Albany International Corp (AIN) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Albany International third-quarter earnings conference call. At this time, all the participant lines are in a listen-only mode. However, there will be an opportunity for questions. Instructions will be given at that time. (OPERATOR INSTRUCTIONS). At the request of Albany International, this call is being webcast and recorded.

I would now like to turn the call over to the Senior Vice President and Chief Financial Officer, Mr. Michael Nahl.

Good morning. We refer you to 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 authorized to rebroadcasting is strictly prohibited.

In the third quarter, Albany International earned 33 cents per share, after 9 cents per share of restructuring-related expenses. The 9 cents of restructuring-related expenses consisted of 3 cents per share for tax valuation allowances related to tax loss carryforward generated by restructuring activities. And 6 cents per share was for restructuring charges such as severance payments and equipment write-offs.

In addition, costs related to equipment relocations and plant cleanups reduced earnings by an additional 3 cents per share in the quarter. These costs cannot be categorized as restructuring costs for accounting purposes. We continue to generate substantial amounts of cash. Cash flow from operations in the third quarter was $24.9 million.

We had some major cash uses in the quarter. Among them were $20 million contributed to our USA pension plan, $14.9 million for capital expenditures, severance payments of $8.8 million, and $43 million in the third quarter to purchase 1,489,943 shares of our common stock, which was 4.5 percent of the shares outstanding at the time of purchase. The four large cash outflows for the quarter totaled $86.7 million. In spite of these cash outflows during the third quarter, our debt increased only $30.2 million, while cash remained comfortably over $80 million. Please refer to the consolidated statements of cash flows which is attached to this release for a comprehensive presentation of cash flows of the Company for the first nine months.

Since the beginning of 2004, the Company has purchased 2,319,943 Albany International shares, which equates to 6.9 percent of the shares outstanding at the end of 2003. We have spent $66.1 million to purchase Albany shares during the first three quarters.

Our $30 million cost reduction program is now largely complete, and will result in cost reductions of over $39 million. We expect only the following payments and costs related to the program over the next two quarters. We will pay approximately $15 million for severance payments in the fourth quarter. That will affect cash, but not earnings. Affecting earnings and cash will be expenses related to equipment relocations and plant cleanups of approximately $1.5 million in the fourth quarter of 2004, and 1 million in the first quarter of 2005. In addition, non-cash charges of up to $4 million may be required in the fourth quarter, as we finalize our equipment requirements and related valuations.

Net sales and most other key financial information are covered pretty thoroughly in the quarterly financial release, so I will highlight only a few of the other financial results.

Third-quarter gross profit was 39.2 percent of net sales in 2004 and 40.4 percent in 2003. The decrease is due to higher medical costs in 2004, lower constant-dollar sales in the engineered fabric segment and the incremental costs associated with plant shutdowns.

Depreciation, amortization and capital expenditures are broken out now in a little more detail than we have got in the report. Depreciation was $12.8 million, and amortization was $900,000 in the third quarter of 2004, compared to 13.2 million and 1.1 million in the third quarter of 2003. The decrease in 2004 was primarily due to the effect of lower amortization expenses on software and financing agreements.

Capital expenditures were 14.9 million in the third quarter of 2004, bringing the year-to-date total to $41.3 million, compared to 30.3 million for the first nine months of 2003. The increase is principally due to the new facility in France, as well as the capacity and efficiency improvements at our plant in Finland. The Company anticipates 2004 capital expenditures will be approximately $58 million, compared with the full-year estimated depreciation of 52 million and amortization of 4 million.

With increases in expenses such as energy and raw material costs, medical costs and professional fees associated with Sarbanes-Oxley compliance, there will be major efforts by our employees throughout the world in 2005 to reduce the adverse impact of those external cost increases.

Other expense net was $2.1 million in the third quarter of 2004, compared to income of $2.1 million in the third quarter of 2003. In last year's third quarter, we had income of approximately $4 million from currency transactions, including a re-valuation of intercompany balances, while the third quarter of 2004, these items netted to an expense of approximately $100,000.

In working capital, accounts receivable decreased $5.1 million during the third quarter of 2004. Excluding the effect of changes in currency translation rates, the decrease in the accounts receivable was $8 million. Our note receivable decreased $1.2 million.

Inventories, as measured in US dollars, decreased $1.2 million during the third quarter of 2004. Excluding the effect of changes in currency translation rates, inventories decreased by $3.6 million during the third quarter of 2004. Accounts payable decreased $1.9 million during the quarter.

