Albany International Corporation

Good day and thank you for standing by. Welcome to the Albany International Corporate Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Hobbs, Director of Investor Relations. Please go ahead.

Thank you, Jacinda, and good morning, everyone. Welcome to Albany International's second quarter 2023 conference call. As a reminder for those listening on the call, 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, those same statements apply to our verbal remarks this morning. Today, we'll make statements that are forward-looking that contain a number of risks and uncertainties which could cause actual results to differ from those expressed or implied. For a full discussion of these risks and uncertainties, including a reconciliation of non-GAAP measures we may use on this call to their most comparable GAAP measures, please refer to our earnings release of July 26, 2023, as well as our SEC filings, including our 10-Q and 10-K. Now I'll turn the call over to Bill Higgins, President and Chief Executive Officer, who will provide opening remarks. Bill?

Thanks, Sean. Good morning and welcome, everyone. Thank you for joining our second quarter earnings call. We're pleased to report another strong quarter of results with revenues of $274 million, up nearly 5% compared to the same period last year, and solid execution across our operations. Gap EPS of 86 cents was down from last year's $1.25, impacted by non-operational items that Rob will cover. Adjusted EPS was 90 cents, and adjusted EBITDA was nearly $65 million in the quarter. As a result, we finished the first half of the year in good shape, and we're raising our guidance for the full year. The machine clothing segment continues to deliver healthy results, with revenue growth of 5.6% on a constant currency basis. Gross margins in excess of 50% and adjusted EBITDA margins exceeding 37%. Our machine clothing team has done an outstanding job navigating the challenges posed by macroeconomic headwinds in Europe and China, inflation, and the effects of the war in Ukraine. Since the end of 2022, trends in machine clothing's revenues, operating profit, and adjusted EBITDA have all been positive and now exceed our pre-pandemic performance. These impressive results are testament to the effectiveness of machine clothing's disciplined operating model, the consumable nature of our products, and our well-earned reputation as a supplier of mission-critical paper machine clothing products with exceptional reliability and value to our customers. Last month, we announced our agreement to acquire the Heimbach Group, a manufacturer of machine clothing based in Germany. Heimbach is a great fit and creates opportunities to provide our customers with even more value. Geographically, Heimbach is strong in Central Europe, which complements our Northern European presence. The addition of Heimbach's Asian operations will augment our presence in faster growing Asia as well. Heimbach and Albany each have long, proud legacies in machine clothing, and we look forward to working with the Heimbach team and leveraging the best of both companies to add value for our customers and shareholders. We expect the transaction to be accretive in both earnings and cash flow in our second year of ownership. And we have good news this morning. We just heard from the regulatory authorities that we've been approved to proceed with the closure of the deal, and we're going to move towards closing. So, as we've said before, we expect closing to be in the second half of the year. We're pretty excited on the news we received this morning. The engineer composite segment achieved top-line growth of approximately $5 million in the second quarter, up nearly 5% compared to Q2 of 2022. Growth in the quarter was driven by higher revenues from commercial programs and from some smaller programs that we've brought on over the past 12 months. Our aerospace team continues to ramp up the CH53K production line and is doing a great job managing supply chain delays and supporting our customers. Adjusted EBITDA in this segment was about $21 million, relatively flat with the second quarter of last year. AEC continues to do a great job for customers in on-time delivery, quality, and customer satisfaction. And this strong operational performance is notable in an industry that's still hampered by supply chain delays and other challenges. It gives our customers confidence in our ability to take on new business, either through more content on existing platforms or new programs. Our aerospace team did a great job at the Paris Air Show, and our business team, our business development teams, our engineering teams had a full slate of meetings to discuss new opportunities for growth. In many ways, it built on the momentum we achieved last year at Farnborough. We continue to build our reputation as the premier partner of choice in composites manufacturing. Finally, I can report that our board of directors is working diligently on my succession. The CEO search process is well underway. I'm committed to a smooth transition, working with the board and the management team to continue executing our strategy and doing a great job for customers and shareholders. And we'll let you know as soon as we have an announcement to make. So with that, I'll hand the call over to Rob.

