presumably machine clothing, it's really just a grind, you've got to use productivity to offset, you know, any of those increases, because I think the contracts are more lengthier in nature, and they don't often come up for renewal. Is that correct?

Yeah, and it depends on the customer and the specific contract. There are three types of contracts. Some are repriced regularly. Some are firm fixed price for many years with no reopener. Some have an escalator in there, whether it be tied to some industrial or consumer price index. But overall, it's certainly true that We do not get to pass along the full impact of the cost increases to our customers. And as you say, we do have to rely on continuous improvement efforts to offset a significant portion of that increase.

Yeah, as I noted in my commentary, we've done a really good job over the years of offsetting inflation, wage inflation, inflation. at lower levels now that we're seeing higher increases of wage pressure around the world in both segments, but in machine clothing, it's more work to try and offset that through productivity and cost savings. But we'll be able to get part of it, but it just depends on how high wage inflation goes here.

Got it. Helpful. And then just shifting to the F-35, you know, obviously you guys articulated the new plan from Lockheed. I mean, Are you guys going to be dealing with any sort of inventory destock? I mean, those original plans, you know, I think called for, you know, maybe close to 170 units this year moving to 180. Are you going to have to deal with any excess capacity? Presumably there's going to be a headwind on revenue as that program flattens out. But anything else on the destock or, you know, maybe excess capacity weighing on margins that we should be aware of?

I don't see any destocking challenge, anything of that severity. It's more the revenue pressure and managing the production, you know, through the next couple of years and trying to keep it at a level rate so that we can be most effective, most cost effective in the factory with our suppliers as well.

As we've said before, Mike, we did go through some degree of inventory destocking this year, unrelated to the plateau from 56th. And so we're absorbing that impact this year. As I think you know, we have been on the trajectory for we're growing our average revenue per ship set. So at the same time as this is leveling out, there's been some growth in that. So it's a little noisy in terms of showing our exact revenue. profile. Our exact revenue profile won't match Lockheed's build profile exactly, but there's a little uncertainty in the out years exactly how those two effects are going to feather together and what sort of growth or lack thereof we might see in 22, 23, 24, but we'll have more color when we issue guidance.

Yeah, I would say too the other thing that's a little hard for us to predict is what the demand is going to be for sustainment for the aftermarket repairs and overhauls and whatnot. Sometimes that's hard for us to see going forward.

Got it, got it. Yeah, and I think they actually put out Lockheed called sustainment maybe growing 6% CAGR through 26 in their slides today. Last one I had, I know you're not going to obviously provide 22 guidance, but, you know, mashing this all together, you know, F35, 787 at drag, sounds like the max production rate is still an unknown. you're going to exit fourth quarter with a machine clothing EBITDA margin, you know, 30%. You know, maybe it's a little bit better. Sounds like that gets more challenging, you know, as we go into next year. I mean, just trying to calibrate us for 22, I mean, it seems like it could be a challenge to grow earnings year over year if there is pressure, you know, all those kind of unknowns and pressures and, Is that the right way to kind of be thinking about the operations as you move into 2022?

Now, again, as you pointed out up front, we're not going to give guidance for 2022. I will note in your list of things that you noted machine clothing margins close to 30% in Q4. I'd be careful about using that as some sort of jumping-off point for predicting 2022 margins in that business. Typically Q4 is one of our lower absorption quarters. There are a lot of holidays in the quarter and therefore lost production days and therefore lower absorption. Therefore, you know, fixed cost is more of a drag on our production costs in fourth quarter. So that's not a normal number. I would be careful of rolling that forward into 2022. The other pressures you talk about certainly exist in 2022, and we have to deal with them. As you say, though, it's premature for us to start giving you any specifics. Bill, I don't know if you have other color to give on that.

No, not at this point. I think we'll come back to it. Okay. Fair enough. Thanks, guys. I'll jump back in the queue.

And next, we can go to the line of Peter Skibitsky with Allenbeck Global. Please go ahead.

Hey, good morning, Bill, Stephen, and John. Nice quarter.

Peter.

I guess I'll start with machine clothing. Even at the low end of your revenue guidance here, the updated guidance, it looks like you're expecting to be pretty much back to your pre-COVID volume levels, you know, up 6% year-to-date order-wise. I'm just trying to get a better feel from you if kind of the midterm outlook for machine clothing is the same, or you're thinking flat to maybe up low single digits, or has that changed at all for you guys after COVID with this kind of, you know, packaging surge? How are you kind of thinking about that?

