Albany International Corp (AIN) 2002 Q3 法說會逐字稿

Ladies and Gentlemen, thank you for standing by, and welcome to the Albany International third quarter investor call.

At this time, all participants are in a listen-only mode. And later we will conduct a question-and-answer session. Instructions will be given at that time. If you should require any assistance during the call today, please press zero, then star. At the request of Albany International, this conference call is being Webcasted and recorded.

And I would now like to turn the conference over to your host, Senior Vice President and Chief Financial Officer, Michael Nahl. Please go ahead.

Thank you, .

Good morning.

We refer you to the comment about forward-looking statements, which is contained in the press release, and we note that the state statement applies to our remarks in this conference call. In addition, this is a copyrighted presentation of Albany International Corp., and any unauthorized re-broadcasting of it or any part of it is strictly prohibited.

The company earned 44 cents per share in the third quarter of 2002, compared to 30 cents per share earned in the third quarter of 2001. Our earnings are holding up well, in spite of a rather weak economy in Europe, except for the Nordic area. The Nordic area in Europe was actually up, compared with last year's third quarter. Germany and much of the rest of Europe, however, were especially weak.

Our success in this quarter is attributable to our continuing focus on both delivering value to our customers and improving our efficiency. These efforts have resulted in reducing our net debt, which is total debt less cash, by $21.7 million in the quarter and by $71.8 million for the first nine months.

Third quarter net sales were up 1.2 compared to the third quarter of 2001. Excluding the effects of currency, net sales were down 1.7 percent in comparison to the third quarter of 2001.

Our engineered fabrics segments, which is defined in our annual report, is our largest segment. Approximately 90 percent of this segment's revenues are derived from the sale of paper machine clothing or PMC. In the engineered fabric segment, net sales in the third quarter of 2002 were up 3.1 percent, as measured in U.S. dollars, and up 0.4 percent when excluding currency effects.

Regional net sales in the third quarter for engineered fabrics were as follows. In the United States, net sales were down 0.5 percent, compared to the third quarter last year. In Canada, net sales declined 2.8 percent in U.S. dollars and were down 1.5 percent in local currency. European net sales were up 8.1 percent in U.S. dollars, but were down almost 1.1 percent in local currencies.

In the Albany door systems segment, sales were down 6.2 percent, as compared to the third quarter of 2001, when measured in U.S. dollars. In local currencies, net sales were down 12.1 percent compared to the third quarter of 2001. Sales of Albany door systems products tend to decline more in economic slowdowns than our PMC business. Sales in the applied technology segment were down 10.3 percent in U.S. dollars and 10.7 percent in local currencies.

Third quarter total cost of sales for the sum of all of our businesses decreased 4.2 percent, while net sales increased 1.2 percent. Excluding currency translation effects, cost of sales were down 7.3 percent, while net sales were down 1.7 percent. Year to date, total cost of sales for the sum of all of our businesses decreased 5.2 percent, while net sales, excluding currency translation effects, were down 3.5 percent. Our cost of sales, excluding those same currency translation effects, were down 6.1 percent.

Third quarter total fixed costs, which include manufacturing costs and selling, technical, general and research expenses, are down 0.3 percent as compared to the third quarter of 2001. Excluding currency translation, fixed costs are down 3.2 percent, compared to the same period last year.

Third quarter variable costs, as a percent of net sales, were 34.4 percent in 2002 and, excluding the effects of currency translation, were 34.2 percent in the third quarter of 2002. Third quarter gross margin was 41.3 percent, as compared to 38 percent in 2001. Our third quarter 2002 gross margin was $7.8 million higher than the same quarter of 2001. The principle factors effecting gross margin were listed in tabular form in our news release this morning.

The adoption of FAS 142, which discontinued the amortization of goodwill, accounts for approximately $1.7 million of the gross margin increase. In the third quarter of 2001, we slowed production at several operations in order to reduce inventories. This reduced gross margin in last year's third quarter by approximately $4.8 million. In the third quarter of this year, we continued to reduce inventory without significant cost effects.

Cost of goods sold in the third quarter of 2002 includes approximately $1.1 million of costs related to headcount reductions as part of our continued efforts to reduce future expenses. The rest of the improvement is principally the result of our continuing improvement in efficiency.

Depreciation and amortization was discussed in the news release. I'll add to that information that depreciation for the first nine months of 2002 was $35.2 million, and is currently estimated to be about $12 million in the fourth quarter. Amortization expense was $1 million in the third quarter, $3.5 million for the nine months, and is expected to be about $4.5 million for the full year.

Capital expenditures were $7.4 million in the third quarter of 2002, bringing the year-to-date total to $18.8 million, compared to $18 million for the first nine months of 2001. The company anticipates 2002 capital expenditures will not exceed $40 million, including possible lease buyouts.