We would like to thank all of our employees throughout the world who have been working so hard to both increase our efficiency and to deliver outstanding value to our customers. We have made some very major progress this year on both fronts, and would like to thank all of you who have been involved.

Now, I would like to turn the discussion over to our Chairman and Chief Executive Officer, Frank Schmeler. Frank?

Good morning. Customers in our major engineered fabric markets generally saw improved demand for their products and services during the quarter. After adjusting to exclude the effect of changes in currency translation rates, higher sales in our Albany Door Systems and Applied Technology segments offset a slight decline in the engineered fabric sales, resulting in a slight increase in the Company's consolidated sales compared to the same period last year. The engineered fabric segment, which includes paper machine clothing, processed belts used in the manufacture of paper and paperboard products and engineered products for the nonwovens and pulp industry.

Third-quarter net sales for this segment increased 1.8 percent compared to the same period last year. Excluding the effect of changes in currency translation rates, net sales decreased 1.6 percent compared to the third quarter of 2003. Net sales were affected by technology gains that provide longer fabric life. Customer efforts to reduce overall PMC inventory and the Company's decision to decline certain sales opportunities that do not meet profit projections.

Despite these factors, share of market in the quarter reflected normal gains and allowances by market segment, and overall share of market was stable. In the United States, Canada and Mexico, paper and paperboard operating rates improved over the third quarter of last year, and overall paper and paperboard production increased.

In spite of these improvements for our customers, industry data suggests that year-to-date industry sales of PMC declined compared to the same period last year. For the company, North American net sales for the quarter were 1.5 percent lower than last year. Excluding the effect of changes in currency translation rate, third-quarter net sales decreased 2.1 percent compared to the same period in 2003. Year-to-date net sales decreased 2.2 percent and decreased 3.1 percent excluding the effect of changes in currency translation rates.

During the quarter, our focus on delivering value through new products provided economic benefits to our customers. At the same time, our internal activities improved efficiency in our operations and provided processed gains in several areas. Value-focused activities are improving our results and will have a positive impact on our business in future quarters.

In Europe, paper and paperboard production increased, as most customer operations performed over 90 percent capacity. In spite of the production increases, industry data indicates that year-to-date shipments of PMC in Europe declined. Our third-quarter net sales increased 8.9 percent over the same quarter in 2003, but remained flat excluding the effect of changes in currency translation, an improvement over the second quarter of 2004.

Year-to-date net sales increased 6.8 percent and decreased 3.1 percent, excluding the effect of changes in currency translation rates. The transition of production in connection with the restructuring activities was carried out during the third quarter, without disruption of supply to our customers. The expanded dryer fabric facility in Finland and the new engineered fabrics facility in France were officially dedicated during the quarter, and are now fully operational. With the European organization focused on delivering value to our customers, we expect future quarters will benefit from the completion of the restructuring activities and performance improvements that new products provide for our customers.

Third-quarter net sales in the Pacific region decreased 3.3 percent compared to the same period last year, and 4.5 percent excluding the effect of currency translation rates. Year-to-date net sales decreased 3.3 percent and 6.2 percent, excluding the effect of changes in currency translation rates. Within the region, year-to-date results varied, as success in China and Korea have been offset by sales declines due to inventory and pricing practices in other countries. We are addressing these issues, and expect the next several quarters to benefit from programs in place and the value derived from new technologies.

In the Albany Door Systems, net sales increased 11 percent compared to the third quarter of 2003, and 3.6 percent excluding the effect of changes in currency translation rates. Year-to-date net sales increased 12.6 percent and 3.9 percent, excluding the effect of changes in currency translation rates.

In spite of the negative impact of economic weakness in Germany, a major door market, year-to-date sales and earnings improved. We expect further sales and earnings benefits in future quarters, resulting from the development of new products and markets and the completed efficiency improvements.

In the Applied Technology -- this section includes materials and structural component businesses, including installation for personal outerwear and home furnishings, Primaloft, special materials and composite structures for aircraft and other applications, Techniweave, specialty filtration products for wet and dry applications, industrial process technologies and industrial insulation products high-performance materials. Net sales in this segment increased 28.5 percent compared to the same period in 2003, and 25.3 percent excluding the effect of changes in currency translation rates. Year-to-date net sales increased 32.6 percent and 25.6 percent, excluding the effect of changes in currency translation rates.

