Albany International Corp (AIN) 2003 Q2 法說會逐字稿

Welcome to the Albany International second quarter investor conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star zero. At the request of Albany International, this teleconference is being webcasted and recorded.

Now I'd like to turn the conference over to our host, Mr. Michael Nahl, Senior Vice President and CFO. Please go ahead.

Thank you, Linda.

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 and any unauthorized rebroadcasting is strictly prohibited.

The company earned 49 cents per share in the second quarter of 2003, compared to 43 cents per share in the second quarter of 2002. Despite a difficult economic environment, the company has been able to grow earnings and crash throw. In the second quarter of 2003, our net cash provided by operating activities increased to $32 million bringing the year to date cash from operations to $64.3 million.

Our progress in the second quarter is a direct result of harvesting cash from our previous cost reduction efforts. We are now on schedule to implement the newer $30 million plan announced in January which will be completed mid-year 2004. Remember that three times of four in the last five years we've announced cost reduction programs and each time we accomplished everything we said we would. We're just as confident about completing the current program as we were in implementing the last three successful programs. Second quarter net sales were up 9.6% compared to the second quarter of 2002. Excluding the effect of changes in currency translation rates, net sales were flat in comparison to the second quarter of last year.

Our engineered fabrics segment, which is defined in our annual report, is our largest segment. About 90% of this segment's revenues are derived from the sale of paper machine clothing, which we just call PMC. In the engineered fabrics segment, net sales in the second quarter of 2003 were up 8.8% in comparison to the same period of 2002. Excluding the effect of changes in currency translation rates, second quarter sales were flat in comparison to the second quarter of last year.

In analyzing actual sales demand within regions, we can say that both European and North American net sales in the engineered fabric segments, excluding the effect of changes in exchange rates, were weaker than the second quarter of 2002. Demand in parts of the Pacific Rim was up moderately in local currencies. Year to date, net sales were up 9.7% compared to 2002. Excluding the effect of changes in currency translation rates, net sales were up 1.3% in comparison to 2002.

In the engineered fabrics segment, year to date net sales were up 9.1%, in comparison to the same period of 2002. Excluding the effect of changes in currency translation rates, year to date net sales were up in engineered fabric segment by 1.4%. Second quarter total cost of sales increased 11.3% while net sales increased 9.6%. Excluding the effective changes in currency translation rates, total cost of sales increased 1.1% while net sales were flat. Cost of sales for the second quarter of 2003 includes $1.3 million of severance relocation and other costs related to the cost reduction initiatives. In the second quarter of 2002, there were approximately $200,000 of those expenses.

Second quarter gross margin was 41.5% as compared to 42.4% in the second quarter of 2002. The decrease in gross profit margin is attributable to higher costs associated with the implementation of cost reduction initiatives and the effect of currency translation fluctuations. Our year to date gross profit margin was 42.0% as compared to 42.2% in the same quarter last -- same half last year. Excluding changes in currency translation rates, gross profit margin was 42.4% in the first half of this year.

Second quarter depreciation and amortization was $14.4 million compared to $12.8 million for the same quarter in 2002. Depreciation expense increased from $11.5 million in the second quarter of 2002 to $13.1 million in the second quarter of 2003. Primarily due to currency translation.

Second quarter amortization of intangibles and other items was $1.3 million in 2003 and in 2002. Capital expenditures were $9.3 million in the second quarter of 2003, bringing the year to date total to $18.7 million compared to $11.7 million for the first six months of 2002.

The company anticipates 2003 capital expenditures will increase to approximately $55 million resulting from the planned investments in France and inland and our emphasize on operation efficiency and process improvement. In addition, we may purchase up to $11 million of currently-leased equipment in the second half, which is essentially a financing decision. Next year's capital expenditures are likely to decline significantly. We also mentioned in our press release -- mentioned in our press release that despite the combination of higher expenditures for capital and an estimated $20 million contribution to our United States pension plan, our cash may increase slightly in the second half of 2003. The prospects are good for substantial net cash flows in 2004, particularly in the second half following the completion of the cost reduction programs. Management is evaluating, on an ongoing basis, which alternative uses for cash would be most beneficial for our shareholders. We've discussed that with you in previous calls and there is nothing we can add about that at the current time.

Second quarter selling, technical, general and research expense, or SDG&R were up 4.8% in comparison to the second quarter of 2002. Excluding the effect of changes in currency translation rates, STG&R costs were down 3.8%. This reduction is a reflection of the continuing progress our employees around the world have been making on our cost reduction efforts. Second quarter operating income was 12.8% of net sales as compared to 12.3% in the second quarter of 2002. Changes in currency translation rates had no impact on second quarter operating income as a percentage of net sales. Year to date, operating income was 13% of net sales compared to 12% in 2002, excluding the effect of changes in currency translation rates, operating income as a percentage of net sales was 13.4% for the first six months of 2003.