Our earnings before interest, taxes, depreciation and amortization were $39.3 million in the third quarter this year, compared with $38.5 million in the second quarter of this year and $36.5 million in the third quarter of 2001. Third quarter selling, technical, general and research costs were down 1.3 percent in comparison to the third quarter of 2001. Excluding currency effects, those same costs were down 4.6 percent.

In the third quarter of 2002, the company had re-measurement losses on foreign currency receivables of approximately $99,000, compared with $641,000 losses in the third quarter of 2001. Excluding these losses from the third quarter of each year, our 2002 selling, technical, general and research costs were down 3.7 percent in comparison to last year.

For the first nine months of 2002, the company had re-measurement losses on foreign currency receivables of approximately $3 million, compared to $800,000 of re-measurement gains in the first nine months of 2001. Excluding these losses from each year, 2002 selling, technical, general and research costs were down 2.3 percent in comparison to last year.

Other income and expense net was $800,000 of expense in the third quarter this year, compared to $3.4 million of income in the comparable period of 2001. The unfavorable change is primarily due to the effect of currency rates on inter-company loans and balances. As explained in the news release, this had the effect of reducing earnings per share in eight cents in comparison to last year's third quarter.

Third quarter interest expense net decreased 35.1 percent to $4.5 million, as compared to last year's third quarter. The decrease is primarily attributable to substantial debt pay down in 2001.

Our efforts to improve efficiency and the value we deliver to customers continue to result in significant cash generation. During the last three years, we've reduced our debt by over $300 million. Last year, we prepaid all of our term debt. This year we have increased cash $51.3 million, while decreasing debt $20.5 million. As part of our 2003 business planning process, we are evaluation our future financial requirements and debt structure.

In the third quarter of 2002, the company contributed $12 million to its U.S. pension plan, compared to a contribution of $7.4 million in last year's third quarter.

I'd like to turn the presentation over now to our Chairman and Chief Executive Officer, Frank Schmeler.

Good morning, ladies and gentlemen, and thank you for your interest and support of Albany International.

No sustained improvement in paper and paperboard markets developed in the third quarter. In spite of the continued slowdown, we were able to improve earnings.

Cost reduction initiatives contributed to earnings in the quarter, as did improvement in working capital. Inventory and accounts receivables declined during the quarter; the result of focused efforts and process improvements in both areas.

A few comments on the engineered fabrics segment. The paper and paperboard industry operating rates in the United States averaged 86 percent year to date unchanged from 2001. Paper machine closures and downtime of Albany's customers continued in the third quarter. As a result, the company's net sales of paper machine clothing and engineered fabrics in the United States declined 0.5 percent compared to the same period last year.

Average prices increased as a result of new product upgrades and modest price increases. Operating income was higher than last year. As compared to June 30, 2002, there was a significant drop in inventories, while accounts receivables remain flat.

In Europe, European net sales of paper machine clothing and other engineered fabrics in euros declined 1.1 percent in the third quarter of 2002, compared to the same period last year. Sales were negatively effected by continued paper and paperboard production curtailments in Western Europe and by weaker currency in some of the company's exports markets.

While sales volumes were slightly lower, operating income improved as a result of the lower cost structure and from sales of high technology products, which resulted in unit price improvements. The company continued to implement programs that resulted in reduction in inventories and accounts receivable. In euros, inventories in Europe were reduced by 6.6 percent, and accounts receivables by 8.4 percent during the quarter.

Canada, Pacific and Latin America, despite challenging economic conditions in the third quarter, paper machine clothing sales of the company's Canadian, Pacific and Latin American operation increased by 4.6 percent, excluding the effect of currency translation, as compared to the third quarter of 2001. After a weak start, sales for the first nine months of 2002 are approximately equal to the same period last year. Operating income for the quarter and year to date, excluding the effect of currency translations, is ahead of 2001.

Albany doors systems segment, a weak economic environment in Europe, especially in Europe, especially in Germany, affected the demand for the company's high performance door products in the quarter. In this difficult environment, the company announced its intention to consolidate its German operations. This will result in discontinuing the sectional door manufacturing operations in , Germany. Improvements in operation efficiency and cost reduction activities in all the areas of this segment should positively impact future earnings.

The applied technology segment, sales were down in comparison to the third quarter of 2002, but operating income was higher. Operating income was higher due to cost reduction efficiency improvements and higher sales of products, the company's synthetic insulation for apparel and home furnishings.

The startup of a product manufacturing in Italy reduced earnings in the third quarter and will have a slight negative effect in the last quarter of 2002. The operation will provide new business opportunities in Europe for the full range of products.

Although paper manufacturers have put modest price increases in place selectively, and operating rates are improving slightly, we are uncertain and want to expect sustained improvement. Our global presence will allow our people to support industry recovery whenever and wherever it develops.

