Albany International Corp (AIN) 2004 Q1 法說會逐字稿

Welcome to the Albany International first-quarter investor conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time. (OPERATOR INSTRUCTIONS) At the request of Albany International, this teleconference is being webcast and recorded. I would now like to turn the conference over to our host, Senior Vice President and Chief Financial Officer, Mr. Michael Nahl.

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

The company earned 10 cents per share in the first-quarter of 2004 compared to 65 cents per share in the first-quarter of 2003. These results include several individually significant items that affect the comparability of the earnings. First, expense associated with our ongoing restructuring activities decreased earnings by 24 cents per share in the quarter compared with 2 cents per share from similar expenses in the first-quarter of 2003. The first-quarter of each year also includes some favorable adjustments related to certain income tax matters. Specifically tax related items increased first-quarter net income per share this year by 3 cents compared with a favorable affect of 16 cents in the first-quarter of 2003.

Additionally, in the first-quarter of 2004 the Company recorded a charge of 8 cents per share for an impairment loss on an unrelated entity. We have provided a reconciling table in our financial release this morning which compares the two first quarters excluding those items. That comparison is 51 cents per share in the first-quarter last year versus 39 cents per share in this year's first-quarter.

The remainder of the decrease in earnings is principally due to weak demand for paper machine clothing early in the quarter, competitive pricing pressure and also the Company's decision to decline certain sales opportunities that did not meet profit objectives. Frank Schmeler will have more to say about those factors in his comments.

On March 9th we preannounced sales and earnings after only two months when it became clear that we could not achieve CSFB's forecast of earnings for the full quarter. In spite of an extensive analysis at that time of the reasons for the weak start, we were not comfortable giving a detailed analysis until the full quarter results were available. For example, market share data we received lags our sales data and the data we had received could easily have led investors to what we believed might prove to be wrong conclusions. We have outlined all of the relevant factors in our financial release this morning.

The bottom line is that in spite of two months of very weak results and higher than normal tax payments in the first-quarter; our operating income before restructuring charges was $24.6 million and net cash provided by operating activities was $24.5 million. We remain convinced that we are taking the right steps to grow our future cash flow per share. The impact of these steps should be substantial.

We do not provide guidance about forecast total earnings or cash flow, although we do provide some of its components. For example, we expect capital expenditures to be approximately $55 million this year compared with about $50 million of depreciation and $4 million of amortization. We still expect to contribute about $20 million in the third-quarter this year to fund the pension plan for our employees in the United States. Our inventories will probably remain somewhat higher than normal this year during our manufacturing restructuring activity. Our tax rate for the year is not likely to exceed 30 percent.

The impact of simultaneous manufacturing plant closures in a complex global market may result in poor visibility of earnings over the next two quarters. Because of that poor visibility shareholders should not expect that we would make preannouncements again this year even if any early quarter results were lagging behind anyone's published expectations of our earnings. One should not imply from this statement that we expect any such earnings shortfalls. It simply means that we think that our earnings over the next two quarters are simply not very meaningful in comparison to what we are doing to create more lasting value.

Indeed our decision to purchase 764,300 shares of our common stock in the first-quarter is a reflection of our belief that the steps we are taking will prove beneficial to our shareholders regardless of the noise they may have to endure in our financial numbers over the next couple of quarters. The Albany International management team is determined to continue growing the Company's capacity to generate earnings and cash flow per share. Now I'd like to turn the presentation over to our Chairman and Chief Executive Officer, Frank Schmeler.

Good morning, ladies and gentlemen. On March 9, 2004 we announced sales and earnings for the first two months of the year. As reported at that time two months earnings were negatively affected by lower net sales and margins were reduced by a shift in product mix to lower margin segments. Earnings for the two months and for the full quarter were also reduced by higher than anticipated operating costs at locations in North America that are absorbing production from operations that are in the process of being closed. These additional costs are considered necessary to protect certain customer delivery commitments. The Company expects that these additional transition costs will be eliminated as North America restructuring activities are completed.

