Albany International Corp (AIN) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Albany International’s Fourth Quarter and Year-End Earnings Conference. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for questions. Instructions will be given at that time.

If you should require assistance during the call, please press * -- then 0. And at the request of Albany, International, this conference is being web cast and recorded.

I would now like to turn the conference over to our host, SVP and CFO, Michael Nahl. Please go ahead, sir.

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

In 2004, the employers of Albany International completed a challenging and complex operational restructuring. They introduced new products to our customers, and they increased the value of our products and services. And they generated $140 million cash from operations before payments related to restructuring -- which helped us deliver more than $90 million in cash to our shareholders through stock buybacks and dividends.

We entered 2005 in very strong competitive and financial position. We believe that these strengths create excellent potential to continue delivering value to our customers and shareholders in 2005.

We’ve completed the implementation of our restructuring grogram announced in January 2003. The total cost-savings from the program will be more than $40 million -- in comparison with the $30 million we originally announced. Some of the savings have already been reflected in 2003 or 2004 earnings. There should be about $25 million in incremental savings from that completed program in 2005.

Cash required in 2005 for restructuring liabilities and equipment relocations is expected to be approximately $13 million, which includes about $4 million that will recorded as operating expense in 2005.

Last year at this time, we had successfully reduced our leverage ratio, as defined in our principal credit agreement, from above 3.6 in the third quarter of 1999 when we acquired the Geschmay Company, to below 1 at the end of 2003. During that 4.25 year period, our debt declined by $320.3 million. My definition of “debt” is both debt on our balance sheet and the cash that was received for accounts receivables sold, which we consider equivalent to debt.

During the same period, our cash plus cash surrender value of life insurance policies increased by $76.8 million. That combined debt-reduction and cash and life insurance cash value improvement was $397.1 million in 4.25 years. That’s an average of $23.4 million per quarter, and $93 million per year.

Our stronger financial position, going into 2004, permitted us to consider some additional ways to deliver value to our shareholders. In our conference call last January, we said that, “Our strategic flexibility for shareholder-friendly initiatives is excellent.” End of quote. Clearly, our shareholders had already benefited from a substantial increase in the market value of the stock -- from the low in October of 2000 right through a vicious bear market.

In 2004, we delivered a total of $90.7 million cash to our shareholders through $9.6 million in cash dividends and $81.8 million in stock buybacks. We purchased 2.8 million shares of Albany stock and ended the year 2004 with 31.4 million shares outstanding.

Our bankers can continue to sleep very well at night with the knowledge that our leverage ratio, which was 0.97 at the end of 2003, increased to only 1.09 a year later, after we spent $90.7 million buying stock and paying cash dividends. Our interest coverage ratio, as defined in the previously-mentioned loan agreement, increased from 9.34 to 9.66.

While we do not make public earnings or cash flow projections, we do estimate capital expenditures. And for 2005, we expect to invest $45 million, and our depreciation and amortization are likely to be about $52 million and $4 million, respectively. Our projected capital expenditures are based upon our 2005 operating plans, and could be affected both by changes in currency exchange rates, and the development of new, attractive business opportunities.

Fourth quarter selling, technical, general and research expenses -- or STG&R -- were up 5.2 percent in comparison to the fourth quarter of 2003. Excluding the effect of changes in currency translation rates, STG&R costs were up 0.5 percent.

In the fourth quarter of 2004, loss on remeasurement of accounts receivable were $901,000 compared with $460,000 for the fourth quarter of 2003. Excluding this additional effect, STG&R expenses were flat.

Several times over the last few years, we said we would reduce costs. Each time we said it, we did it. We will continue to seek ways to increase our efficiency and effectiveness in 2005, to help offset some of the effects of inflation on our costs. Selling, technical and general expenses remain an area where we believe there are substantial opportunities for efficiency improvements. The fact that selling, technical, general and research expense in 2004 was flat, after excluding the effects of currency translation and remeasurement, we were able to offset sharp increases in professional fees, and other expenses related to Sarbanes-Oxley compliance -- as well as higher insurance and pension costs -- and nearly all other cost categories which were affected by general inflation.