The increased sales in this segment reflect successful growth in a number of businesses, including industrial filtration, Primaloft, synthetic insulation and Techniweave. Our industrial filtration business served several wet and dry applications, including dry filtration products for power generation. Expansion of power generation capacity in Asia is creating new demand for these products, for which our regional production capabilities provide a strategic advantage. Primaloft synthetic insulation, outerwear and home furnishing markets in both North America and Europe continue to grow. As Primaloft expands to additional applications, satisfied users are increasing the value of the brand. Techniweave has been successful with applications in aerospace and in other industrial use, employing advanced materials, pre-form shapes and composite structures.

In the third quarter our paper and paperboard customers increased production in response to improved demand for their products. We are pleased with the much-needed relief for our customers, and are optimistic for the coming quarters. While changes affecting the paper and paperboard industry and its suppliers over the last years appear to be stabilizing, and should be beneficial in the long-term, they have been difficult to manage and have resulted in unusual swings in our business. Although fully anticipating all of the effects of this changes has not been easy, we believe the Company is well-positioned to date as a result of our efforts. The opportunities presented by new PMC technologies are very positive, and are focused on technological improvements continuing.

In the Applied Technology segment, the success in filtration for power generation and the growth of Primaloft and Techniweave is encouraging. Technology from this segment contributes to our other businesses, with respect to materials and processes. The Albany Door segment results improved in the third quarter. New product introductions, after-market sales and service increases and efficiency improvements have been implemented globally, and we expect to see continued improvement in coming quarters.

Increased operating expenses, resulting from higher energy prices, will have an effect on our operations in 2005. Our primary raw material for PMC is petroleum-based, and we anticipate that higher petroleum prices will result in increases in raw material, energy and other costs in 2005. In addition, we will incur incremental audit fees of approximately 1.4 million in the fourth quarter of 2004, resulting from compliance with requirements of Sarbanes-Oxley Act.

We continue to believe that our customers will place their business with suppliers that offer them the greatest value. The Albany value concept directs our efforts externally, in the form of new and improved products and process support (ph) and internally through a focus on quality, consistency and efficiency. These actions are aimed at producing continuing, substantial benefits for our customers and improved returns to our shareholders.

Thank you, Frank. John, we'd be happy to take questions now.

(OPERATOR INSTRUCTIONS). Mark Connelly, Credit Suisse First Boston.

Thanks, Frank and Michael. I have got several questions, but I wonder if we could start with the top line. It doesn't look like you saw any further deterioration relative to what you have been seeing the last few quarters, but the question on my mind is, what about next quarter? Are we likely to see more of this top-line pressure that we have been seeing, or do we think that it has more or less run its course?

Mark, now that the restructuring is over, we have a stronger paper industry, as you know. And production is increasing and the profitability of our customers is improving. Our supply chain is anticipating and filling customer requirements, which is better than it has been. And the value focus of new products are improving our customer results. Quality and delivery remain our highest priority, and I am optimistic for the next quarter and going into 2005 that we will continue to see improvements.

Can we come back to the issue of resin? I know that in past years, you renegotiated more or less once a year those resin contracts, and you have had a fair amount of success in the past with offsetting them, between raising prices and costs. Can you give us a sense of the kind of things you are doing to try to offset these increases?

You know, in today's terms, Mark, with oil where it is at $54 or $55 a barrel, this is a real challenge for us, and like everybody else. And all costs related to energy, freight, travel, heating and raw material will be affected.

Now, our employees understand the situation and are working hard to be as efficient as possible in the use of energy. At the same time, we are working with our suppliers and our customers to address this situation. And that is the real part with the resins, as you talked about. As you know, we produce about 50 percent of our monofilament ourselves, but we still get caught with the pellets that we need to process into monofilaments. And we are currently negotiating with our suppliers and trying to figure out where we are going to be. In the past, yes, we have had contracts with them; and right at the moment, we are negotiating with our suppliers in that area. And it's hard to say where we are going to end up, but if I were to say that by the end of this quarter, the fourth quarter, when we get into what is really happening out there, I am hoping that between what we are doing ourselves, what we can do with our suppliers and the rest, that we will come out of this fairly good.

Mark, let me just add that essentially, there are two principal activities that are directly addressing the issue that you have raised. The series of efforts that are being made internally, with regard to continuing to drive efficiency, that we expect to go a long way towards trying to offset some of that inevitable external cost increase. And it's not only the energy cost increase, but the other ones that we referred to in terms of medical, Sarbanes-Oxley, et cetera.