Customer demands for new technology in the markets we serve represent opportunity for our company. In 2002, new product offerings in our primary markets represented a significant portion of the product mix. We will continue to develop new products to improve our customers' operations. Increasing sales of paper machine clothing products that involve new technologies and and drying, as well as processed , continues to be an encouraging aspect of the company's business.

Our efforts to improve efficiency and the value we deliver to our customers continues to result in significant cash flow. As Michael mentioned, during the last three years we have reduced debt by over $300 million. Last year, we prepaid our term debt. This year we will have increased cash $51.3 million, while decreasing debt $20.5 million.

The company's employees and all of us at Albany International remain committed to improving shareholder returns. We will continue to focus on areas within our control, including debt reduction, inventory and accounts receivable improvements, cost reduction and developing products and services that bring added value to our customers -- Michael.

, we'd be happy to take questions now.

Ladies and gentlemen, if you wish to ask a question, please press the one on your touch-tone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up your handset before pressing the numbers.

And the first question is from the line of Mark Connelly, Credit Suisse First Boston. Please go ahead.

Thanks, Michael, Frank.

A couple of questions with respect to cost reduction. You have previously talked about fairly specific cost reduction targets. I wonder if you could give us an update there and also talk about the SG&A line and what potential we have on that line for further improvement. I see it's -- you know it's better year over year, it's better quarter over quarter. I'm wondering what we should expect there.

Good morning, Mark.

We had announced over the last couple of years a total of programs totaling cost reductions of about $75 million. Now we have completed the steps necessary to take out the entire $75 million by the end of this year.

As Frank Schmeler has indicated in prior public conversations, this is a job that is never done. This is a process that we have to continue working at. We have not concluded that it is in anyone's interest for us to state specific additional cost reduction targets, but Frank is working with the management team to develop a process of continuing to improve efficiency throughout the company.

Now, as it happens, that you have really highlighted in the selling, technical and administrative area, an area where we feel that we are relatively less efficient than we are on the manufacturing floor. And there is clearly a major opportunity there for us to continue working at improving our efficiency.

Frank, would you care to add anything to that?

I think that this is one area, as we said earlier this year, that we were concentrating on and working in order to become as efficient in that area as we have been in the manufacturing and the restructuring of our plants.

Mark, in fact, in the third quarter -- and we will expect again in the fourth quarter -- the principal improvements in our cost structure, relative to the same quarters last year, are in the selling, technical and administrative area. So that's where the big improvement is coming right now.

OK. Similarly, can you -- you know you're making more progress on inventories, which has been a nice and then working capital in general. Should we be expecting a lot more or a little more in that area? Quite a bit has already been done.

Mark, I think that that is also an ongoing process. As we mentioned before, we are working with our customers to get our supply chain in better shape. Our customers have responded extremely well and we continue to work with our customers and we continue to lower our inventory levels.

As you know, when we started this process, we didn't have a very good position in terms of our inventory. But I think as we go forward, we will continue to work with the customers and lower.

Let me just add to that, Mark, as you know better than most people who follow us, we go in and starts and spurts on this. And what happens is we make progress and then we try to hold our gains for a quarter or two and then we make some additional progress.

It's very clear that we have an intention to continue to reduce inventories. I think for planning purposes, you should work under the assumption that we go into a plateau for a few quarters before there's another material improvement. The whole supply chain is a very tricky area to work on, and you want to make darn sure, number one, that you always meet your customers' requirements.

And working with those customers really involves some very high level discussions. My guess is that we'll be further inventory improvement before the end of next year, but I would hate to have you forecast it for any particular quarter in the immediate future.

OK. And one last question. On the price hike issue, it's unusual enough to see price hikes at Albany in any case, but particularly in a soft market like this. Can you talk about, Frank, what's changing that is allowing you to get price beyond, you know, introducing new products?

I think that the new products, or the upgrades, as we call it, is probably the biggest chunk. It's a change in technology that adds value to our customers' process. And, as you know, pricing, as you mentioned, has not been increasing -- pricing has not been great over the last two years. But with Albany and our people working with our customers and adding value, that they have seen that and have given us some relief in some segments.

Let me squeeze in one last one. You talked about your debt levels and plans to look at the capitalization. Is a dividend increase one of the things that you would be considering?

Clearly, Mark, the comment that Frank made with regard to continuing to strive to increase shareholder value requires us to look at every arrow in the quiver. And it would surprise me if we do not continue to include, on an annual basis, a re-look at the dividend levels to make sure that we're doing the right things for our shareholders.

Thanks very much.

Thank you.

And our next question is from the line of Joe Gomes, C.L. King & Associates. Please go ahead.

Good morning, guys.

Good morning, Joe.

I was wondering, first, can you provide us with any type of update on the program to diversify their holdings?

No. The family has been implementing their program on a basis independent of anything in communication with us. And, as you know, there are periodic reports filed with the Securities and Exchange Commission when there are trades under that program.

