Albany International Corp (AIN) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Albany International second quarter investor's conference call.

(OPERATOR INSTRUCTIONS)

At the request of Albany International, this conference is being webcast and recorded.

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

Thank you, Julie. 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 unauthorized rebroadcasting or transcription is strictly prohibited.

This was a good quarter and six months. Earnings per share were $0.64 in the quarter, compared with a loss of $0.47 in the second quarter of 2004. Last year's second quarter included the effects of both $0.66 per share from restructuring charges and a tax valuation allowance of $0.14 per share. Without the restructuring charges and tax valuation allowance, the earnings per share were $0.33 in the second quarter last year.

The paper and paperboard production disruption in Finland, in the second quarter, reduced earnings in the second quarter by an estimated $0.06 per share. We continued to generate good cash flow in the quarter. Cash from operations of $22.4 million was lower than in some prior quarters, but for the right reasons. We had strong sales and a strong order backlog, which resulted in increased accounts receivable and inventories. Inventories were increased to assure timely deliveries to our customers and to prepare for the summer vacation shutdowns.

Our working capital increased $9.8 million during the quarter. During periods of more rapid growth, there may be increases in working capital, even while we are increasing efficiency. We will continue our focus on increasing the efficiency of our working capital and we will continue to increase the efficiency of our operations.

In the second quarter of this year, we continued to show signs of successfully transitioning to growth. Net sales increased 5% in the most recent quarter, excluding the effect of changes in currency translation rates in comparison with an increase of 0.9% in the first quarter.

There was growth in all three-business segments. Excluding the effect of changes in currency translation rates, Engineered Fabrics sales grew 4.7% and Albany Door Systems grew 3.8%. The fastest-growing segment in both the first and second quarters was Applied Technologies. Excluding currency effects, sales grew 4.7% in the first quarter and 7.3% in the second quarter compared to the same quarters of 2004.

We think the results speak pretty well for themselves, so I would like to turn the presentation over to our Chairman and Chief Executive Officer, Frank Schmeler. Frank?

Good morning, ladies and gentlemen. We are pleased with the operating results in the second quarter. Our customers in the paper and paperboard markets reported mixed results geographically, which were further complicated by production disruptions in Finland during the quarter. In spite of these varied market conditions, sales increased in our Engineered Fabrics segment.

Overall market conditions in our Albany Door Systems and Applied Technologies segments were also mixed, with slow economic growth affecting our European-based customers. As compared to the second quarter of last year, sales increased in both segments. In each of our business segments, the restructuring activities completed in 2004 and continued efficiency improvements positively affected earnings in spite of cost increases in energy, raw material, and employee health costs.

Second quarter net sales for the Engineered Fabric segment increased 8.6% compared to the same period last year Excluding the effect of changes in currency translation rates, net sales increased 4.7. Net sales were positively affected by strong demand in North America, South America and Asia. Year-to-net sales increased 6.1% and increased 2.5% excluding the effect of changes in currency translation rates.

The increase in net sales was achieved in spite of slow economic conditions in Europe and the seven-week interruption of paper and paperboard production in Finland. Published industry reports estimate the loss in paper and paperboard output from the interruption at 1.7 million tons. The Company estimates that net sales lost by the Company due to the paper and paperboard production in Finland reduced earnings in the second quarter of 2005 by approximately $0.06 per share. The Company does not expect the PMC sales lost during the second quarter to be recovered as supply lines normalized in the third and fourth quarters.

Second quarter, Doors Systems net sales increased 7.8% compared to the second quarter of 2004 and 3.8% excluding the effect of changes in currency translations. Year-to-date net sales increased 6.5% and increased 2.2% excluding the effect of changes in currency rates.

Weak demand and price pressure in Germany was offset by improving demand in other regions due to new product introductions, improved sales channel management, and increased service and after-market sales. The resulting sales increase, especially in North America, combined with improved efficiencies in all Door Systems operations, contributed to improved earnings.

