Albany International Corp (AIN) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Albany International second quarter investor conference. 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. If you should require assistance during the call, please press star, then zero an an operator will assist you. At the request of Albany International, this call is being webcast and recorded.

I would now like to turn the teleconference over to the Senior Vice President and Chief Financial Officer, Mr. Michael Nahl. Please go ahead, sir.

Thank you, Bill. Good morning.

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 unauthorized rebroadcasting is strictly prohibited.

Albany International had a net loss of 47 cents per share in the second quarter, compared with income of 49 cents per share in the second quarter of last year. The first table in our news release summarizes some of the principal factors effecting our results. It identified 66 cents per share restructuring charges, and another related 40 -- 14 cents per share resulting from evaluation allowance related to a tax asset in a country where we're closing manufacturing operations. Closing those operations reduces the certainty that the tax asset will be successfully utilized in the future. Excluding the 66 cents per share restructuring charge and the 14 cents per share tax valuation allowance from the 47 cent loss, earnings for the quarter were 33 cents per share.

In our news release, we identified $2.3 million, or 5 cents per share of costs related to plant shutdown activities, including equipment relocations and production inefficiencies that cannot be categorized as restructuring costs for accounting purposes. That 5 cents per share effect is not included in the previously mentioned table showing 80 cents per share of identified restructuring-related charges.

During the second quarter our cash increased $13.4 million. Net cash provided by operating activities was 26.9 million during the second quarter of 2004, compared to $32 million for the same period of 2003. The decrease includes approximately $5 million related to severance payments and machine relocations. We expect to make additional severance and machine relocation payments of about $13.5 million in the third quarter, and 10 million in the fourth quarter. In addition, the Company anticipates that it will make a contribution of $20 million to its United States pension plan during the third quarter. We expect all of these payments will be funded by cash from operations.

Capital spending during the quarter was $11.2 million. Third quarter capital spending is expected to be approximately $12 million, with fourth quarter spending increasing to approximately $14 million. Full year capital spending is expected to be approximately $52 million with full year depreciation and amortization approximately $54 million.

During the second quarter, the Company purchased an additional 65 ,700 shares of its own stock at an average price per share of $29.88, and remains authorized to purchase an additional 553 ,100 shares without further notice. For the benefit of our bankers who are listening to this call, this -- the calculated leverage ratio under our credit agreement was 0.94. A copy of our credit agreement is available on the SEC website.

Our net sales declined 3.3% in the second quarter, as compared to the same period of last year when excluding the effect of changes in currency exchange rates. The decrease in sales was due principally to weak demand for paper machine clothing and share of market loss in some regions. Our Chairman and CEO, Frank Schmeler, will discuss some of the factors effecting global PMC in his comments in a few moments.

In the Albany Door Systems segment, net sales increased 5.6%, compared to the second quarter of 2003, and increased 1.3% excluding the effect of changes in currency translation rates. New product introductions and improvement in after-market sales resulted in sales gains in spite of continued softness in key markets. In addition to the sales increases, efficiency improvements contributed to the increase in our door segments earnings.

Applied Technology net sales increased 38%, compared to our second quarter of 2003, and increased 32.4% excluding the effect of changes in currency translation rates. Increased sales of filtration products and sales growth for both our Primaloft and Techniweave operations contributed to the stronger quarter. Sales and earnings for the segment benefited from increased customer spending levels, new products, and improved efficiency.

For our entire Company, the management of our costs remains very important. Excluding the effective changes in currency translation rates, second quarter total cost of sales decreased 0.2%, while net sales decreased 3.3%. Included in costs of goods sold for the second quarter of 2004 is approximately $2.3 million of incremental costs related to plant shutdown activities, equipment relocations, and production inefficiencies. Excluding these incremental costs and the effective changes in currency translation rates, total cost of sales decreased 1.9%.