We know nothing more about the program than what was publicly disclosed by the family at the time of our last earnings release.

OK. With the closing of the manufacturing operations, are you going to have to take any charges for that?

Joe, there will be some charges on the fourth quarter on that. They're not significant, but there will be some charges probably in the up to $1 million range.

OK. And you guys were talking about the new products and how the new product offerings represented a significant portion of the overall product mix. And I was wondering if you might be able to provide some more color on that. What percent of the sales there are now being derived from new products?

Joe, I think because of where we are in the industry and the nature of the industry, I can tell you that this is a major push by Albany International. And I'm a little reluctant to put out the percentages for obvious reasons. But I think you must understand that the newer paper machines that are running today require new products for properties and the speed intentions of our fabrics on those high-speed machines. And going forward, that will be a major thrust of Albany International in introducing new products so that we continue on the technology side of improving our customers' process.

OK, thanks.

And our next question is from the line of with . Please go ahead.

Good morning.

Good morning, , how are you?

I'm great. How are you guys doing?

Terrific.

I have a couple of questions. I don't know if I missed it on the call, but how much -- what were the capital expenditures for the quarter?

Yes, we did include it, but let me just grab it for you real quickly. The capital expenditures were $7.4 million in the third quarter, bringing year to date to $18.8 million, compared to $18 million for the first nine months of last year. And we expect our capital expenditures for the year -- this year -- to not exceed $40 million. To get up to that high a number, that would include some possible lease buyouts.

OK.

But we've been keeping the capital expenditures pretty tightly controlled this year, in what's been a pretty lousy economic environment.

Yes. And next year, probably -- and I don't know if you've done your budgeting -- but next year you think they'll be around the same level?

We have not done our budgeting for next year. Obviously, a lot of it depends, , on just how strong the economy becomes. We've been pretty tight on our capital expenditures, as you can see, throughout the economic slowdown.

OK.

I would not expect it to run away.

Yes. I wanted to get a little more color -- you know it's very interesting to me -- you know, I understand the U.S. being weak and Europe being weak, but currency, Canada, the Pacific Rim and Latin America were a little bit stronger. And I was wondering if you could give us a little bit of color on why you think that is.

Well I think we can start with Canada. As you know, the economy in Canada has been fairly good this year and is reflected, to a certain degree, in the industry that we serve. If we go to Asia and the Pacific, where we have plants in Australia, Korea and China, that market is performing well.

And despite the situation in Latin America, the industry -- the paper industry -- has been performing quite well. And since we are one of the major players down there, we have done reasonably well. I think when we talk about the economy, I'm hoping that the U.S. is getting stronger. And we are looking for our turnaround in Europe in the - probably the end of the first or second quarter.

um hm.

With regard to the Brazil and Mexico piece of that, the combination of Brazil and Mexico were down 5.1% in US dollars, but were actually up 9.2% in local currencies. You have got the screwy situation down in Brazil with the currency getting whacked -

Yes.

-- is over 3.9 last time I looked at it, and it was about 2.7 or 2.8 earlier in the year, so the - both economies have done really pretty well, and we have held up quite well in both economies.

um hm. Now you know, did you - are you planning for any kind of recovery next year?

What we're doing is we are assuring that we have the right to pass the in place for that - hopes for eventual recovery.

Yeah.

It's just that we are not inclined to wave a big green flag yet, in terms we can see strong evidence of it. Obviously I did mention that the Nordic area in Europe was relatively stronger than the rest of Europe in the third quarter. United States is not bad, in spite of the fact that it does not appear to be chugging along strongly on the upside, it sure isn't getting any worse, and the real GEP appears to be positive in terms of growth. But we sure haven't seen a conventional kind of an economic recovery yet.

Yeah. So things haven't gotten worse, but they haven't really gotten better? It's just that it's kind of flattish?

Yeah, I think what you've seen basically - the improvements that you've seen in our performance have been based upon the things that we have been able to control ourselves rather than what's external. Now what we are trying to do, obviously, is we are trying to budget and plan and increase efficiency in the worst expectations that the economy does not get any better, or even gets into another dip down. And then because we have got the right capacity in place, if we are pleasantly surprised with the upside, I think that quite a lot of cash might be generated.

Yeah, I'm incredibly impressed with your controls in this lousy environment. How you are able to get - not only take such costs out of the - continue to take costs out of the systems, but also put your price increases.

Thank you.

So, that's all my questions. Thanks very much.

Thanks Beth.

You're welcome.

Thank you ladies and gentlemen. If there are any additional questions, please press the '1' at this time.

OK Mary, well, thank you very much. Hearing no other questions, we would like to thank all of you for participating in our conference call this morning, and for your continuing support. Thank you.

Thank you ladies and gentlemen, this does conclude today's conference call. You may now disconnect.