Albany International Corp (AIN) 2003 Q4 法說會逐字稿

(Call Begins In Progress) -- afternoon yesterday rather than our normal practice of early this morning. We did this because we noticed what we considered to be an unusual pattern of trading in our shares. We called the situation to the attention of the New York Stock Exchange and accelerated the release of our earnings report in order to assure a level playing field for all members of the public.

Okay. We had a good year and a disappointing fourth quarter. I'd like to start our Web conference by identifying both the positives and the negatives in the news. The most positive aspects were the continuing strength of net cash provided by operating activities and our very strong balance sheet and financial capacity. Net cash provided by operating activities was $128.1 million in 2003, which amounts to $3.89 per share on an average of about 32.9 million shares outstanding.

For the fourth quarter, net cash provided by operating activities was $36 million, which certainly was not disappointing. This management team continues to focus on cash flow and building value for our customers and shareholders, and we're making good progress in both of those efforts.

The biggest negatives in the quarter were in net sales and in the squeeze on margins caused by the sharp run-up of the euro and some other currencies against the U.S. dollar.

Fourth quarter net sales, after excluding the effect of changes in currency translation rates, were weak in comparison to the fourth quarter of 2002. While real GDP growth in the United States is reported to have been strong in the fourth quarter following the redhot 8.2 percent growth in the third quarter, we certainly didn't see any sizzle in the paper and paperboard industry in the fourth quarter.

Although our customers' brown paper segment was improving in the United States, the newsprint, fine paper and tissue segments all appear to be struggling in either pricing or volume in parts of the country. The European paper industry looked even weaker than the paper industry in the United States in the fourth quarter, as economic growth in Europe continued to lag behind the United States.

While paper industry operating rates were relatively unchanged in the fourth quarter, remember that those rates are calculated on the basis of paper and paperboard manufacturing capacity and that capacity is adjusted downward every time a paper machine is shut down permanently. Flat operating rates are not helpful when machines are being shut down.

In addition to our weak sales in the fourth quarter, the sharp increase in the value of the euro against the U.S. dollar from about 1.165 at the end of the third quarter to about 1.26 at the end of the year, squeezed our margins on U.S. dollar-denominated export sales out of Europe to other regions and particularly to Asia. Approximately 20 percent of the paper machine clothing we manufactured in Europe was exported from Europe to other regions and sold to customers in U.S. dollars. The increase in the value of the euro against the U.S. dollar increased our dollar costs for those sales without any improvement in our revenue in U.S. dollars.

There was a similar but smaller effect on export sales from Canada and Australia.

The effect of our lower fourth-quarter net sales on net earnings per share, after changes in currency exchange rates are excluded, was 11 cents. The effect of the higher euro on our margins on dollar-priced exports from Europe was another 4 cents per share for a total of 15 cents per share for those two factors.

It's also important to remember that our earnings in the fourth quarter of 2002 included the benefit of a favorable income tax adjustment of $2.8 million, or 9 cents per share. Without the benefit of that tax adjustment, our 2002 fourth-quarter earnings per share would have been 46 cents per share, in comparison to the 44 cents per share earnings before restructuring charges in the fourth quarter of 2003 that we reported in our earnings announcement.

The weaker dollar also had an adverse effect on selling, technical, general and research expenses, which in the fourth quarter were up 10.1 percent in comparison to the fourth quarter of 2002. Excluding the effect of changes of currency translation rates, STG&R costs were up only 0.3 percent. The U.S. dollar weakened during the year, not only against the euro but also against other currencies, including the Swedish crona, the Australian dollar and the Canadian dollar.

For the full year of 2003, after restructuring charges -- which lowered net income per share by 46 cents -- we earned $1.64. The 12 cents per share restructuring charge in the fourth quarter and 46 cents for all of 2003 result from our $30 million cost reduction program announced in January, 2003. These restructuring charges do not reflect any of the costs that will be incurred related to announcements made last week.