Second quarter, Applied Technologies net sales increased 11.6% compared to the same period in 2004 and 7.3% excluding the effect of changes in currency translation rates. Year-to-date net sales increased 9.5% and increased 6% excluding the effect of changes in currency translation rates.

Nearly all product lines within this segment reported increased sales. Focus on growing markets, sales channel improvements, close cooperative -- close cooperation with original equipment manufacturers, and successful new product introduction continued to -- contributed to the substantial increase in sales and earnings.

In the Engineered Fabric segment, we're seeing some early signs of slowing paper and paperboard demand in North America. However, our global paper and paperboard markets appear unchanged for the near term. Due to our strong back order backlog and strategies for growth, we are optimistic about the next two quarters. We will generate growth by concentrating on the areas that we control, including efficiency improvements and new products that deliver value to our customers.

Albany Door Systems will continue to focus on growth by targeting new market segments with value-added products and with high-performance doors designed for specific applications. We expect continued growth in North America as the distribution channels improve. In Europe and Asia we expect some moderate improvement as we launch strategies for new products in growing markets. Applied Technologies will benefit from new product development in several product lines. Increases sales combined with the benefits of this efficiency gains should provide continued growth in the second half.

In all of our business segments, we had a good second quarter and first six months of 2005 because demand for our products and services was strong, and we continue to control our costs and improve efficiency. Increased costs resulting from higher energy prices will continue to impact our operations, but is not expected to exceed the 12 million annual increase previously announced.

For the remainder of 2005, I am cautiously optimistic about our growth prospects. Our growth strategies include the continued focus on important value drivers for our customers, which will improve their operation and increase their profitability. In doing so, we are providing superior value to our customers and creating value for our shareholders.

At this time, I would like to think the Board and everyone associated with Albany International on a global basis for your efforts and your support during the first six months. I'd also like to thank the shareholders for your support, and I'd also like to thank Mark Connelly for the service that he has done for investors during the period that I have been the CEO. He has worked very hard to dig in and understand exactly what's going on behind the scenes in our industry and what we are trying to do with the company.

Of course, he has been rough on us and kicked us around a little bit, but I will say that he had the fortitude and the strength to continue working and guiding us to a certain degree when we are offbeat with our investors. And I thank Mark for having that faith in us, and if he kicked us around a little bit, I don't worry too much about that. We're all big boys.

So, thank you all and good luck.

Thank you very much. Julie, that completes the presentation. We'd be happy to take any questions.

Thank you.

(OPERATOR INSTRUCTIONS)

So, we'll go to the line of Mark Connelly with Credit Suisse First Boston. Please go ahead.

I'm no going to kick anybody around today, that's for sure. Frank and Michael, I've got several things. A little bit of housekeeping first. The impact of Finland you say your estimate as $0.06. Do you have a sense of whether there is ongoing impact from Finland? Was there any inventory buildup or backup or anything like that that you expect is going to -- an opportunity in the next quarter?

We will turn that over to Bill McCarthy.

Good morning, Mark. We have returned to our normal shipping patterns here in the third quarter and probably don't expect any additional impact as we go forward for the rest of the year at this point.

Okay. You know last year a big -- the big disappointment was pricing pressure primarily. It that -- doesn't look like to have pricing pressure with the kind of revenue that you are showing, but can you tell us what the pricing situation feels like to you?

I guess that is one for me as well, Mark. I would say that we have certainly been able to give modest price increases geographically broadly based. We still see some selective pricing pressure and some activity by competitors, but we have been very pleased with the modest price increases we have been able to get across so far this year.

Okay. That's going to leave I guess. Okay. Next question, Applied Technologies is showing very good growth last quarter and again this quarter. Can you give us a sense of where that growth is coming from so we can get a sense of how substantial it might be?

That sounds remarkably like a forward-looking question.

Would you like to make a forward-looking comment on the Applied Technologies business?