And I think you know Frank well enough to know that we are just never going to stop in that area. If it happens, it is not going to be in the form of plant closures in 2005, but we have got a lot of things that we're going to be driving in terms of efficiency to keep working at that. And the other side, quite frankly, is we are having some very frank discussions with our customers, also. The fact of the matter is that our customers are going to have to help us, too, and so we are working on both of those fronts simultaneously.

If we could switch gears for a second, you have talked about and you have demonstrated strength in both Applied Technology and maybe a little more recently on the doors side. Do you have much of a sense of whether the kind of growth you are seeing in the short run is sustainable? Is there an identifiable pickup, or is it too early to call on those two?

I think, in the applied technologies -- and let's talk about the dry filtration and the wet filtration, because that is where we are seeing some real opportunity. Dryer filtration for power generation is growing, especially in Asia, as you know. Asia lacks power generation, especially in China. And we are seeing an awful lot of activity in power generation plants in Australia and China. And we feel that this is an area that is going to continue to grow, because of the lack of power generation in this part of the world. And we are currently manufacturing in China and in Australia, and we feel we are well-placed for the bag business for these power generation plants.

At the same time, in the wet filtration area, which the aluminum industry, the steel industry and the chemical industries are getting a pickup. And we see growth in that area, and from what I can see now, Mark, barring anything that gives us a blurp (ph) in that part of the world, I am quite confident that the growth is coming in those areas, and I am glad we are there and we are well-established to be able to take this opportunity.

Frank, do you have the capacity to supply that growth now? Are we going to see you spending more money to keep up with it, or --?

I think the hold issue of Asia is under review, Mark. And as we solidify that area, we will let you know. That's a funny part of the world, as you know. You know, you just don't grab everything and run to China and expect to survive on cheap labor and the rest. It's still a technology game, in our estimation, and that will continue to be analyzed and move forward. As you know, we are in China the moment, and we're investigating what is happening with China, what is happening in the paper industry in China and also what is happening in the applied technology areas of China.

I've got two financial questions, and then I will shut up. First, Michael, you talked about 2004 CapEx. Can you give us a sense or an early read on where you think 2005 is, or is it too soon for that?

I guess we have estimated that our capital expenditures for next year will be around $40 million. We have nothing better than that at this point. We are continuing to work and rework the numbers. As Frank indicated in the answer he just gave you, with regard to the Pacific Rim and China in particular, we do not have anything that is going to go beyond that on the plate right now. But again, this is a work in process. We do think it's going to be a relatively lower capital expenditure year, and the best number we have at the moment remains that 40 million. But it's a work in process.

Okay, that's fair. And one last question. Obviously, you generated a lot of free cash flow this quarter, relative to what I expected you to do, given the big outflows. Is there anything unusual that we should be thinking about coming up in Q4, or any big items that might be new in '05?

No, just the one -- that is why we made a point of mentioning the large severance payments. And that, plus the capital expenditure number, which we also gave you, and that is it.

What about working capital? Is there more you can do there? It seems like you have done a heck of a lot already.

I really meant it when I said it to our colleagues that are listing on the Internet right now. They have done a heck of a good job, and we are really very proud of what they have done in a pretty tough environment this year, particularly as we have been going through this transition with the plant closures. It has been an extraordinarily challenging job for them. If they could pull this off in the fourth quarter on working capital, I just am not going to say anything other than our employees have consistently shown that they can deliver with improvements in working capital. We keep telling the investment community that you ought to not assume that there will be any further improvement in that area. But I assure you that we have got teams all over the world working on it to try to make further improvements.

John Emerich (ph), Bricoleur Capital.

Two unrelated questions; I will ask them separately. First, I missed the explanation of other expenses. It's interesting that the gross profit was up, SG&A as a percentage of sales was down. So the operations are mending nicely, and I think the biggest swing year over year was actually about 8 cents down in that line item. So I was just wondering if you could explain it one more time, and talk about what the outlook is for those items in other expenses.