Our second quarter interest expense net decreased 16% to $3.5 million as compared to the second quarter of 2002. The decrease is primarily attributable to lower average debt. Net debt, which is total debt less cash, decreased by $21.1 million in the second quarter of 2003. As of June 30, 2003, total debt was $234.8 million. Net debt, which is total debt plus cash and marketable securities was $175.6 million. Accounts receivable increased $11.6 million in the second quarter of 2003, excluding the effect of changes in currency translation rates the increase was $1.4 million. Inventories, as measured in U.S. dollars, increased $7.6 million during the second quarter of 2003. Excluding the effect of changes in currency translation rates, inventories increased by $400,000 during the second quarter of 2003 and have increased $2.7 million since the end of last year.

Our inventories typically are higher at the end of June because of the summer production schedule in Europe. This year, because of the cost reduction activities, we may not see the normal decline in inventories by year-end as we need to assure perfect delivery executions to our customers throughout the transition among sourcing.

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

Good morning. Without sustained economic improvements in our global markets during the quarter, sales remained flat, excluding the effects of changes in currency translation rates. However, we were able to improve earnings compared to last year, principally due to our cost reduction initiatives.

Paperboard operating rates globally were unchanged overall but did reflect some regional demand increases. Paper operating rates remained weak, especially in the United States. Paper and paperboard production did improve slightly in major markets but overall industry consumption of paper machine clothing in the first half was unchanged from 2002.

In Asia, despite the adverse affect of SARS on regional order activity, PMC sales improved modestly. As our representatives resumed travel activity in this region, we expect future orders to return to normal levels. To improve our efficiency in Asia, we restructured our sales coverage and assignments in the region.

Sales of new product upgrades increased during the second quarter, reflecting our customers' desire for new PMC technologies to reduce major operating costs and improved paper and paperboard properties. Weak economic conditions continue to adversely affect our high performing door business. Compared to the second quarter of 2002, sales increased 7.8%, but decreased 7.8%, excluding the effect of changes in currency translation rates.

Low capital spending levels, particularly in the major high-performance door markets in the United States and Germany continued to affect this segment. During the quarter, we announced the closure of our door manufacturing facility in Canada and the consolidation of the North American operations into the large fill, Georgia plant during the third quarter of 2003. Applied technologies segment sales increased 26.1%, compared to the second quarter of last year, and increased 19% excluding the effect of changes in currency translation rates. Results from this segment, particularly in our textile products in Europe and South America were encouraging.

In addition, sale of PrimaLoft, our premium synthetic insulation for apparel and home furnishings, continues to grow as market penetration into Europe expands. As with other segments, effective cost management has provided earning benefits. Continued emphasize on technology development in product and process should improve efficiency and increase revenues for all of our business segments. Increased global attention to the Albany Value Concept, a program that matches products and services to customer needs, help us focus our efforts on activities that deliver greater value to our customers and improve returns to our shareholders. Michael?

Linda, we'd be happy to take any questions now.

Thank you, ladies and gentlemen, if you wish to ask a question, please press star, then 1 on your touch-tone phone. You will hear a tone indicating that you've been placed in queue. You may remove yourself at anytime by pressing the pound key. If you're on a speaker phone, pick up the handset before pressing the numbers. Once again, if you have a question, please press star 1 at this time. One moment, please, for the first question. Our first question comes from the line of Mark Connelly with CSFB. Please go ahead.

Hi, thanks. Frank, Michael, a couple of things. First, can you -- can you talk to us about resin and filament prices given that energy prices and resin have really not come down the way they were expected to. Can you tell us how that's affecting you now and how it's going to affect you next year?

Mark, we do have contractual agreements with our major suppliers of filament and fiber. We have had some modest price increases and as these contracts -- agreements come to the end, I'm sure that that the way the world is working today that we may see some uping on the pricing for 2004. But I don't think it will be of any great degree, you know, sometimes in the 3% range or 4% range.

Okay. And -- and a question about the door business. Is it still your view that this is a cost of capital business? Is there anything structural changing? Or are we just going through the, you know, cyclical downturn?

We think this is pretty much a replay of what happened in the early 1990s. It's just a pure capital goods business that has certainly generated attractive returns on the capital we employ in it over the course of an economic cycle. We see nothing structurally different about the business today than we saw about it when we were in the middle of that recession.

Will there be any opportunities to grow that business welcome I mean are their competitors out there suffering or struggling more than you are?

In fact, that's an interesting question because in fact, it is clear that some of the competitors are really struggling and are losing -- are losing money. So -- In addition --

So, that's a maybe?

I will say that's definitely a maybe.

Okay. I wonder if you could give us a little better sense of what's happening in applied technology sales, the business picked up pretty nicely, your expanding PrimaLoft capacity. Has there been a renewed emphasis on that at Albany or has it taken off from nowhere?

No, I think, Mark, a year ago we took a real hard look at this segment of our company and as you know, we -- we ventured into Europe with a manufacturing line for PrimaLoft to penetrate the European market and that decision has paid off handsomely and we are penetrating that market. As you know, our -- our insulation is -- is on the high end of the price scale. But we are getting good response from the product and what is really growing is the home furnishing area. The outerwear market, which we refer to as the -- as the -- the ski jackets and the parkas, that remains relatively flat and has for the last couple of years. The other industry in the train, in the textile industry that was an acquired portion of Geshme that was not in very good shape and we've changed the management, of course, we've changed the process, we've taken out some of the products within that segment that we felt were not -- with were not very good and we stayed with the core of that segment and we've been improving it quite well.