Many of you who have followed us over a long period know that we're reluctant to make forward-looking statements and are very cautious about saying anything that implies earnings and cash flow in the future. I do think, however, it's fair for us to point to some opportunities in Applied Technologies, which are doing very well and, which might result in some substantial growth. So with the warning that good opportunity is to not always translate into good results.

Within our Applied Technologies segment, one area, which appears to have significant potential, is engineered textiles and composite parts and structures for the aircraft and aerospace industry. Albany International has some intriguing proprietary technology for making composite components and fabrics, which utilize high-strength carbon and high-performance fibers. The result is lightweight, strong, durable components for aircraft.

We listed some of our products on page three of our annual report, including containment fabric for aircraft engines, grated structures for high-temperature seal, multidirectional aerospace preforms and composites, and thermal protection systems for space applications. Since the publication of the annual report, we have made progress working on those and additional applications for aircraft engine and airframe components.

Aircraft manufacturers have a substantial incentive to substitute very strong and durable lightweight components in aircrafts. With crude oil selling in the mid $50 range, that's more important than ever. We believe that we're demonstrating that we can create value with technology you need to Albany International. A second product line within are Applied Technologies segments, which is been doing very well and appears to offer attractive growth opportunities and excellent returns on investments is our synthetic down business, where our PrimaLoft brand continues to exhibit both strong growth and attractive new product potential.

PrimaLoft has developed strong consumer brand recognition and is penetrating new markets. PrimaLoft is used in the home furnishings and outerwear markets and has the advantages of soft and comfortable as a goose down with the added benefit of hypoallergenic in home furnishings and of a lightweight warped and water resistance for the technical outerwear market.

Our excellent PrimaLoft team has developed some opportunities, which have potential for significant growth. One of the other Applied Technologies opportunities, I would mention is in filtration products for power generation. Coal fire boiled power generations demands for filtration media appears to be entering in period of strong market growth. As market demand is driven by increasing demand for coal, typically, with oil prices so high, by the fast pace of economic growth in China and Latin America and by the need cleaner air in China by the time of the Olympics in 2008.

We believe that we're very well positioned to continue creating value for customers in the fast-growing power generation market. Albany International has an excellent track record for manufacturing filter bags for on-site installation and for ongoing technical service to the power generation facilities.

I would add that our opportunities for growth and dry filtration are also enhanced by the increasing emphasis on raw materials such as alumina, some of which involve manufacturing processes with airborne contaminants for which our products and processes are very well suited. There are several other opportunities we're working on that should be indicative of potential from the Applied Technologies business, but I remind you that there is no assurance that any of them or all of them will grow sufficiently to result in major increases in the press about you of future cash flow. So we obviously wouldn't be working on a market we didn't feel they had very great potential.

That is -- a lot of good color the -- the thing that strikes me is that it sounds like what you're saying is the several pieces of Applied Technologies have sort to start to click at once, because up until recently, we really had not heard much more than PrimaLoft.

That's right, Mark. And again, what Frank and I have tried to do is let results speak for themselves. But I think that your question was a fair one because we have seen a change in the sustainability of the growth rate in the segment. And I think our investors, as you suggests, deserve to know something a little more about what's going on there.

I just have a couple other questions. And again, some of this is a little bit of housekeeping. But you had a couple of big senior operator changes that you announced earlier this year. I wondered can you talk about was it we should expect there to be any meaningful ships coming out of that. Will you bring somebody a new end, different views of the way the business should be run? Is DMC business going to experience any discontinuity and either favorable? I assuming you are going to tell me at the favorable way.

Mark, that's a good question. And the two senior people that retired were strong contributors to the organization. With the new organization, remember that these people have been with the company in excess of 20 and 25 years. I think that all of us continue to work with the same strategies of growth and returning value to our shareholders. And at this particular time, there is no change in the direction or the strategy at this particular time. And as you know, we've just come off the restructuring, and as I said, in 2005, this is the year to capitalize on the things that we have done and continue with our strategies to return value to everyone.