There will be some highly-probable cost increases affecting our 2005 results. The effect of higher-priced petroleum will lead to raw material cost increases, which we estimate to be approximately $12 million. Medical costs are likely to increase again, but are a lot harder to quantify. And there will be general inflationary increases in many cross-categories.

A couple of other costs may decline, somewhat. Sarbanes-Oxley compliance costs and insurance costs will probably decline in 2005. But we have to work hard again this year to drive for increased efficiency throughout the Company.

We expect our effective tax rate to increase from 19.9 percent in 2004 to nearer 30 percent in 2005. During the fourth quarter of 2004, the resolution of [the suite] tax items and a change in mix of consolidated earnings resulted in a reduction in our tax rate. While the precise levels and timings of cash rates is very difficult to forecast, we will use 30 percent as the most-likely rate for 2005, until future developments change our outlook.

Other expense net was expense of $3.4 million in the fourth quarter of 2004, compared to income of $600,000 for the same period of 2003. In the fourth quarter of 2003, we had income of approximately $3.3 million in currency transactions -- including revaluation of short-term intercompany balances. While in the fourth quarter of 2004, these items netted to an expense of approximately $400,000.

For the full-year 2004, other expense net was $13.5 million compared to expense of $700,000 for 2003. The difference is due principally to an impairment loss of $4 million recorded in the first quarter of 2004, currency hedging activity and the remeasurement of short-term intercompany balances at operations that held amounts denominated in currencies other than their local currency.

In 2003, currency hedging and remeasurement of short-term intercompany balances created $8.2 million of income in comparison to $1.5 million of expense in 2004. However, currency hedging activities had an $8.1 million positive impact on cash in 2004.

Now I’d like to turn the presentation over to our Chairman and CEO, Frank Schmeler.

Good morning. 2004 was a significant year for our company. We concluded the restructuring program announced in January 2003, which reduced costs by more than $40 million. In addition to the closure of manufacturing facilities in Europe and North America during the year, we made substantial investments in plant and equipment for efficiency and future growth.

Matching our capacity to the changing demand of global paper and paperboard industries -- while a difficult challenge -- has made the Company stronger and well-positioned to meet the needs of our customers.

In 2004, global paper and paperboard manufacturers continue to produce more tons of product with fewer units of paper machine clothing -- a trend reported earlier in the year. Several factors contributed to this trend -- including enhanced P&C product performance. That creates additional value to our customers. More efficient paper machine operation, as a result of industry consolidation and [inaudible]. And the practice by some paper manufacturers to run their machine clothing products longer.

Since the rate of paper industry consolidation and rationalization appears to have slowed, the Company expects the negative impact of this effect on paper machine clothing demand in future periods to decrease.

Fourth quarter net sales for engineered fabric segment increased 2.2 percent, compared to the same period in 2003. Excluding the effect of changes in currency translation rates, net sales decreased 2.4 percent compared to the fourth quarter of 2003.

Full-year net sales increased 1 percent and decreased 3.5 percent, excluding the effect of changes in currency translation rates. Net sales in 2004 were affected by weak P&C demand, due to extended fabric life, customers’ efforts to reduce overall inventory and the loss of some business due to price.

The impact of completed restructuring initiatives, as well as the efficiency gains from the substantial investments in plant and equipment contributed to improving gross margins in the third and fourth quarters of 2004.

The Albany Door System’s fourth quarter net sales increased 8.3 compared to the fourth quarter of 2003 -- and 0.5 percent, excluding the effect of changes in currency translation rates.

Full-year net sales increased 11.3 percent and 2.9 percent excluding the effect of changes in currency translation rates. The results for the full year were positively affected by efficiency improvements, new product development and increase in after-market and service revenue -- even the customers’ capital spending for high-performance door products did not improve in major markets.

The applied technology segment’s fourth quarter net sales in this segment increased 3.2 percent, compared to the same period in 2003, and 0.8 percent excluding the effect of changes in currency translation rates.