We will not publicly disclose the amount of the 2004 charges until we have completed our discussions with works councils, trade unions and employees. We expect substantial charges in connection with these programs in the first and second quarters.

Because we have manufacturing facilities in several geographic regions, we have the ability to gradually relocate production to our most cost-effective sources. We do not, however, move production from one region to another based on temporary currency swings or other short-term factors. But in the long-term, we will take appropriate actions to improve our margins and reduce our exposure to undesirable currency effects.

Earnings from our High Performance Doors business were weak in 2003 but they are likely to strengthen in 2004 as economic conditions in Europe improve and the benefit of internal efficiency improvements are realized.

While the High Performance Door business is more volatile than the Engineered Fabrics business, it has a history of providing attractive returns on investment over the course of a complete economic cycle.

Many of our investors have come to know Frank Schmeler's management team pretty well over the past two years. I think you know that we try to present the facts to you just as we see them, without any guilding of the lily. If something is not going well, we are quite willing to say so and then quietly get about taking the steps we need to improve the situation.

While the decline in fourth-quarter sales was disappointing, we have been moving forward in creating opportunities to generate higher earnings and cash flows per share. We've taken specific actions to assure that we will achieve our target of at least $30 million in cost reduction by the end of the third quarter of 2004. The improvement in earnings and cash flow should be significant in the fourth quarter of this year and throughout 2005.

We have realigned a number of geographical organizations to ensure top performance in meeting our customers needs. We continue to receive excellent responses from our customers through our program of documenting delivery-of-value. We continue to develop new products and processes to create increasing benefits for our customers and our shareholders.

Our earnings release yesterday fully disclosed the new revolving credit agreement that we signed earlier this month. This new agreement improves our strategic flexibility for increasing shareholder value. The $78.8 million in cash, $32.3 million in cash surrender value of life insurance and the ability to borrow up to an additional 260 million under the new revolving credit agreement, our strategic flexibility for shareholder-friendly initiatives is excellent.

We expect that working capital, after a minor increase caused by higher inventories due to equipment moves during plant shutdowns, will begin declining against late this year.

Inventories, as measured in U.S. dollars, increased $1.1 million during the fourth quarter of 2003. Excluding the effect of changes in currency translation rates, inventories decreased by $4.6 million during the fourth quarter and $3.2 million for the full year.

Accounts Receivable increased $2.6 million in the fourth quarter of 2003. Excluding the effect of changes in translation rates, Accounts Receivable decreased $5.6 million in the quarter and $7.4 million for the full year.

I have a feeling that it will be a lot more fun talking about the financial results for the fourth quarter of 2004 than we are having in presenting the fourth quarter of 2003. While we have no control over the markets we serve, there is a lot we can do to create value for our customers and shareholders. We will continue to be focused on both.

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

Good morning, ladies and gentlemen. Although the reported improvements in the general economy has not yet resulted in significant improvements in our customers' markets, we maintain a cautiously optimistic view of 2004.

Further improvement in efficiency and opportunities for new products and process development should result from our restructuring activities. Their successful completion will require the continued best efforts and full support of all of our people.

As previously reported, we expect significant charges associated with these restructuring steps to occur in the first and second quarters of 2004.

Our building projects are on schedule in both Finland in France. Finland has already started to produce, and France will start producing at the end of this quarter.

Within the last week, we announced our intention to close forming and pressing manufacturing operations in the Netherlands and cease manufacture of dryer fabrics in the United Kingdom. I cannot say any more about these matters than we put in our press release because we want to carefully obey the laws of the countries in which we are working, and we have further discussions ahead with works councils and labor unions.

It hasn't been easy, for me personally, to conclude that we have to close down operations where so many excellent employees have tried so hard to do their best to help our customers and shareholders, but we will continue to take the tough steps when we conclude that, in the long run, it will be important to both our customers and our shareholders.

Our paper and paperboard customers are asking us to assist them in improving their operations through paper machine clothing improvements. They understand the significant impact that improved PMC products can have on the quality of paper and paperboard and on the costs and efficiency of the paper and paperboard manufacturing process. Among the strategic objectives for our business is the continued search for solutions that will benefit both our customers and our shareholders.

