Albany International Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Albany International fourth quarter 2021 earnings call. At this time, your telephone lines are in a listen-only mode. Later, there will be an opportunity for questions and answers with instructions given at that time. If you should require assistance at any time during the conference call, please press star, then zero, and an AT&T specialist will assist you offline. As a reminder, your call today is being recorded. I'll now turn the conference call over to your host, Director of Investor Relations, John Hobbs. Go ahead, please.

Thank you, Alan. And good morning, everyone. Welcome to Albany International's fourth quarter 2021 conference call. As a reminder for those listening today, please refer to our press release issued last night detailing our quarterly financial results. Contained in the text of the release, 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, these 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 February 15th, 2022, as well as our SEC filings, including our upcoming 10-K. Now I'll turn the call over to Bill Higgins, President and Chief Executive Officer, who will provide opening remarks. Bill.

Good morning and welcome everyone. Thank you for joining our fourth quarter earnings call. We're pleased to report another strong quarter capping a great year in 2021. Our employees performed remarkably well throughout the year. We continue to do a great job for customers, won new business, brought new products to market, and navigated successfully through supply chain and COVID challenges. We generated record free cash flow of more than $160 million in 2021. our highest cash flow in the history of the company, on sales of $929 million with over 40% gross margins, 27% adjusted EBITDA margins, and world-class operational performance in delivery quality and safety. At the segment level, machine clothing's operational performance and financial results continue to be exceptional. With better-than-expected customer demand at year-end, machine clothing was able to deliver fourth-quarter sales growth of nearly 10% over prior year's fourth quarter and do it with great flow through to the bottom line at 52% gross margins and 38% e-theta margins. Engineer composites also performed well in the quarter with solid program execution across the board. Commercial aviation recover is underway and its initial stage is in 2022. The recovery will be seen as a mixed shift as our elite production volumes ramp back up to support narrowbody aircraft demand. Beyond 2022, as the recovery progresses, we're excited as growth is expected to continue for our LEED and CA53K programs and the anticipated wide-body demand recovery begins. We also expect new business wins will layer on top of that to provide a solid foundation for longer-term growth beyond 2023. As we ended last year, demand in our end markets was healthy, yet still recovering in a few areas. Machine clothing demand was better than expected, and appears robust entering 2022. Packaging, pulp, and engineered fabrics have all been strong, especially packaging in the Americas and Europe. Even publication enjoyed slight growth in 2021, perhaps a short-term rebound, as we expect publication will revert to the longer-term downward trend as digital media continues to replace printing and writing paper. While machine clothing demand is expected to remain healthy in 2022, We're somewhat cautious as some customers may have built up on-hand inventory of machine clothing belts to mitigate the risk of supply chain and logistics disruptions. The outlook for engineer composites demand is improving as commercial aerospace gradually recovers from the pandemic. Domestic airline travel is leading the way while international travel is still slow to come back. Consequently, narrow-body demand has already picked up, and we're ramping our lead production to meet the needs for the Airbus A320neo and Boeing 737 MAX aircraft. We do not expect a recovery in wide-body production, and specifically for our Boeing 787 composite frames manufacturing in 2022. It'll take longer. On the defense side, we have great programs, Joint Strike Fighter CH-53K, JASM missile that have longevity, In the short term, we do see some temporary headwinds on the Joint Strike Fighter as inventories have been overbuilt. Longer term, however, as production plateaus and more aircraft enter service, we expect this to remain a healthy and attractive program for us. Now, let me make a few comments about our strategy. Our first strategic priority is to invest in R&D and product development for organic growth. As planned, we increased R&D investment by 10% in 2021. We added talent to our design, engineering, and customer pursuit teams. We continue to collaborate with key customers to design the next generation of advanced materials and bring new products to market. Our strategy is to position Albany as the technology leader and partner of choice in our segments and markets. This means we must be good at both advanced materials development and operational performance to win new business and to expand our market share with existing customers. Our machine clothing business has successfully used this strategy to establish a leadership position second to none in its industry. We've earned a long-standing reputation for producing products of exceptional quality and durability for our customers. We spend more on R&D than our nearest competitors, and we work intimately with customers to design solutions that address their biggest technical challenges. This results in a pipeline of new product introductions that our customers value. Furthermore, we support our customers with a technical sales team assuring customers they get the best paper quality and production efficiencies that our products can deliver. About a decade