Albany International Corp (AIN) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Albany International Fourth Quarter Investor Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, where instructions will be given at that time. If you should require assistance during the call, please press zero, then star. And at the request of Albany International Corporation, this conference is being webcasted and recorded.

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

Thank you, Annette. Good morning. We refer you to the comments about forward-looking statements, which is contained in the press release, and we note that the same statement applies to our remarks in this conference call. This is a copyrighted presentation of Albany International Corp. Any unauthorized re-broadcasting is strictly prohibited.

In spite of continuing economic weakness, and lower sales, our fourth quarter earnings per share were 55 cents, in comparison to two cents in the fourth quarter of 2001. To better compare our performance in the two quarters, it's useful to separate the effects of three factors. First, expenses related to cost reduction initiatives were 12 cents per share in the fourth quarter of 2002, and were 45 cents per share in the fourth quarter of 2001. Second, the favorable resolution of certain tax contingencies reduced our taxes by nine cents per share in the fourth quarter of 2002, whereas there was no comparable event in the fourth quarter of 2001. And third, the change in accounting for goodwill, FAS 142, was effective January 1st, 2002. If the change had occurred in 2001, that year's fourth quarter earnings would have been six cents higher. Adjusting our earnings for all of these factors, as explained in the third paragraph of our earnings release today, the company earned 58 cents per share in the fourth quarter of 2002, compared with 53 cents per share in the fourth quarter of 2001.

We're also announcing today that the company's anticipated tax rate for 2003 is expected to be approximately 30%. That compares with the full-year 2002 tax rate of 35%, before the fourth quarter resolution of certain tax contingencies, and also compares favorably with the 31.5% full-year 2002 tax rate after the benefit of resolving those contingencies. The lower anticipated tax rate for 2003 should result in additional earnings and cash flow in the year ahead.

Our anticipated 2003 lower tax rate is a result mainly from aligning our corporate structure to better reflect how we run our businesses. Earnings per share before the cumulative effect of changes in accounting principles were $1.70 for the year 2002 and $1.07 in 2001. We successfully completed our series of previously announced operational restructuring initiatives, which have taken $75m out of our cost structure since 1999. We will not stop there. We are announcing our intention to take another $30m out of the costs by mid-year 2004. We currently anticipate that cash costs associated with our cost reduction initiatives will be about $22m, and that there will be other, non-cash charges associated with retiring less efficient assets. The biggest charges are likely to occur in the second half of this year, and the first quarter of 2004. The resulting lower ongoing costs will begin in the second half of this year, building to a substantial reduction in our costs over the first and second quarters next year. The full benefit of the $30m lower cost run rate should be in effect in the third quarter of 2004.

Our margins in the fourth quarter of 2002 were encouraging. Our gross margin, excluding the expenses related to cost reduction initiatives, was 43.4% in the fourth quarter of 2002, compared with 41.1% in the fourth quarter of 2001. The comparable figures for our operating margin, which is operating income excluding the expenses related to cost reduction initiatives, divided by net sales, were 15.5% in the fourth quarter of 2002, and 14.7% in the fourth quarter of 2001.

We are continuing our focus on cash flows, with a lot of hard work by our colleagues around the world. Excluding the effect of currency translation, we reduced the sum of inventory and accounts receivable by $10.1m in the fourth quarter and $30.8m for the full year 2002. Net cash provided by operating activities was $49.1m in the fourth quarter of 2002, and $118.8m for the full year. Debt was reduced by $25.4m in the fourth quarter of 2002. For the full year, debt declined $45.9m and cash increased $12.6m.

Capital expenditures were $31.7m for the full year 2002, compared to $25.8m in 2001. Capital expenditures are expected to rise to the $55m range in 2003, namely as a result of our planned investments in France and Finland, which Frank Schmeler will discuss in his remarks. Amortization expense in 2002 was $5.4m, and is anticipated to be $5.5m to $5.8m in 2003.

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

Thank you, Michael. Good morning, ladies and gentlemen, and again, thank you for your interest in Albany International. Global demand for paper and paperboard remained sluggish in the fourth quarter, negatively affecting our sales of paper machine clothing. Our paper and paperboard manufacturing customers continue to right size operations and work to balance capacity to global demand. During the quarter, machine closures and short-time in certain paper grades continued. Our Albany Door Systems and Applied Technology segments were also impacted by slow global economies. As part of our continuing efforts to consolidate facilities, increase efficiencies, and reduce costs, we announced during the quarter the closure of an engineered fabrics plant in Finland a door plant in Germany. We also announced the construction of a new engineered facility in France, which will replace a very old and less efficient facility. The new plant is expected to start up during the first quarter of 2004, with high-speed, efficient equipment, that will enable us to consolidate production for expanding global non-woolens market.