The comparison of changes in costs to sales is also negatively effected by lower sales in the engineered fabrics segment. Second quarter gross profit was 38.8% of net sales in 2004, and 41% in 2003. The decrease is principally due to lower sales volume in the Engineered Fabrics segment, and the incremental costs associated with plant shutdowns.

As noted in our news release, in response to an SEC comment letter received during the second quarter of 2004, the Company changed its classification of outbound freight costs. These costs are now reported as a component of costs of goods sold whereas in the past, theses costs were deducted in the calculation of net sales. The reclassification has the effect of decreasing the second quarter gross profit percentage by 0.9% in both years.

Depreciation and amortization was $14 million in the second quarter of 2004, compared to 14.3 million in the second quarter of 2003. Second quarter selling, technical, general, and research expenses, or STG&R, were up 3.7% in comparison to the second quarter of 2003. Excluding the effect of changes in currency translation rates, STG&R costs were up 1%, principally due to higher wages and travel. In the second quarter of 2004, the Company had remeasurement losses on foreign currency receivables of approximately $0.4 million, while the remeasurement effect on the second quarter of 2003 was income of $100,000. Excluding this additional effect, STG&R increased 0.3%. It's important to note that even though STG&R costs are roughly flat when certain items are excluded, there has been some real improvement in many cost categories; however, some of our cost reduction achievements have been offset by cost increases for pensions, other benefits, and costs related to Sarbanes-Oxley compliance. With our low leverage ratio and strong cash flow, we anticipate that the capital requirements identified in the liquidity and capital resources section of our news release, as well as the other cash needs of the Company, will be comfortably manageable from our operating cash flow.

Last year we announced that we would take $30 million out of our costs. The steps we have taken will lower our costs by about $39 million per year. While the amount of the restructuring charge was large, the $39 million benefit certainly supports the $42 million of cash costs which we are incurring to attain the savings.

We are in the midst of a challenging transition. In the first phase, we acquired a competitor and then systematically went about generating over $300 million of cash in 3 1/4 years. By the end of 2003, where he had reduced our leverage ratio to under one and we were prepared to move aggressively and opportunistically to build additional shareholder value. This year we're delivering $39 million in cost savings where we had promised 30, and we have delivered over $30 million of cash to our shareholders through dividends and stock buybacks in slightly over 6 months. While we would have preferred to manage our business in a more robust paper machine clothing environment, we will respond appropriately to our current economic opportunities and we fully expect to continue to create excellent value for both our customers and our shareholders.

Now I'd like to introduce our Chairman and Chief Executive Officer, Frank Schmeler, to complete our presentation.

Good morning, ladies and gentlemen.

Paper and paper board manufacturers increased production in many regions during the second quarter; however, reduction in global PMC demand and the Company's previously disclosed decision to decline certain sales opportunities that did not meet profit objectives resulted in a decline in sales for the quarter. A number of factors appear to be adversely impacting PMC demand. In North America and Europe, some customers are running PMC longer and modifying PMC inventory practices to reduce overall PMC inventories. In addition, the overall global PMC market appears to have shifted and contracted over several quarters.

As previously reported, the Company's net sales of engineered fabrics excluding effects of changes in currency translation rates declined in each of the last 2 years. Such declines continued in the first half of 2004, even though paper and paper board operating rates improved. Industry consolidation by paper and paper board manufacturers, especially in North America, has resulted in the closure of older mills and the shutdown of less efficient machines, shifting more paper production to newer, more efficient paper machines that require fewer fabrics per ton of paper produced.

This trend has been most evident in the dryer section as the consumption of dryer fabrics on these more efficient machines in North America appears to have declined 10%. As a result of these factors, North American PMC shipments declined 4% during the quarter, while North American paper and paper board production increased 3%.

