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spk01: good day and thank you for standing by welcome to albany international's third quarter 2023 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'll need to press star 1-1 on your telephone you will then hear an automated message advising your hand is raised to withdraw your question please press star 1-1 again please be advised that today's conference is being recorded i would now like to hand the conference over to your speaker today Mr. John Hobbs, Director of Investor Relations. Please go ahead, sir.
spk02: Well, thank you, Norma, and good morning, everyone. Welcome to Albany International's third quarter 2023 conference call. As a reminder for those of you listening on the call, please refer to our press release issued yesterday afternoon detailing our quarterly financial results. Contained in the text of the release is a notice regarding our forward-looking statements and the issue in 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, which could cause actual results to differ from those expressed or implied. For a full discussion of these risks and uncertainties, please refer to both our earnings release of November 6, 2023, as well as our SEC filings, including our 10Q. Now, I'll turn the call over to Gunnar Cleveland, our President and Chief Executive Officer, who will provide opening remarks. Gunnar? Thank you, John.
spk05: Good morning and welcome, everyone. Thank you for joining our third quarter earnings call. I'm pleased to be here today on my first call as President and CEO of Albany International. The company has again produced very good results in the third quarter, with excellent operational execution and positive free cash flow for both the quarter and on a year-to-day basis. Before we get into the details, I'd like to take a moment to acknowledge Bill Higgins' steadfast leadership of Albany as President and CEO through the past several years. While he has retired from his role, he continues to provide guidance and counsel as a member of the company's board of directors. My transition has proceeded smoothly, and Bill leaves a legacy of a great company with innovative proprietary technologies, businesses that are performing well, and a healthy balance sheet. The business segments each have impressive product quality and exceptional customer service. I know from experience these elements are the foundation of excellent customer relationships. continued business opportunities, and a sustainable competitive advantage. These factors weighed on my decision to join Albany. I spent my first few weeks getting more familiar with operations, traveling to numerous sites across the business, meeting with our team, and having meaningful conversations at all levels of the company, from the shop floor to the C-suite. Really spending my time focusing on the technology, operations, and getting more familiar with the culture, introducing myself as well as gathering impressions from our customers and the investment community. The company's technologies and track record of innovations really strike me as strategic assets. The same underlying weaving technology is fundamental to the company's businesses and driver of ongoing technical collaboration and interchange. Within aerospace, the push towards lighter weight, more environmentally friendly designs is the number one challenge to be solved for the next generation of commercial aircraft. Albany's proprietary composite technologies, such as our 3D woven composites, are well-positioned to play a role there. In machine clothing, it's clear from my conversations that customers value Albany's industry-leading product technology and technical expertise. In an industry that places a high value on operational reliability and operating efficiency, machine clothing's custom-tailored and consumable belts are a well-earned reputation, helping our customer make the most efficient use of their raw materials, energy, and labor. I believe a company's culture and people are the key to success. Albany's operational metrics in safety, quality, and customer service indicate to me a well-developed operational discipline. I think of continuous improvement as a lifestyle, which I also see across Albany's operations. From my operations leadership experience, I know how important on-time delivery and quality are to manufacturing operations. Finding a supplier with the performance of Albany International is very hard. And, well, as a customer, that just makes you want to give them more business. That kind of execution is a great foundation for a long-term and profitable business relationship and profitable growth. When you add the technology and innovation that we have to offer to all our customers, I think Albany International is an easy pick. Our challenge is to deliberately and strategically manage our growth while not losing sight of operational execution and capital discipline that is foundational to the business long-term success. Now let's look at third quarter results we announced last night. The company completed the acquisition of the Heimbach Group on August 31st of this year, so the GAAP results include one month of Heimbach operations and of course expenses associated with the transaction. The details are included in our press release. Rob will review these in more detail in his remarks. Heimbach Operations added nearly $16 million of revenue in the MC segment and reduced the segment's operating income by $500,000. We're reporting GAAP revenue of $281 million, up 7.9% year-over-year, driven by sales