ago, machine clothing management recognized the secular shift in the paper industry and redirected investment to emphasize serving customers in the growth areas of the business. That strategy continues to pay off. Today, sales to tissue and packaging producers account for the majority of our revenue, while sales to producers of printing and writing grades of paper, the grades in secular decline, contributed only 17% of our sales, down significantly from over 30% 10 years ago. Machine clothing's focus on improving its global footprint, product technology, operations, and continuous improvement has paid off. As I previously mentioned, machine clothing delivered record-adjusted EBITDA margins of more than 38% in 2021. That's nearly a 10 percentage point expansion over the past decade, reinforcing our strategy of providing the most advanced material solutions with great operational execution. In engineering composites, we're earlier in the journey. We're executing a consistent strategy to bring the next generation of advanced materials to market, and we're earning a reputation for operational excellence and great customer service. It builds on the application of 3D woven composites we developed by collaborating with Saffron on leaf fan blades and cases. The durability and performance of 3D woven composites exceeds those of any other fan blade materials, titanium or 2D composite blades. And the production rates we achieved have demonstrated the commercial feasibility of high-volume production of 3D woven composite components. We're using the LEAP experience as a springboard to build a complement of composite design engineering and manufacturing capability and propagate the use of 3D woven structures across the aircraft. The strategy takes advantage of long-term secular trends driven by climate change and energy efficiency that demand lighter and stronger materials that raise the bar for fuel efficiency and contribute to a more sustainable future. Our strategy is to be at the center of this shift to lighter composite aircraft. We believe it will include a range of composite materials and applications, the right material and manufacturing process for the job. Over the last 18 months or so, we've announced new business wins, partnerships, and technology collaborations that advance the strategy to become the leader, the leading supplier of advanced composite technologies and solutions. We've been awarded more content on existing aircraft, including Boeing 787 composite frames, Lockheed Martin Joint Strike Fighter composite components, now over 200 part numbers, and on Sikorsky's CH-53K helicopter. Winning this additional share reflects the strength of our operational performance, on-time delivery quality and service, and how important it is to our customers. In 2021, we extended our technical collaboration with Safran for 25 years with the goal of developing the next generation of 3D-woven composite products for the revolutionary RISE engine to power the next generation Narabar aircraft. We're also working on the GE9X with Safran to develop a composite fan case for wide-body aircraft. In addition to engines, we're working on 3D woven composite applications for wings as a partner with Airbus on the Wing of Tomorrow program. And in 2021, we also formed a technology collaboration with Spirit Aerosystems to develop 3D woven carbon-carbon composite materials for high-temperature use on hypersonic vehicles. Another application, we're excited about the unparalleled benefits of 3D woven composites. And today, we're pleased to announce that Sikorsky has awarded Albany the CH53K Aft Transition Manufacturing Program. This program award reflects trust and confidence in our ability. It solidifies our strategic relationship with Sikorsky on a durable program critical to defense capabilities with a value over $300 million. It also positions Albany as a major player in composite rotorcraft structures. We already manufacture the CH-53K sponsons and vertical tail. And with the aft transition section, we essentially will manufacture the back half of the helicopter. This win adds to the foundation we're building for long-term organic growth. Effective capital allocation remains a top priority and continues to be focused on driving long-term organic growth. It starts with research and development. And while these expenditures live on our income statement, we consider them an essential investment in our future success. Our capital expenditure program focuses not only on maintaining our current capabilities, but advancing our production efficiency and growing our capacity and capabilities as our business base grows. Share repurchases supplement our regular dividend as a flexible method of capital return. Finally, targeted discipline acquisitions will continue to be a key element of our long-term growth strategy, at the right price, of course. Historically, acquisitions have played an important role by enabling us to build on our technology leadership and global market positions in line with our strategic priorities. As a company, we ended the year 2021 in great shape, a strong pre-cash flow generation, a robust balance sheet, a relentless focus on operational excellence, and leading technologies in both of our segments. We continue to invest in R&D to position Albany for long-term organic growth. We believe long-term secular trends are favorable. Machine clothing continues to advance its technology leadership position globally in an industry that is becoming more attractive as a sustainable resource as paper replaces plastic. Engineer Composites continues to win new business as the emerging partner of choice for the next generation of advanced, lightweight composite material applications on aircraft that will deliver on the promise of more sustainable aviation. So with that, I'll hand it over to Steven.