In the last quarter of 2003 it appears that many primary global economies were experiencing improved growth; yet paper and paperboard manufacturing was just beginning to see improvement and then only in selected grades and regions. As a result demand for paper machine clothing remained weak through year-end. Early in 2004 paper and paperboard manufacturers began to validate the expected demand increase for their products and announced price increases across several grades. After a slow start PMC sales and earnings showed strong improvement in March.

Restructuring charges during the quarter are related to activities in engineered products in France, the dryer fabric facility closure in the United Kingdom and the closure of the Greenville, South Carolina press fabric plant. The new plant in France for the global engineered products business and the expanded dryer fabric facility in Finland are on track for second-quarter startups. While we complete the restructuring activities we will continue to ensure consistent quality and reliable delivery to our customers.

First quarter 2004 sales for the engineered fabric segment increased 4.3 percent compared to the same period last year excluding the affect of changes in currency translation rates. Net sales decreased 3.5 compared to the first-quarter of 2003. PMC demand, which was weak early in the quarter, improved in March in each of our business regions. In addition to the weak demand, early in the quarter we lost some business based on price as our customers continue to reduce costs. We have encountered some additional pricing pressure on PMC products. In response we continue to focus on delivering value through our products and services; a number of our customers have learned that buying low-priced PMC can result in both higher production costs and reduced quality of paper produced leading to substantial reduced profitability for their operations. We are a strategic supplier to the paper industry and we will continue to focus on supplying our customers with superior technology and services that will increase their profitability.

In the United States, Canada and Mexico paper and paperboard operating rates improved as compared to the first-quarter of last year. PMC sales demand early in the quarter were lower than expected and improved later in the quarter. For the quarter the net sales in North America were 1.3 percent behind last year. Excluding the effect of changes in currency translation rate sales decreased 3.4 percent compared to 2003. In Europe paper and paperboard production grew at approximately 2 percent from 2001 through 2003 and we expect similar growth for the foreseeable future. Late in the first-quarter we saw evidence of modest increases in PMC demand. First-quarter net sales in Europe increased 11.3 percent over the same quarter in 2003 but decreased 3.7 percent excluding the effects of currency translation rates.

First-quarter net sales in the Pacific region increased 4.8 percent over the same quarter of last year and decreased 0.6 percent excluding the effect of currency translation rates. Robust economic growth in China was accompanied by continuing new paper machine announcements which should provide improved PMC demand as the startup of these machines begin. In the Albany door systems compared to the first-quarter of 2003 net sales increased 21.4 percent and 6.9 percent excluding the effect of changes in the currency translation rates. This sales gain is the result of growth in new products and improved aftermarket sales. New products coupled with continuing cost reduction activities should improve results for the remainder of the year.

In the applied technologies net sales in this segment increased 30.3 percent compared to the same period of 2003 and 17.7 percent excluding the effect of currency translation rates. New products, efficiency gains and the improving global economy are driving increased revenue and earnings in this segment. Net sales in Techniweave and high-performance materials improved significantly as a result of new products which included vast (ph) materials and a unique woven composite. Industrial process technologies sales and earnings increased sharply during the quarter due to regained market share resulting from new products and lower cost.

The improvement in the global paper and paperboard finally resulted in increased demand for engineer fabric products late in the first-quarter and we remain cautiously optimistic about a sustained recovery in this segment. Our Albany door systems segment continues to be adversely affected by the slow economic improvement in Germany and this is an important market for this productline. In spite of the continued weakness we are optimistic that sales and earnings in this segment will gradually improve through the year. Results in the applied technology segment are encouraging and we expect to see continued improvement over last year driven by new products and efficiency gains.

Our strategy to focus on value added products and services for our customers is resulting in accelerated development of new products in each of our business segments. Our objective is to continue to create solutions for our customers that significantly improve their operations and increase their profitability. We continue to use the Albany value concept to demonstrate its added value to our customers through our products and services. Our employees are using the Albany value concept internally to continue to create best practice opportunities and a common business culture focused on delivering value to customers and ultimately to shareholders. It is through this difficult period our employees have remained focused on the task of serving our customers, completing our restructuring activities and ensuring our success. Michael?