We also increased capacity at our Helsinki drier fabric manufacturing facility by installing high-speed equipment, as we further consolidate our European drier fabric production into two locations.

Paper and paperboard industry operating rates in the United States averaged 87% in 2002, compared to 86% in 2001. The paperboard segment of the industry experienced a slight gain, whereas the paper segment dropped. Paper machine closures and down times continued in 2002, negatively affecting paper machine clothing consumption. The company's net sales in the United States decreased 1.7% during the fourth quarter of 2002, compared to the same period last year, and 2.7% for the full year. In this consolidating environment, our market share increased, unit prices increased, primarily as a result of shifts to new products.

Operating income, while slightly lower in the fourth quarter compared to the same period last year, increased for the full year. We reduced both accounts receivable and inventories in 2002.

The European net sales, in Euros, decreased 11% in the fourth quarter of 2002, as compared to the same period last year. In the fourth quarter of 2001, sales were higher as a result of company-initiated agreements with customers to ship aged inventory and eliminate consignment stock in some markets. The company's European PMC operations completed the implementation of previously announced cost-reduction initiatives in the fourth quarter, with the full benefit to be realized in 2003. We remain focused on inventory and accounts receivables. As a result, compared to the year 2001, inventories and accounts receivable, in Euros, decreased by 11.8%, and 17.6%, respectively.

Net sales in Canada/Pacific/Latin America operations increased 14.4% in the fourth quarter of 2002, and 3.3% for the full year, excluding the effects of currency translations.

During the fourth quarter of 2002, we benefited from strong sales in Brazil, Australia, Korea, and China. Excluding the effect of currency translation, operating income for both the quarter and the full year finished ahead of 2001. A wide range of economic conditions continue to exist in the Canadian/Pacific/Latin America regions.

The China market continues to grow, with several modern new paper and board machines scheduled to start up in the next two years.

The market for our high-performance doors continued to be soft in the fourth quarter of 2002. Economic conditions in Germany, an important door market, remain weak and show no sign of improvement. As compared to the fourth quarter of last year, sales in Europe were down 8.4% and sales in the United States increased by 7.9%. Operating income in the fourth quarter of 2002 was below last year, due to lower sales, but did improve over previous quarters in 2002. Inventory and accounts receivable were reduced in the fourth quarter of 2002, and were lower when than compared to December 31st, 2001.

Ongoing process improvement activities, combined with new product development and quick cost reductions in response to poor market conditions in 2002 should positively affect operations in 2003.

In the applied technology segment, the soft global economy and the shutdown of non-performing portions of this business segment in 2001 resulted in lower sales in the fourth quarter of 2002, as compared to the fourth quarter last year. All of our businesses within this segment were reorganized during the year to increase efficiency, reduce cost, as well as to strengthen sales and new product developments. These efforts should improve results in 2003.

We expect further consolidation and restructuring in paper manufacturing in 2003, aimed at balancing supply and demand. In response, we will achieve gains in operational efficiency and match our manufacturing capacity to customers' demands. Because our facilities are strategically located, we will be able to support customer needs whenever and wherever they develop.

It is important that we listen to the needs of our customers and shareholders, and that customers understand the value delivered through our products and services. In 2002, we created the Albany Value Concept, a campaign to focus internally and externally on value delivered. By listening to our customer needs, we will continue to develop new products and technologies to add value, which will assist our customers in enhancing their products, expanding their markets, and improving their profitability. We understand that the success of our customers is essential to our future.

Having successfully completed the previously announced cost reduction initiatives, which reduced costs by $75m since 1999, we are announcing our intention to reduce costs an additional $30m by June of 2004. This global initiative will focus on continued rationalization of assets, the reorganization of the research and development activities, and reductions in selling, technical, and administrative costs. Process improvements, enhanced with efficient, high-speed equipment, and a leaner organization will enable us to do more compact manufacturing, which should lower our costs going forward.

I would like to thank our employees for their role in 2002 and we are very appreciative of their accomplishments during the year.

In 2003, we intend to focus on the things that are within our control -- increased operational efficiency, process improvement, and product and technology innovation. By delivering greater value to our customers, we believe we can deliver greater value to our shareholders as well.

