Albany International Corp (AIN) 2003 Q1 法說會逐字稿

Welcome to Albany International First Quarter Investor Conference Call. (Caller instructions). I would now like to turn the conference over to Senior Vice President and Chief Financial Officer, Mr. Michael Nahl. Please go ahead, sir.

Good afternoon. We refer you to the comment 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 authorized rebroadcasting is strictly prohibited.

It was a very good quarter. The Company earned $0.65 per share in the first quarter of 2003, compared to $0.10 per share in the first quarter of 2002. This year's first quarter includes a $0.16-per-share benefit as a result of resolving certain tax matters. That resolution of certain tax matters helped out our net income by $5.2m and resulted in 6.1 million of cash inflow to the Company, helping us achieve 32.3 million of cash flow from operations in the first quarter, compared with a total of 7.8 million cash from operations in the first quarter of last year. The first of our restructuring costs in connection with our current $30m cost cutting initiative was $800,000.00, which reduced net income per share by 1.7 cents in the first quarter of 2003.

The first quarter last year included an $0.18-per-share charge related to the write-down of goodwill in our Applies Technologies segment. Excluding that write-off, we would have earned $0.28 in last year's first quarter. The increase in quarter-over-quarter earnings is mostly attributable to higher sales, the benefits resulting from cost-reduction programs and from lower income taxes.

Now let's go into a little more detail about the sales. First quarter net sales were up 9.7 percent compared to the first quarter last year. Excluding the effective changes in currency translation rates, net sales were up 2.6 percent in comparison to the first quarter of 2002.

Our Engineered Fabrics segment, 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 Fabrics segment, net sales in the first quarter of 2003 were up 9.3 percent in comparison to the same period of 2002. Excluding the effective changes in currency translation rates, first quarter sales were up three percent. In analyzing the actual sales demand within region, we can say that excluding the effective changes in currency translation rates, both European and North American net sales in Engineered Fabric segment, were relatively flat in comparison to the first quarter of 2002. Within Europe, the Nordic area was somewhat stronger than the rest of Europe. Demand in parts of the Pacific Rim was particularly strong in the quarter.

In the Albany Door System segment, sales were up 14 percent as compared to the first quarter of 2002 when measured in U.S. dollars. However, in local currencies, net sales were down 2.2 percent compared to the first quarter of last year. Sales of Albany Door Systems products continued to be affected by poor market conditions.

Sales in the Applied Technology segment were up 7.6 percent in U.S. dollars and up 5.8 percent in local currencies. In the first quarter of 2003, this segment benefited from stronger sales of PrimaLoft, insulating products, tannery and textile fabrics and our Techniweave products.

Our costs in the first quarter reflected the continuing emphasis our employees around the world have put on improving efficiency. First quarter total costs of sales increased 8.6 percent, while net sales increased 9.7 percent. Excluding the effective changes in currency translation rate, total cost of sales decreased 0.6 percent, while net sales increased 2.6 percent.

Our first quarter total fixed costs, which include manufacturing costs and selling, technical, general and research expenses were up 8.7 percent compared to the first quarter of 2002. Excluding the effective changes in currency translation rates, fixed costs were up 1.7 percent as compared to the same period last year. First quarter of variable costs, as a percent of net sales, were 33.7 percent in 2003 and 34.8 percent in the first quarter of 2002.

First quarter gross margin was 42.5 percent, as compared to 42 percent in the first quarter of 2002.

Our depreciation and amortization expense in the first quarter was 13.8 million, compared to 12.7 million for the same quarter of 2002. The break-out of depreciation and of amortization are provided in the consolidated statement of cash flows, which are included in our news release today.

Our capital expenditures were 9.4 million in the first quarter of 2003, compared to 5.1 million in the first quarter of 2002. The Company anticipates that our 2003 capital expenditures will increase to approximately $55m. The increase is due to a new plant in France, where the Company will consolidate production to serve the non-wovens markets and to an expansion in Finland that will enable the Company to consolidate most of its European [indiscernible] production into two locations.

Our earnings before interest, taxes, depreciation and amortization were $40.281m in the first quarter of 2003, compared with $30.637m in the first quarter of 2002. Those numbers can be derived by the attachments. And that's why I gave you the extra decimal points so you could find exactly that number -- taking the net income before tax and adding the depreciation and amortization and interest expense to it.

Our fixed costs for the quarter were up 1.4 percent. And I want to make sure I'm clear as to that particular number -- 1.4 percent.

Our operating income in the quarter was 13.2 percent of net sales, as compared to 11.6 percent in the first quarter last year. Excluding the effective changes in currency translation rates, first quarter operating income as a percentage of net sales was 13.9 percent in the first quarter of 2003.