In Europe, PMC industry shipments remained flat during the first half of 2004, in spite of reported increases in paper and paper board production during this period. Although European PMC industry shipments declined slightly in dryer fabrics, the total PMC market for all forms of PMC remained essentially unchanged over the last several quarters. In contrast, the PMC market in Asia appears to be growing at a pace equally to the growth of paper and paper board production in the region. Since major consolidation and capital -- capacity rationalization in the paper industry appears to be largely complete, the Company expects the negative impact of these changes on PMC demand in future periods to be minimized. As previously reported, the Company continues to decline business that fails to meet this profit objectives.

Our strategy to grow our business is focused on documenting to our customers the economic value of our products and services. We remain convinced that our customers will pay for value when it can be demonstrated. Our restructuring efforts further contribute to the shortfall on earnings in the second quarter. As we close plants, reduced our work force, transferred equipment and processes to other Albany facilities, we focused on providing our customers timely delivery of products. During this process, we incurred additional operating costs. As the disruption associated with the restructuring activity lessens, we expect these costs will be largely eliminated by the fourth quarter.

In the Engineered Fabrics segment, which includes paper machine clothing and processed belts used in the manufacture of paper and paper board products and engineered products for the non-wovens and pulp industries, second quarter net sales for engineered fabrics segment decreased 4.1% compared to the same period last year. Excluding the changes in currency translation rates, net sales decreased 6.4% compared to the second quarter of 2003. The sales decrease result in weaker PMC demand due to customer PMC inventory adjustment, longer fabric life due to product enhancement, the impact of more efficient -- efficient installed paper machine base, and less of the unprofitable business due to price. Despite having walked away from some unattractive business during the period, the Company's share of the global PMC market remained relatively constant.

In the United States, Canada and Mexico, paper and paper board operating rates improved over the second quarter of last year, although shipments of PMC declined. For the quarter, net sales in North America were 3.9% behind last year. Excluding the effect of changes in currency translation, net sales decreased 3.8 compared to 2003. Percent. Year to date net sales decreased 2.6% and decreased 3.6% excluding the effect of changes in currency translation rates. Changes in customer inventory practices by some customers had a negative impact on sales for the quarter.

In Europe, industry shipments of PMC remained, flat while paper and paper board production increased based on the most recent industry report. Second quarter net sales increased 1.1% over the same quarter in 2003, and decreased 5.1%, excluding the effect of changes in currency translation rates. Year to date net sales increased 5.9% and decreased 4.4%, excluding the effect of changes in currency translation rates. Many customers in Europe are running fabrics longer and are reducing their PMC inventory. While the reduction in inventory has the effect of disrupting PMC shipments in the short-term, it provides mutual benefits in inventory management.

In the Pacific, second quarter net sales decreased 10.2% compared to the same period last year, and decreased 12.6% excluding the effective changes in currency translation rates. Year to date net sales decreased 3.3%, and decreased 7.1% excluding the effect of changes in currency translation rates. During the quarter -- the second quarter of 2004, net sales were adversely effected by customer PMC inventory practices and the absence of new machine startups. Sales in this region commonly fluctuate based on the timing of new machine startups. The Company expects the impact of the inventory practices will be minimized in the future quarters. Net sales to China, the largest potential market in Asia, were flat compared to the second quarter of last year, but remain well ahead of 2003 six-month results.

In spite of the market impact on our customer's consolidation, and continued pricing pressure in some PMC markets, we remain optimistic about our potential for revenue and earnings growth. In each of our industries served, we look for growth due to our ability to create value with products and services, using the Albany Value Concept, we are making a difference for our customers and providing new opportunities every day. At the same time, our employees are using the Albany value concept internally to create best practices, opportunities, and a common business culture on delivering value to customers and ultimately, shareholders.

The Albany Value Concept, combined with our new product development efforts, has resulted in a very strong new product portfolio. For our customers, these new products improve their operation and profitability of their businesses. We believe this value and technology focus provides our best opportunity for growth and improvements for our customers.

On the cost side, our restructuring activities resulted in removing more costs than previously announced. The apparent adjustment in PMC market size makes these additional gains especially important. We will complete our transition in the third and fourth quarters and expect to eliminate the disruptions resulting from the restructuring activities by the end of the year.