growth at AEC and one month of Heimbach results in MC. GAAP net income was $27 million, or $0.87 per share. up from the GAAP results of third quarter last year of $11 million or $0.34 per share, which incorporated $49 million of pension settlement charges. As expected, Heimbach was slightly dilutive to GAAP EPS for the quarter, about a penny per share. Excluding the impact of the Heimbach acquisition, revenue of $266 million was about 5 million, or 2%, higher than the third quarter of last year, driven by higher revenue at AEC. Adjusted EPS was $1.02 per share compared to $1.15 per share reported in third quarter of last year. Adjusted EBITDA, excluding Heimbach impact, was 63 million, or about 24% of sales, right on the company's stated long-term target. The machine clothing business continues to perform very well, particularly in light of challenging macroeconomic conditions in Europe and China. Excluding the effect of the Heimbach acquisition, machine clothing revenue of 151 million was about 2% lower on a currency-neutral basis, while adjusted EBITDA, again excluding the effect of the acquisition on this measure, was 56 million. This translates to 37% margin. North American markets continue to report sales growth year over year, while sales decline in other regions of the globe. The Heimbach integration is underway and proceeding as planned. Our segment president, Daniel Haftemeier, and his expanded team have been focusing on workforce engagement, ensuring operational stability, and financial integration in these first few weeks. We have a clear line of sight into the cost savings, and efficiency opportunities that the company previously announced, and expect acquisition will become accretive to earnings and cash flow in 2025. The aerospace composites business had a very good third quarter. Revenues of $115 million were up 6% year-over-year on a constant currency basis. Adjusted EBITDA of $22 million was up about 3%. The business is well-positioned and continues to win new programs, both commercial and defense, from existing and new customers. These will collectively contribute to AEC's long-term growth over the coming years. The company is executing well. It is in great financial health, and it is well positioned with unique technologies and know-how across the businesses. We are in an enviable position. We will continue pursuing continuous improvement across all of our operations, We expect to deliver the benefits of the Heimbach integration as planned. We're investing wisely today in technology development that will position the company to profitably grow well into the next decade. I'm excited about the opportunities. And with that, I will hand the call over to Rob to review the results in more detail and provide our updated guidance for the year. Rob?
spk00: Thank you, Gunnar, and good morning, everyone. I will now turn to our third quarter results and then provide our updated outlook for the year. As Gunnar mentioned earlier, we are reporting gap net sales of $281 million, up 7.9% from the third quarter of last year. Excluding currency translation effects and the one month of Heimbach sales, revenue growth for Albany was 2% versus the prior year period. Machine clothing net sales excluding Heimbach declined 1.5%. higher sales in packaging and tissue product lines were offset by contraction across our other product lines, most notably in pulp and engineered fabrics. Compared to a year ago, European markets are clearly softer, while Asian markets have been mixed. The North American market continues to perform well with modest growth over the prior year period. Engineer composite net sales of $115 million grew 5.7% on a constant currency basis compared to the third quarter of 2022, driven principally by year-over-year growth on the LEAP, 787, and various space programs. This was partially offset by lower CH53K revenues. Our CH53K results from the prior year provide a difficult comparison for us as the last year benefited from significant amounts of non-recurring revenue for the Helicopters Aft Transition Program. The CH53K non-recurring items largely concluded in the second quarter of this year, so we will continue to see tough comparisons through the first half of next year. Our CH53K program sales will grow as the program moves toward full rate production. The AAC LEAP program generated $45 million of revenue in the third quarter, nearly $5 million higher than the same period last year. We now expect full year ASC LEAP revenues to be up approximately $15 million compared to the full year 2022. 2023 LEAP revenues are higher than we had previously guided as we manage production efficiencies on the program. Our long-term LEAP revenue target of $200 million for 2026 remains intact. Third quarter gross profit for the company was $102 million, up $1.4 million, or 1.3% from the same period last year. With NMC, higher input costs and lower overhead absorption were offset by the incremental gross margin from Heimbach. Excluding Heimbach, machine clothing's gross margin was 50.7%, very similar to the 50.8% we reported in the first two quarters of this year, and down about 100 basis points on a year-over-year basis. At AEC, gross profit expended $1.3 million or 6.2%. During the quarter, we recognized a net favorable change in the estimated profitability on long-term contracts of $900,000 compared to a favorable change of $2.6 million in the third quarter of last year. AEC's gross margin was 19.7%, similar to the same period last year. Third quarter R&D spend of approximately $10 million was largely