Albany International Corp (AIN) 2003 Q3 法說會逐字稿

Welcome to the Albany International third-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. (OPERATOR INSTRUCTIONS). At the request of Albany International this conference is being web cast and recorded. I would now like to turn the conference over to our host, Michael Nahl, Senior Vice President and Chief Financial Officer.

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 rebroadcast or distribution of transcripts of parts or all of it, is strictly prohibited. The company earned 20 cents per share in the third quarter of 2003 compared to 44 cents per share in the third quarter of 2002.

Results for the third quarter of 2003 include restructuring charges of 30 cents per share related to the $30 million cost reduction initiative announced in January of this year. The 30 cents per share restructuring charge was in connection with the specific actions announced during the quarter to implement the first major step in our $30 million cost reduction program. Only $2.2 million of the $14.3 million of restructuring charges taken during the third-quarter will require cash outlays. The rest of the charge was for plant and equipment write-downs.

In spite of weak sales our net cash provided by operating activities was $27.8 million during the quarter and $92.1 million for nine months. Those figures compare with 37.2 million and 69.7 million for last year's third-quarter and nine-month periods. In the third quarter of 2002 net cash provided by operating activities was helped by a $9.6 million reduction in Accounts Receivable and a $10.6 million reduction in inventories. That contributed $20.2 million to cash provided by operating activities last year compared to a corresponding $2.9 million contribution from Accounts Receivable and inventory reductions in this year's third-quarter.

Currently we do not expect much near-term improvement in inventories due to our need to assure that our customers receive timely deliveries of all products during the current $30 million cost reduction program. While we are never completely satisfied with our performance we are pleased that we can continue to generate a substantial amount of cash in spite of fairly uninspiring economic conditions in a global paper industry. Since the acquisition of a paper machine clothing competitor, Geschmay, four years ago Albany International has reduced debt by $364.7 million and increased cash $38.5 million for a combined improvement of $403 million in four years.

The corresponding improvement during the first nine months of 2003 is a $13 million reduction of debt and a $44.7 million increase in cash for a combined improvement of $57.7 million so far this year. That improvement this year was in spite of a third-quarter $20 million contribution to our pension plan in the United States. We believe that we have successfully demonstrated that we are able to generate substantial amounts of cash in good times and bad. We do it by focusing on delivering value to our customers and by driving quality and efficiency within our organization. While we would hope that the paper industry which we serve will return to a stronger growth mode next year, we haven't seen any conclusive evidence of that yet.

Just look at how weak our sales were in the third-quarter. Third-quarter net sales were up only 1.7 percent compared to the third quarter of 2002 in spite of a significantly weaker U.S. dollar. Excluding the effect of changes in currency translation rates, net sales were down 5.2 present in comparison to the third quarter of 2002. We simply don't see any upturn yet in demand for our principal paper machine clothing products. Our engineered fabric 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 fabric segment net sales in this third-quarter were up 0.4 percent in comparison to the same quarter of 2002. Excluding the effect of changes in currency translation rates third-quarter sales were down 5.9 percent in comparison to the third quarter of last year. That decrease is fairly consistent across each region in which we operate. In the Albany Door Systems segment sales were up 3.3 percent as compared to the third quarter of 2002 when measured in U.S. dollars. However, in local currencies net sales were down 7.3 percent compared to the third quarter of 2002.

Sales of Albany Door Systems products continue to be affected by poor market conditions. Sales in the Applied Technology segment were up 20.2 percent in U.S. dollars and up 11.9 percent in local currencies. Our experience over a lot of years suggest that it is usually wisest not to overreact to any one quarter of sales, either weak or strong since there can sometimes be temporary factors at work. The current quarter should probably be interpreted in the context of our year-to-date results. Over the first nine months of this year our total net sales for all businesses increased 7 percent compared with the same period last year. That 7 percent increase is entirely due to the weakening U.S. dollar.

Without changes in currency exchange rates our total net sales would have declined 0.9 percent. This is a picture of flat sales. We can only be glad that we have done a lot of work to increase our ability to generate cash. If or when global economic growth becomes more vigorous that effort is likely to pay off for our shareholders. Our third-quarter gross profit margin was 41.3 percent of net sales in 2003 and in 2002 and our year-to-date gross profit margin was 42.1 percent as compared to 41.9 percent in 2002. For those of you who run economic models of Albany International we will save you some calculation time by reporting that our third-quarter depreciation was $13.2 million and amortization was $1.1 million. The nine-month figures are in our press release.

Capital expenditures were 11.2 million in the third quarter of 2003 bringing year-to-date total capital expenditures to $30.0 million compared to $18.8 million for the first nine months of 2002. The company anticipates that 2003 capital expenditures will be approximately $55 million and 2004 is likely to be about the same level. We expect depreciation and amortization in 2003 to be approximately $57 million. Other income and expense net was $2.1 million of income in the third quarter of 2003 compared to $800,000 of expense in the comparable period of 2002. The favorable change in 2003 is primarily due to currency hedging activities. Our currency hedging strategy is aimed at mitigating volatility in our income statement that can be caused by sharp changes in currency exchange rates. I would 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 in Albany International. Weakness in global paper and paperboard markets and other industrial markets continue to have a negative impact on the demand for our products as our customers reduce capacity and limited production and capital spending. Sales were also adversely affected by our previously disclosed decision to decline certain sales opportunities that did not meet minimum profit objectives. The company continues to focus on the development of new and improved products that meet our customer's needs and support improved earnings for the company. Global paper operating rates remained weak although paperboard operating rates improved in the U.S. and parts of Europe. The improvements results from a reduction of capacity that in turn slightly reduced the consumption of paper machine clothing and negatively affected our sales.

