Albany International Corporation

Thank you for standing by. My name is Pam and I will be your conference operator today. At this time, I would like to welcome everyone to the Albany International First Quarter 2025 earnings 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 this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to J.C. Shatnani, VP Investor Relations and Treasurer. You may begin.

Thank you, Pam, and good morning, everyone. Welcome to Albany International's First Quarter 2025 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 April 30th, 2025, as well as our SEC filings, including our First Quarter Form 10Q and our 2024 Form 10K. Now I will turn the call over to Gunnar Cleveland, our President and CEO, who will provide opening remarks. Gunnar?

Thank you, J.C., and thank you for joining us as we review our First Quarter 2025 results. Overall, I'm pleased to report that our businesses are executing to the plan that we laid out at the start of this transition year. Our new business segment leaders are performing well and they restructure as they restructure and strengthen their respective operations. While we see uncertainty in the markets, we were not affected by tariffs or other disruptions in the First Quarter. Due to our mostly regional setup for both suppliers and customers, the overall direct impact of tariffs as they currently stand is not expected to materially impact our financial or operational performance. Machine clothing continues to deliver consistent strong results and the integration of Heimbach is proceeding to plan. We expect to see the benefits of the Heimbach integration efforts accelerate into the second half of this year as our actions take effect. AEC is executing well on its current portfolio programs and the segment continues to win new business. The team is making progress on process improvements on our CS53K and Gulfstream programs. And we had lower EAC adjustments in the quarter, which we will discuss in more detail later. For the quarter, we reported revenues of $289 million and overall adjusted EBITDA margin of .3% and an adjusted diluted EPS of 73 cents. Free cashflow was ahead of plan and we expect 2025 to be another strong free cashflow year. We returned capital to our shareholders who'd bought a regular quarterly dividend and our re-initiated share repurchase program. In the first quarter, we repurchased 69 million worth of shares. We currently have $193 million of capacity remaining under our latest share repurchase authorization of 250 million. Turning to our individual businesses, for the quarter, machine clothing reported revenues of 175 million and an adjusted EBITDA margin of 28.4%. In terms of grades, secular trends in packaging remain strong, tissue, pulp and engineered fabrics remain stable. North America had a slight decline in deliveries in the first quarter, but strong order flow shows strength in the market. Europe is showing signs of recovery with good deliveries and strong orders making us cautiously optimistic for the region. Finally, Asia is mixed with some weakness in China. Our global empty order backlog is strong with order to sales ratio above one, and giving us confidence in our outlook for the year. At Heimbach, we continue to make good progress on our integration plans, which is focused on footprint rationalization and operational efficiency. As a reminder, since the acquisition, we have closed two Albany facilities, sold one Heimbach business and closed two Heimbach facilities. We have also restructured operations at the remaining Heimbach facilities in Durant, Manchester, Burgos and Zoujou. These consolidation activities are strengthening our operational and production efficiencies and enhancing the regionalization of our business. The synergy benefits of these actions occur over time. We expect the run rate on our synergies to be particularly strong as we exit 2025. And we remain confident of hitting our original synergy targets with a three and a half to four times effective purchase multiple. Turning to tariffs, we're monitoring and assessing the fluctuation in the tariff landscape as they occur. Our current fee is based on tariffs as they currently stand. The situation is dynamic and our teams are vigilantly addressing both challenges and opportunities. And we continue to adapt as the situation develops. As it relates specifically to our MC business, it should be noted that most of our sales and sourcing is regional and therefore generally insulated from tariffs. For example, in North America, the transaction among our facilities in Mexico, US and Canada are covered by the USMCA. With the acquisition of Heimbach, our EMEA sales and supply chain is strengthened regionally by local trade treaties. Finally, in Asia, we're also supplying our customers from within the region. However, we have some potential exposure to sole source supplied materials and certain highly engineered products manufactured by us only in the US or the UK. To mitigate any impact, we're assessing and using trade mechanisms, looking at cost controls as well as considering other actions. Turning to our engineered composite segment, revenues for the quarter were 114 million with an adjusted EBITDA margin of 13.5%. We keep making progress in our AEC operations and we recorded a total EAC adjustments of 7 million for the quarter. Half of this is driven by CH53K and Gulf Street with a balance across a mix of programs. The frontline leader coaching, operator training and progress in planning and supply chain are driving the expected improvements as well as setting the sights up for the future growth. On LEAP, as you may recall, last quarter we took a conservative approach as we projected lower volumes both at LEAP as well as our other Boeing programs. The drop in revenue in the first quarter is in line with our forecast. We stand ready to meet Safran's production schedule as the demand at Boeing and Airbus recovers and have ample capacity to meet any upside to the demand. With respect to our other programs, we're seeing growth in advanced air mobility with expected ramp to build through the course of 2025. On new program wins, we recently announced a long-term agreement with Bell on the 5-5 program. For JASM, we added to our current backlog and are working on the new multi-year contract. As these awards translate into purchase orders, they will be added to our existing AEC backlog which at quarter end was 1.3 billion. As a reminder, this is backlog that does not include LEAP volumes beyond the current calendar year and only relates to our other AEC platforms. This backlog provides us with visibility and confidence into our business performance in 2025 and beyond. Finally, as it relates to tariff for AEC, our sourcing and production in Mexico, Canada, and USA is again currently protected under the USMCA. The direct impact of our earnings from tariffs at AEC is currently expected to be negligible. We're tracking how second order tariff impacts play out, particularly from suppliers as they may be impacted in their own value chain. Similarly, we're monitoring the impact of demand at our end customers. At this point, we are not aware of any changes from our customers or suppliers. If we begin to see impacts, we have assessed and prepared mitigating actions and we will address these challenges as needed. In the current macro and geopolitical environment, we believe the ongoing titanium shortages and extended lead times will continue. This creates even more opportunity for our engineered materials, especially in 3D woven composite parts, which can be a superior alternative to titanium in terms of strength, weight, and cost. As our product offering gains more acceptance among our customers, our competitive advantage will be on a catalyst for additional long-term growth. We have proven our industrialization of this technology with the LEAF FanBlade and Case, 7779X FanCase, as well as parts for landing gears. Our solution can be delivered at a fraction of the lead time with readily available materials and a production capacity proven to deliver 100% on time, which is in stark contrast to the current and historical titanium supply issues. Finally, we continue to streamline our operations and are upgrading our SAP system with S4HANA across the entire company with a Go Live schedule for next week. This will improve our systems and operational efficiencies and deliver enhanced analytics to improve our business agility. With that, I will now hand it over to Rob to provide more details on the quarter. Rob.