Michael?

Annette, we'd be happy to take questions now.

Yes, sir. Ladies and gentlemen, if you wish to ask a question, please press the one on your touchtone phone. You will hear a tone, indicating you have been placed in queue. If you pressed one prior to this announcement, we ask that you do so again at this time. 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 once again, if you have a question, please press the one at this time.

And our first question comes from the line of Joe Gomes. Please go ahead, sir.

Good morning. Michael, I was wondering, you know, historically, you have provided some sales for the three divisions in dollars and in local currencies, and I was wondering if you might have those figures available?

We did include in the public release this time the information by region that we thought was most useful. One of the complications to providing the information that we normally do, Joe, is that the way we collect the data is in association with the manufacturing operations for the regions. What's happening is, we are transferring manufacturing from some of our non-U.S. plants -- for example, Canada and some in Europe, into the Pacific Rim manufacturing operations, so we looked at what the numbers would have looked like, if we gave you those figures by region, and you would have seen numbers that looked like a huge increase in Asia, on a percentage basis. So we thought it would be misleading to you.

OK.

In general, I can just tell you that Europe continues to look very sluggish, and Germany looks positively dreadful. The United States appears to be fairly flat. Neither going up or down. Canada not much-- not much better. China is just growing very strongly, as mentioned in our public release, Joe, because of the new paper machines that they've put in there, and that looks like to be the most rapidly growing paper sector of the world at the moment.

OK. And do you have a number for what depreciation was in the fourth quarter and the full year?

Yes, we do. Dave, you want to just pull it off the sheet there? We try to put that in the release normally; I'm surprised.

It is. It's on page two. Depreciation expense in the fourth quarter--

OK, I'm sorry, I must have just read over that.

OK, $12.2m depreciation.

Yep, yep, I'm sorry. Also, have you guys-- I know one of the things you've talked about in the past was, you know, looking at your capital structure, and I was wondering where you were on that plan, and if you might be able to make some comments on any potential dividend increase or stock buyback?

We typically would not comment on specific actions of that nature before decisions are made, and certainly we would not before our board of directors--

Right. But just your thought process, I guess.

Agreed with management on the subject. I think we try to give people a pretty good flavor for this in the last quarter, when we-- when we alerted people that it's clear that having paid down well over $300m in debt over the last three years, we-- and getting our debt to capital ratio down sharply, our leverage ratio down sharply, that we're very mindful that our-- the reason we're in business is to help our customers, but deliver strong returns to our shareholders, and so we're thinking through the whole range of activities that you'd normally expect there. And without tipping our hand specifically, you can just work under the assumption that we've reviewed every single alternative, which any investment bank would put in front of anybody who's generating a lot of cash, and we clearly are not limiting our thinking at this point, and until we really get agreement with our board of directors on the best way to go here, we're just not going to comment further. It's a nice problem to have, Joe.

OK, OK. That's it for now. Thanks.

Thank you, Joe.

Thank you. And our next question comes from the line of Mark Connelly of Credit Suisse First Boston. Please go ahead, sir.

Frank, I wonder if you could talk a little bit about this cost reduction program, putting it in the context of what you've already done. It seems to me that there's been a tremendous amount of costs already pulled out. Some of the areas that you highlighted here have not been the primary focus last time. Can you give us a little bit of a sense of how this program is either the same or different?

Mark, as you know, we are adjusting ourselves to the paper industry that you understand very well. And in reviewing with the team over the last year, in getting our capital base in terms of plant and equipment and consolidation and taking out the old stuff, and putting in high-speed for more efficient operations, I think if you look at the income statement, you still see that it's costing us about $238m in STG&R, which I feel is way too high for a company of this size, and as I mentioned in the release, that we are taking a hard, good look at this, in order to become more efficient and lower our costs in this area.

So should we assume that this is primarily going to be directed towards those areas where the past programs have been primarily manufacturing? Is that fair?

No. I think this will be a broader range, and cover all aspects, and all disciplines of the company, Mark.

So you're not letting anybody off the hook? Michael, I wonder if you could talk about foreign exchange for a minute.

Sure.

You know, the dollar has come down a lot, and we're not seeing you guys highlight foreign exchange gains. Can you tell us what we should be expecting the rest of the year, assuming that the dollar sort of hangs out?

Yes. Thank you. First, alluding to the year just past, I think the combined effect on our operating income, Rick, correct me, but about $250,000?

For the year?

For the year.