Full-year net sales increased 24.2 percent and 18.6 percent, excluding the effect of changes in currency translation rates. Filtration product for power generation plants -- principally in Australia -- and gains in cannery and textile markets in Asia and Latin America -- provided a large portion of the 2004 improvement in this segment. In addition, results at Techniweave were positively affected by new business in structured components.

We are optimistic about expectations for global paper and paperboard markets in 2005, and their effect on our financial results for the year. Current operating rates remain high -- especially in paperboard. And demand for most paperboard grades and selected paper grades is expected to hold through the first half of 2005.

The Albany Door System segment should continue to grow in 2005, due to new products and the expansion of aftermarket sales and service. The applied technology segment should benefit from new car generation plants, which will come on-stream in 2005, improvements in cannery and textile markets in Asia and Latin America and the growth of the wet filtration products.

Increased operating results from higher energy prices went back on our operations in 2005. Our restructuring activities are complete, and in 2005 we will focus on growth. We believe that customers will place their business with suppliers that offer them the greatest value. And the Albany value concept supports this belief. It directs our efforts through the marketplace in the form of new-and-improved products and superior process support for our customers. At the same time, it focuses our employees on product quality and consistency and the pursuit of process and efficiency improvements in all areas of our business. The Albany value concept should continue to provide substantial benefits for our customers, and improved return for our shareholders. Thank you.

All right, Cathy. We’d be happy to take questions, now.

Thank you. Ladies and gentlemen, if you’d like to ask a question, please press *, then 1, on your touchtone phone. You’ll hear a tone indicating you’ve been placed in queue. You may remove yourself from queue at any time by pressing the # key. If you’re using a speakerphone, please pick up your handset before dialing.

Our first question comes from Mark Connelly with Credit Suisse. Please go ahead.

Thank you. Mike and Frank, I’ve got a bunch of questions. Can we start with CapEx? The $45 million is a little bit higher than I had figured it was going to be. Can you tell us what’s in that number? Frank, you did talk about currency. How fixed is that number?

I would say it’s… Let me put it this way. As I mentioned, we were looking at $40 million last quarter. But I had increased it by $5 million since then, to reflect new growth opportunities that we have identified in the last quarter -- which we hope to be able to develop later in 2005.

A part of the effect, also, Mark, is in -- in fact -- currency. A great deal of the capital expenditure is denominated in Euros. The Euro has certainly hung up pretty high, relative to where it was a year ago.

Could you give us a rough sense of how much of the CapEx number is in the US versus somewhere else?

I would think that, Mark, there are not very many. Or there are actually no US suppliers for weaving looms, for needle looms and for dryers. So I would say that 80 percent of the CapEx is coming from offshore.

Okay. That explains quite a bit, then. Second, Frank. You talked about customers drawing down inventory. I know this is a difficult thing for you to judge, but do you have a sense of how different customer inventories look now than they might’ve looked a year ago? I mean I understand that over the last several years, we’ve seen inventory coming out of the system -- either on your end or on their end. But do you have a sense of how tight it might be?

Mark, I think at this particular time, for Albany especially because of the restructuring. But I think as we work with our customers -- and our customers don’t like this inventory any more than we do… As our cycle time improves within our operations and the dependability of delivery increases, I am hoping -- going forward -- that we will be able to shorten the supply chain, and ourselves and our customers will not have to carry the amount of inventory that they need.

As you know, in the paper industry, inventory is a very critical situation, with paper machines. They do need to have a good source of inventory quickly. Because none of these people want to shut down these machines for the lack of clothing. So I think there are some gains that as we shorten the cycle in our plant, and as we work with our customers to shorten the supply chain, I think there is some room to continue to improve.

Okay. That’s helpful. And also, Frank, on the door business. From time-to-time, somebody gets on this call and says, “Why don’t you sell that crummy thing?” And it’s usually when the cycle is turning down. You said that business was actually decent, even though spending’s not up. Can you go into that in a little more detail?