Mark, let me just add to that. I think there is no question that not only has that transition going well, but it's very clear that we are having a seamless transition to the welcome addition of Joe Morone coming in as President of Albany International. Frank has done a terrific job of getting the entire senior management team working together and working to get Joe's full participation in the things that we're working on. And we're very, very encouraged by the terrific input that Joe is already giving us, and we think that this is going to be an absolutely seamless transition.

I think that the last time we talked, we said that Joe would come on board in the 1st of September, but we have moved that up a month, and Joe will be on site on August 1st, one month earlier.

Okay. Just a couple other things then. Obviously, you talked about working capital going up for the right reasons, but more broadly, working capital has been a huge source of funds for you over the last couple of years. Are there still opportunities in there or should we figure that you've kind of got more than you're going to get?

What we have said in recent quarters is that for financial projections purposes it would be wise to assume that it doesn't get any better in an absolute sense. What that -- what is unsaid in that statement is that, in fact, we're going to continue driving to increase the efficiency of working capital. And I feel very comfortable that the number of good things are going on in that regard, it's just a -- as the growth rate goes up, you have to run hard just to get it to stand still. And we've got a lot of work to do, but we're -- a lot of good progress is getting made, notwithstanding the increase in the quarter for the reasons I mentioned. The heat will remain on the working capital area, but for forecasting purposes people are to assume that it remains fairly flat.

Okay. That's all. Just two more things and I promise I'll shut up. First, can you give us a sense of how the resin price hike impact factors in? It's usually an early part of the year thing. Is it kicking in any differently or is it likely to kick in any differently this year? Again, I'm trying to think about models.

We certainly -- the resin prices, that we forecasted originally, Mark, we're still sticking with those estimates of the impact of not just resins, but also energy impacts of roughly $12 million this year. That hasn't changed. We have seen that there's been great disruption in the oil segment of that, of course, in recent months. But our anticipation that we're still on course to track that way for the rest of this year.

Okay. That's helpful. And very last question, I promise. Cost reduction, you have lots of programs over the last couple of years and quite a bit of success with them, can you tell us where you guys think you are with your cost reduction targets?

Sure, Mark. While we have announced various programs over the last several years, I think that we're not likely to be announcing a specific program in the near future. We do, however, have quite a few things going on that we are absolutely convinced will lead to continuing increases of efficiency for various reasons. We would rather not going to the details of those programs, but I would have to say that Bill McCarthy, Frank, and I are all very enthusiastic about our ability to keep driving efficiency. And with more than immaterial possible effects, we have suddenly realized more than $40 million in connection with the last program that we had announced at $30 million. One was at the start of '03, I guess, it was.

Yes, at the end of '03.

So, we clearly-- basically every time we have said we would do something, we did it and more. I think we would be inclined at this point to just quietly get about our business and try to make some good things happen on the cost front and driving efficiency, while simultaneously increasing quality and reliability within our operations is important.

Okay. Fair enough. Thank you very much.

Thank you, Mark.

Thank you.

(OPERATOR INSTRUCTIONS)

And we will go to the line of Robert Jacapraro with ICM. Please go ahead.

Yes. Good morning. Is there any way in the PMC segment that you can breakout or at least quantitatively frame, as far as, the impact of price versus volume in the last quarter results?

David Borwick (ph).

The volume increase had a far bigger impact than the sales price. It's about a 3 to 1 ratio.

Okay. Is that a turnaround from the trends you have been seeing in recent quarters?

I would say that, yes, it's -- because of the increase in total volume, we benefited from that, but I will go back to the comments I made earlier about the modest price increase, have been an impact upon that, and we certainly will continue to push that through our value approach, but will take advantage of the value at the same time.

Thank you very much.

Thank you, Robert.

Thank you. We have no further questions. Please continue.

We would like to thank you all for participating in the conference call today. We are pleased that we can continue to bring you a story of increasing shareholder value. We thank you for your continued support of Albany International. Thank you, Julie.

Thank you. Ladies and gentleman, this conference will be available for replay 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.