Yeah, it's – It's not easy to see through how it plays out. Again, we're kind of talking about next year as we go forward. Obviously, we really like packaging and tissue markets, and that's where we've moved our strategic approach to, and we've had a good run there so far. Tissue has been sort of a mixed market, as we noted in our comments. At home and away from home, it behaved differently in the distribution channels, production, But overall, packaging has been really strong in the Americas. We've seen a little bit of a slowdown in Asia. We're watching China, for instance, with the energy shortages there and some material shortages. We're seeing a little bit of softness in China. But then Europe, it seems like it's a little bit behind in the recovery, so it's coming up a little bit. So it's a real mixed picture around the world, so that kind of gets hard to look through into next year at this point. Hopefully we'll have a better view on it when we get to the fourth quarter report.

Okay, yeah, I've been seeing some of the energy issues in China, so I hear you there. And then I just wanted to switch gears. Lockheed is talking about pretty meaningful supply chain issues on the military side, so not necessarily inflation and logistics per se, it seems like, maybe more so shortages. I guess we'll learn more later. But are you guys seeing any of that on your side, you know, real genuine, we can't get you the parts? supply chain issues on the military side, and do you have any visibility into any inventory building up on the military side for you guys because of that?

Yeah, we don't really see it, or I should say we don't really experience it. We start with raw materials of fiber and resin, and we make a lot of our components. We're not buying a lot of manufactured components that we assemble then into subsystems. So the products that we make were earlier in the supply chain, and we seem to be doing okay. I will say the behavior we see out there includes Albany as well, where we've added a little extra inventory for cushion. It's probably driving capacity constraints at suppliers in general, so I imagine that's what Lockheed is referring to it, in addition to the logistics and shipping challenges from all over the world. So we're not having that same experience, though.

Okay, okay. And just so, again, maybe you can talk to this generically or directionally, but it looks like CH53K is kind of all systems go. I think Lockie has talked about another production award or accelerated production there. And it seems like your F-35 comp would be easy going into 2022. So just directionally, should we feel good about those two programs?

Yeah, we feel really good about CH53K. And longer term, F-35 as well. We've just got to work through the next year or so on F-35.

Okay. Okay. Great. Thanks for the call, guys. And next we can go to Lionel with Cohen. Please go ahead.

Hey. Good morning, guys. Morning. So, a couple questions. Maybe, Stephen, could you talk about could you quantify the destocking again for 787, F-35, and any other programs in 2021. Just update us on what you expect those to shake out at.

Yeah, look, you know, kind of as we talked before that Back in 2019, 787 was north of $50 million. It was in the $40 million range last year in 2020. And this year, we'll be in the $10 million range when all is said and done. We've been in that $2 to $3 million per quarter range. uh and each quarter so far so it'll be in that range so you see there it's been an impact you know of about 30 million now that's a mix of you know he's talking and you know just reduced production rates overall uh but but just give you an idea that that's the impact here in 2021 787 f-35 you know is smaller we'd originally feared it could be a significant reduction it will be some reduction this year But it'll be lower than we'd originally feared. We'll see exactly where we come out. But, you know, reduction somewhere in that, you know, close to $10 million range is probably fair. Five to 10 for the full year is probably not unreasonable to assume. And in that case, that's largely driven by, you know, some destocking where they produced fewer aircrafts last year than they expected and consumed less in depots. They came into the year with more of our finished goods on hand than they had originally expected.

Okay. And those are the only programs you'd call out in terms of destocking this year. I mean, obviously, we're seven years old.

Yeah, look, on LEAP overall, you know, obviously we talk a lot about the destocking we're going through, but as we mentioned, in terms of revenue, you know, last year we produced close to 100 million of revenue on that program. This year, you know, it's going to be a similar number. We're trending a little higher than that, but, you know, a few million higher than that this year, but, you know, materially at roughly similar level as the growth in 1A has, you know, has picked up nicely. And even though we're not generating a lot of revenue on 1B, overall, it's about the same level of production as last year.

Okay. And I may have missed this in your opening remarks, but I think you mentioned 2 million of favorable EACs at Engineer Composites this quarter. And if that was the number, then what explains the sequential increase EBIT margin decline X if we take out EACs? Was there anything about the mix underlying that was different or any other costs that you want to call out specifically?

Yeah, no, look, it's primarily what I called out. Mix is a big driver where, you know, while year over year we have revenue growth, if you look where we grew year over year, LEAP grew, whereas programs like 787 and F35 declined. F35 and 787, certainly 787 as it was last year, much higher margin than LEAP last year. And so as we just, you know, grow one, shrink the other, you get a mixed impact where the margin comes down. This quarter was, you know, a little unusually low for F35 compared to some of their other quarters that didn't help us. And LEAP was unusually high, you know, on a relative basis. And then the lack of fixed cost absorption because of both 787 and And F-35 being down, both our fixed price programs produced in our Salt Lake City facility, we have to worry about the overall fixed cost absorption there. That was a challenge this quarter. You're right with the $2 million of EAC pickups. It was three and a half a year ago. So that million and a half alone represents a couple hundred basis points of margin degradation. So you add a few of those factors together, you get there.