Good morning, everyone. I will review our first quarter results and then provide our outlook for 2025. As a reminder, please note that starting last year, we allocated our GIS cost to our operating segments to better reflect their two underlying performance. Consolidated net sales were in line with our plan at 289 million, down .8% from 313 million in the first quarter of last year. Machine clothing net sales of 175 million decreased .7% versus the first quarter of the prior year due to targeted product line divestitures and lower sales to a large time by customer. AEC net sales of 114 million were lower by 11% versus the first quarter of 2024, primarily due to a 7 million negative top line impact from the EAC adjustments during the quarter. This was coupled with lower lead sales as well as expected. We were able to partially offset the sales decline with growth in our advanced air mobility and CH53K platforms. Consolidated gross profit was 96 million or .4% of sales, down from 109 million in the prior year or .7% of sales. Machine clothing gross profit of 80 million decreased from 85 million in the prior year, while gross margin percentages remain constant at 45.7%. This performance reflects improved operating efficiencies as we continue with our integration efforts. AEC gross profit of 17 million decreased from 24 million, largely reflecting the impact of the cumulative EAC adjustment for the quarter. Of the 7 million of EAC charges for the quarter, 2 million related to the CH53K program, 1.7 million related to Gulfstream with the balance spread across multiple other programs. Net R&D expense at 4% of revenue remained relatively flat in the first quarter versus the prior year. Our consistent investment in R&D underscores our strategy of using material science as a competitive advantage. Consolidated SG&A expenses were 54 million for the quarter, down slightly versus the 55 million in the prior year. The effective tax rate for the quarter was .6% versus .2% in the prior year. The lower rate is mainly due to favorable discrete tax adjustments, primarily related to a decrease in our valuation allowance on foreign tax credits. Gap net income attributable to the company for the quarter was 17 million compared to 27 million last year. Gap diluted EPS was 56 cents per share in the quarter versus 87 cents in the same period last year. After adjustments primarily relating to FX revaluation and restructuring costs as detailed in our non-gap reconciliation, the adjusted diluted EPS was 73 cents versus 90 cents in the same period last year. Consolidated adjusted EBITDA was 56 million for the first quarter versus 65 million in the prior year period. Machine clothing adjusted EBITDA was 50 million versus 52 million in the prior year. Adjusted EBITDA margin was up slightly to .4% versus .2% prior year, reflecting improved operational efficiencies. AEC adjusted EBITDA was 15 million as compared to 21 million in the prior year period, largely reflecting the effect of the EAC adjustments. Adjusted EBITDA margin at AEC was .5% of sales versus .6% in the prior year. Once again, reflecting the current period EAC cumulative catch up adjustments, as well as the effect of EAC charges, which were recorded in the second half of last year. During the quarter, free cash flow was negative 13 million versus negative 17 million in the prior year. We remain on track to deliver another strong cash flow performance this year. Our balance sheet remains strong with a cash balance of over 119 million and 384 million of borrowing capacity under our committed credit facility. Based on our analysis of tariff impacts and given our first quarter's performance, which was in line with our plan, we are reaffirming our full year guide. In terms of earnings cadence, we still expect the second half to be stronger than the first half due to the ramp at AEC combined with the acceleration of Heimbach Synergies. Now I'd like to open the call for questions. Operator.