I'd be happy to. In the third quarter of last year, we had income of $2.1 million on that line, compared to the $2.1 million expense this year, as you have noted. And a key aspect there is that in last year's third quarter, we had income of about $4 million from currency transactions. We have a hedging program that we are quite active in, in the course of the year, and that delivered a pretty substantial slug of income in the third quarter of last year. I apparently have fallen down on my job this year, because we ended up in the third quarter of this year with the effect of the currency transactions and the re-valuation of intercompany balances of a -0.1, $100,000. So it's a swing of $4.1 million. I did a lousy job in the third quarter this year and pretty decently last year.

So that is the swing. That still leaves 1.9 million of other expenses. What would those be?

Rick, would you care to characterize any of those other expenses?

While he is digging through, would you care to ask your other question?

Yes, sir. Q4 looks like it's traditionally seasonally strong. You've talked about, while not providing specific guidance, that each of your markets seem to be mending off of kind of cyclical lows. And I'm just wondering, with that seasonal kind of normal strength and the markets mending, would you expect that to happen again this year? And do we see some operating leverage from that higher level of business, or are there things that crop up in the fourth quarter to take away some of that otherwise expected benefit from the higher business level?

Well, we have tried to be as explicit as we can about the things that we see specifically in connection with the fourth quarter, but we have said, from our conference call in January, that we expected to see a lot of noise in the numbers over the first three quarters, and that we are really looking forward to the fourth quarter of this year. And I guess, based upon all the facts available to us right now, we continue to view the prospects for the fourth quarter with a great deal of enthusiasm.

And I myself have been trying to net out all the noise, and was really just focused on the operating things. But my last question -- if I could ask it before we get back to the other expense number -- was what is the status of the pension underfunding? You have given some detail on what you have been putting into it, in the last couple of quarters. Where is that now, and what is pension expense projected to be for the year? You pretty much make your assumptions early on and have a pretty good handle on what it is going to be. I'm just wondering if you can share that with this.

We would be happy to try to help you out on some of that, and Dave Michaels, our Treasurer, will handle that.

Albany maintains, and has traditionally maintained, a focus when it looked at its funding of its pension plans -- we really focused on what the ERISA and other local government requirements are, with respect to funding those various plans. And we strive to maintain a fully funded or slightly overfunded status, as measured by those local government authorities. As you know, the majority of our obligations and assets relate to our US pension plan. And we expect that that was, and we expect it to continue to be slightly overfunded.

That puts us in a position, because US GAAP measures funded status a little bit differently than do many of the governments, often in a position where we are slightly underfunded. And we think it is most important to remain in compliance with those government standards, and I think we will continue to do that. We have contributed, over the past three years, $52 million to our US pension plan alone, and $20 million, as you know, in the third quarter.

Next year, I am not quite sure yet what we'll contribute. It will depend a lot on the asset performance this year, interest rates, things like that -- information that I don't have yet. But we will maintain our practice with respect to our pension plan.

John, let me have Rick Carlstrom follow-up on your other question now.

Back to your GAAP of 1 million 9 in your question, it's basically financing costs. This additional financing goes in our debt agreements, and the cost of our receivable sales is the majority of that difference, so that basically, you can probably cross-reference the financing costs which don't go into interest expense.

And those are quarterly recurring items?

Yes. They are recurring items. You have seen them in the past. You will see them again in our footnote, so there's nothing really new in here, other than what we have had in the past.

(OPERATOR INSTRUCTIONS).

While we are waiting for another question, one of my colleagues has suggested to me that I may have been unduly harsh on myself for the hedging activity, inasmuch as, while we lost $100,000 this quarter, we did have cash generated from hedging activities of over $7 million this year. So I am pleased to accept his suggestion. Any other questions?

Ryan Harkins (ph), Credit Suisse Asset Management.

I hopped on the call a little late, so you may already have provided this info. But I just wanted to know what the share count was at the end of the quarter. I mean, I see the average number of shares, but I understand you did some repurchasing during the quarter.

Dave Pollack (ph) will handle that. David?

It is on the balance sheet, the share count. But let me get you the net number. The net number at the end of the quarter was 31,722,000, rounded. That's net of treasury.

And, Mr. Nahl, I have no further questions in queue.

Well, thank you all very much. We are very pleased that we have been able to get through this three-quarter period that has been extraordinarily challenging. Once again, Frank and I would like to thank all of our colleagues around the world who have been working so hard during this period to really make major improvements in efficiency and continue driving up the value that we are delivering to our customers. Thanks so much and thanks to all of you for participating today.

Ladies and gentlemen, a replay of this conference is available at the Albany International website, and that does conclude your conference for today. Thank you for your participation, and you may now disconnect.