This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to Albany International Corp. Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. I would now like to turn the conference over to JC Chetnani, VP IR and Treasurer. Please go ahead.
spk01: Thank you, Debbie, and good morning, everyone. Welcome to Albany International's second quarter 2024 earnings 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 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 and 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 August 6th, 2024, as well as our SEC filings, including our 10-K. Now, I will turn the call over to Gunnar Cleveland, our President and CEO, who will provide opening remarks. Gunnar?
spk10: Thank you, JC. Good morning and welcome, everyone. Thank you for joining our second quarter earnings call. I will provide an overview of our business performance. Rob will later discuss our financial results in detail. Overall, we had another good quarter as our businesses delivered strong results and are responding well to their industry challenges. We continue to deliver strong profitability and have further strengthened our balance sheet. Free cash flow was strong with 64 million generated in the second quarter. Machine quoting revenues at 194 million grew year-over-year driven by our Heimbach acquisition, slightly offset by a lower organic demand, primarily in Europe and North America. Our global order backlog remains stable. We continue to make progress with integration at Heimbach. Our performance has improved sequentially quarter-over-quarter with a 220 basis point expansion in machine clothing. adjusted EBITDA margins, and we took further action on our global footprint with the consolidation of two UK facilities. We successfully implemented SAP at Heimbach in the second quarter, which will enable us to further execute on our integration plans for the second half of this year. We commend the team for executing the implementation with no operational disruption, and I thank them for all their hard work. Moving to our engineered composite segment, we're pleased to report that during the quarter, we received over 200 million in new orders, bringing our year-to-date orders to over 900 million. This will further drive revenue growth in 2025 and beyond. For the quarter, we delivered 20% year-over-year top-line growth as our current programs ramp up. We see growth in our commercial markets, especially in space and other emerging platforms. Our defense business is also growing, primarily the CH53K and JASM platforms, partially offset by the Joint Strike Fighter program. However, our profitability for the quarter is lower with adjusted EBITDA margins at 16.9%, lower by 130 basis points versus the prior year, driven by inefficiencies related to program ramp-up. We expect margins to improve in the second half due to operational improvements and program mix. Turning to the LEAP program, we've been working closely with Saffron to adjust our 2024 production plan in light of the continued situation at Boeing. We now anticipate LEAP revenue to be slightly down this year versus the prior year, with minimal impact to overall profitability. Despite changes to LEAP production, we're maintaining our full-year AEC guide, as other programs will serve to offset this reduction. Overall, our business is performing well. Our margins in machine clothing are improving as we execute our Heimbach integration plans, and substantial new business wins at AEC have improved our backlog. I would also like to welcome Chris Stone as president of AEC. Chris brings strategic capability combined with experience in leading complex operations and supply chain. These skills will be critical to AEC as they continue to execute their growth strategy. And with that, I'll hand it over to Rob to provide more details on the quarter. Rob?
spk04: Thank you, Gunnar, and good morning, everyone. I will review our second quarter results of 2024 and then provide our outlook for the balance of the year. Consolidated net sales came in at $332 million, up 21.1% from the second quarter of last year. The growth was driven by a combination of Heimbach revenues and organic growth at engineered composites. Machine clothing net sales of 194 million increased 21.6% versus the second quarter of the prior year, driven by Hombach, partially offset by a 4 million decline in organic sales on a currency-adjusted basis. North America comps were lower year-over-year, primarily due to a strong performance in the second quarter of last year. However, for the first half of the year, North America is stable and this simply reflects quarter-to-quarter variability. AEC net sales of $138 million increased 20.5% from the second quarter of 2023. Our growth was driven by CH53K, 787, and other commercial and space programs. We continue to see a ramp up of our various commercial and defense programs. Consolidated gross profit was $112 million of $10 million or 9.4% from the same period last year. Machine clothing gross margin decreased from 50.8% in the second quarter of 2023 to 45.9% in 2024. The reduction was driven by the inclusion of Heimbach. When you exclude Heimbach, machine clothing gross margins increased 90 basis points to 51.7% versus the prior year, reflecting continued excellent