Albany International Corp (AIN) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Albany International first-quarter investor call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions being given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. At the request of Albany International, it is also being recorded on the -- excuse me, is being recorded and being broadcast on the webcast.

I'd now like to turn the conference over to Michael Nahl, the Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Leah (ph). Good morning.

I refer you to the statement about forward-looking comments, which is contained in our press release. That same statement applies to the content of this webcast. This is a copyrighted presentation by Albany International and any rebroadcasting or other use of this webcast without our prior written approval is strictly prohibited.

We had a strong quarter, which gets us off to a very good start for the year. Probably the most useful earnings comparison is $0.56 for the quarter after subtracting out the benefit of the resolution of certain income tax matters with $0.39 in the first quarter of 2004. Last year's first quarter of $0.39 would start with the reported $0.10 per share, add in the $0.24 restructuring charge, add another $0.08 for the impairment loss and subtract the $0.03 per share effect of the favorable resolution of the tax matters. All of the pieces of that non-GAAP calculation are in the first two bullet points on the first page of our press release. While most analysts will want to subtract the effects of the resolution of tax matters from both quarters' results, the benefits to our shareholders of maintaining a low effective tax rate are very real.

With results this strong, I will keep my remarks brief and highlight only a couple of points which may not be immediately obvious on our press release. Our regional sales were strongest in the Americas region, which includes both North and South America, but sales were mixed in Europe and in the Asia-Pacific regions. Our Albany door systems sales increased the most in North America but our profits for doors increased in both North America and Europe. Sales of our Applied Technology businesses increased faster than the other segments. Our press release defines what is included in each of the segments and the quarterly comparisons are shown on identical bases.

Our costs are tracking as we expected. Our Capital Expenditures were 9.3 million in the first quarter, compared with depreciation of 13.4 million and amortization of the $700,000 during the quarter. The corresponding figures for the first quarter of 2004 were Capital Expenditures of 15.3 million, depreciation of 13.8 million, and amortization of $900,000. Repeat that Capital Expenditure in the first quarter of 2005 was $9.5 million.

Other expense, net, was 1.3 million of expense in the first quarter of 2005, compared to 5.8 million of expense in the first quarter of 2004. In the first quarter of 2004, we took a full impairment loss of $4 million against an investment in an unaffiliated company, the $0.08 I mentioned earlier in this call.

At the end of this year's first quarter, cash was $65.9 million and the cash render (ph) value of life insurance policies was 35.4 million for a total of $101.3 million. That compares with total debt of 221.9 million and proceeds from our Accounts Receivables sales program, which we consider off-balance sheet debt, of 43.6 million. We view this internally using the non-GAAP measure "adjusted net debt" of $164.2 million. Our leverage ratio, as defined in our principal borrowing agreement, which is publicly available on the Internet, is close to 1 at the end of the first quarter and our interest coverage ratio is about 9.5.

That completes my brief remarks about the financials. I'd like to thank many of our employees around the world who have worked so hard to get us off to a great start this year and who continue to deliver increasing value to our customers and our shareholders. Now, I'd like to turn the presentation over to our Chairman and Chief Executive Officer, Frank Schmeler. Frank?

Good morning, ladies and gentlemen, and thank you for your support of AI.

Net sales increased in each of our business segments during the quarter. Margins improved despite the impact of expected cost increases in energy, raw materials and employee health costs.

First-quarter 2005 net sales for Engineered Fabrics segment increased 3.6 compared to the same period last year. Excluding the effect of changes in currency translation rates, net sales increased 0.3% compared to the first quarter of 2004. Our supply strategy continues to focus on the introduction of products and services that will increase our customers' profitability. As a result, we were able to obtain modest price increases in several markets during the quarter. The combination of stronger net sales and the benefit of completed restructuring activities resulted in improved earnings in this segment for the quarter.

First-quarter net sales for the Door Systems segment increased 5.4% compared to the first quarter of 2004 and 0.8%, excluding the effect of changes in currency translation rates. Economic weakness in Europe continued to adversely impact this segment. Earnings for the segment increased due to sales gains in North America and improved operating efficiencies in both Europe and North America.

Net sales in the segment of Applied Technologies for the first quarter was 7.2%, compared to the same period in 2004, and 4.7%, excluding the effect of changes in currency translation rates. New products and efficiency gains continue to drive increased revenue and earnings in this segment.

We are cautiously optimistic about the remainder of 2005, encouraged by the improved earnings for the Engineered Fabrics segment in the first quarter and the positive impact of our completed restructuring activities. However, we are concerned about the current uncertainty regarding prospects for global economic growth. Improving revenue and earnings in the Albany Door segment appear to be sustainable, despite economic weakness in Europe. Results in the Applied Technologies segment are promising, and we expect to see continued improvements over last year, driven by new products, efficiency gain and new market opportunities.

Our focus on value-added products and solutions for our customers is resulting in the accelerated development of new products in each of our business segments. By creating solutions for our customers that significantly improve their operations and increase their profitability, we are also providing value to our shareholders.