Our other income and expense net was $1.2m of expense in the first quarter 2003, compared to 4.4 million of expense in the comparable period last year. A favorable change in 2003 is primarily due to the effective currency rates on inter-company loans and balances. Our interest expense in the first quarter net decreased 12.6 percent to $3.9m as compared to the first quarter last year. The decrease is primarily attributable to lower average debt. Net debt, which we define as the total debt minus cash, decreased $20.3m in the first quarter of 2003. As of the end of the quarter, total debt was $235.1m and net debt was $196.8m.

The effective tax rate prior to the income tax benefit was 30 percent in comparison to a rate of 35 percent for the first quarter of 2002. You may recall that the 30 percent tax rate had been projected in our earnings release of both -- our earnings release for the fourth quarter, which we made in January. We believe it is highly likely that a 30 percent rate can be maintained over the balance of the year based upon current likely income and expenses. The improvement in the tax rate, relatives to last year's, is due to improving the tax efficiency of our Company.

Accounts receivable decreased $600,000.00 in the first quarter of 2003. Excluding the effective changes in currency translation rates, the decrease was $4.5m. We've continued to work hard at improving accounts receivable and those efforts will continue throughout this year. As a reminder, in the third quarter of 2001, the Company sold a portion of its North American accounts receivables, which generated cash at that time of $39.6m. You may recall that this is purely a financial transaction and has been available to us on favorable terms. If at any time the effective cost of that program becomes higher than other financing, we'd simply change to a more attractive financing alternative.

In the first quarter of 2003, accounts receivables sold decreased $400,000.00 and the related note receivable on our balance sheet increased 2.6 million for a combined $3.0m negative cash flow in the quarter. As of March 31, 2003, our accounts receivables sold was $70.8m and the note receivable was $22.7m. Excluding the ongoing accounts receivable sale transaction and excluding the effect of changes in currency translation rates, accounts receivable decreased $4.7m during the first quarter.

Inventory, as measured in U.S. dollars, increased five million during the first quarter. Excluding the effective changes in currency translation rates, inventories increased by $2.3m during the first quarter of 2003. We’ve made a great deal of progress reducing inventories over the past two years. This year we will almost certainly have to increase our inventory somewhat in connection with moving production equipment among plants.

Our shareholders equity in the first quarter increased by $33.8m.

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

Good afternoon, ladies and gentlemen.

Although the markets we serve remain sluggish, the Company improved first quarter results, largely due to the impact of our cost-reduction efforts and favorable shifts in product mix, resulting in part from the introduction of the Albany Value Concept. An early benefit of the Albany Value Concept, a business strategy designed to deliver economic value to our customers, is a clear shift to higher value of Albany products and services.

Cash flow was strong in the first quarter. Inventories and receivables remain under control, but we'll probably increase inventories to a certain degree in the middle part of the year as we move equipment. But it will be a one-time event.

First quarter sales of -- First quarter 2003 net sales for Engineered Fabrics, as Michael mentioned, were nine percent -- were increased 9.3 percent, compared to the same period last year and three percent, excluding exchange. On a global basis, paper and paperboard operating rates, one measure of industry trends, remained unchanged with only selected regional improvement. Sales improvements were due primarily to shifts in product mix. As paper and paperboard companies look to improve their operations, we are introducing new products that help our customers improve the efficiency of their operations and the quality of their products. By documenting improvements, we encourage customers to focus on their major cost drivers, which include fiber, energy and chemicals, and to work with us to direct our new product development in a meaningful way.

In addition to the cost-reduction efforts that positively impacted the first quarter, further efficiency improvements were initiated in the quarter and future cost reductions remains a high priority. Results of the Albany Door business segment continue to be negative, affected by slow economies, leading to decreased capital spending by our customers in the U.S. and Europe. Net sales increased 14 percent as compared to the same period last quarter. However, net sales declined 2.2 percent, excluding the effective exchange -- the rates. And that is because of the larger volume of sales in U.S. versus the sales in Europe -- the larger volume of sales in Europe versus the U.S.

Despite the slowdown, we have positive gains in manufacturing efficiencies and the elimination of some low margin products during the quarter. These gains should have a positive effect on our results when the economies strengthen.

PrimaLoft, the synthetic down insulation for outerwear and home furnishing, increased in the U.S. and Europe. Our European market penetration is increasing as PrimaLoft production within Europe is now fully operational. And, as Michael said, we've had good sales in tannery, textiles and Techniweave businesses.

Global economic uncertainties created a difficult operating environment in the first quarter. While we see improvements in selected markets, we do not see sustained global improvements for our customers. As a result, we will continue to focus on areas within our control and prepare our businesses for eventual economic recovery. Our employees are using the Albany Value Concept to match our products and services to our customers' needs. We believe this approach can favorably impact our customers' operational efficiency, overall product quality, while ultimately improving their earnings. Helping our customers remain successful is essential to our future and should improve returns to our shareholders. Improvements in operational efficiency, cost reduction, new product development remain a high priority and contributed to our first quarter results. The $30m cost reduction initiative announced in January of 2003, resulted in a restructuring charge of approximately 800,000 during the first quarter. We expect a similar restructuring charge in the next quarter and substantially higher restructuring charges in the second half of 2003. The initiative will be completed by mid-year 2004 as anticipated.