Recent sales and earnings growth in the applied technology segment is encouraging and reflects both efficiency and market improvements. New product opportunities in this segment will assist in sustaining market momentum.

The Albany Door System segment, while improving, has yet to return to expected business levels, principally due to continuing market softness in Germany. With efficiency improvements in place and under way, new product introductions and full rollout, the expansion of the after market efforts, we expect further improvements in this segment in the second half. Through the first half, our employees continue to focus on the task of supporting our customers, completing the restructuring initiative, and ensuring our success.

Michael?

Bill, we're prepared to take questions now.

Thank you. [Caller Instructions]. The first line we'll open is the line of Mark Connelly at Credit Suisse First Boston. Please go ahead.

Thanks. I've got a couple of questions. When -- Frank, you talked about China being flat year over year. Are you getting any indication that the, the efforts China has made to slow their economy are taking hold, or is this just sort of, you know, within the band of normal activity for you, do you think?

Mark, I think this is in the band of everyday business. As you know, in China, the sales are effected greatly by the startup of the -- of the new machines and that's what we are saying. As far as the -- the government trying to slow things down over there, as you know, there is probably 25-30 machines on the list to be built in China over the next few years. Now, this may not happen, but it just gives you an idea of what China is thinking about in terms of the paper industry and their role in the paper industry.

There are apparently 2 machines we'll start up later this year, or early 2005, and there are 3 more machines in late 2005 that are already under construction. Now, these new machines will increase the total PMC market by about 1 to 1 1/2 over the next 2 to 3 years. So I, I am still quite bullish. I think that they -- even if they do slow down, try to slow down the economy over there, there are investments by OG, as you know, by other UPM, and Pan Asian that are investing in China, which is not Chinese money. Sure, there's some -- something along with it, but I think that it will continue, maybe not at the same rate.

It's 1to 1 1/2% global effect.

Right, right. Just switching gears for a minute, talking about longer PMC runs and, you know, my, my notes say that forming fabrics are supposed to be 30-45 days, press 30-35. How much longer are people using these fabrics and is it more pervasive in, you know, pressed fabrics versus dryer fabrics, or is it across the board?

I think in forming and pressing, those, those running times are fairly consistent in most cases. There are some cases where they are running longer. I think where we're really seeing the falloff, Mark, is in the dryer section. We still continue to identify these situations and as we do, there has been some cases where it has run longer.

So can't you just, you know, downgrade the product quality and make them rip a little sooner?

You know, in -- it has always been a tradition in the paper industry that the suppliers would give out knives. There was a reason for that.

Just a couple more questions. The -- when you go from 30 million of cost savings to 39, is there any meaningful shift in where those savings are going to accrue, whether it's at the gross margin, versus the operating margin level? Is there -- looking for more information, of course.

The -- by far, the biggest effect is going be in the cost of goods sold area. The -- in order to get that -- to assure that we could get $30 million in cost savings, we clearly targeted substantially more than $30 million to make darn sure we could deliver on our promise, and we're very pleased that we were able to do that. A lot of the credit goes to our terrific teams in Europe who have worked so hard to get so much out of the cost structure in Europe, but costs of goods sold would definitely be the bigger impact.

Okay, okay, and just a couple more things, if you can humor me. Your foreign exchange -- I'm trying to recalibrate because obviously I need to recalibrate my model a little bit. Are there any meaningful changes going on in where you're shipping from and to, given the shifts that we've seen in the currency?

Not really.

Okay. So we're not -- so what we're seeing now should be more or less indicative if the currencies stay where they are?

If you're thinking more intermediate term, in the short run, the answer that I gave you is correct. If in the intermediate term, obviously the fact that we have, we are shutting down the Netherlands operation is going to be part of a process where an increasing share of the Pacific area demand is met from that region itself, and that will help the -- some of the negative influence of manufacturing in Euros and selling in U.S. dollars that we have been hit with over the last year and a half. In the short run, there will be relatively little effect.