That isn’t want is helping us in the door business. As you know, we have restructured that business. And that restructuring has been completed. We’re finding that the cost area is improving and continues to improve. The new products and the efficiency that I mentioned are improving our position, despite the lack of capital spending. And that’s especially in Germany -- one of our larger markets.

But what we are seeing -- we’re seeing a lot of growth in the aftermarket sales and service, which we grew in 2004, in the poor markets. But we’ve really started to focus on the value of these door products, and that is improving.

I’m optimistic, despite the capital being spent -- especially in Europe and the United States -- that 2005 will be a very successful year for the door business. I’m hoping that Europe will see their way through the current situation and start to spend. Now, that’s always debatable. But I think with our new products, our improved cost structure and efficiency, I’m optimistic on this segment.

Would I be stretching to say that you’re assuming that that business will remain a cost-to-capital contributor?

No, you’re not stretching. But we really are quite bullish on this business for 2005. I don’t think that that’s a stretch, at all.

Okay. Just a couple more questions, if you’ll bear with me. There’s usually not a huge queue, so somebody’ll have to wait just a little. In terms of the restructuring benefits on the P&C side. You spent the last year making major changes to your plant infrastructure. Frank, as you look at it now, are you in a position to say, “I got what I went after,” or are there any specific areas where you’re a little bit disappointed? Either with what you got or how quickly you’re getting it?

That’s a good question, Mark. Let me say this -- especially to the people that work for Albany International. This has been a long haul in the last 2 or 3 years. I congratulate the employees. They have stuck with us and they have worked their way through this restructuring, which has not been easy. And I thank them for it.

I am optimistic, Mark, from the standpoint that this is behind us. As I mentioned, it’s not been early. I think we’re in pretty good shape with our capacity related to the demand that I see out there. Yes, there have been some negatives to this thing -- such as being able to transfer the technology and the manufacturing process from one plant to the next. And we’ve had a few quality problems here -- there’s no doubt about it.

But I am pleased with what we’ve been able to accomplish, here. And I am looking for an awful lot of optimism, moving forward. We will continue to take out the cost as we move forward. That will be going on and on and on, like any other business. But I would say to our employees, that they’ve done a real good job. There’s been a lot of risk in this. But I’m very hopeful, Mark, that we are in a very good position moving forward. And with the support of our employees, I’m sure that we will continue to move forward.

One last question -- this is for Michael. We had so many moving parts this year, operationally. But I wonder if you could help us split out what the currencies really did to you -- sort of in a macro sense. You know -- Asian businesses picking up. You resourced some of that supply from Canada to Europe, I think. Can you give us sort of a big picture sense of what the currencies really did this year?

We’d be happy to, Mark. This is really a very complex issue. David [Pollack] has done quite a good detailed analysis of this. David, would you contribute here?

Sure. Mark, as you pointed out, there are many moving parts to the analysis. In absolute terms, currency had a negative effect on the fourth quarter of 2004 of about $900,000. And for the year, negative -3 million.

In the earnings announcement, we also summarized the year-over-year and quarter-over-quarter changes. The changes were much larger than the numbers I just mentioned. A lot of that was currency movements in 2003 that contributed income -- from currency hedging activities and also the intercompany balances. But in summary for the quarter, fourth quarter 2004, the net result was slightly negative.

And Mark, let me just add that as you’re well aware, we take a very proactive view with regard to continually evaluating the risk-and-reward opportunities in connection with hedging activities. Some of the benefits of that activity never show up on the income statements. Those write into the equity section. And clearly we have, as I mentioned, an over $8 million positive cash effect from hedging activities in the year 2004.

We can’t count on that every year, obviously. But at the same time, that hedging activity is designed to dampen the effect of the oscillation of substantial swings in the principle currency pairs. It’s a highly-complicated subject, but we work it pretty hard.

Okay. That’s very helpful. Thank you.

Thank you. Our next question comes from [Michael Pescadoulo] with [Enwood] Capital. Please go ahead.