execution. We continue to progress on our Heimbach integration plans, and we expect further margin expansion as a result in the coming quarters. AEC gross margin decreased 200 basis points from 19.0 percent in the second quarter of 2023 to 17 percent. This includes a $5 million unfavorable change in the estimated profitability of long-term contracts. This is due to inefficiencies related to program ramp-up. For comparison purposes, in the prior year, we recognized an unfavorable $2 million charge. Net R&D expenses increased 2 million in the second quarter versus the prior year, remaining at approximately 4% of revenues. We continue to make strides as we focus on material science capabilities to further differentiate ourselves from our competition. SG&A expenses for the quarter increased by 18.7% nominally, but this was due to Heimbach. As a percentage of revenue, SG&A has decreased from 17.1% to 16.7% as we continue to further streamline our operations and focus on efficiencies. Corporate expenses increased $7 million. This is primarily due to the Heimbach IT-related cost, acquisition and integration-related expenses, and employee-related compensation. Additionally, we recorded foreign exchange hedging losses of $4 million as part of our global foreign exchange hedging program. These transactions do not qualify for hedge accounting treatment, and as such, we will experience quarterly fluctuations in the normal course of business. The effective tax rate for the quarter was 27.9% versus 42.8% in the prior year, and generally in line with a long-term guidance of 30%. The rate for the second quarter of 2024 was lower than the prior year, mainly due to the unfavorable discrete adjustments we took in the prior year period. Gap net income attributable to the company for the quarter was 25 million compared to 27 million last year. Gap diluted EPS was 79 cents per share in this quarter versus 85 cents in the same period last year. After adjustments primarily related to the Heimbach acquisition and other restructuring activities as detailed in our non-gap reconciliation, the adjusted diluted EPS was 89 cents unchanged from the same period last year. As a reminder, we also had a 10 cent headwind in foreign exchange hedging this quarter. That is not reflected in our adjustments. Consolidated adjusted EBITDA was 63 million for the second quarter versus 65 million in the prior year period. Machine clothing adjusted EBITDA, including Heimbach, was 62 million, an increase of 5% versus the prior year. Adjusted EBITDA margins were 32.2% versus 37.3% in the prior year. with the decrease driven by the inclusion of Heimbach. AEC adjusted EBITDA was 23 million, a nearly 12 percent improvement over the prior year. Adjusted EBITDA margins at AEC were 16.9 percent of sales versus 18.2 percent in the prior year. During the second quarter, free cash flow was 64 million with positive operating cash flow of 83 million offset by capital expenditures of approximately 19 million. Our balance sheet remains strong with a cash balance of over $116 million and $430 million of borrowing capacity under our committed credit facility. Net leverage is below one turn. This provides us with significant financial flexibility. Turning to our outlook for the balance of 2024, we are reaffirming our full guidance for the year. I want to provide some context around the segment level guides given the dynamic environment we are in. For machine clothing, the low end of the range reflects greater than expected softness in our European and Asian markets and delays in the realization of our targeted Heimbach synergies. The high end of the machine clothing guide reflects improving market conditions, in particular Europe, combined with constructive markets in the Americas and Asia with Heimbach synergies realized ahead of plan. For AAC, the low end of the range reflects further reductions in lead production lower 787 rates, as well as continued challenges as we ramp up our key programs. The higher end of the range reflects better than expected performance on our program ramps, including on our new programs.
spk07: Now I would like to open the call for questions.
spk00: We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to redraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. Your first question comes from the line of Peter Arment with Beard. Your line is open.
spk11: Yeah, thanks. Good morning, Gunnar, Rob, JC. Hey, Gunnar, maybe just to start on MC, could you talk a little bit about just kind of what you saw from the organic side of things? I guess North America was up in Q1 and down in Q2. It's just Is that more timing-related, and I guess have you seen any kind of – or has that pacing kind of continued as we're halfway through Q3? Good morning, Peter.
spk10: The comp for year-over-year was difficult this year, but if you look at the overall North America for the first half, we are up. So we believe that it's a continued strong market in the U.S.,
spk11: Got it. And then you've continued to do footprint consolidation. Where are you, I guess, in that journey? Are you completed for the year, or is there more to go?
spk10: No, Peter, we are continuing. We are on plan, and we're continuing the efforts, frankly, through 2025. But there's more actions coming.