In the uncertain global environment of 2005, we will focus on business growth. We will generate growth by concentrating on the areas under our control, including new product development, efficiency improvements, and the strong relationships we have developed with our customers. I would also like to thank everyone for their efforts during the first quarter.

Michael?

Leah, we would be happy to take questions now.

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

Frank, Michael, I've got a number of questions. I wonder if we could start in some of the details. Frank, when you look at your R&D spend, over the last several years, it's been a relatively stable number. We haven't always gotten a lot of evidence that it was coming through on the bottom line, but Applied Technologies does seem to be doing well now. So, I guess my question is, is something different in R&D? Are you committed to maintaining the same levels of spending there? What's working that wasn't working before?

Mark, that's a good question. We will continue to spend on Research and Development. The nature of our businesses, not only the Paper Machine Clothing but the other businesses and the opportunities for solving problems for customers through products and service, is extremely important. As you know, Paper Machine Clothing, the demand for performance on these new machines is raising every year. A couple of years ago, we took a hard look at our R&D; we felt that we weren't organized the way that we should have been organized to handle all of our product lines. In other words, typical R&D, we were working on a lot of things that were probably longer-term that we like, so we have changed the organization in R&D; we're concentrating on both the short term and long term. We are more focused on the products side of it in order to be able to create solutions for our customers. So ,we will continue to spend in the R&D area. That is one of our strengths that we need to continue to build.

Thanks, Frank. On the resin side, can you give us a sense of how the resin negotiations have played out for you and what kind of impact that's going to end up being and, you know, what you might -- (multiple speakers)?

We mentioned, in prior conversations, that we expected that the cost of resin prices would be approximately 12 million. We think that that is unlikely, that the 12 million figure will exceed this year partly because of what we're seeing from our suppliers, but I caution everyone that, in this uncertainty that we're going through with the oil prices and the rest, I don't think we will exceed it, Mark, but I'm still very cautious.

Frank, can you give us a sense of where your restructuring is, relative to your own expectations? I mean, if you put this on a scale of 1 to 10, where are you in the curve and in terms of bringing the bottom-line benefits you expected at the beginning?

I think that we are on course, Mark, with what has happened. We are not planning to shut anything down this year. I think we're still out of line on the STG&A and we continue to work on that area but right at the moment ,with what everybody has done in the last two years or three years, what I'm trying to do now is to focus ourselves on growth, going forward, and growing the top line, not only in the PMC business but also in our other opportunities of our Applied Technology businesses and also the door business. I am quite comfortable with where we are today. I think everyone in the Company has done a super job in getting through this tough time, so we still have work to do in terms of getting more efficient as we go forward and we continue to work with programs. Hopefully, we will be able to see added benefit, going forward, on the cost side.

Frank, you mentioned some selected price hikes. Is the discounting that we saw last year -- is it over now?

I wouldn't necessarily say it's over but I think, fortunately for ourselves, people are starting to understand that running these paper machines and running these other product lines -- I think that there is some stability in the pricing market. You know, over the last year, we said we had lost some share of market. Now, share of market lags between two and three months and sometimes longer, but we don't feel that we're losing share of market at this particular time.

Okay if I could switch gears, Frank, can you give us an update on the CEO succession process? Any indication of when we might get an answer as to what's going to be coming next?

As you know, Mark, we lost two senior people, Michele Malkin (ph) and Walter, who were efficient and effective managers. Both of them have given us plenty of advance notice on their retiring. This was not unknown to us. They were replaced by two strong internal managers with plenty of experience in the business, with Tom Curry in North America and Daniel Halftermeyer in Europe. Both of them are in the range of about 25 years of experience with the Company.

As for the CEO search, we have excellent candidates for the job within the Company. The Board of Directors recognized that this is the single most important decision that they have to make, in choosing the CEO, and they are making that very carefully by assuring that they have looked externally as well as internally, and I am confident they will make good decisions.

As far as the timeline is concerned, Mark, that is continuing.

Just two last questions -- I'm sorry to hog the microphone here, but with the Zirium (ph) offering out there -- and I don't expect you to comment on the offering, but we are hearing from Zirium that they believe that they have superior technology and offering -- to offer -- and superior margins. Is Albany, at this point, in a situation where it's playing catch-up to Zirium?

Absolutely not, Mark. First, we wish Zirium good luck in their public offering of equity, and we've got nothing but good things to say about Zirium and our other largest competitors -- Hoyt (ph) S & Johnson (ph), Heinbach (ph), Ichikawa (ph) (indiscernible) all of whom have excellent managements and are very good companies.

One of the luxuries of being the clear leader in the Paper Machine Clothing industry is that we can let our actions speak for us rather than our words. We intend to continue our practice of not saying anything negative about any of our competitors.

