Albany International Corporation

Good day and thank you for standing by. Welcome to the Albany International Third Quarter 2024 earnings 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 the 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 first speaker today. JC Chetanani, VP Investor Relations and Treasurer. Please go ahead.

Thank you, Brittany, and good morning, everyone. Welcome to Albany International's Third 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 October 30th, 2024, as well as our SEC filings, including our 10K. Now I will turn the call over to Gunnar Cleveland, our President and CEO, who will provide opening remarks. Gunnar?

Thank

you, JC.

Good morning and welcome, everyone. Thank you for joining our third quarter earnings call. I will provide an overview of our business performance. Rob will later discuss our final results in detail. I'm pleased with the overall results of the quarter as we focus on operational excellence, evidenced by strong results at machine clothing, and our ability to generate free cash flow of 78 million a year today. Furthermore, our balance sheet is very healthy. Turning to the EAC adjustments announced earlier this month, we are addressing operational issues to stabilize production and to advance the ramp up of the programs at our Salt Lake facility. Our team is making good progress, leveraging support from our other sites. Machine clothing revenues at 183 million grew year over year, driven by our Heimbach acquisition, partially offset by publication grade globally and packaging in Europe. In the third quarter, engineered fabrics delivered year over year growth. Overall, the industry's secular growth trends remain in place for packaging, tissue, and pulp. In terms of geographies, North America remains a strong contributor, while Europe continues to demonstrate weakness. Overall, Asia is stable, except for China, which is experiencing some softness. Our global order backlog remains stable. Turning to Heimbach, our integration plan remains on track. We made progress on functional organizational integration this past quarter, and the closing of our South Korea and Rochdale UK facilities is largely complete. Revenue has seen an impact from the overall weakness in Europe, combined with the SAP implementation, which has delayed some sales into the fourth quarter. In our engineered composite segment, we recorded revenues of 115 million, while our profitability was impacted by our previously announced EAC adjustments. In our commercial markets, we have seen near-term weakness in LEAP and our other Boeing programs. Our defense business continues to grow, primarily on the CH53K and JASM platforms. Though we have seen some near-term reduction in the Joint Strike Fighter program this year, we expect recovery in 2025 and beyond. Our backlog is well over 1 billion, and longer term, we continue to see growth in space and our other commercial programs. With the LEAP program, we're monitoring the situation at Boeing, but as previously announced at our second quarter earnings call and earlier this month, we have twice lowered our 2024 production plan. We're working with Safran on our 2025 production plan, and we'll share that with you when it is finalized as part of our overall 2025 guidance. Our long-term fundamentals for the business remains strong, and we have new operating leadership in place, all of which gives me strong confidence in the future of the segment. It's important to note that the updated margin profile of the business remains well ahead of our peer group. Overall, our business fundamentals remain solid, and I have my team in place. We have Chris Stone as a new leader at Albany Engineered Composites. Chris brings strong experience, display, and strategic agility to the segments, which will support our strong growth projection. In Albany Machine Clothing, Merl Stein took over leadership after several years of being groomed to the role, and will take his industry experience and strong business development capability into shaping the future of our machine clothing segment. As disclosed earlier, due to the common material science of our businesses, Rob Hanson was appointed CTO and is leading our overall innovation and R&D. In order to capitalize on our significant investment in R&D, we recently hired Paul Watts to lead our new business ventures. Paul has experience from Boeing and Techshon, and will take new product through a gated process for addition to our businesses. With all this change in momentum, we also plan on hosting an investor day in the spring of 2025 to showcase the plans for the next five-year period and give analysts and investors the opportunity to hear directly from our new management team. With that, I'll hand it over to Rob to provide more details in the quarter. Rob.