It's about a quarter million--

Oh, for the quarter-- for the quarter, it was $250,000. For the year, it was about a million-one.

Up.

Up -- positive. But I think Mark is alluding to something pretty important here, because in fact, with the Euro at 108 this morning, and I would just say that, you know, for planning purposes, we had used par, so with over 40% of our sales coming out of Europe, this can only be good. Now, the offset in any particular quarter is that we can have the translation of intra-company payments, or, for example, our receivables with customers that are denominated in currencies other than the currency of the country that is extended the receivable, can come back and whack you in the opposite direction. So, in the very short term, you can have in a quarter a $1m, $1.5m hit to income in the- in the perverse case that the Euro goes up, relative to, say, the-- the earlier period, even though at the end of the day, these things get translated back into U.S. dollars. So what happens is sometimes you get an income effect that's negative and a equity hit that's positive. For example, if you look at our equity section of our balance sheet, you will-- you will see that there was a very large, positive impact on equity from currency. Well, equity doesn't buy you a cup of coffee, so we don't pay much attention to equity, but we do believe that by far the biggest effect is very positive, Mark, because that means we're generating out of that very substantial investment we've got in Europe, you know, just in the first month of the year, you know, roughly 5, 6% more revenue than we would have anticipated, based on a budget at par.

OK. OK. Following on some of those comments, with respect to accounts receivable, et cetera, you had another good working capital improvement here, that at least we hadn't been expecting. Similar to Frank's comments on the SG&A side, can you talk about whether there's really a lot more you can do here? You pulled a lot of money out and paid down a lot of debt with your improvements in working capital. Is this still going to be a high priority, to get these numbers down further?

Mark, working with our customers and having a good relationship and understanding with them on time of delivery of product and holding of inventory, the process is working very well, and there are still some areas of improvement, not only in the finished goods at our customers, but in the way that we operate our plants with the work in process and the raw materials, so the emphasis will still be on, the programs will still be in place, and we hope to continue to gain in this area.

OK. And one final question -- Michael, the substantial reduction in the guidance for the tax rate in 2003, should we be thinking about that as a new, ongoing rate, and can you give us a sense of what the moving parts of the risks are?

Yes. We're very comfortable with that 30% rate for next year. As to the moving parts, I would simply say that we are- we are convinced that even with increased profits in 2003, which would tend to have the highest marginal tax rate effect, we should be able to do no higher than a 30% tax rate. I've got Dave Michaels here with me. Dave, would you like to add anything else to that?

No, I agree with that, Michael. I would just like to add that Michael's comments really focused on next year, and it is a goal of mine to maintain that 30% tax rate for as long as we can, so it's really a long-term goal of ours.

We'd like to see that, too. Thanks very much.

You're welcome.

Thanks, Mark.

Thank you, and our next question comes from the line of Richard Blass of Morgan Stanley. Please go ahead, sir.

Hi, guys.

Hi, Richard.

Nice quarter and excellent working capital work.

Thank you.

First, on the getting back, just in terms of the fourth quarter, on the SG&A line, you know, as a percent, it was up, and obviously, I don't think you guys had robust expectations on the sales side. Can you give us a little insight as to why that was?

I can comment on that. There are really a couple of items. First is the currency translation; of course, items being converted from Euros back to dollars increased, and included in the cost restructuring initiatives that we talked about in the earnings release, there was approximately, or just short of a $1m that hit the SG&A line in the fourth quarter of 2002. And if you take out those two factors, the fourth quarter of 2002 is flat with the fourth quarter of 2001.

OK, that sounds. And in terms of the CAPEX, you guys have moved from roughly $26m to $32m and now are moving to $55m. Is this counterintuitive, that this number has gone up, even X these plants you're building in Europe. It sounds like your maintenance CAPEX has gone up, even as you're shrinking your footprint of plants. Does that--

No, that's not-- I'm glad you asked the question, because that's what's inferred. It doesn't match reality. Because those two plants, the two plants, the expansion in Finland and the new plant in France, between them, will account for over $20m. And as we look, and if you take $20m out of the approximately 55, you're down to about 35, which is still less than our depreciation, so-- and in that 35, really, as Frank implied from his comments, the whole focus is to drive efficiency, and there's a substantial amount of capital in that 35 associated with process improvements. So, I think that is a fairer description of what's going on. Frank, do you want add anything to that?