I would like to thank our employees for their contributions during the first quarter as we strive to deliver greater value to our customers and shareholders.

Rita, we'd be happy to take any questions.

(Caller instructions). We have the line queued-up of Mark Connelly from Credit Suisse First Boston. Please go ahead.

Thank you. Nice quarter. A couple of things -- Michael, a year ago at this time we were talking about the backup from the shift in inventory policy and who was going to carry that. Can you give us an update on how that process has gone and whether there are any further hiccups to come?

Yes. I'd be delighted to. In fact, we're very pleased with the progress that has been made in partnership with our customers. As you recall, in 2001 we changed the terms of sale in paper machine clothing to assure that after a specific period of time, depending on the product, once we had made it, a customer was expected to pay for it. And one of the things that Mark is referring to in his comment is that there have been periodically some adjustments in terms of accelerating sales from one quarter to another as a result of customers getting used to the fact that they're supposed to pay for products that they ordered. In fact, that process has worked very well and we are seeing material improvements in the amount of inventory held in combination between the customers and Albany International. Although there will occasionally some little blips between quarters, we don’t believe we saw anything material in the first quarter of this year versus the fourth quarter of last year. And we think the process is working well to the benefit of both our customers and the industry.

Thanks. Michael, can you also comment on the impact of energy or obviously a fairly resin-intensive business. Can you talk about resin pass-throughs work?

Sure. Specifically, like many companies that have some raw materials that are oil-based, we did experience some increase in some of the ingredients for some of our products. Specifically, we had, for example, a three percent ingredient surcharge in polyester as the oil prices reached high levels in the first quarter. We hope that that is a temporary surcharge and that prices will return to normal. But that is the kind of thing that is working -- that has been affecting some of our costs. In addition, related to the oil price increase, our actual variable fuel and purchased power costs went up in the first quarter, and I think it's fair to say that analyzing the number in detail, it appears to us that the increase in the first quarter relative to the same quarter last year was over ten percent. Clearly, we are hopeful that that decline in crude oil prices over the last few days, after the end of the Iraqi war, may come back to help us out later.

Two more questions, Michael. First, can you talk about what's going on in the Pacific Rim? We're not hearing great things from paper producers there -- obviously some new capacity coming up. Is this a market share thing?

No, we don't think it's a market share thing. We think that -- just looking at our numbers, there was some very good strength, interestingly, not particularly in China for this quarter. It was Australia, which was very, very strong. Now there may be some elements of market share associated with that, but I think there's good industry strength there. Frank, would you care to add?

I think -- you're right, Mark. When it comes to the paper industry, we're not hearing good things out there either, but from a supply of paper machine clothing, the number of new machines that are up and running and the new ones coming into China, that makes quite a difference for us in that part of the world. We do see some slackening in production, especially newsprint, as you know. And I'm just hoping that it will not be as severe as it is in some other parts of the world.

Frank, can you remind us where the whole Asian market is supplied? Is that still -- you've got your facility in Korea, but is there still a lot coming from Canada or is that ---?

I think that we are increasing our output in our China plant for one product line. That is exported -- some of that is exported to other parts of Asia, as you know. The Korean plant is doing extremely well. What we don't have in Asia is we don't have a wet felt press fabric plant and the exports from Sweden and from Canada and Europe are filling that void at this particular time.

Okay. Thank you. One last question. You've talked about reviewing capital allocation plans. You obviously don't have a lot of debt out there. You don't have much of a dividend and yet you've got some extremely strong performance. Can you give us any sort of an update on your thinking about capital allocation?

I think, as we mentioned earlier, or last time, that we will probably spend about $55m this year, Mark, in improving our efficiencies with new equipment for better future cash flow and also, at the same time, we announced that we would probably earmark between 12 and 13 million for our pension plan in going forward. I think we're more interested right now, is investing in our core business to -- as I mentioned, to develop future cash flow in and above what we are currently doing.

We had also indicated in the previous quarter that, while that clearly is our top priority is to assure that we grow the cash flow in our core business, the other alternatives that we continue to evaluate on a continuing basis are next to grow the industrial product businesses that have been actually growing at more rapid pace than the paper machine clothing business itself, and we are hopeful that some good opportunities will be materializing there. We also, of course, will periodically review our quarterly cash dividend and we certainly would expect our rate of increase in cash dividend to materially exceed the rate of inflation. And, finally, depending on how each of the first three categories that Frank and I have discussed go, when we have a very low leverage ratio, and we're certainly getting to leverage ratios that are very comfortable, we will evaluate some of those alternatives, such as growing industrial product businesses by purchasing other companies, against the fourth alternative, which is to purchase our own shares, and at the moment, it's real hard to find anything out there that we can buy that has as attractive a ratio in terms of market price to cash flow as we are.