Thank you, Gunnar, and good morning, everyone. I will review our third quarter results and then provide our outlook for the balance of the year. Consolidated net sales came in at 298 million, up .1% from the third quarter of last year. Machine clothing net sales of 183 million increased .9% versus the third quarter of the prior year driven by Heimbach. North American comparable sales were higher every year and reflect the strength in that market. However, we were negatively impacted by continued weakness in Europe and mixed markets in Asia. The SAP implementation at Heimbach has also provided a near-term headwind as we transition to our new systems. Organic sales for machine clothing for the period declined 1% year over year, largely due to sales delays from the SAP implementation. AEC net sales of 115 million were largely flat versus the third quarter of 2023 on a gap basis, inclusive of a 16 million negative top line impact from the EEC adjustments in the quarter. We experienced growth in our space and emerging platforms, offset by lower sales in LEAP and CH53K. I wanna highlight that excluding the cumulative catch-up impact, our underlying sales on our CH53K program increased as we worked towards ramping production to meet our customers' needs. Consolidated gross profit was 90 million, down from 102 million in the prior year, driven by the EAC cumulative catch-up adjustment of 22 million. Excluding the EAC adjustment, our gross profit for the quarter would have increased to 112 million, with a margin of approximately 36%, in line with last year's results. Machine clothing gross margin increased from .6% in the third quarter, compared to 48%, I'm sorry, increased in the third quarter of 2023 to .6% in 2024, marking the first year over year improvement since the Heimbach acquisition. The margin increase was primarily driven by reduced input costs. Excluding Heimbach, machine clothing gross margins increased approximately 270 basis points to 53.4%, reflecting continued excellent execution. We continue to make progress on our Heimbach integration and are on track to meet our long-term synergy targets. AEC gross margin decreased from .7% in the third quarter of 2023 to 1.3%, driven by EAC adjustments that were detailed previously. Hescent to 22 million EAC cumulative adjustment, AEC's gross margin for the quarter would be 18.2%, a 150 basis point reduction from the prior year. Net R&D expenses increased one million in the third quarter versus the prior year, remaining at approximately 4% of revenue. SG&A expenses for the quarter were essentially flat, however, as a percent of revenue, SG&A has decreased from .5% to 17.5%. Corporate expenses decreased a half a million versus the prior year to 14.3 million. The effective tax rate for the quarter was .6% versus .3% in the prior year, mainly due to favorable discrete tax adjustments. This discrete tax benefit is mostly attributable to the truth of the prior year estimated taxes and the release of a valuation allowance in a non-US jurisdiction, due to positive evidence indicating that a full valuation allowance was no longer required. Gap net income attributable to the company for the quarter was 18 million compared to 27 million last year, the reduction largely due to the EAC adjustments which negatively impacted net income by 17 million. Gap diluted EPS was 57 cents per share in this quarter versus 87 cents in the same period last year. After adjustments primarily related to the Heimback Acquisition and other restructuring activities as detailed in our non-GAP reconciliation, the adjusted diluted EPS was 80 cents versus $1.02 in the same period last year. Our EAC cumulative adjustments negatively impacted our third quarter diluted EPS by 55 cents per share. Please note that our third quarter EPS also benefited from the timing of certain operating expenses which we expect to occur in the fourth quarter. Consolidated adjusted EBITDA was 54 million for the third quarter versus 65 million in the prior year period. Machine closing adjusted EBITDA including Heimback was 64 million in increase of 12% versus the prior year. Adjusted EBITDA margins were .2% versus .5% the prior year, with the increase reflecting improved operations across the defense. AEC adjusted EBITDA was 4 million as compared to 22 million in the prior year period. Adjusted EBITDA margin at AEC was .1% of sales versus .3% in the prior year. AEC adjusted EBITDA excluding the EAC cumulative adjustments would have been 26 million or .8% of sales. During the third quarter free cash flow was 32 million with positive operating cash flow of 47 million, offset by capital expenditures of 15 million. This brings our year to date free cash flow to 78 million versus 25 million in the prior year. Our balance sheet remains strong with a cash balance of over 127 million and 440 million of borrowing capacity under our committed credit facility. Net leverage is below one term. Turning to our outlook for the balance of 2024, we are tightening our guidance for the balance of the year relative to the guide provided earlier in the month. We have narrowed our revenue guidance for both segments, effectively leaving our midpoint similar to the guide we provided earlier this month. Our consolidated adjusted EBITDA guidance is slightly higher than our prior guide and has also been narrowed. It should be pointed out that our full year AEC EBITDA guide translates to high team margins for the fourth quarter, reflective of the underlying strength of the business. The midpoint of our adjusted EPS guidance is $3.20, a 5 cent increase from the prior guide. We plan on providing full year 2025 guidance when we announce our year end results. We will also provide longer term guidance when we host our investor day next spring. Now I'd like to turn the call open for questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Peter Armit with Bayer, your line is now open.

Yeah, thanks, good morning Gunnar and Rob. Gunnar, can you give us your latest updated thoughts on one, the Gulfstream contract that you talked about earlier this month, just kind of how that progresses from here, what's the latest and how do we think about kind of revenue for next year?

There's no real change on my contract or performance since our call a month ago. We're putting effort on the program with the team that is there engineering and working with Gulfstream to get to the rate and deliver a part with less hours than we do today. So the effort is there, but there's not really an update. I don't expect anything to impact our revenues for the program next year.