David, we're prepared to take questions.

(OPERATOR INSTRUCTIONS) Mark Connelly, CSFB.

Frank, Michael, can you talk about the pricing environment out there right now? Are you still feeling cost pressure -- price pressure? Are you seeing orders being lost today and can you give us an idea of the order of magnitude; what percent of your book of business is seeing price pressure; how much is price pressure it is, that sort of thing?

On the pricing -- I have a feeling that it'll start to let up a little bit as the paper industry improves. Up until now we've had some pressure but in certain parts of the world and depending on the condition of the customers. As you know, we have decided in the past to walk away from some business or to not take business which we feel that was unprofitable to ourselves but at the same time we are trying to improve our cost position. I think that things will improve going forward.

I think that one of the aspects of this pricing situation is that we see this episodically, Mark. This is not new; this is not the only quarter this has ever happened to us. What frequently happens is that every once in a while one of our competitors -- it could be a different competitor from time to time -- but one of our competitors could conclude that they see an opportunity to grab some share of market when they're having problems in their own house and they make a particularly aggressive bid to a customer that may not be as sophisticated in terms of understanding the economics of their own business.

In general, in fact the vast majority of the cases where this occurs, typically the result to the customer is an increase in their total cost of production or a reduction in the quality of the paper produced. And although it does create some little jiggles along the way, by and large we find that once customers understand what it is that we're really doing for them they will understand that it doesn't make a lot of sense for them to throw out a strategic supplier to the profitability of their business just because somebody has a temporary pricing advantage.

Mark, over the last few months with the Albany value concept; this concept is a direct relationship with the people that are running the paper machines and we are demonstrating value and that's the important thing for these large paper machines. And I think that pricing -- although pricing is there I think that we are demonstrating the value for their operations and their profitability. And I'm quite optimistic that this will continue.

So, is it fair to say that you don't expect to have to meet those prices?

We never do.

But I mean at some point if you're not getting business back you're going to have to make a decision.

That's correct, Mark, but up until now we are the premium pricer; there's no doubt about it. But we still believe that our products are delivering the value and the differences in pricing are not that important any longer.

A couple of other things. If we move over to the restructuring. You've taken a fair amount of restructuring charges; do you have any sense of how much of the restructuring costs are behind you -- in ballpark terms?

I guess the short answer, Mark, is yes we do. And we cannot disclose any more than we put in the announcement today. And the problem there is that we still are in the midst of some important discussions going on in the Netherlands right now which we alluded to in our release. But no, we have a very good fix on it but there's not a darned thing we can say about it publicly at this point.

Okay. Now the cost to the new plants -- you said that the timing is on track, is the cost also on track?

Yes.

And CAPEX?

Yes.

And again, switching gears one more time, the door business looks like it's picking up a little bit. Is that business providing a satisfactory return at this point or is it on its way back to health?

It's very clear to us that this is a business that over the course of an economic cycle it returns a very attractive return on investment. We still are early enough in the recovery in Germany particularly that it has not yet reached the return levels that we are accustomed to on average over an economic cycle; but we're pretty encouraged that this is going to be going the right way in the course of this year.

And how would you compare that to Applied Technologies? Is that business earning a decent return now or is that again on the rebound?

That's on the rebound and it's got a way to go; but it's got some very interesting opportunities out there that we are really quite interested in.

One last question. Working capital was a significantly bigger use of cash than we're used to; can you give us a sense of what we should be expecting there given you've obviously got a lot going on right now in the short run?

Yes. We alluded to that both in the public release and in my comments. During the course of this manufacturing restructuring we will carry a heavier working capital burden than normal as we really need to make very, very sure that our customers have absolute seamless supply of product, the right product, right time, timely deliveries, top-quality product -- and that means that we'll have some duplicative efforts going on to make sure that our customers are very well taken care of and that there are no slipups going on. We would expect that to start improving late in this year and certainly throughout next year.