Thank you, Bill, and good morning, everyone. My first full quarter with Albany has been tremendous. I visited a number of our locations in both the U.S. and Europe, and I'm impressed with the very visible operational excellence across both businesses. The culture and our people are very inspiring, and I'm grateful for the opportunity to be on the team. We had another great quarter and continue to execute on our growth strategies, including the recently announced Heimbach acquisition. As Bill mentioned earlier, Heimbach is an excellent fit for us and creates real opportunities for significant value creation for our shareholders over time. Both former for the Heimbach transaction, our financial leverage will remain very modest, with net leverage slightly above one times the EBITDA as we plan to fund the transaction with available overseas cash. We will continue to have considerable room under the financial covenants in our revolving credit facility to invest in organic and inorganic opportunities. I will now turn to our second quarter results and then provide our updated outlook for the year. For the second quarter, total company net sales were 274 million, an increase of 4.9% compared to the prior year period. On a constant currency basis, net sales increased 4.8% year over year. In machine clothing, also adjusting for currency translation effects, net sales grew 5.6% compared to the same period in 2022, with higher sales across all paper machine clothing product lines somewhat offset by contraction in engineered fabrics as nonwoven demand has returned to its lower pre-pandemic levels. Engineer composite net sales, after adjusting for currency translation effects, grew by 3.8% compared to the second quarter of 2022, driven by growth over a number of programs, including some recent wins. This growth more than offset the temporary decline in CH53K as we transitioned from non-recurring development efforts last year to recurring production in 2023. The AAC lead program generated revenue during the second quarter of about $45 million. approximately $5 million higher than the same period last year. While our first half LEAP revenues were above the prior year, that is mostly timing, and we expect our full year LEAP revenues to be generally flat when compared to 2022. Second quarter gross profit for the company was $103 million, an increase of about 2% from the comparable period last year. The overall gross margin declined 100 basis points to 37.5% of net sales. This was caused primarily by higher input costs and lower absorption in machine clothing combined with program mix impacts and a 1.9 million unfavorable change in the estimated profitability of long-term contracts within AEC. Second quarter selling technical general and research expenses increased from 50 million in the prior year quarter to 57 million in the current quarter. There were a number of factors driving the year-over-year increase. We saw a negative FX impact of approximately 2.5 million at machine clothing. We also incurred higher corporate expenses related to executive transitions, professional services related to business development activities, as well as expenses related to the Heimbach acquisition. We also had increased IT spend to support our growth and to enhance security. Other income and expense in the quarter netted to income of $4.5 million, compared to $7 million of income in the same period last year due to lower foreign exchange revaluation gains. The effective income tax rate of 42.8% this quarter was unusually high due to discrete tax items, driven by withholding taxes resulting from international tax planning as well as a provision for international tax audits. As we look at the back half of the year, we expect the tax rate to normalize to historical levels between 28 and 30%. For long-range forecasting purposes, we believe that these same effective tax rates apply for our current operations absent unusual tax items. Net income attributable to the company for the quarter was $27 million compared to $39 million last year. Gap earnings per share was $0.86 in this quarter compared to $1.25 in the same period last year. After adjusting for the impact of foreign currency revaluation gains and losses, restructuring expenses, acquisition and integration expenses, adjusted earnings per share was 90 cents this quarter, down from the $1.06 reported in the second quarter of 2022. Adjusted EBITDA of $65 million declined approximately $1 million from the $66 million reported in the second quarter of 2022. Machine clothing adjusted EBITDA was $59 million, or 37.3% of net sales, up from $58 million, or 38.2% of net sales in the prior year quarter. AEC adjusted EBITDA was $21 million, or 18.2% of net sales, approximately flat last year. During the quarter, the company generated $12.4 million of free cash flow, defined as net cash provided by operating activities, less capital expenditures, which for the quarter totaled 18.7 million. During the quarter, we experienced some working capital investment that we expect to unwind in the second half, leading to improved cash flow performance in the second half of the year. I would like now to turn to the outlook for the full year. Overall, we were pleased with the first half performance and are raising our guide for the full year. Machine clothing delivered another exceptional quarter. Overall business conditions were similar to those we experienced in the first quarter. On a constant currency basis, we experienced demand growth in all paper machine clothing product lines, and as we noted last quarter, a return to lower pre-pandemic levels in our engineer fabrics business. Given typical vacation and winter holiday impacts in the second half of the year, combined with softer markets this year in Europe and Asia, we expect revenue in the second half of 2023 to be modestly lower than the first half. Taking into account our strong first half, we are increasing machine clothing's revenue guide by 20 million on the low end and 10 million on the high end to a range of 610 to 620 million for the year. As we've mentioned for the past couple quarters, inflationary pressures are easing. And for some raw materials, we are even seeing price reductions. However, in general, raw material prices remain above pre-pandemic levels. Despite the easing price pressure, it'll take a few quarters to see this flow through our results. as we work through the raw materials acquired in prior periods. We continue our efforts to offset the inflationary impact through ongoing continuous improvement efforts and input cost management. Logistics have largely normalized with both better pricing and better availability. We expect machine clothing's adjusted EBITDA margins to be in line with our long-term expectations of mid-30s percent for the full year. As a result for 2023, we are narrowing our guidance for machine clothing, pulling up the bottom end of the EBITDA guide by 5 million. We now expect machine clothing adjusted EBITDA to be between 210 to 225 million. Turning to engineer composites, our outlook for the year improved with some recent new business wins. We are still expecting full-year revenues for our two largest programs, LEAP and CH53K, to be relatively stable this year compared to 2022. For CH53K, we are largely complete with our tooling and NRE work on the app transition, so revenues on that program will grow as the production ramps towards full rate over the next few years. Taking into account the performance so far this year, we are raising the revenue guidance by 10 million. We now expect AEC revenue to be between 430 and 450 million. Our AEC full-year adjusted EBITDA guidance of 82 to 92 million is up 2 million and implies margin expansion in the second half of the year as we see improved program mix and continued strong operational excellence in the second half. At the total company level, we're updating our 2023 full guidance as follows. Revenue between 1.04 and 1.07 billion, up 30 million on the low end and 20 million on the high end from prior guidance. Adjusted EBITDA between 232 and 257 million, up 7 million on the low end of the range and 2 million on the high end. An effective income tax rate of 32 to 33%, implying effective tax rates of approximately 28 to 30% in the second half of the year. Depreciation and amortization between 72 and 74 million. Capital expenditures in the range of 85 to 95 million. This is 5 million lower than their previous guidance, as we expect some investment to move into next year. Gap earnings per share between $3.07 and $3.67. Adjusted earnings per share between $3.15 and $3.75, up 5 cents on the low end and 15 cents per share on the high end. With that, let's open the call for questions.