Thank you. We'll now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad. To raise your hand and join the queue, if you would like to withdraw your question, simply press star one again. If you are called upon to ask a question and are listening via a loud speaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And your first question comes from the line of Peter Armandt with Bird. Please go ahead.

Yeah, good morning Gunnar, Rob, JC. Hey Gunnar, you talked about kind of, the ability to kind of step up to meet Safran's schedule if rates increase. Could you just kind of remind us, I know that there was probably some inventory that they were burning through, but where things stand regarding LEAP and kind of how things are progressing there.

All right, good morning Peter. And right now, you know, there is some use of inventory. We expect to be, and as I've mentioned before, we have a requirement to sit on certain inventory for Safran. So as we get through this first half of the year, we expect to be at that level. And we are monitoring how they're pulling. We're continuing to meet with them regularly. So I would say there is upside to the back half of the year the way it is looking right now. But as of now, we're staying with the plan.

Got it. And then just, you mentioned the other programs, the $1.3 billion backlog that, you know, talks to the rest of the programs and mix. Just wondering, you're seeing about new opportunities in terms of, I know there's probably a lot you can't talk about in terms of the classified world, whether it's hypersonics or other things, but there is a lot of funding dollars coming through the supplemental and other areas. Are you seeing new opportunities to grow that backlog?

I definitely am seeing opportunities. And we have the benefit actually now, picking and choosing a little bit what we want to go after. Our focus is on our technology, whether it's 3D woven braiding or other capacities that we have and where we have a competitive advantage. But there's definitely opportunity out there. I would say the opportunity is in space and in some of the missile programs. As well as we ramp up now across both Boeing and Airbus engines is a priority.

Yeah, that's helpful. And just lastly, just maybe on lower EACs this quarter, you know, maybe just CH53K, such a huge program for you guys. Maybe just to give a little more color on how that program's going. Thanks.

Yeah, our plan is working, Peter. The team is progressing. We have the right people in place. We still have to hire more people, which always introduce some risk. But I would say we are better at onboarding. We're better at training and we have better frontline leadership people. And so I'm optimistic about continued improvement on the CH53K. We also closed out several programs in the first quarter, which was part of the EAC adjustments. So as new programs are coming on, we're well situated, well

prepared. So very positive. Appreciate the color. I'll jump back into Q. Thanks, guys. Thanks.

Your next question comes from Michael Charmoli with Trois Securities. Please go ahead.

Hey, morning, guys. Thanks for taking the questions. Hey, maybe Ghanar or Rob, just to stay with Peter's last, or the last line of questioning there on new programs. Can you give us more color on this seven-year contract with Bell? And I mean, I guess just thinking of it specifically from a risk or margin profile, we've kind of all been conditioned, I think, to think that structures are challenging business. How do we get comfortable with what you're potentially going to be working on at delivering there?

Yeah, so I'm very excited that we do have a contract with Bell now. We've been working with them. It's a situation where one of their suppliers failed, which is we've seen before. And we took on some rather complex parts from all the 525, tail boom specific. So I would say it's an opportunity for us to show our capability. Those parts are in our Bernie facility right now, and we're delivering and supporting Bell as they're ramping up on the 525. I think, I believe in the 525 program, I think it's a good program going forward. And we're, but it's really a catalyst to get us in with Bell and show our capabilities and see what else we can do for them. As far as returns, since we do have a choice of the work that is coming towards us, we are being picky about the work that we're taking and we're getting the returns that we have projected in the high deans for AEC.