This is all part of our effort to look at shareholder-friendly growth strategies. In areas that we really have some strong competency in. And it's clear to us that it's a whole applied technologies area, there is an opportunity for significantly higher growth rates than we are likely to enjoy in the paper machine clothing business. It appears that we're beginning to make some progress there.

Just -- just a couple of more things. First, you -- you talk about currency translation related to currency held in other than the local currency. Is -- is -- is there anything -- is there anything in that -- that -- that's unusual? I assume that's just you operate in a lot of different jurisdictions and occasionally hold cash, but it seems like a very big number.

I will turn that over to our treasurer, Dave Michaels.

There is nothing unusual there, Mark, it's just our function of holding a lot of cash and temporarily investing that in certain entities, pooling it, just doing typical, what we think is best practices in the treasury area.

Okay.

And we -- we have a fairly diversified currency exposure and don't necessarily hedge that exposure, it's expensive and the diversity that we have really enables us to offset a lot of those overtime.

Okay. Fair enough. Now, I don't know if there's a politically correct way to ask this question, so, I'm just going to ask it right. One doesn't generally think of France as the most pro-business place to -- to be investing. You obviously have a significant existing business there, but can you tell us what the thought process is in putting your -- your newest plant on the continent in France rather than the slightly more pro-business companies?

Mark, that's an interesting question. You know, Albany International has been in France for over 45 years. When it comes to what the French feel and what the outside world thinks about the business climate in France, we have been very successful in operating in France. We have an excellent workforce in the -- in the three units that we have. We have never had any real problems with labor. I think that our people in France manage the companies extremely well. The new plant that we are building is in a location where the employees are critical to the product and to the process. And we are very confident that -- that we will continue to be successful in -- in -- in France.

Okay. Thanks very much.

Our next question comes from the line of Hale with Inwood Capital. Please go ahead.

Good morning, as you talked about industry demand being roughly flat, can you give us a better handle for what the inventory to consumer level might be, so when we see a pickup in the economy and/or the industry that maybe there's a kind of double snapback almost? Thanks.

Hi, Hale, this is Michael. While we -- while we are not inclined to give forward-looking statements as to the specific projections, it's very clear from what was said that -- that the economic environment in both North America and in Europe was -- was pretty sluggish. And the -- the inventory -- the inventory levels as I've pointed out were up a little bit at the end of the six-month period, principally in anticipation of the summer shutdowns that typically occur. We would expect, as I've mentioned in my comments, that normally these would come down a little bit. And I -- I cited the specific reason that we're probably not going to bring them down is that because we're engaged in the process of changing some sourcing within our organization, we want to make sure that this is absolutely perfect as to deliveries for our customers throughout this period. So, we're probably not going to bring it down at all. Now, you're really asking an additional effect here, which is what happens when things do start snapping back and there, obviously, we'll get some material increases in the -- the rate of growth in sales but what I would anticipate is you would not see a large snap-up in inventory since we've already essentially got the pipeline full because of the need to take good care of those customers. Have I answered the part of the question that you're most interested in? Or have I missed something here?

I think I asked it in kind of a confusing way. You've done a great job managing your inventory. I'm trying to get a better handle on the inventory your customers are holding and when the economy is better, will they be willing to carry more inventory themselves, therefore creating kind of a filling effect?

We don't think so. We've been working with our customers to absolutely reduce to the minimum the amount of inventory that is held in the -- in the entire pipeline. And now, you are -- your question really implies there might be a willingness on the part of our customers to take a greater portion of that pipeline. We -- we think that that is somewhat unlikely at the moment. The paper inventories are -- in terms of our customers' inventories, are clearly tighter than normal. That will certainly see a snapback when this -- when the economies pick up but it is our anticipation that we've got very good control systems in place right now that will enable us to continue to keep the total pipeline between us and the customers very, very lean with 100% of assurance of being able to supply in -- in events of emergencies and yet we expect to see the -- the balance in terms of who's carrying what to be about the same. We made some important changes over the last year and a half in terms of the practice that once a customer orders paper machine clothing, they must pay for it within a certain period of time regardless of whether they have used it. This practice, which we are pleased to see has been picked up by many of our competitors, is leading to our customers making more rational decisions in terms of the true economic desirability of how much to hold. So, we -- we think we've pretty much played through the bulk of that, Hale.

Thanks for the color and you're doing a fantastic job generating a lot of cash in a difficult environment.

Thank you very much.

If there are any additional questions, please press star 1 at this time.

Okay, hearing no additional questions, we're very pleased that you all could join us on the conference call this morning. Thank you very much. We appreciate the continued support of our excellent shareholder base. Thank you.

Ladies and gentlemen, this conference will be available for replay on the Albany International web site. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.