Operator? Thank you. We will now conduct the question and answer session. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question is from Guatam Khanna. of TD Cohen. Please go ahead.

Hey, it's Gotham here. Thank you.

Hey, Gotham. Hey, Gotham.

Hey, guys. I was curious if you could update us on your expectations for the LEAP program this year, and perhaps if you have any early view into next year, and also on the CH53K. I know both were relatively flat this year, but You know, what's your visibility on a re-acceleration into next year, if any? Thanks.

Yeah, let me start, Gautam. You know, we're pretty excited about there's some just good news out there, you know, on 737 production rates going forward, longer term, HV20. Narrowbody is the place to be, as we all know. How that manifests itself, we'll have to wait and see in the next year. As we reported, we over – We overachieved a little bit in the first half of the year versus our lead plan for the year, which kind of is testament to our ability to ramp up real quick. Operations are running really well, and inventories are moving through. So we're encouraged as we look at next year, but we don't really have any updates at this point to anything different for this year. We're still maintaining kind of a flattish level this year, although we're on a better run rate than that right now. And then we expect to see growth next year but don't have any numbers on it yet. That's on the LEAP program. On the CH53K, as I think Rob mentioned, we've gone from the tooling and development stage into the production stages where we've got one line up and running and very successful. We've shipped product to Sikorsky on the CH53K and continue to, and we're bringing a second production line online, which is an automated production line this, you know, the next couple of months. So we expect to begin production and shipping off that second line. line in the second half of this year. So things are going really well there. And, again, good news on the CH-53K to me in longer term as well. So excited about that.

Okay. And then just if you could also update us on your view on 787 and F-35. 787, look, Boeing says they're at four a month on the way to five, on the way to ten. I didn't know if you guys are finally starting to see – demand pickup with the Boeing subcontract manufacturers that you ship to, and likewise on the F-35, if you have an update.