unchanged from the prior year and including the Heimbach revenues, represented about 3.5% of sales. Third quarter SG&A expenses were $52 million, up $15 million from the third quarter last year. A number of factors drove the year-over-year increase. Machine clothing SG&A increased $6.5 million, principally driven by Heimbach SG&A expenses, and $2.3 million from currency translation effects. AEC SG&A was $1.9 million higher on increased incentive comp and personnel related costs. Corporate expenses increased $6.4 million principally due to acquisition related expenses, CEO transition expenses, incentive compensation, as well as IT investments in support of our CMMC requirements. GAAP net income attributable to the company for the quarter was 27 million compared to nearly 11 million last year. As indicated earlier, Heimbach reduced net income by approximately 500,000. GAAP earnings per share was 87 cents in this quarter compared to 34 cents in the same period last year. After adjusting for the impact of CEO transition costs, acquisition and integration costs, purchase accounting adjustments, On this quarter's results and other adjustments detailed in our non-GAAP reconciliations, adjusted EPS was $1.02 this quarter compared to $1.15 last year. Adjusted EBITDA of $64.7 million declined $3.4 million from the third quarter of 22. Machine clothing adjusted EBITDA was $57.5 million or 34.5% of net sales. That is down about $1.5 million from $59 million in the prior year quarter. AEC adjusted EBITDA was $22.1 million, or 19.3% of net sales, up about $600,000 from last year's result. During the quarter, the company generated $45 million of free cash flow. Cash flow from operating activities was $59 million, and capital expenditures totaled $14 million. Net cash consideration from HILAC was $133 million. We remain in a strong financial position with a cash balance of $172 million and well over $300 million of additional liquidity under our committed credit facility. We closed the quarter having refinanced our credit facility for another five years with a maturity into 2028, and we upsized the facility to $800 million. Our net leverage at the end of the quarter was a modest 1.3 times, providing us the flexibility to continue pursuing our long-term growth strategy. I would like to now turn to our outlook for the full year. Please note that our full year guidance for the machine clothing segment includes four months of Heimbach operations. Please also note for modeling purposes, we will incur 5.5 million of inventory step up for the full year 2023 relating to the transaction. The inventory step up will be complete by year end. Heimbach's estimated annual DNA, including the impact of purchase accounting, will be approximately 12 to 13 million going forward. Machine clothing business conditions softened somewhat during the third quarter. On a constant currency basis, we experienced demand growth in packaging and tissue product lines, while the other product lines were lower. Business conditions in Europe are clearly soft relative to the past few years, while Asian markets are mixed with the Americas growing modestly. Orders at the end of the quarter were lower than they were at the same time last year. We will have a full quarter of Heimbach operations in the fourth quarter, and as a result, expect revenues to increase sequentially and year over year. We are raising machine clothing's revenue guide to a range of $660 to $670 million, increasing approximately $50 million, including the estimated contribution from Heimbach. We continue our efforts to offset inflationary impacts through ongoing continuous improvement efforts and input cost management. As a result of the Heimbach acquisition, we are revising our adjusted EBITDA guidance range for machine clothing to 215 to 225 million. As is typically the case, machine clothing's fourth quarter revenues and EBITDA results will be modestly lower than the prior quarters. Turning to engineer composites, as mentioned earlier, we expect the AAC LEAP program to generate approximately 10 to 15 million more revenue in 2023 than we had originally guided. During the third quarter, we stepped up 787 production. Based on this, along with growth in smaller programs, we are raising our revenue guidance and now expect AEC revenue to be between 440 and 460 million. We are narrowing our AEC full-year adjusted EBITDA guidance to 85 to 90 million. At the total company level, we are updating our 2023 full-year guidance as follows. Revenue between 1.10 and 1.13 billion, up 60 million. Our guidance includes approximately 50 million top line contribution from Heimbach. Adjusted EBITDA between 238 and 254 million. An effective income tax rate of 32 to 33%, implying an effective tax rate of approximately 28 to 30% in the fourth quarter of the year. Depreciation and amortization, including Heimbach, of approximately 75 million. Capital expenditures in the range of 85 to 95 million. Gap earnings per share of between $3.02 and $3.37, taking into account approximately 16 cents of dilution from the Heimbach acquisition, largely the result of purchase accounting. Adjusted earnings per share between $3.35 and $3.70. The impact of Heimbach is anticipated to be negative four to six cents in the balance of the year. With that, let's open the call for questions. Operator?
spk01: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. Please wait for your name to be announced. One moment for our first question. Our first question comes from the line of Peter Austin with True Securities. The line is now open.