spk11: Got it. And then just quickly on AEC, You mentioned that LEAP revenues are going to be slightly down. Can you call out maybe some of the programs that are going to be offsetting or providing you the ability to grow? Is that CH53K? Is it JASM? Anything in particular?
spk10: On the military programs, it is definitely CH53K and JASM. But But for our guides, some of our new programs that we reported the $200 million in new orders includes space, engine components, and that will start later this year and continue through the long term. We are signing some good long-term contracts, and that's helping our backlog and future. But there are some additions this year as well. So that's how we're holding our guide.
spk11: Okay. And just lastly, on the 737 rate, when do you expect to be back in sync with where ultimately Boeing gets if Boeing gets to 38 a month at the end of the year?
spk10: Yeah, that's difficult to answer, Peter. I think Boeing, we have no challenge with meeting any ramp-up. We know we have the capacity. Our work is with Saffron to make sure that we do not build inventory in this period, and so we have adjusted our rates. Our ability to ramp up following that will be – is not the challenge for us. And we'll monitor Boeing through this, as well as what's happening with the actual LEAP engine and some of the supply chain issues that are having that. But we're tight with Safran and adjusting as necessary.
spk07: Appreciate all the details. Thanks, Connor. Sure.
spk00: Next question comes from the line of Pete Skibitsky with Alemic Global. Your line is open.
spk05: Hey, good morning, guys. Hey, good morning. Hey, Gunnar, I want to make sure I understood you right. Did you say the year-to-date orders is more than $900 million at AEC, or is that backlog?
spk10: Yeah, that's New orders we have taken this year is $900 million, and that transfers to backlog some this year, but primarily 2025 and beyond.
spk05: Okay. So if that was the order flow, what's the backlog?
spk04: It's about $1.2 billion, Pete.
spk05: Okay, okay. And that's just for AEC you guys were talking about? That is correct, yes. Okay, okay. That's great. That's pretty sizable, it seems like at this point. And then you guys talked in the release about the strength in space and other emerging markets. I guess that was part of that order flow. Any more details? I know you've been kind of reluctant to talk too much to the new stuff, but are we any closer to being able to talk more about what exactly you're doing in space and what other new programs you're involved with there so we can get a sense of kind of the the long-term upside?
spk10: I think the good part here is that we keep getting orders and they're not spot buys. They're long-term agreements based on our ability to deliver both on the space as well as in other programs. We're not yet able to share who our customers are. I think as these programs expand, my goal is to be able to share that, but we're not at that point yet, Pete.
spk05: Okay. Okay. Fair enough. Last one for me. The 5 million negative EAC adjustment, I think at AEC – do you guys feel like you've got a good handle on that program now? It sounds like it was a newer program and you guys have not had a history of, of EAC changes of any meaningful size. And, you know, I think aerospace analysts are in shell shock because there's other firms out there that are kind of take serial EAC charges quarter after quarter on the same programs. And so I just would like to get a sense that you guys feel like you've really got this particular program, you know, um, well aligned to what the future accounting looks like.
spk04: Yeah, Pete, that is Rob. I mean, if you look historically, you know, our EAC adjustments have been, you know, less than 1% of top line. So to your point, you know, this year, today, we're about seven and a half million, which is, you know, it's been higher than clearly that we would like. But, you know, we've been working very closely on a number of these programs and feel good about the adjustments that we've made to reflect the state of the programs And, you know, we're certainly very closely monitoring the operations to make sure that they're performing. So, you know, at this stage, we feel, you know, we feel confident with the adjustments. And, you know, these are really good long-term programs that are complicated in their ramp up. So, you know, we're working that very closely.
spk10: And I would just add, this is the area where we added the additional content, and we're going to full rate. At the same time, so it is a major effort by the team, but we are ramping and we're supporting our customers.
spk07: Okay. Okay. Thanks for the call, guys. Appreciate it. Thank you, Pete.
spk00: Next question comes from the line of Jordan, UNI with Bank of America. Your line is open.
spk02: Hey, good morning.
spk07: Morning, Jordan.
spk02: On the AAC guide, I appreciate the color that you gave earlier. Just in that downside risk, how much is being considered if there were to be an extended strike at Boeing and what that would mean for follow-on production rights for the leap?