The Company expects capital expenditures to total approximately 55 million in 2004. Investments in new equipment are intended principally to maximize the benefits of the relocation of production to centralized locations.

Depreciation in 2004, after giving effect to proposed plant closures, is projected to be approximately 50 million, and amortization is projected to be approximately 5 million.

Going forward, after the completion of these projects, I expect our capital expenditures to be in the range of 35 to 40 million. Our focus on delivering value contributed to the improved returns for our shareholders and benefits to our customers in 2003. Some customers have already identified millions of dollars in savings through the application of our value-driven products and services. We intend to maintain and sharpen this focus during 2004.

At this time, I would like to thank our people, our Board of Directors and our stakeholders for a good year. It was quite a challenge. Thank you.

Well, we are ready to take questions.

+++ q-and-a.

(OPERATOR INSTRUCTIONS). Dohyun Cha, Credit Suisse First Boston.

I have just a few questions. I will start with an easier one, I guess. Can you talk a little bit about what demand did in your major regions during the quarter and give us an update on how they did the first few weeks of January?

The question, Rick -- I am surrounded by some very able financial people, Dohyun, and I'm going to turn this over to Rick or David. The question concerns the sales demand in the fourth quarter, regionally. (inaudible). He asked about the first quarter, which is a little premature to talk about I think but certainly, we can say what the trend was in the fourth quarter.

Sure.

I would hesitate without the month of January closing for us to say anything yet about sales because peculiar things happen in the course of a month. David?

In the fourth quarter of 2003, the regional sales data in the Engineered Fabrics segment was down in really every region, fairly uniform throughout the regions.

Okay. Given the 20 percent you referred to, Michael, earlier about the -- (multiple speakers) -- other regions from Europe, what's a more normal level there? Because I'm assuming that the weakness in Europe led to that -- led to an increase of sales to other regions. Is that -- (multiple speakers)?

Actually, that's not true. In fact, that export percent of sales of what they manufacturer is about typical for the entire year.

Okay. Next question, can you talk a little bit about what price and volume did for your PMC business during the quarter sequentially from the third-quarter levels?

Dave or Rick, can you help out all there? Okay, David will take a crack at it.

I can say that the PMC volume was down in most of the products within Paper Machine Clothing in the range of 0 to 5 percent.

But pricing? (multiple speakers)?

Pricing is holding up pretty well on a U.S.-dollar base anyway.

Are you seeing any weakness there? Because I know that there has been a move through 2003. Despite a weak market, you have been successful at implementing a higher-value product at a higher price point. I'm just wondering if you're seeing more resistance or more acceptance of that from your customers.

I think with our relationship with our customers on putting the value concept in is that our customers are supporting us very well where we can demonstrate value in relation to price.

Last question -- the charges you are expecting in 2004, can you remind us how much you expect to be cash and how much you expect not to be cash?

Rick can handle that one. The charges for 2004 are mainly cash.

Okay. Do you have a range?

Not at this point. We're still in negotiations on the settlement (indiscernible) we have to come up wit here, so no, we do not have a range for you.

While we are on the free cash flow topic, the guidance I think you gave last quarter for CapEx levels beyond 2004 I think was closer to the $45 million mark and I think Frank, you just said 35 to 40 --.

I think that now that we have gotten into the projects that I'm more comfortable that we could be between the 35 and 40, depending on the year and the project.

Andrew Simon (ph), First Albany.

Hi, Michael. Can you please tell me what the off-balance sheet securitized receivables were at the end of the year?

Sure. David?

Yes, they were -- (technical difficulty) -- about 45 million, 45.2 million.

Thanks very much.

Hal Hocke (ph), Enwood Capital.