If I could squeeze in one more -- I lied?

As many as you want, Mark.

The remaining authorization is now smaller than what you actually acquired this quarter. Do you and Frank expect to be going back to the Board to ask for another authorization?

We ever telegraph those things in advance. I think our actions speak louder than our words on the subject.

Fair enough, thanks.

Beth Lily (ph), Woodland Partners.

I have a couple of questions. To tag along with Mark's question on pricing, could you provide a little bit of perspective on where you experienced the pricing weakness, in what markets?

We would be inclined not to do that because our friendly competitors are listening in on the telephone today -- or on the Webcast today and we think that that's probably something that we should not be discussing publicly. I would say, however, that wherever it happens in the world the answer that we gave earlier applies. We know that there will be episodes of this occurring and it can occur in any region. But our response is always going to be the name. I'm sorry I can't be more helpful, Beth, but we've thought about that ahead of the time on this one.

I think, Beth, though that we have mentioned before that the situation in Italy where we have declined business because of the pricing.

So this happens every so often and you give up share and then you eventually end up gaining it back; is that what happens as customers end up (indiscernible) deal?

When I came with the Company 23 years ago we had about a little under 15 percent or market and today it's 31; so I'd say that's pretty much the case. We'll take two steps forward and one backward. Remember, interestingly we're not driving for share of market. That's not an objective of ours. What we're driving for is generating the net present value of future cash flow and discounted at our cost of capital and there are circumstances under which we have concluded that we are better off reducing share of market in order to achieve our shareholder objectives.

Okay. Next question is on the restructuring that -- do you expect one more quarter of restructuring charges and then it's all going to be behind you?

I'm going to turn that over to our controller who is the world's leading expert on this subject.

Beth, it depends on the negotiations in Holland; but I would expect it will go into the third quarter at this point.

If he is correct you would have some charge in the second and third-quarter.

You will definitely be charged in the second and more likely than not the third is what I can see today.

And then that's it, right?

I hope so.

I guess my question is that as we come to the end of 2004 we won't see any more restructuring charges out of the guys?

That's our plan.

Great. And then my third question is also a complement. I was delighted to see the amount of stock you bought back. And I am going to tail again on Mark's question about authorization of another buyback. And I would encourage you at these stock prices to go to the Board and to -- given the amount of cash that you're going to start to generate, it would probably be in the best interest to go get another authorization. So we would encourage you along those lines.

Thank you for your encouragement.

Thanks so much, guys.

(OPERATOR INSTRUCTIONS)

If there are no other questions -- did someone come in?

Mark Connelly.

Just one more thing. Do you have any further clarification on the capital spending side post Q2 -- for what the second half spending is going to look like and then maybe talk about what next year should look like?

Yes. Specifically in the press release we indicated that the capital expenditures will decline somewhat from the pace in the first-quarter in the second and third and then should be a bulge in the fourth-quarter. David Folic (ph) or Rick Carlson (ph), do you have anything to add to that?

That's correct.

Next year it should be coming off significantly as we have previously publicly released. Do any of you present remember what exactly we said in the last --? 35 to 40 next year. So it should come off quite a bit next year under the current plan.

Mark, our biggest quarter will be the fourth-quarter.

In terms of spending and that's because of the capital leases?

Well, it's a few things. We tend to wind things up in the -- (indiscernible) later in the year we tend to wind things up and closeout some leases. Basically that's the way it's supposed to be. The summer is a slow time because of vacations also. We tend to run into -- the first-quarter and fourth-quarter are our highest two but the fourth will be highest this year. There's some equipment coming in the fourth-quarter that's going to be fairly expensive that will (indiscernible) us up a little bit in the fourth-quarter.

Okay, perfect. Thank you.

We would like to think of you for joining us today on the Albany International conference call. We appreciate the support we've been getting from our shareholders and we hope that you will be appropriately rewarded for your patients. Thanks very much.

Ladies and gentlemen, a replay of this webcast will be available at the Albany International Website. That concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.