Okay. And I know you don't want to guide 22. But I am curious, machine clothing, you know, been an upward revision story for a while now, for years, actually. So I'm curious, you know, at one point, we thought that, you know, under 200 million of EBITDA was the right, you know, baseline, I think a quarter or two ago, you mentioned it might be 200 million ish, or slightly better as the run rate. even with publication grade declines and what have you. Do you guys have an updated view? I mean, obviously this year you took up the numbers again, but how much of over-earning are we actually seeing? Order of magnitude, is there any way to kind of frame it? I'm not asking about 22, I'm asking about long-term. You know, what is sort of the right mean reversion level we're going to move back to?

Yeah, we don't see... We don't see a reversion back to where we were before below the 200 level. I mean, you know, we can't predict the future, and we haven't given guidance for next year, but we're going through our annual planning, our strategic look for the next number of years, and profitability is very, very good in MC. The work that we've done, the strategic work to shift the business towards the higher growth markets, packaging and tissue, and where the technology development is today, particularly in tissue, And then the global footprint we've had, we've done a really good job. The teams have done a great job over the years, and you mentioned it has been an upward revision for years because of that strategic footprint that we've worked towards by consolidating sites and moving towards where the customers are and having our operations running at the best utilization rates we can around the world and then shifting the mix once in a while if we need to to optimize. So the teams have done a really good job, We expect to, you know, we're still going to run above that 200 million. Can't say exactly how high above it, but we'll come back around on that when we talk about next year. But it is at a new level of performance, and we're really pleased with the teams and how they've done.

Sure. So 200 plus is sort of the low end, and we're at 225 this year. Last one, Stephen, I also thought you mentioned that Q3 had some more just timing of deliveries that benefited machine clothing in the quarter. Are there any – I imagine your salespeople are pretty close to when these things are going to need replacement. Are there any things you'd point out at least in 2022 about, hey, you know, this quarter is going to have more activity than that quarter, even directionally, just based on how these things are being utilized? And thank you.

Yeah, no, look, nothing unusual to point to really in 2022. As we look at third quarter of 2021, certainly two things are true. One, third quarter of 2020 was a little low. You know, third quarter of 2020 had been down, you know, I think it was 8% year over year from third quarter of 2019 and almost, you know, I think it was 9% sequentially from second quarter of 2020. So third quarter of 20 was a fairly low quarter. So it was a relatively easy comp. Part of what explains the high growth in the third quarter of 2021. But also, as Bill alluded to, there's a little bit of our customers being a little risk averse and maybe taking delivery of some product a little earlier than they may otherwise do so to make sure they can get it in the door since they're worried about logistics and supply chain constraints. But that partly, you know, might explain a little bit of a weaker Q4. I'm not sure yet. It's a little premature to talk about some particularly weak or strong quarters in 2022. At this stage, we don't see anything terribly unusual in 2022, but it's early yet. You know, things have a habit of changing quickly over the last couple of years, so that's why it's a little early for us to start giving any specific guidance. Thanks, guys. Hey, thank you, Colin.

Next, we'll go back to Michael Cernally with Tourist Securities. Please go ahead.

Hey, guys. Thanks for taking the follow-up. Just on the LEAP-B and the MAX in general, can we assume that your current production, are you in line with Boeing's stated 16 a month? And just remind us what – Boeing is going to take that to 31 a month and realizing you've got a little bit of destocking left to get to that 100. But I think, what would you say, 30 units this quarter, so 15 planes and maybe 20 left to go. I mean, when should we see or, you know, what's the normal lead time if they are going to go up to 31 per month?

Yeah, so right now, look, they're consuming not only, as you mentioned then correctly, during the quarter we shipped 30 more engine chipsets than we produced, equivalent to about five aircraft a month. You take that off the top. There is also a product, finished goods of our product elsewhere within the Boeing supply chain that's being consumed, whether it's at Safran or elsewhere in the engine supply chain. So right now we're producing well below Boeing's target build rate right now. And we don't expect that to materially change starting here in Q4. As I mentioned, we hope to see it pick up early in 2022, assuming everything goes smoothly and Boeing hits marks. But there's another couple of quarters to go before we settle down fully.

Yeah, I would say the short answer is no, we're not totally lined up with Boeing's production, but we are with Airbus A320. Got it. Perfect. Thanks, guys.

And currently we have no further questions in queue.

Good. All right. Thanks, Brad. Thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany International. And, of course, if you have any questions, please feel free to reach out to John Hobbs, our Director of Investor Relations. His number is 630-330-5897. Thank you and have a good day.

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