Obviously, there's a little bit of I guess -- confusion is the wrong word -- but the foreign exchange obviously negatively impacted your business quite a bit. I think you said about 15 cents in the quarter. Is there a time or metric that we should follow to see when you may anniversary some of those negative impacts from foreign exchange, or is there something you're looking for to occur or do we just have to wait for I guess the change?

I wish we had a really good formula for you. (LAUGHTER). We've actually done some analysis internally try to figure out what could be useful to institutional investors or individual investors trying to figure out what that impact is, and it's very complex.

But it's not something you can necessarily anniversary?

David?

Hal, I just wanted to -- one of the things you said was that the effect of the currency was a 15 cent negative in the quarter, so just to clarify that, Michael's comment was "the combined effect of lower sales", which he said was about 11 cents, and the effect of the euro exports was about 4 cents, so that's how we got to the 15. But if you look at the overall currency effect -- and you can see that on Page Three of the earnings announcement -- there was a $4 million pick-up from translating non-U.S. statements into U.S. dollars. That was partially offset by that $1.7 million negative effect from the euro exports. So just to make sure you have the data correct.

The short answer to your question, it's horrendously complicated. There's so many pieces to the puzzle.

With regard to the -- I forget the word you used, but anniversarying -- it isn't that easy because, remember, what I tried to say in my comment is that we are constantly responding to those changes which we feel are other-than-temporary. So, if you tried to anniversary something, we may be changing our operations in a way that would be unpredictable to you.

Right. Well, despite all the noise, it seems like you are generating a lot of nice cash flow so --.

That's the one good part of the story.

There's a lot of good part and that's the one we are focused on. Good luck!

Chad Gilmer (ph), Woodland Partners.

Good morning. I was just wondering what your thoughts were on your capital allocation priorities in the future now, specifically your plans with regards to stock buyback?

Chad, that is a question that I know is on many investors' minds. Since the Board of Directors makes those decisions, I really think we can't say any more than we have said in the past, which is that we have previously identified what the obvious alternatives are but at the end of the day, the Board of Directors is going to have to make those decisions. I'm very comfortable, however, that with the kind of cash-generating capacity we have and the financial capacity to do shareholder-friendly things, that whatever their decision is in the period ahead will be very beneficial to us all.

Because we've seen you take your debt from over $0.5 billion to a couple hundred million now. Cash flow is building on the -- cash is building on the balance sheet now. You started paying a dividend a couple pf years ago and that's increasing, so now it just seems like it would be a great time to start the buyback, too.

We are glad you're thinking about these good things! (LAUGHTER). You are not alone in thinking about them!

Thank you very much.

(OPERATOR INSTRUCTIONS). We have a question from Andy Ramer, Fiduciary Management.

Good morning. Could you please review the (indiscernible) status of your (indiscernible)? Thank you.

I'll turn it over to Dave Michaels. David?

Sure. Let's focus on the U.S. pension plan, which makes up the bulk of our pension obligation. We made a $20 million contribution in 2003. We also had some improved asset performance, and we also had a reduction in our discount rate. The combination of these three things made our plan over-funded, as measured by ERISA, and still under-funded on the accounting measurements. So, if look at PBOs (ph) and ABOs (ph) for our plan, we're going to come in at about 62 to 70 percent on those funding status (sic). But what we do when we are funding our plan, we're really focusing on the ERISA funding requirements and our annual contribution is based on maintaining above 90 percent ERISA funding.

A couple of important points about that U.S. (indiscernible) -- number one, it is a closed plan. In other words, employees hired after September 30, 1998 are not eligible to participate in that plan. So for us at least, that obligation is somewhat binding.

The other thing to remember is that all the international policy of funding 90 percent is really based on that ERISA requirement, and we think that's the most important thing to focus on.

There are no further questions at this time. Please continue.

Thank you very much for joining us this morning on this conference call. You may work under the assumption that this management team is focused on the things that you'd like us to be focused on.

We look forward to your continued support and we believe we will be able to deliver some pretty good results for you all in the future. Thank you very much.

Ladies and gentlemen, a replay of this teleconference will be available at the Albany International Web site. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.