Overall paper and paperboard market outlook in response to economic trends is still reported as unchanged. In the door business in the United States and Europe, weak economic conditions continued to effect capital spending for high-performance doors by our customers, however, our aftermarket and service businesses continue to grow. The consolidation of our door manufacturing operation in North America, our sectional door business in Germany were completed during the quarter. These and other efficiency improvements and cost reductions combined with the introduction of new products should provide improved results in future quarters.

In the applied technology group, as Michael mentioned, increased 20.2 percent compared to the third quarter of last year and increased 11.9 percent excluding the effect of currency translation rates. Sales of tannery, textile filtration products for power generation applications increased during the quarter as compared to the same period last year. In addition, the expansion of PrimaLoft premium synthetic insulation into the European market should provide continued growth for this product. With the strong sales -- with stronger sales and the benefit of the cost reduction already in place, this segment has shown steady improvement.

There is some recorded industry optimism for improvement in the paper and paperboard markets in 2004. However, we have not seen any sustained improvements to date and we continue with our plans to balance productive capacity with customer demand, improved efficiency and continue to reduce costs. The restructuring efforts announced by the company during the quarter will focus on North American and European manufacturing into fewer plants with modern equipment which should result in improved efficiency output and product quality. As previously reported we expect additional significant charges associated with the $30 million cost reduction initiative in the first half of 2004.

Customer demand for technologies that will positively impact their operations is driving our product development and application efforts. Product innovation efforts underway in several areas are expected to produce growth opportunities for our major markets. These activities will continue in each of our business segments. The Asia-Pacific region remains the world's fastest growing market for paper and paperboard. We continue our focus in this market and recently reorganized our management structure to support our expanding operations in the region. This should position the company to take advantage of the opportunities presented by the region's rapid growth. The company anticipates that the 2003 capital expenditures to total 55 million and currently expects a comparable level all the year 2004. As we renew capacity and relocate production to centralized operation, short-term inventory increases are expected to ensure continued product supply to our customers. Prospects for continuing strong cash flow in 2004 remain good particularly in the second half as we complete the $30 million cost reduction program.

We are continuing to evaluate which alternative use of cash would be most beneficial to our shareholders. Delivering value remains the company's highest priority and drives all of our activities. We believe focusing on product and process innovation coupled with the efforts of the entire Albany team to improve all our internal operations will provide value to our customers and improve returns to our shareholders.

Before we take questions, I would like to make a small correction to one of the numbers that I gave in connection with year-to-date total net sales of the entire company. As I mentioned, they were up 7 percent compared to 2002 for the nine-month period excluding the effect of changes in currency translation rates, net sales were down 0.9 percent, not the 0.7 percent that I had mentioned earlier. This 0.9 percent is the same figure that is in our public release. We would be happy to take any questions now.

(OPERATOR INSTRUCTIONS). Mark Connolly with CSFB.

Just a couple of simple questions first. You have closed two plants, one here and one in Europe recently. Can you give us a sense of how on track the savings you expected those to deliver are or is it too early to tell?

At the moment I can tell you that we are on track but as you know in different parts of the world it sometimes takes a little longer to complete it than in North America, but for now I am pleased with what the team members have done so far and we are making good headway.

You mentioned that working capital inventories will be up through this restructuring process. When the restructuring is finished will we see a net benefit other than just a reversal of the pickup? Can you give us any sense of where you think working capital might be headed?

I think, Mark, as you know we are down just a little bit so far. Let me tell you what we are doing. In the Accounts Receivable especially we have a number of global teams working in this area, especially in these uncertain times, and we are on top of this issue when it comes to the receivables. In the inventories, as we stated, we will probably take them up a little bit in the short-term while we move the production around to make sure that our customers are protected. And we continue to work with our customers in order to get them to understand that there is this need for all of this safety clothing, as I referred to, stacked up behind the machines. It's not necessary anymore because of the improvements that they have made in their business and we will continue to rightsize our inventory with the demand of those paper machines.

In specific answer to the question about what happens to inventory after this restructuring is over, in fact, one of the nice implications of the restructuring is that it does streamline some of the processes that create inventory in the pipeline and so I would anticipate that after the restructuring program is over that in fact there will be some benefits to the inventory side.

Okay. Question. Frank, you talked about reorganizing your business in China. We have got a big surge of new capacity coming online in China. How significant is that in your expectations for your Asian business? Is that going to be a big deal to your revenue line or is it not big enough to matter?

I would say that it matters, Mark. It is just a question of how fast they continue to grow. As you are well aware of, that is the only place in the world where they are putting in new capital and we are very interested in moving with that country in terms of developing and also from the standpoint that we are located in that country. So I think that is a major opportunity for us going forward. The size of it will depend on how fast they continue to invest and grow.

As you look at the door business which obviously is going through a cyclical slump are you seeing anything secular out there that is going to change the outlook for this business or your commitment to it?

No, not at this time, Mark.

The CAPEX number that you have given us for '04 is higher than I had been using. Can you talk, Frank or Michael, about what is in that number, why it is not coming down next year and what the quarterly progression roughly might look like?

I think Mark, the thing that is -- what we are interested in is we are spending capital on new equipment which is more efficient and higher in speed. We took on a couple pieces of equipment a little bit earlier in 2004 than we probably anticipated earlier in the year so that we can continue to consolidate the operations and get it into more efficient, larger plants. That is where the extra is coming from.

Okay. Thank you very much.

There are no further questions at this time, Mr. Nahl.

Thanks to all of you for joining us this morning. We appreciate the support we have had from our shareholders and we are pleased that we can continue to report good cash flows for the shareholders. Thank you very much.

Ladies and gentlemen, this conference will be available at 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.