Okay, and lastly, maybe most important question, the level of restructuring activity, level of restructuring expenses, is this -- is this substantially in line with what you expected in terms of size or timing? Is it more front loaded or back loaded than you expected? Is there any color you can give us on that?

Well, I indicated that any time we make a promise publicly, we, we target something substantially more aggressive in order to assure that we can meet it, recognizing the vicissitudes of -- of the changing realities of the marketplace. We're very pleased that the cost-cutting program -- our more aggressive targets have been met and it's on time. The plants are built. The transition's on schedule, and we're just very pleased that we were able to deliver not only what we promised, but what we sought to do.

So no meaningful hiccups in the startup of the new plants and the transition process so far?

No. They are you positive, they are up and running.

And obviously,-- obviously your overall costs you're expecting to be even better than before. Are the costs specifically focused on those plants where they are supposed to be?

Yes.

That's [inaudible] one -- that I recognize.

No, absolutely. The areas that we had targeted to get the costs out of is exactly where they are coming.

Outstanding. Thank you.

Thank you.

Thank you. The next line we'll open is the line of Andy Ramer at Fiduciary Management. Please go ahead.

Yeah, good morning, guys.

Good morning, Andy.

If I take a look at the respective geographic markets, first addressing North America, you guys have mentioned the closure -- [inaudible] leading to the closure of less efficient machines and I guess, you know, it was always our understanding that a lot of this consolidation, commercialization, had basically taken place back in '01. So we're just kind of curious as to why we're seeing a significant impact from those actions, you know, right now in the current quarter in light of the increased demand for paper worldwide.

The shutdowns have occurred over the period and, you know, in the 2001 when things were really slow, and as we stated earlier, you know, we have not seen the, the increase in shipments or the improved shipments in PMC in the paper industry in North America and that's principally due, as we said, to the inventory adjustments that are going on, the supply chain is getting better between suppliers and customers, and in some cases we've had cases of longer life, especially in the dryer section.

Okay. Well, I guess turning to Europe then, you mentioned that the industry shipments are flat, but yet your sales excluding effects were down about -- were down about 5%. You know, which implies some share loss. I'm just wondering who is exactly out there cutting prices, you know, where is that-- where is the competition basically coming from?

We did have, we did have selective share of market loss in the period. With regard to the specifics of the question that you have asked, for obvious reasons, we, you know, we would prefer not to point at specific competitors or, or exactly the dynamics of the competitive situation there. We're actually quite comfortable that we're doing the right things for the intermediate term, and by and large, when -- we have found that when people compete against us based on price, they may pick up a count or 2 in the short run, but we -- the customers sooner or later figure out that it's value in their profit line that counts, not the cost of the PMC product. It's the value of the product that's delivered. So we're pretty comfortable. This happens periodically and we're not particularly concerned about it.

Okay. I guess lastly, looking at Asia, you guys mentioned in the release the market for PMC is growing at a pace equal to paper production. It's been our understanding that paper production is booming in Asia, but yet your sales are down, I guess 13%, so I guess what are we missing there? I mean your sales in PMC in Asia implied paper production was down significantly in the region in the quarter.

I think as I mentioned earlier, especially in China, the sales are going to fluctuate as the -- as the new machines come on stream because there's only the initial clothing sales that effect that, and so far this year we haven't had, haven't had the shipments on the new machines because they're in the process of being built and started up. So that's the main, that's the main reason. You will see the fluctuation in our sales. They will be extremely high one year and lower next year and that influenced primarily by the new machines. As you know, there are very few new machines in the other parts of the world, so it's easier to track the sales in paper production.

Okay. Great. Thanks a lot.

The next line we'll open is John Emerich with Bricoleur Capital. Please go ahead.