spk04: Yeah, Jordan, it's a really good question. I mean, I think if there were a strike at Boeing, clearly... you know i mean we've taken some of that into the into the downside but it really just it would depend on the length of that strike um and and really that you know what that really looks like and you know that that comes down to length i mean clearly that's it that's hard to forecast yeah but uh you know we've definitely you know the downside does reflect lower lead production um which certainly would result if there was a strike and
spk02: Got it. Okay. And then on the new orders, strong backlog, how do you feel about current headcount to meet the ramp across these programs?
spk10: I think hiring has been challenging over time. I think Salt Lake is our biggest site and where we're hiring the most. We are almost at the rate that you know, the headcount that we need for the current ramp-up. And so, you know, now the trick is to keep everyone. So I'm, you know, the team is, our HR team is performing well. We're bringing people in, and they're becoming effective. But hiring is more challenging in Salt Lake than any of our other sites. And I will say that Both for MC and AEC, we do not have a challenge on hiring in any of the other sites.
spk07: Got it. Thank you so much. Thank you, Jordan.
spk00: Next question comes from the line of Jack Ayers with TD Cowen. Your line is open.
spk07: Hey, guys.
spk03: Good morning. Thanks for the question.
spk11: Good morning, Jack.
spk03: Hey, yeah, so just kind of wanted to drill down again on sort of the LEAP production forecast. I know you guys are just kind of calling it down year over year. I wonder if you could maybe, you know, refine that a little bit more. And then I guess going into next year, how we think about 2025, just given, you know, the assumptions already at CFM about, you know, the 40% sequential ramp in LEAP output in H2. you know, if those guys don't hit those targets, kind of what that means for 2025. Just any color there would be helpful. Thanks.
spk04: Yeah, Jack, I mean, I think for 24, I mean, we're looking at approximately, you know, $5 or so million reduction in LEAP revenues and, you know, approximately about $1 or so million of EBITDA impact. The planning, of course, is underway for 2025. We're not in the position to necessarily provide any outlook towards 2025, but as Gunnar referenced, we're very much aligned with Safran, who clearly is in close discussions with their customers regarding the LEAP engine. So we have the flexibility to adjust our output, either up or down. And, you know, to your point, right, there's just a lot of volatility right now around, you know, the LEAP supply chain. Nothing to do with us. But, you know, we're just going to have to navigate.
spk03: Okay. That makes sense. And then just a quick one on 787. I know you guys called it, you know, up this quarter. Can you size that, like basically how big that program is today for you guys?
spk04: Yeah, no, we haven't. I mean, it is an important commercial program for us. We have not in the past discussed, you know, the relative program size. You know, for us, year over year, if you recall, you know, 787 went, you know, to a pretty low production rate for a long time. And, you know, year over year, it's been a favorable, you know, comp for us. But we are clearly, you know, aligning our production with, you know, balmy run rate as they ramp back up to five per month.
spk03: Okay, great. And then I guess just one high-level question, I guess, for Gunnar here. You know, kind of coming into this relatively new, I think for the past few quarters, just would love to hear your, you know, sort of perspective on the portfolio. You know, you've got a ramping aero business here and a kind of, you know, unique MC business. So would love to hear your impressions of the MC business and kind of moving forward how you kind of see the portfolio evolving. Thanks so much.
spk10: Thank you, Jack. And, you know, we are going through our strategy review and strategy planning for the next five years now, so I'm well-versed. I do appreciate being called new still. I think I have another month. But it is – I really – I love the machine clothing business. I think, you know, the name is a misnomer in a way. It is a great business. I think the acquisition of Heimbach was a good opportunity. As we integrate, that will continue to be a strong business for us with great returns and great cash flow. And what's not to like about that? so machine clothing i like the the foundation i want to repeat is material science and we have this ability to use our our technology our material science to to expand on what was started with with machine clothing and expanded into into aerospace with a with a 3d woven And I think we have lots of opportunity there. The growth rate on aerospace business is very good. We need to be able to manage the growth. And I see continued growth, but maybe moving more towards our technology there. So 3D woman is a focus in years to come.
spk07: Great. Thanks, guys. I'll pass it on. Great. Thank you, Jack.