Okay, that's helpful. And then in your kind of, I guess, I don't know what you can say about the classified work or business that you've been winning. How does that look in terms of a revenue opportunity when we think about next year and beyond? I know you'll probably get a lot of details next spring at your investor day, but what's going on in the defense classified world for you guys? Yeah, we're

very active on the defense side and also with some commercial opportunities. I'm not gonna get into details there and we're not announcing any specific deals this quarter, but there's a lot in work. I see a great opportunity for us going forward. The buildup of our backlog over the last three quarters is indicative, I think, to what we're doing.

Okay, appreciate it. And just one quick one, Rob, on your guidance for AECs, EBITDA for the year, kind of obviously implies a nice step up in the fourth quarter. Can you talk a little bit about some of the moving parts there and the confidence level around that EBITDA?

Sure, yeah, Peter, we have a fairly high confidence level in our guide, especially considering we're two months out from finishing the year. What we've seen is a really good increase in volume in some of our more higher margin areas as well that we expect to see continued growth in the fourth quarter. We are controlling expenses as needed. So overall, certainly with Chris on board and the team's focus on turning things at Salt Lake, we feel good about the guide. The implied margin range, as I'm sure you did the math, Peter, is 17 and a half percent for the fourth quarter. That's the midpoint of our AEC guide and it's a good business, so we feel good about the profile.

Appreciate that, Colin. I'll jump back in here,

thanks. Thank you so much. One moment for our next question, please. Our next question comes from the line of Michael Carmole with Truett Securities. Your line is now open.

Hey, morning, guys. Thanks for taking the question. Sure, hey, Mike. Rob, just to stay on Peter's last question, I mean, 17 and a half percent is good, but I mean, these margins are trending down. How should we think about the longer-term trajectory? And you're doing more defense-classified work, presumably that's -a-kind products or structures which always inevitably are gonna carry design, development, engineering risks. So how can we be confident in these margins on a go-forward basis?

Yeah, so I mean, of course, once we will give the 25 guide when we announce our year-end results and we're planning on investor day, but Mike, I think what should give us a lot of confidence is a lot of the areas where we're seeing good levels of growth are in higher margin programs, especially on the commercial and kind of emerging or advanced air mobility platforms and space. So those are very good areas for us. And you're absolutely right. We definitely have a focus on some defense work which does provide in the right contract setting really good margin opportunity and predict invisibility. So we feel really good about the blend. I mean, we're definitely looking to have visibility, given our strong backlog on what the margin profile should look like. And it's gonna come down to execution, I think to your point, Mike, right? On the commercial and space and other programs, we need to execute and we're definitely feeling good about where we're situated going forward.

Are these classified, are they cost plus initially, or did you bid anything in the more high risk from fixed price development? Or because I would think if it's cost plus, that would be a little bit dilutive as you kind of go through them at first.

Yeah, I mean, Mike, I mean, when we're looking at these development programs, we're very careful about the amount of risk we're gonna share with our customers. We will typically look for some level of self protection. So I don't think we're putting ourselves at a very significant risk on these development programs, like some others.

Okay, fair. And then just shifting gears to leap. I mean, the output has been revised down now, down 10%, I mean, that's the third time. Can you talk to maybe the ramp trajectory? I mean, I know you're not gonna give 25 guidance, but it seems like the overall ramp there is gonna be lower than planned. And I mean, can you give us any sense of what kind of inventory in the channel you might have? I mean, it seems like there might be at least 200 shipsets based on kind of if you were tracking tightly with Safran and how many revisions they've done this year. So any color on the LEAP program you can give us?

Yeah, we're comfortable with where we're at for the year. And we're working with Safran on our 2025 plan. And there's a balance there, right? Our reductions have fit with where Safran is. And we will continue to do that. It's a tight relationship. We also know that there is growth in the future and we can't pull back too far and not be able to do the ramp up. So that's part of the balance as well. We're not going to give guidance for next year, but you can imagine that there is a balance there between maintaining the capability and the ramp up as well as minimizing the inventory.

Yeah, and Mike, and just one other thing to kind of keep in mind, when we provided our LEAP guide for the year, we were holding flat and that was against a backdrop of a 25% expected increase at the beginning of the year. And obviously that's been ratcheted down as the situation at Boeing has unfolded during the year. But the relative impact to us relative to those expecting those 25% increases was much more modest. We have taken our estimates down, but not, and if you look at Safran's most recent earnings release, they were very clear to state that they understand the balance of their supply chain. The long-term program is in excellent shape. The backlog is there. They want to be very careful in that to damage the supply chain, of which we are a very important part of that. Okay, okay, sure.

Is the 600 million in AEC revenues in 26 still good?

Yeah, Mike, we'll be providing long-term guidance when we come out with our investor day. So let's wait until then. Okay, sure, thank you. Good question, fair question.