Thanks. Just two questions. I'll ask them separately. One is the -- we're doing a lot of plant shutdowns. I've looked at this business from the same kind of return on capital perspective that you all do and from both sides of the balance sheet. If I look at it kind of a -- as return on assets deployed, I've kind of been modeling that the -- we're shutting down the capacity so assets are going to shrink a bit. But CapEx is actually up meaningfully year over year. And on -- can you help me understand where the money is going in light of the fact that we're actually, you know, shuttering in consolidating capacity, what are the CapEx dollars are going?

Let me tell you in this case. I know it seems, it seems strange, but a lot of the capacity that we are shutting down is fairly old. The technology of the paper machine clothing industry is changing in terms of innovative products and the rest of it. And what we are investing in is what I would call high technology equipment in order to be able to manufacture the new innovative products that give more value to the customers going forward. That's where the money is being spent.

Okay. That's helpful. That leads me to a follow-up. In that process, do you feel like on average you're just catching up to competitors, or are you leapfrogging them by 6 months or 6 years? Help me understand that aspect of it if you could.

I, I-- that's a very difficult question because I'm not exactly sure to any degree of what's really happening out there in terms of our competitors. But I will say that our products, our new innovative products are beg well accepted in the marketplace and sooner or later people will understand that you need this capital investment in order to make these products for our customers.

Let me just add, John--

Sure.

A key part of who we are, the essence of Albany International is technological leadership.

Right.

And that's been true for decades and decades. And basically it -- we are committed to providing leadership in paper machine clothing for the new technologies to provide them to our customers. And that's -- and that's -- that's why this investment that Frank has mentioned is so -- is critically important to us. We can't always tell, as he just mentioned, what's going in the laboratories of our competitors, but we do know that we are committed to continuing to lead and we think we are continuing -- we know we are continuing to lead right now and we're positioning ourselves to continue that position.

Do you garner no insights from your customers? I mean, if I asked you the question What do you think you're doing today and tomorrow different than your competition, does it-- does the behavior or commentary from your customers offer you any insight into the answer to that question?

Sure, sure. Now, we, we get very good feedback constantly from our customers and we're just striving to continue to increase our, the value that we're delivering to them.

Okay. Last question, is, you know is, if I just kind of look at full year '03 and I know sales are going to be up a little bit, margins will be lower. And I'm not talking -- this isn't a guidance question, but I'm saying conceptually. If I looked at '03 and added back the $39 million to operating income for '03, we'd have an operating margin of, you know, some 16%, some 200 basis points better than the best year I could see going back to '92, I think, although sometimes this database I use has got some inaccuracies. Will that happen or will you kind of spend some of that margin in share gain or reinvest it in new growth businesses? I'm just kind of conceptually wondering about how that will play out.

Well, I think one thing is sure, and that is that there are certain cost categories that we alluded to, which are rising sufficiently fast that we can't, we can't bank the entire $39 million. And we specifically pointed to the pensions and other benefits. We've certainly got energy cost issues and this year particularly, we've got the heavy Sarbanes-Oxley compliance costs that we would not anticipate getting any worse, but we're not all that convinced we're going to get any less in the future either.

At the same time, we've got to be mindful that we will continue attempting to drive efficiency in all areas of our businesses. While we don't anticipate, you know, closing any manufacturing facilities in 2005, we certainly intend to continue increasing efficiency in all of our operations, and there's going to be this dynamic going on where there's going be a general inflation in all costs of doing business that we have to run hard to continue on that efficiency improvement front in order to assure that we can realize a substantiate portion of the 39 million you alluded to.

Right, and I guess the real opportunity captured all and then some is if the market continues to rebound sufficiently to cause behavior to kind of correct itself in the marketplace and allow you all to get some pricing, I guess.

That would definitely be the biggest possible effect.

Thank you for your time.

Thank you.

Once again, ladies and gentlemen, if you do have a question or a comment, please press star, then one on your touch-tone phone at this time.

The next line we'll open is the line of Beth Lilly with Woodland Parts. Please go ahead.