Thanks. Yeah, on the 787, we're pretty much synced with the Boeing demand. We are running the production line. As you know, last year we had stopped the line, and prior to that we had run at a really low level, so the line is up and running. We were, how would I say it, cautious in how we started up the line to make sure that demand was coming, and it looks like it's is pretty good so far. So we're in sync with that, you know, four going to five rate level as we go from this year into next year, and we'll continue to ramp up from there. So that looks pretty good so far. So we haven't heard any changes to the production demand there. The F-35, also good news out there about longer-term demand. So we're waiting to see. I don't have anything to report today on the demand for it, but we're excited as we look at next year and beyond.

Thanks, guys.

Thank you. Please hold for our next question. Our next question comes from Michael of Trudis Securities.

Hey, good morning, guys. Thanks for taking the questions here. maybe just to stick with Gotham's line of questioning on, on some of the platforms, obviously still early with the, the Pratt and Whitney disclosure. And I know there's, there's been some chatter out there. If, if, you know, airlines or, you know, deliveries from Airbus, you know, get held up, could there be a shift to more, to more lead platforms? I mean, how are you guys too early or how are you guys thinking about that in the, trajectory of LEAP production here?

Yeah, I think, you know, we're watching it with interest. And full disclosure, my first job was at Pratt & Winney in the turbine engine group. So I'm watching it with a lot of interest. The, you know, longer term, it's just a great program to be on, the LEAP program. And, you know, we look forward to increasing our share and being real competitive. So we're just going to watch it, see how it goes. Got it.

Got it. And then I don't want to be Kind of flipping here with this question, but the Heimbeck deal looks like a solid acquisition. But from a strategic standpoint, you know, how did that come about, you know, the decision to acquire them? Rob, you know, I'm assuming you were too new to be intimately involved. You know, Bill, you're on the way out. Was this from maybe Daniel at the machine clothing side? Was the board? I mean, I'm just trying to figure out, you know, strategically who really pulled the trigger on this thing.

Yeah, it was a real strong team effort. The board, Danielle and his team, myself, we're all very highly engaged in it, worked it for a long period of time, I will say. So we're very excited about it. As I said, Heimbach has a long tradition. It's got a great brand in the industry, and we're excited about working together with them. So it was a collaborative approach, a lot of work, but we're really excited to get moving forward here.

And then, Mike, I'll just add this. Yeah, I'll just add, you know, I came in obviously late into the picture, but, you know, giving an independent view of it coming in, it's a phenomenal deployment of capital for the company. When you look at, you know, the opportunities to create value and to really build out the machine clothing business, which, as we all know, generates a ton of cash and has given us the strategic flexibility to pursue a lot of growth across the company.

Yeah, no, I totally agree. I mean, it sounds like a great path to earnings and EBITDA accretion for sure. Just the last one for me, and I'll get out of the way here, I guess. You know, just looking at the guidance, what has to happen for second half earnings to be down 26% versus first half to get to the low end of the range? You know, I mean, I know you talked about machine clothing and, you know, normal European seasonality and other pressures, but, I mean, it just seems like it would be a real struggle to get down there. And, I mean, you even had a pretty big tax headwind here, you know, in this current quarter. So can you maybe give us some of the mechanics on the ranges out there for the guidance?

Yeah, let me start, and I'll hand it over to Rob. It's a fair question. It's – You know, we look at – we do a bottoms-up. We look at all our programs that are on. We go through, you know, platform by platform. And you see, we look at the marketplace in machine clothing. And as you know, the machine clothing business, we have bookings that go out a period of time, but they don't go out a long distance. So we look at the market. We look at what the – The paper companies are doing the machine, and there's a lot of machine downtime right now where they're doing maintenance, and quite often we sell when they do maintenance, even if they take extended downtime because perhaps the demand is lower right now. So publication is down in Europe in particular, quite a bit down. There's more closures coming there. So we're just watching it. So, yes, it would take a lot to get down to the lower end of that range, but we look at the the perturbations of what could happen. And without having bookends that go all the way through the end of the year, at least not significant quantities, we're just trying to put bookends around it. So it's not likely we're going to go to that end of the range, but that's kind of how we teed it up.