Yes. Good morning. I wanted to ask a question just to try to tie together some of the cost-savings and the cash-restructuring charges over the last year and a half. I know originally the cash portion of the restructuring costs was about $42 million. And there had been some thought, right, that there’d be about $35-40 million of savings. So a very high efficiency-realization ratio, I guess. I was just trying to maybe get an update on those numbers. The entirety of the restructuring program since 2000. And to also put that in context with the $25 million of savings for ’05 that was mentioned at the beginning of the call.

Well, the cash part is about what we said -- the $42-43 million. We’ve also written off a lot of equipment that we no longer need in our production facility, to streamline the facility. So total cost for the project will be about $74 million -- including write-offs of equipment over the 2-year period. The savings are well over $40 million, and more than we anticipated when we originally set this program up.

So the numbers we gave you last time have held up pretty well. And the $25 million is basically the effect of the major shut-down portion from 2004. As you know, the big [inaudible] down 2004.

The shutdown savings we’ll really start to see in 2005 as the old inventory works through and the new cost structure takes place. So we’ve had some cost-savings already affected, where we’ve let people go in the [STNA] area. But it takes a little longer to flush the savings, as you have to get the old inventory out. That’s where the $25 million’s going to come through, as we flush the inventory. The big plants are shut down, and the savings are really going to take full impact in 2005.

Is the $25 million included in the 40?

Yes.

Yes. In the over-40.

In the over-40. Yes.

Over 40. Right. Okay.

The total savings in over 40 was 25 will be effected fully, this year.

Okay.

The additional 25. Incremental.

And what’s the tax rate guidance again for ’05?

30 percent.

Okay. So that $25 million is $17.5 million of after-tax savings on the reduced share count. So that’s about $0.56 a share, right there.

Yes. In the ballpark. Yes.

Then on inventory, I guess the Company’s really brought it down and kept it flat here, in that 175 to 185 range for the last 4 or 5 quarters. Is there still a safety stock element built in there, just as you’ve consolidated plants? And clearly, it seems like some of your customers are playing chicken with their “just-in-time” inventories. I know you haven’t wanted to do that, just to keep your fulfillment levels high. Where could that inventory level go? Or should we just figure from a working capital perspective, it stays flat, here?

I think, although we indicated at this time last year that you should expect some build in inventory in connection with the restructuring for the first 3 quarters, and a decline beginning in the fourth quarter… And you certainly saw exactly that. And you saw in the announcement that on a real basis, taking off the currency effects, we did have a decline in the fourth quarter. Actually both in receivables and inventory.

We tend to think that the prudent thing for the investor to do is to assume no change. But clearly, we have as part of our internal objectives, working further improvements, there. Now obviously we don’t mind inventory going up at all, if it goes up a lot less than the sale go up.

So what we try to do is we try to drive this in terms of the relative efficiency and the cycle time. We will continue working on it, Mike, but I think that the practical thing for the analyst and investor is to assume it’ll stay at about the same level of efficiency, while we’ll try to beat that.

Fair enough. Just a last question on the stock buyback. Could you recap for us just the full number that you bought? And I guess that comes to about 7 or 8 percent. And what’s remaining on the authorization?

The authorization is included in the release. It is a little over a million shares left.

Okay. Remaining. Okay.

Yes. It’s 1,053,100 shares remaining under the authorization, and we bought a total of 2,819,943 shares -- which was equivalent to 8.4 percent of the shares that were outstanding at the end of 2003.

I see it here in the release. Very good, gentlemen. Thank you.

You’re welcome. Nice to hear from you, Mike.

Then the next question will come from [Rich Hampton] with Fidelity. Please go ahead.

Frank, when you go through all the clicks and takes of the P&C market in ’05 versus ’04, could you give us some expectations on whether you think the market grows next year or not?

I’m always very cautious on this statement. As we know, I’m optimistic about the paper industry for 2005. But we are starting to see a lot of mixed signals. Some grades will do well. Some grades will not do so well -- such as newsprint and the reset. But I think that the P&C market has stabilized, and I’m hoping that there will be some growth in 2005, because of what has happened with the inventories and the rest.