I don't disagree. Thanks very much.

Thank you, Mark.

(Caller instructions). And we have a question from the line of [Beth Lily] [ph] Woodland Partners.

Good afternoon.

Hi, Beth.

How are you?

Fine, thanks.

I wanted to just spend a minute and talk about just the overall -- two things -- talk about the overall environment and then I wanted to clarify something that Frank said, in terms of additional charges that you expect to take in the second half of the year.

Uh-huh.

Okay. So let's start with the charges question. Is that -- you've taken the $30m restructuring charge. You took one last quarter, correct?

No. No, that's right and I'm glad you asked the question. What we announced in January was the initiation of a new $30m cost-reduction program. The only things that we have publicly disclosed with regard to charges are in the release today. Specifically, we will have more fine-tuning on what is likely to transpire in terms of the larger charges that could materialize in the second half of this year, probably a little bit more towards the fourth quarter than the third quarter. But until we really have a finer definition of what those are, we are disinclined to provide guesses that could be somewhat lie to the mark. We -- you're absolutely correct in assuming, however, that there will be -- anytime you have a substantial cost-reduction program such as this, material charges that will be made over the period between now and the middle of next year when that program is completed. But, as this point, we hesitate putting anything out there other than what we said in the product release, which was that we have about a similar number in the second quarter and clearly we'll have substantially higher numbers before the program is over because we're trying to go after $30m.

Okay. That's helpful. And just can you talk about the overall environment and what you're seeing domestically?

I think that -- Beth, I’m cautiously optimistic. It seems like it's an awful dead place out there today. But I see some light from our customers and I'm hoping that they are right and that they can continue to improve on the pricing side and on the efficiency side and improving their products as they go forward. From our other businesses, as we mentioned, the Applied Technologies, we have a little bit of growth in those areas. The PrimaLoft business is extremely strong, which is basically used in consumer products of home furnishings and outerwear. The Door business is capital-intensive of -- from the standpoint of capital expenditures and, of course, nobody is spending any money other than what they really have to. You know the same question you're asking me here, I've been asked by our associates in the company and there is a lot of concern out there with what is happening in the world today. But I think that I am optimistic -- cautiously in the short term, but hopefully, later in the year, we'll get with it and get some enthusiasm going in this country and pull ourselves our of this situation.

So your customers -- you're cautiously optimistic based on what your customers are saying.

Yeah, what we see out there and what's happening with our customers.

Yeah. Okay. My last question is -- you guys have done a phenomenal job rightsizing this business and generating a lot of cash flow and paying down debt and such. When the cycle does turn and when the markets do improve, the cash flow is just going to flood through your business. And I'm just curious about -- I want to follow-up on Michael's comment about your stock is much more attractive than the prices that you're seeing out there for businesses. At what point do you make that decision with the share buyback? I mean, where does that rank in terms of all the different various alternatives that you have and is it something that's kind of on the front burner?

Well, we listed it as fourth of four. And frankly, it is the golden standard against which we evaluate everything else we do. At the end of the day, we're in business to try to give our shareholders and attractive return on their investment, while providing the best products in the industry at good, fair -- it's attractive value to our customers. And all I can tell you is every senior management meeting that I've been in over the last two and half years, we have talked, at one point or another, about what are we doing for our shareholders today. The decision to buy share is ultimately is going to be up to our Board of Directors and we're not going to second guess them, but you may work under the assumption that this will continue to be a discussing point in the period ahead. Now, obviously, the more quickly we can pay down debt and we'll certainly done it pretty darn fast with over $25m a quarter of cash generated over the last 14 quarters now -- this is a pretty good little cash machine that's been chugging along here.

So even though you listed it at fourth of four, it doesn't necessarily mean that's where it truly is.

It means that we have to think about the first three first.

Yep.

But the fourth is what we measure everything against.

Okay. Great. Well, terrific job, you guys. Thank you.

Thanks, Beth.

(Caller instructions). We have no further questions at this time.

Thank you very much. Thanks to all of you for tuning in. We appreciate your continuing support. We're very pleased that we could report, in fact, a very, very strong first quarter and indications that we can continue to generate good cash in what is not a particularly an inspiration geopolitical or economic environment. Thanks for continuing to support us and we look forward to reporting to you next quarter. Thanks, Rita.

Thank you. Ladies and gentlemen, this conference will be available for a replay at the Albany International Website. This does conclude your teleconference for today. Thank you for your participation. You may now disconnect.