And, Michael, I mean, I think it's really just a real caution that we have around, you know, the macros in Europe and some parts of, you know, Asia, including China, So we wanted to just ensure that the range, as Bill said, kind of captured that possibility. We don't think it's a high probability we're going to wind up with a low end, of course, but we just wanted to bookend it. And I think you raised a fair point that a lot would have to happen negatively for us to get there.

Yeah. Okay. Okay. Fair. I'll jump back in the queue, guys. Thanks. Thanks.

Thank you. Please hold for our next question. Our next question comes from Jan Franz Engelbrecht of FAIRS.

Good morning, Bill, Rob, and John. I'm on for Peter this morning. So just a quick question. Morning, Jeff. Morning, morning. So just a quick question on, I wish to think about machine clothing and the margin, since it seems like the acquisition probably closed a little earlier than expectations. So if you look at the first year, first half of the year, so 35.8%, even our margins in machine clothing, and the guide at the midpoint implies about 35.4%. So that's, I assume that excludes, obviously, the Heimbach acquisition, but can you just talk about how would you think about, you know, the second half of the year for MC from a margin perspective?

Yeah, Jeff, I mean, just, I mean, there's nothing in our guide that has anything with Heimbach. I mean, Heimbach is not included in any aspect in our, And I think what we're looking at is, to your point, you know, the second half of the year tends to be a little bit softer, right? We have slightly lower sales, which does also impact absorption at machine clothing. So that also, you know, has a bit of an impact on what we would expect in the second half of the year. And, you know, if you were to look, you know, very, you know, I mean, there's a slight level of seasonality that we typically experience in machine clothing first half to second half. So that is really what's impacting the margins.

There's also some costs that we incurred higher, you know, from the inflation we've experienced where we had material costs we brought in that we've got to work through the system. It'll take a few more months to work through that into the fourth quarter, probably before those higher cost materials flow through the P&L.

Okay, perfect. Thank you. Thanks for the detail. And then if I could just have a quick follow-up. And I understand 2026 is far off, but if I just looked at the investor day targets for LEEDs, 787 and CS53K, are you sort of still comfortable with those targets? If you just look at 787, I think we're doing, let's say, about $5 million this year, and the previous target was at $40 million for 2026 for annual revenues. If you can just touch on those three programs, I guess.

I think certainly, you know, kind of looking at 787, we're at a low point right now, clearly, with the production, but if Boeing's forecast is correct and they ramp up to those production levels, then I think we would feel pretty comfortable with our longer-term outlook for 787. And in terms of, you know, CH53K, I mean, we definitely feel comfortable with that. And certainly, you know, if you were to look at our backlog numbers, you know, that we've reported in the queue, a lot of growth related to CH53K. We've done very well in getting contracts there. And then, you know, on that 35 or leap, you know, we feel comfortable with where those projections are based on everything we're seeing.

Okay, great. Thank you. Appreciate it. I'll jump back in the queue.

Thanks. Thank you. One moment for our next question. Our next question comes from Ron Epstein of Bank of America.

Hey, good morning. This is Jordan on for Ron. Hey, good morning. Hi, Jordan. Hey, so actually on the 2026 targets too, with defense spending and all the restocking and also the European spending, are you guys thinking about those targets, especially for missiles, improving long-term? And then also too, Anything else that you guys are seeing down the pipe that you think would be really interesting for hypersonics?

Yeah, we didn't talk about technology on this call. We usually do. I get pretty excited when we get into hypersonic discussions. But yes, we are excited about that longer term, and we are making some investments there. But again, it's a little bit longer term. Regarding the 2026 targets that we've talked about in the past, if you go back to last year, our investor conference where we We said we're going to double the AEC business over that timeframe. We're still on track to doing that. The mix has changed a little bit. We've won some business to cover for some of the areas that maybe have been a little bit shorter than we thought. For instance, the 787 didn't ramp back up quite as quickly as we thought, but the team's done a great job winning new business and multiple applications. So that adds up to it. So we're pretty confident we get to those 2026 levels, if not beyond.

All right. Thank you.

Thank you. I'm showing no further questions at this time. I would now like to turn the conference back to Bill Higgins for closing remarks.

Great. Thank you. 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, feel free to reach out to John Hobbs, our Director of Investor Relations. So thank you and have a great day.

This concludes today's conference. Thank you for participating. You may now disconnect.