Thank you very much.

We now have a follow-up from Mark Connelly. Go ahead, please.

Thank you. A couple of additional things. Michael, were there an surprises in the regional P&C demand mix, either this quarter or in terms of trend through the year?

No. There’s nothing noteworthy on that front. There’s nothing that you would not expect just by reading the Wall Street Journal, in terms of the underlying economic conditions.

Okay. And a related question. I know it’s tough on a short-term basis to measure this. But is it your sense that you are maintaining, more or less, market share in this sort of period of declining business?

Mark, we have lost some share of market, primarily due to price pressures in some parts of the world. We have lost a little bit in some parts of the world and held in other parts. And we expect, working with our customers, that we will increase. Hopefully that we will continue to strengthen our position in the market.

Okay. And then on an unrelated note -- back to the CapEx again. Is applied technologies getting a disproportionate share of CapEx? You talk a fair amount about it in the press release.

There isn’t a lot, but we’re clearly going to fund that business for every opportunity that they present to us that is in line with what they’ve been able to demonstrate they can deliver in the past. It’s a good business, and we’re going to fund it. But it’s not disproportionate to the others.

Okay. And on a related note, both Michael and Frank. You had some changes in the R&D group management a while back. Is that transition where you want it to be? Are you in the right place with your balance of investment in R&D and the commercialization that you’re hoping to get out at the other side of it?

Mark, I think that we have improved our situation in R&D. We have become more focused on developing new products for all of our segments. I can tell you clearly that I am not happy with the speed at this particular time. We just had some world conferences on R&D, and I think that we can do a much better job, going forward. And everybody understands that.

Okay. That’s all I’ve got. Thank you.

Thanks, Mark.

Thank you. And for any further questions or comments, please press *1, now. We do have a question from Beth Lilly with Woodland Partners. Please go ahead.

Good morning, guys.

Hi, Beth!

How are you doing today?

Doing great.

I had two questions. One is, I was wondering. You talked about market share and it’s [inaudible]. One, it seems like… Frank alluded to the fact that the P&C market seems to have stabilized, and that last year you lost some share. So I was wondering if you would talk about just the overall pricing environment, and what you’re seeing competitively?

I think that there has been some pressure in certain parts of the world. And that’s not unlike what has been happening over the last few years. The introduction of new machines. There’s always a price pressure in order to be able to get a portion of those machines. But I think that overall, the pricing -- our customers are starting to understand the situation with energy and raw material pricing. And I think that we’re better positioned now to address that than we had been during the restructuring.

Okay. My second question is you guys have been very aggressive in buying back the stock, which we fully support. And you’ve got a million shares left. You’re going to continue to generate a lot of cash. So is it fair to say that all else being equal, if you can’t find anything to buy, you will do another reauthorization? You’ll go back to the board and get another buyback?

I think you know us well enough at this time, Beth. Essentially, the one thing that can be clear to all shareholders is that we are very focused on delivering value to our shareholders. As you know, as we have looked at various alternatives and we’ve discussed publicly what those various alternatives are -- we concluded and have concluded that of the alternatives available to us, stock buybacks appear to be rather attractive, relative to most of those alternatives -- given that we think the stock price is very attractively priced, relative to the cash flow that this Company does and will be able to generate in the future.

We’ll continue to look at all forms of enhancing shareholder value. Frankly, we look at that quite literally every quarter. But stock buybacks certainly remain a very attractive alternative, with the stock priced in this region.

Okay. That’s terrific. Thanks so much, you guys.

Thanks, Beth.

You’re welcome.

Thank you. And we have no further questions at this time.

Well we’d like to thank all of you for participating today. We are delighted to be able to do exactly what we said we would do in the year 2004. And I assure you that this management team is determined to make additional progress in 2005. Thanks very much for your participation.

Thank you. And ladies and gentlemen, a replay of this conference will be available at the Albany International website. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.