Good morning, guys.

Hi, Beth.

Couple questions. The-- in the engineered fabrics side, you know, excluding currency, revenues were down over 6%. I'm wondering if you can kind of talk about, break that down in those different factors that you spoke about in your opening comments in terms of, you know, PMC demand is down, fabric license is longer, more efficient and less business due to price competition. Could you give us a sense of, you know, how much you can attribute to each factor?

I think, I think, Beth, that it probably would be unhelpful for competitive reasons for us to go into a great deal of detail on this. We'd like -- you know, we always want to be helpful to shareholders, but we also don't want to be diagnostically useful to our competitors and I think that our answering the question the way you've asked it could create a problem there.

Mm-hmm. Okay. Well, let me-- let's-- how about we if we dig into the dryer side of the business, in dryer fabrics and why those were down 10%. Does this happen every so often in your industry where, you know, they are trying to save money, so that's a part of the product line that's easier to run longer, or -- I mean can you just give us a sense of that?

That's -- the statement in the answer that you just gave is true, Beth. When, when things get tough [inaudible], and they in some cases slow their machines down, they just let the clothing run. Once the, once the pressure is on to, to produce more paper, then in the past there has been this upswing in shipments, and we haven't seen that. Part of it has to do with the type of machines today that are better balanced to a certain degree, the innovation that we put in the product is all contributing to the longer life.

Mm-hmm.

Now, it's, it's not in every region of the world where the life is increasing that much like it is in North America.

Mm-hmm. So it's in a way, you're creating a problem for yourself because if you innovate better products, they last longer and they can run longer.

I think that, that is a true statement, and the issue in that case there is that you're never going to hold back technology --

Right.

-- so we continue to work that.

And the hope is that then you can charge more for the product.

That's-- we have not done a good job in trying to adjust prices to value and that's what we are concentrating on at the moment.

And so as maybe competitor -- as your customers shift to cheaper products because you are trying to charge more and the customer doesn't want to pay, these less innovative products will hopefully prove to be of lesser quality and so as a result, they do come back.

I think you're over stating the case there, Beth. I don't see any shift towards cheaper products. The--

Lower prices.

It's quite clear, if by that you mean when the customers are economically or financially stressed, there might be a natural tendency on the part of some people who don't understand the true economics of their paper making operations to reach out and say, let's find cheaper suppliers.

Mm-hmm.

But we do see that episodically. This happens every few years. There are runs of this and some customers have decision makers who don't really understand the economics, you know, run towards cheaper paper machine clothing without understanding that in fact, they're harming their own profitability. This will happen and it will continue to happen, but we have no intention of -- of creating cheaper PMC clothing. What we intend to do is continue to increase PMC that will increase the profitability of our customers by adding value, and that, that equation is not going to change in this Company.

So eventually you see these issues resolving themselves, is that--

Yes.

Okay. So this is just more short-term in nature.

We think so.

Mm-hmm. Okay. All right. Those are all my questions. Thank you.

Thanks, Beth.

Next line we'll open is the line of Michael Christodolou with Inwood Capital. Please go ahead.

Good morning. I wanted to take another cut at the customer behavior comments, Frank, that you made. Is there a way to quantify the level of PMC inventories, you know, in the field and at the paper plant level?

You made the comment that you thought that some of these contracting inventory practices should be abating. I was wondering if you had any sense, you know, over the coming few quarters how that could play out and I guess I'm just curious, it seems like in a lot of cyclical industries, participants get fatigued from a sideways-moving maturing market and then they cut it too close and all of a sudden they panic and it suggests you're -- it seems like you're suggesting that could happen again from a, you know, channel refill point of view in a sustained inventory flow point of view.