spk06: Hey, good morning. I'm on for Mike Trimoli this morning. Thanks for taking our questions. So first, I just wanted to ask about the guidance around the Heimbach acquisition. With $2 million of EBITDA assumed for the year, it seems to imply a margin of around 4%. So I was just wondering, are there any elevated cost pressures there you call out or any seasonality that is impacting the margins in the early stages here?
spk00: Sure. Yeah, Peter, this is Rob. Good to see you on the call. Yeah, so as it relates to Heimbach, we definitely are seeing some level of seasonality. And as we published in our materials when we announced the acquisition, for the full year of 22, they were running about 9% EBITDA margins. So to see the fourth quarter roughly in the range of 5% is not unexpected. And as anticipated, we're working with the team and have a number of
spk06: actions uh to really just improve the efficiencies and the margin profile of the business great makes sense and then just to follow up i had on the eps guidance for the year so the implied fourth quarter range would be you know 52 to 87 cents which just seems like a pretty wide range at this point in the year so i was just wondering where are the biggest areas of uncertainty or risk that might drive the business towards the lower end of the range yeah um
spk00: Peter, you know, that's a good question. The 35-cent range is really just a function of the math. If you look at our EBITDA guides, you know, by segment, right, we have about a $10 million range for machine clothing, which is really, you know, also, you know, accounting for Heimbach, right? You know, we just bought the business, so it's hard to know exactly what they'll deliver. And then it's, you know, $5 million spread. So if you add those two, you've got a $15 million spread, which is really what translates to 35 cents. So in order for us to be at the low end, you know, both segments would have to perform at the lower end of the range, which, you know, while a possibility, it's certainly not what we're working towards. You know, we have confidence in the operating team. I think what's more relevant here is to look at the mid-range of the guide. And if you look at the mid-range, we're at 70 cents. And if you adjust the Heimbach impact of roughly four or five cents in the quarter, we're pretty much right on top of what we delivered last year.
spk06: All right, appreciate the color. I'll jump back in the queue.
spk01: Thank you. One moment for our next question, please. Our next question comes from the line of Ron Epstein with Bank of America. Your line is now open.
spk03: Hi, good morning. This is Jordan Lainez on for Ron.
spk00: Hi, Jordan.
spk03: So looking out towards next year, have you guys started to see any demand uptick from SEPHRON for AEC?
spk05: So we're not ready to guide for 2024. We are looking at a year where we have higher LEAP revenue generation, and we expect to continue at that level.
spk03: Okay. And then do you have a sense of how much they've burned through the excess inventory they've had earlier through the year?
spk05: So inventory is a – there will be inventory at our facility, and there will be inventory at Safran, and there will be inventory at GE. And it's – there will be some buffers at each location, and I don't have the details on that.
spk00: Yeah, Jordan, just one other thing. I mean, we typically go through an annual process with Sopran, you know, as we start thinking about production volumes and demand levels for next year. We're not there. We don't have information for that. We'll certainly update the community as we get on our year-end call. But certainly, you know, we're working very closely with them to make sure that the entire chain is managed appropriately. so that our ultimate end customers get the product that they need to support the demand in commercial aircraft. Got it. Thank you, guys.
spk01: Thank you. One moment for our next question, please. Our next question comes from the line of Pete Skibiski with Olympic Global. Your line is open.
spk07: Hey, good morning, guys. Hey, Pete. Good morning. Maybe start with one of machine clothing. You guys mentioned some of the softness in Europe and that orders were down. I'm just wondering, you are very global. Do you have a sense right now of whether the demand pull in PMC is kind of bouncing along the bottom, if you will, or there's some concern out there, I think, that the macro is deteriorating and that maybe we'll be in a you know, take your pick, a soft landing or a harder recession next year. Do you guys have any sense of kind of the way things are shaping up for you in terms of the three major, you know, geographic end markets for PMC?
spk05: And it is, if you look at the three markets, it's kind of interesting because in the U.S., we're seeing growth. And in Asia, we're seeing mixed growth. Markets, China seems to be up right now, but Europe is definitely down. Where that takes us through fourth quarter and into next year is not something we can predict at this point, but we're seeing also a shift in the type of products But I would say that we should expect in the short term now to be similar growth in the U.S., soft in Europe, and maybe we should look at China and see if that picks up.