Okay, okay. Just, yeah, I guess the last time we saw you, you just said you took over from a challenge supplier. I guess that was the Gulf Stream and that proved to be a little bit risky. Okay, I guess just sticking with AEC and kind of trying to dig a little deeper. What were leap revenues or what was the growth year over year? I mean, so you've got GE and Saffron talking about 50 to 20% increase this year, but it sounds like there will be continued de-stock as they manage that inventory. I mean, have you changed your view at all from being down slightly for the year or how should we think about leap?

Let me address the supplier first with Bell. They chose to get out of the business. That's why Bell was in trouble. These are much simpler composite parts than what we have with Gulf Stream. So we've already made delivery of all the parts. So I'm not worried there, but they're complex parts because we are good at complex parts. As far as leap is concerned right now, we're keeping the plan for the year, but as I mentioned to Peter earlier, I think there's upside for the year. It's very positive to see where Boeing is at their ramp up on 737 and with Airbus. So as the year progresses, we will incrementally grow our output with the demand.

Okay, do you have the leap revenue number for the quarter?

Yeah, we haven't disclosed that specifically, but Michael, if you look in the queue, there's a reference to the percentage of revenue. So I'm not, but I mean, I would expect in Q1 to be, pretty much the low point for the year, just based on the full year projection.

Okay, got it. And then just last one for me and I'll get out of the way, just shifting to MC. I guess Heimbeck coming on a couple of years and I think the original plan was to take EBITDA from kind of that 15 to 16 million and maybe triple it. The margins down in MC this year, is that still the trajectory for the overall integration you're working on? Should we be thinking about kind of those Heimbeck, EBITDA margins getting to that 45 million plus rate?

I think what you should expect on Heimbach or what you see right now is an effect of all of the actions that we're taking. And I did repeat that just to remind us and everybody that we're taking significant actions to densify our operations and make our efficiencies better. And as we're doing that, there is some challenges with all the moving parts. And so you're not seeing it right now, but you'll see it accelerate through the year. And so, yes, we're confident that we will continue to see that growth.

Your next question comes from Jordan Lyonins with Bank of America. Please go ahead.

Hey, good morning. Good morning.

Morning Jordan.

Could you talk about how you're looking at the ramp for 7.8 and then a triple 7X going into the rest of the year?

So .8.7, we believe to be just growing very, very slowly through the year and then accelerating next year. So we have a relatively, I would say, cautious outlook for .8.7 for this year, but better next year. Triple 7, it's all about the certification and we're building parts to support that certification. Cool.

And then on the tariff impacts, for the direct one, I know you guys said you were mitigated. Were you guys looking at the second derivative impacts?

Yeah, we're listening to the international paper. We're looking at listening to whether it's GE or Safran or Boeing. If we're gonna have to monitor that and also see what happens with the tariff landscape as it seems to change every week. So right now it is looking relatively flat for us.

Got it. Thank you so much. Sure. Thanks Jordan.

Again, if you would like to ask a question, press star and send the number one on your telephone keypad. Your next question comes from Steve Tusa with JP Morgan. Please go ahead.

Hi, this is Chigusa Kotoko on for Steve. Thanks for taking my question. So I'm guessing to ask on the MC side, I think the organic growth was maybe worse than expected and you kept the full year guidance change. So it embeds like an acceleration through the year on tougher comps than an uncertain macro. But what just gives you confidence on this and just any color on what you're seeing in the macro?

Yeah, so Chigusa, I have to also remind you that it is down because of the vestitures, both of a company, the Arcari that we sold in Italy, as well as some lines that we stopped because of poor economics, just simple as that. We're a little below organically in the first quarter, but our backlog and our orders are very strong. So with the current outlook, second and third quarter is looking healthy.

Okay, great. And then did you see any signs of pull forward orders during the quarter or is it hard to

tell? No, we have seen no pulled orders.

Okay, great, thank you.

Pull forward or pulled? Either. We haven't seen any. Now, I mentioned that we do make some MC product here in the US that goes to the whole world. So we're monitoring that the volume is relatively low outside US and Europe.

Okay, great, thanks.

There are no more questions. I will now turn the conference back over to Ghana Cleveland for closing remarks.

Okay, 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.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.