I think what we are looking for, Mike, is that the supply chain between the supplier and the customer, can be -- the number of pieces in play can be reduced because of the, of the, our demand pull system where, on how we enter orders and be able to deliver orders. And I think that that has the effect that a lot of -- a lot of customers realize that they had too many pieces ahead of the machine, to put it that way. The risk of obsolescence, the timing on some of these fabrics' running time is a year. As they understand the inventory pull better with their suppliers, we're going to hopefully see a continued decrease in the amount of inventory that the suppliers are carrying and the customers are carrying.

We do get the idea though, Mike, that, you know, clearly we're well along in that process and as you have implied by your question, there has to come a point, and we can't predict exactly when it is, when that gets to a level where there is sufficient snugness that the customers are going to begin underst -- having to respond quickly to their needs as they are consuming products and they may not be adding to the supply chain, but they in fact -- it actually results in our getting better sales performance than we have enjoyed, than we've had in this particular period.

Right, and then a question on the 39 million of savings, I think you stated, so it's a cumulative one time cash restructuring cost of 42 million and that's going to basically have, what, a 93% efficiency payout, so you'll have -- all other factors being constant, revenues and costs, 93 cents on the dollar of your restructuring costs will payback every year in terms of earnings?

Exactly. You know, that's-- I would lining to make those investments every day I could make them.

So that would be 70 cents a share, but as you said, there's still a few aspects, Sarbanes-Oxley and energy, which are going to eat into the 70 cents a share, again, all other things equal.

That's correct.

So better inventory -- better capacity utilization on your part when the customers start picking back up again on your new reduced capacity running more efficiently, that really could drive some gross margin leverage and allow you to capture more of the 70 cents a share?

While we are obviously reluctant to make optimistic comments having just gone through a tough six-month period, clearly the case that you have just outlined is one that we think has a lot of potential.

Gotcha. Look, you guys have been in business for 100 years, so I think you know what you're doing. I commend your discipline on the cost cuts and also culling out some of that weaker business. They'll come back to you and pay higher prices, I suspect.

Thanks very much, Mike.

The next line we'll open is the line of Mark Connelly with CSFB. Please go ahead.

Just a couple of small things. I don't want to beat a dead horse here, but when you look at what you said about what was happening in business conditions in the last couple of quarters, a lot of what you said is, well, we're not exactly sure. Now you seem to be quite sure about what's happening in the market, you know, about the shrink in the dryer business, et cetera.

Can you help me calibrate? I mean do you feel at this point that you have a very clear sense of what's going on, or are we still sort of feeling our way to where we're going?

Well, we have the advantage -- we have the advantage of some more comprehensive data than we had as recently as our last quarterly conference call. We also have had extensive conversations with our sales and service people throughout the world, you know, addressing these issues.

Now, frankly, we were surprised that we did not get a better pickup in PMC demand in the first half of 2004 with the pickup in the paper production, and therefore, we've spent a lot of time over the last few months trying to analyze exactly what it going on. So I feel very comfortable that we have, at least qualitatively, substantially better understanding of exactly what's going on and it took a lot of work to get there. We are mindful of the fact that the industry data that we get does lag by typically several months. The actual occurrence of -- obviously we've got our own data, but clearly qualitatively, we're way ahead of where we were just a 3 months ago in understanding exactly the dynamics of the industry.

Frank, do you want to add anything to that?

No, I think that's true, Mark, that we have become more cognizant of what is happening out there and we started to really start to analyze it with our people around the world.

Okay. Just one last small question, on the door business, you talked about the weakness in Germany. Is the U.S. business showing better improvement than that?

Actually, yes, very recently that is true. It took -- U.S. door business is picking up a little better definitely than the European.

Okay. That's all I've got. Thank you.

Thanks, Mark.

No additional questions at this time. Please continue with your presentation.

Well, we thank you very much for your participation in the conference call and we look forward to continuing the focus on the things that we think will add value to you as shareholders. Thanks very much for participating.

Ladies and gentlemen, the replay for this teleconference will be available at the Albany International website. Thank you for your participation and for using the AT&T executive teleconference. You may now disconnect.