spk00: Again, if you would like to ask a question, press star 1 on your telephone keypad. And we have our last question comes from the line of Michael Tiaramoli with TruViz Securities. Your line is open.
spk06: Hey, good morning, guys. Thanks for taking the questions. Just to maybe keep beating this Leap issue, can you just maybe give us a better sense of do you have an idea of what kind of inventory is in the channel? And I know you said a couple times you're aligned with Safran. I mean, you know, they were originally planning 20% to 25% growth in Leap. for the beginning of the year, which I guess would have been nearly 2,000 engines. They scaled that back to 10 to 15 and now flat. So, I mean, are you guys actually producing units now or is it an inventory burndown situation? Can you give us any more color of maybe what's in the channel there?
spk10: Yeah. Yeah, we are continuing to produce. It is important that we continue to produce and keep our people both engaged and the technology fresh there. We were flat from last year, which means we had started the inventory burn down. As we're coming into the second half, we are further reducing our rates. which will, you know, have an impact on inventory going forward. But we're maintaining, we're trying to maintain an inventory for the contract with Saffron.
spk09: Okay. Where the inventory is beyond that, I don't know.
spk06: Okay. And then just thinking about knowing that that's a unique contract and not as accretive to margins, you know, the second half AEC, and obviously you had the negative EAC this quarter, but it looks like you got a 21% or so run rate in the second half. What are the big sort of drivers that kind of give you the confidence in that margin level in the second half AEC?
spk04: Yeah, Michael is Rob. There are a few things that give us that confidence. The first is there is going to be a bit of a shift in program mix. A lot of our space and other programs that we expect to see improve sales in the back half of the year carry higher margin. The operational challenges that led to some of the EACs, we're working to overcome those and feel confident that we'll be able to produce more efficiently in the second half. So you have that. And then thirdly, a number of these restructuring activities that you see at AAC are really about getting the cost structure to a much better place at AAC. And that is also going to be a significant contributor in the second half of the year based on the SG&A reductions that we've made there. So it's really those three items that give us the confidence, the back half of the year margin.
spk06: Okay. Got it. And then just one more broadly on that, not to hone in directly on that negative EAC, but clearly you're winning more defense and space work, and presumably those programs come with a lot more risk. I mean, as you look at your bidding process, contracting terms, design analysis, program management, do you feel that everything is robust enough to sort of contemplate and capture any potential risks? you know, overruns or challenges, so you kind of don't get into this, you know, sort of persistent negative EACs?
spk04: Yeah, I'll start not looking our way in, but Michael, I mean, we have a very robust bid review process. You know, we have, over the last handful of years, we've built out a very strong business development team that works very closely with program management and and supply chain to really understand the program and what's required. I mean, we've walked away from a number of potential opportunities, you know, just given the economics don't pan out and the risk is too high. So, you know, what we're experiencing this quarter is, you know, very significant ramp-ups on very large programs in a very difficult labor market. So that's, you know, really the largest contributor to the EACs that you're seeing. You know, if you take out just a couple of programs, the rest of the programs in that net have been fairly neutral. So we feel overall very, very good about our review process and the type of work that we'll take. As Gunnar mentioned, you know, we're going to continue to focus on our 3D woven technology in particular and, you know, focus on opportunities. But you're right. I mean, you know, in any firm fixed price contract, you know, the risk and opportunity is related to, you know, supply chain, labor, you name it, right, have to be taken into account when you price. And, you know, contractually, you know, we feel that we've done a good job of protecting ourselves as much as we can. And, you know, we have a good team executing.
spk10: And we have the opportunity to be selected. And so we'll select the programs that makes the most sense for us. And I have to emphasize the ability of this team to execute is great. So we're going through a significant ramp and we're seeing some effects of that. That ramp was the beginning of this year. We're continuing to ramp up through the end of the year. We're adding new programs. Some of the new programs are added at our various facilities, which help us disperse the risk.
spk09: So I'm going to support Rob fully in that answer.
spk07: Got it. Thanks, guys. Thank you, Michael.
spk00: There are no further questions at this time. Mr. Gunnar, Cleveland, I turn the call back over to you.
spk10: Thank you. And thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany International. Thank you and have a good day.
spk00: This concludes this conference call. You may now disconnect.
Disclaimer