Thank you so much. One moment for our next question, please. Our next question comes from a line of Jordan Lyonis with Bank of America. Your line is now open.

Hey, good morning. Thanks for taking the question. Again, looking at long-term, good morning. I appreciate you won't give guidance on it now, but on the 787 NGE, 9X and NX, how are you guys thinking about the programs given we've seen the softness on the 787, the 777X just got delayed, and presumably those engines will also have an impact.

Yeah, so 787, we expect growth. So they're not affected by the strike, and there is demand there. So we believe that that's a good program going into next year. There is a delay on 9X. There's no impact this year. And I think for next year, as this is development and continued development of the engine, it's minimal impact.

Jordan. Got it, awesome, thank you.

Thank you,

Jordan. Thank you so much. One moment for our next question, please. Our next question comes from a line of Chigusa

Katoku with JP Morgan. Your line is now open.

Hi, this is Chigusa Katoku on for Steve Tusa. Thanks for taking my question. Morning. Good morning. My first question is on free cashflow. Year to date, the free cashflow conversion has pretty good improved over last year. But how should we think about conversion in 2025? And do you have any color on how it is by business? Does AAC continue to be a user of cash versus a generator?

Sure, no, great question. So yeah, the year to date conversion ratio is about 110%, which is certainly probably a bit higher than we would expect over a very long-term cycle. But we are focused on it. I mean, cashflow has become a very critical focal area for us, because that's what's gonna drive our future growth. So as it relates to the business, we do expect AAC, they were significant users of free cashflow, capital last year. We're seeing some of that come off this year as we are better managing our inventory, we're seeing some of the more productive working capital balances at that business, but also at machine clothing. So I think going forward, in the airspace side, cashflow will tend to be a bit more volatile depending on the types of programs that we sign up for, because typically early stage programs are a user of cash. So, but that's a balance that we're working on. I think what you should expect from Albany Consolidated is continued strong cashflow generation as we go out into the future.

Then shifting to MC, the margins were stronger than we had expected and you attributed it to operational execution, but can you elaborate on that? And what's the right runway to think about as we head into 2025?

Well, I can start with that. I think it reflects the efforts that we're doing with the integration. It's not only affecting the improvements that we're getting from, that you see at Heimback, but also at the core business. And it's also just excellent execution and cost management by the team in a little bit of an uncertain time. So just kudos to the team for performing at that level.

Okay, thank you.

Thank you so much. And as a reminder, everyone, to ask a question, you will need to 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. One moment for

our next question. Our next question comes from a line of

Gautam Khanna with T.D. Cohen. Your name, your line is now open, sorry.

Yeah, hey guys, this is Jack Arizona for Gautam today. Thanks for the question. Hi, Jack. Hey, Rob. Just for Leap, I hate to go back to it, but just to be clear, did you guys take production down incrementally more from your last update? Because I think you guys called it down modestly in the last quarter or maybe the 10-3 update, but since GE took it down 10% now, just wanna be clear for you guys for 24.

Yeah, so we had a lower plan for the year than what was projected from both Safran and GE, and then we took it down in the second quarter, and we took it down again on the third of October. We have not changed it since then.

Okay, and would you be willing to maybe quantify the sort of step change? I think you guys put some numbers around it last quarter.

Yeah, it was very minimal. I mean, we're talking maybe a few million dollars, Jack, from the second quarter to the October 3rd call. Pretty nominal.

Okay. All right. Okay, and then just F35, I know maybe in your script you discussed some softness there, expectations this year, but I guess moving forward, does the Lockheed sort of delivery restart, does that help you guys at all? And I guess how far away are you guys from that? I think 80 million target you might have called out last investor day. Just wanted to kind of get the cadence of the growth trajectory there. Thanks so much.

Okay, we've seen a softness through the middle of this year and we expect that to come back starting into next year for a joint strike fighter. We're pretty far out in the supply chain here, so that does affect us maybe to a lesser degree, but I expect the strike fighter numbers to be steady into next year.

And Jack, we've provided a view in 2022 on kind of what the potential was for F35 and we'll certainly update that again at the investor day, but we believe in the program long-term, the fundamentals remain intact, the program, the Lockheed, now that they've got the tech package three up and running, that's all positive signs that we're seeing right now on F35.

Awesome. Okay, thanks guys, appreciate it.

Thank you.

Thank you so much for your question. I am showing no further questions at this time. I would now like to turn it back to Gunnar Cleveland for closing remarks.

Thank you and thank you everyone for joining us on the call today. We appreciate your continued interest in Albany International. Thank you for joining us. See you and have a good day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.