We have a strategy that is working very effectively, and that is to focus on the delivering of the highest value to our customers. Now, all I would say with regard to how our technology is doing is look at the facts in the marketplace and it is clear and obvious that Albany's prices are the highest in the industry. If someone has a technology that is as good as Albany's, they shouldn't have to discount considerably from Albany's prices to try to get business. So you know, again, we wish Zirium very well. We like our competitors; we think they are good people, well-managed and we respect them, but we are inclined to let the results speak for themselves.

Michael, you know, we've heard that Zirium was marketed to strategic buyers and I'm not going to ask you why you selected not to buy them. You clearly have the money, I suppose. But I would ask you, do you think that further consolidation in the PMC business is necessary? Is the industry structure still in a place where we are not quite right?

Well, we at Albany certainly don't need further consolidation. We would be very pleased for there to be further consolidation in our industry. Within our own company, we currently have a very good balance between demand and demand prospects and our capacity set-up. Some of our competitors might find it useful to consolidate, and we have generally been supportive of consolidation initiatives in the past and are likely to continue to be as supportive.

Okay, last question, I promise. Michael, is it fair to assume that we will probably not see Albany address the relatively low leverage, financial leverage situation until we have a new management team in place? I mean, Albany's got tremendous financial flexibility right now and from most perspectives, one would argue that it's probably under-levered. Is that just something that we're not going to see payout in the short run?

I don't think that's necessarily the case. We've got a very effective Chairman and Chief Executive Officer running the Company right now with a great management team behind them. We are very confident that we're working effectively with the Board of Directors and the Board of Directors will make their CEO decision when they're ready to make it, but that's not going to stop the Board or us from doing the things that we think are appropriate for the shareholders.

Okay, thanks very much.

Michael Christadoule (ph) from Inwood and Company.

Good morning, gentlemen, nice quarter. I actually had a question from your 10-K that pointed out that your backlog, which you disclose annually, is up 11% to $521 million, and clearly I think we all have a sense that your core PMC business is a consumable, so it's got a very high immediate shipping rate, high fulfillment rate, so it's not really a backlogable type of product, generally speaking, but nonetheless, it sure looks like an encouraging data point. I was wondering if you could give us any color on that backlog number in terms of whether or not it is confirming that there are lean inventory levels out in the field at the customer level.

I thing -- this is Frank -- that the inventory levels in the market place have shored up nicely for us. Part of the increase of the backlog is the performance that we are supplying and the acceptability of some of the new products that we have introduced into the market.

At the same time, as you know, the paper industry has improved over the last four or five months, the demand is a little higher for performance fabrics, so we're quite comfortable with our position at the moment.

Thank you very much.

Beth Lilly from Woodland Partners.

Good morning. I have two questions. One is, Frank talked about STG&A being still being a little bit too high. In the quarter, it was a little over 28% of sales. I was wondering if you could kind of talk directionally where you what that number to go in terms of a percentage of sales.

Then my second question is, during the quarter, you didn't buy back any stock and I was wondering why that was.

Okay, let me start with the SG&A question, and here two effects are likely, Beth. The first is that our revenue growth prospects are really looking up nicely, and I think that that's going to help solve part of the problem. The second part is that we are doing a number of things internally this year, which we will do quietly behind the scenes and not advertise, which we think will continue to drive our efficiency improvements throughout the organization. Frankly, we're very proud of a number of the things that our employees are doing in teams all around the world to get at our efficiency in all areas of the Company.

As for the stock buyback, we never comment about our specific intentions regarding stock buybacks. There are certain periods when we simply can't buy shares, even if we'd like to, but for us to tell you whether we were in such a period would set an unhelpful precedent, so we don't intend to start doing that now. Investors who have followed us, as you have, know that we bought 2.8 million shares last year and we will continue to evaluate all of the best alternatives to help our shareholders, and we will not publicly predict which of those alternatives we think are most likely for the year ahead. You may continue to assume, however, that we will manage our business in the best interests of our customers, our shareholders and our employees. I think the investors who know of best, as you do, are pretty comfortable about that.

Was there a reason you weren't in the market in the quarter, then?

I think I tried to say that, if there were, I'm not going to set the precedent of telling you.

(LAUGHTER) okay. Just to follow-up on the SG&A, so there's going to be additional cost reductions, but also you're going to be -- in a way what you're saying is that you are going to grow -- the revenues are going to grow nicely and so as a percentage of sales, that will decline just but function of the fact that your top line is going to grow?

That's correct.

Okay, but there are additional cost reductions that you have identified?

Well, there are additional efficiency improvements that we have identified.

Great. Are you willing to commit to a number as a percentage of sales of where you want to drive SG&A to?

Absolutely not, externally, but -- I mean, you've seen the way we've operated; we've taken $120 million out of our costs over the last four or five years. I mean, we are serious about this business, and we're not going to stop just because we've done something pretty well.

Okay, great. Thank you so much.

Mr. Nahl, we have no further questions. You may continue.

Well, we'd like to thank all of you for participating in the call today. We are very pleased that we could bring you the good news of a strong start for the year, and we look forward to your continued support. Thank you very much for participating today.

Thank you. Ladies and gentlemen, the replay information will be available on the Albany International Web site. That does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.