spk00: And, Pete, I think it's important to really note that we've been very successful. I mean, if you look at overall demand across publications in some of the grades, those have clearly softened. And what really distinguishes our machine clothing business is the ability to generate, you know, a pretty consistent level of gross margin, you know, really through various different demand scenarios. So I think Danielle and his team have done a good job. So we'll manage the demand. I mean, this is one where the brand and product quality actually should hopefully provide us an advantage in a tough market.
spk07: Yeah, yeah, it is cloudy out there. That's for sure. Okay, maybe just one more for me, just switching gears to CH53K. Rob, I don't know if you can share with us, maybe I missed it, what your total revenue for the 53K was this quarter. And then I think, so you'll be at zero next year, I think you've said that before, in NRE for the 53. And I'm just wondering if we should expect You know, because I know Lockheed got a pretty sizable, I think either LRIP or production contract for CH53K. So it seems like production volume should be up for you guys next year. I'm wondering if it'll all kind of equal out year over year, if you're still determining that.
spk00: Thanks. Yeah, no, Pete, good question. And you're correct. I mean, the NRE is pretty much going to run off. As we exit this year going forward, we're not expecting to see any notable NRE whatsoever. And then on a kind of full run rate operational basis, even this year, if you strip out the NRE relative to last year, we expect sales to be up on CHP to 3K in the mid-teens or so. So we feel really good about where the program is trending. You know, if you were to visit our Salt Lake facility, right, we got the automation line. We just actually had a ribbon cutting with Sikorsky on that line. So things are progressing really well for CHP to 3K. And as you said, the order book looks terrific. So this will be a good long-term program for us. Great. Thanks, guys. Thank you, Pete.
spk01: As a reminder, to ask a question, you'll need to press star 11 on your telephone. Please wait for your name to be announced. Our next question comes from the line of Jack Ayers with TD Cowan. Your line is now open.
spk04: Hey, guys. Good morning. Thanks for the question here. And welcome, Gunnar. Great to have you. Thank you. Quick question, and I hate to go back to the Q4 sort of implied guide here. And if my math is right, just AEC specifically, I mean, are we kind of thinking Q4 is going to be down sort of, you know, high single-digit, low double-digit sort of in the Q4 implied there with margins actually stepping up both sequentially and year-over-year? So the sales – the sales down year over year and sequentially, but margins up year over year and sequentially, I guess like what's going on there. Um, and, and just the wide range is, is that, you know, conservatism or, or just other moving pieces with sort of, you know, leap leap, um, inventory, like sort of just, just excess, just any, any color there would be helpful. Thanks.
spk00: Sure, yeah, no, you know, Jack, happy to help. So your math is correct, as we would expect. And, you know, we are probably being a bit conservative, you know, on top line at AEC. But we are going to see a couple programs, volumes in the fourth quarter come off. So we're just trying to account for that. And as it relates to the margin, that's really a function of the shift and mix of programs that we expect during the quarter. As you can imagine, right, LEAP, you know, we're running ahead. You know, that'll kind of cool off in the fourth quarter is our expectation. So, you know, we are expecting to see a higher implied margin. You know, there are some programs, you know, like 787 and others where the margin profile is much better than LEAP, and we're seeing those filings pick up in the fourth quarter.
spk04: Okay. Okay, thank you. And then just one quick follow-up on Heinbach. And I appreciate sort of the moving sort of demand dynamics going on there. But Q4 implied sales of like 35 million to hit the 50 million for the year. I mean, if we run right that, that looks like we're getting to like 140 million. Is that the right way to think about that as we sort of roll that forward into 24, Rob?
spk00: No, yes, the math once again, spot on, Jack. But no, you really shouldn't be run rating Q4 sales in machine clothing and at Heimbach. That is definitely seasonally, and I think it's probably even a bit more pronounced for Heimbach, more seasonal in the fourth quarter. So if you look at what we delivered in 22, what Heimbach delivered was about 160 million euros And, you know, we're certainly working with the team to make sure that the sales volumes stay where they need to stay.
spk03: Okay. Thanks, guys. Appreciate it.
spk01: Thank you. I would now like to turn the conference back over to Mr. Gunnar Cleveland, President and Chief Executive Officer, for closing remarks.
spk05: All right. Thank you, Norma. And 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. Thank you, and have a good day.
spk01: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.
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