I think that's pretty good, Mike. It's efficiency-driven, and as you mention, the footprint is getting a little smaller, but at the same time, the issue of process improvement, enhanced with high-speed equipment, will give us a chance to do more compact and quicker manufacturing systems, which will help our customers and help us on the working capital side.

OK, so the maintenance CAPEX number is not increasing?

Not at all. In fact, it's going down.

All right, so if we had a steady state, it would be going down?

Right.

Next, can you give us any more insight as to the profit levels at Albany Door, and the Applied Technology segment, where we are now?

We will be releasing the complete specifics on the door segment in our 10K, and we'll continue to do that on a quarterly basis. We haven't indicated any more than what is in this financial information at this time. It's fair to characterize the door business, however, as more volatile with the economic cycle than the PMC business. The PMC business is pretty steady. You know, paper machine clothing gets consumed in the manufacture of paper, and manufacturing paper doesn't go back down much, even in a severe recession. So, the difference is that on these doors, which might cost $10,000, $15,000, depending on what kind of size door you're talking about, amount to a capital project, and these are the kinds of things that can be delayed, in many cases, so the earnings are-- sales and earnings are far more volatile, and you'll see that when you see the detailed numbers that we will be happy to provide in that 10K.

That's why some of us like the paper machine business a whole lot better. Is the door business still making money?

Yes.

OK, and Applied Technologies? Where is that in terms of-- is that positive or negative?

It's positive, a little.

It's positive. OK, finally, can you give us some guidance -- I didn't-- I might have just missed this, on depreciation for 2003 and also in terms of the working capital? I guess you're talking about it more tied in with some of the other initiatives, and a $30m program, but is there a lot more we can do there, because you guys have done so much already?

While David is looking up the specific depreciation number for 2002, which we're happy to give you, I'd just say on the working capital side, I think Frank's comments reflected a good intention to keep a focus on it. Clearly, the biggest improvement came in the year 2001, and we said in the first quarter-- actually, in the January announcement last year, that we expected it to take some time to consolidate those gains, and then-- but we'd keep the heat and we'd see some further improvements. You did see them, and you saw it in our public announcement this year. You know, clearly, we think there's a lot more that can be done eventually, but with the big improvements that we've had, I think we should look for modest improvements in 2003, and we're going to try to do better.

David, did you want to give a specific forecast for the depreciation?

We have an estimate of approximately $48.5m for 2003 depreciation.

OK. All right, thanks guys. Nice quarter, nice year.

Thanks very much, Richard.

Thank you, and our next question comes from the line of Beth Lilly of Woodland Partners. Please go ahead.

Good morning.

Good morning. Beth, you must be smiling this morning.

You guys have done a terrific job.

Thank you.

I wanted to-- I got on the call a little bit late. I wanted to explore the $30m in additional cost savings that you've announced. Is all of that going to-- do you anticipate, is going to drop to the bottom line, and I don't know if you went into this earlier in the call, but where specifically are you targeting? Is it the selling, technical, and research side, or where do you look to take out the additional $30m?

Beth, we did try to cover that earlier, but we'd be happy to do it -- in fact, if you want to, we can go offline and just repeat, you know, the same stuff with you right after this call. The essence of it is that we really expect to have cash costs of about $22m, and that the biggest charges will occur in the second half of this year and the first quarter of 2004. The cost improvements, as to the run rate, will begin in the second half of this year, and they will build to a very substantial reduction over the first and second quarter of next year, with the full benefits in place by July 1st of '04. And if you want to chat about that any further, why don't we just--

In addition to that, she was wondering where it's going to fall -- it's going to fall all [inaudible]. As Frank indicated before, it's the manufacturing STA&R, all of that is going to be covered under this reduction effort.

Yeah, I think that's-- Frank specifically mentioned, I think it was approximately $238m of STA&R, and that's a number that's just, you know, very, very big, and we think for a company our size, we can do better than that.

Is it-- is-- so the $30m is all going to drop to the bottom line? Is that correct?

That's correct.

Yes.

OK.

Well, pre-tax.

Pardon me? Pre-tax?

Pre-tax.

Yep, OK. Wonderful. All right, I'll follow-up with you later.

OK, great.

Thanks so much.

Thank you. And at this time, ladies and gentlemen, if there are any additional questions, or comments, please press the one at this time.

OK, well, we appreciate your participating in the call today. We are pleased that we can report good news to you, and we're going to keep trying to do a good job for you this year. Thank you very much.

Ladies and gentlemen, that does conclude our conference for today. Replay of this conference will be available at the Albany web site. Thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.