Albany International Corp (AIN) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Albany International third-quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would like to introduce our host for the conference this morning, Mr. Michael Nahl, Executive Vice President and Chief Financial Officer for Albany International. Please go ahead, sir.

Thank you, Christina. 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 Corporation. Any unauthorized rebroadcasting is strictly prohibited.

Joining us this morning are our Chairman and CEO Frank Schmeler and our President Joe Morone. Our shift in strategy from cost containment and reductions in debt to one of profitable growth is beginning to result in measurable signs of improvement. There was growth in all three of our major business segments in the third quarter in comparison to the third quarter of 2004. Our Engineered Fabrics segment had the largest increase with a 9.9% increase in U.S. dollars and 7.5% sales increase, excluding the effect of changes in currency translation rates.

We congratulate our employees in all business segments for that excellent progress. We generated $46.6 million of cash from operations even after contributing $10 million to our U.S.A. pension fund. We reduced debt $76.1 million, and our cash declined $41.4 million. The decline in debt was $34.7 million greater than the decline in our cash.

While we are pleased with the improvements in sales in recent quarters, signs of softening demand in our customers' markets make it less likely that we will be able to sustain the same rate of sales growth in the near-term. In addition, we expect to invest in people and equipment during the next few quarters that will increase our operating expenses and capital expenditures. We feel these investments are necessary to support long-term growth in all of our business segments. We believe that the initial positive impact of those investments may become evident by late 2006 and in 2007.

Our consolidated EBITDA as defined in our loan agreement was $173.5 million, and our net debt as defined in that same agreement was $118.5 million. Our leverage ratio, defined as our net debt divided by trailing four quarters consolidated EBITDA, declined to 0.7.

The interest rate we pay on borrowings under our revolving credit agreement is LIBOR plus 75 basis points. This morning LIBOR is at 4.21%. We expect to close tomorrow on a $150 million borrowing from Prudential Capital Group with an average life of 10 years. $50 million of the principal will be due at the end of each of years eight, 10 and 12. The fixed-rate interest is 5.34%. This financing was arranged directly by Albany International with the Prudential Capital Group. The 5.34% fixed-rate for eight, 10 and 12-year money compares with the current variable interest rate of 4.96% for borrowings under our current revolving credit agreement.

Proceeds from this transaction will be used to pay down floating-rate indebtedness under the Company's existing credit facility. We believe this transaction further strengthens our balance sheet and provides us the financial flexibility to pursue the shareholder value initiatives we have discussed in previous calls. These include the ability to repurchase our shares from time to time in amounts and on terms that we feel attractive, as well as the ability to make investments in our existing businesses. Such investments may take the form of increased capital expenditures in Engineered Fabrics, as well as strategic acquisitions to provide growth in our other businesses in which we have sustainable competitive advantage.

To that end, we currently anticipate 2006 capital expenditures to be 70 to $80 million. For competitive reasons, we do not plan to elaborate on any specific details about our use of capital or planned shareholder value creation initiatives.

Before I complete my comments this morning, I would like to add a personal note about my friend and colleague, Frank Schmeler. The employees and shareholders of Albany International have been very fortunate to have Frank as our Chairman and Chief Executive Officer since October 1, 2000. Over that period, Frank built an effective management team, he set the strategic vision, and we've focused on generating cash and on strengthening our balance sheet.

To his credit, we not only achieved those financial results, we also created a lot of value for our customers and for our shareholders, and we as employees close to him found it a lot of fun coming into work in the morning. The value of Albany International stock was $12 per share the day before he became CEO and was $35.04 the day before our new President arrived. That 192% increase compares with a decline of 14.1% for the Standard & Poor 500 for the same period.

And since our new President, Joe Morone, arrived, Frank has been hard at work assuring that Joe receives all the support he needs to write the next chapter for Albany International, focused on achieving Joe's vision of growth at attractive returns and increasing our effectiveness in everything we do. Our entire management team is enthusiastic about Joe's strategic vision, and we are already moving fast to implement it.

We could not have been in such a powerful position to help Joe achieve his vision if Frank Schmeler had not done such an outstanding job over the past four and three-quarter years.

It is with great admiration and gratitude that I now turn the presentation over to my friend and partner, our Chairman and CEO, Frank Schmeler.

Michael, this is an earnings call, not a retirement party. Good morning, ladies and gentlemen. We are pleased with the operating results for the quarter which reflects growth and the effects of our continued focus on efficiency improvements. Our paper and paperboard customers experienced swings in demand by region and paper grade. However, demand for our products improved in Europe and remained strong in other regions.

Although market conditions in our Albany Door Systems segment were mixed with slow economic growth continuing to affect our customers in Europe, demand for our products in the Applied Technologies segment remains strong. As compared to the third quarter of last year, sales increased in both segments.

Third-quarter net sales for the Engineered Fabrics segment increased 9.9% compared to the same period last year. Excluding the effect of changes in currency translation rate, net sales increased 7.5. Net sales were positively affected by strong demand for our products in each of our primary markets resulting from new product performance and value focused solutions for our customers.

Year to net sales increased 7.3% and increased 4.1% excluding the effect of changes in currency translation rates.

Third-quarter Door Systems net sales increased 2.5% compared to the third quarter of 2004 and 2.2%, excluding the effect of changes in currency translation rates. The improvement in net sales during the quarter is due to the distribution channel improvements and new product introductions in North America, as well as growth in the European service business. Door sales in Europe and particular in Germany continue to be affected by weak economic conditions. Efficiency improvement in all Door Systems operations continued to improve earnings.

Year-to-date net sales increased 5.2% and increased 2.2%, excluding the effect of changes in currency translation rates.

Third-quarter Applied Technologies net sales increased 7.6% compared to the same period in 2004 and 4.4% excluding the effect of changes in currency translation rates. Strong results in engineered products and PrimaLoft in both North America and Europe and demand for our filtration products in China and Brazil contribute to the sales increase.

As with the other business segments, earnings improved due to sales growth, as well as continuing efficiency improvements. Year to net sales increased 8.9% and increased 5.5%, excluding the effect of changes in currency translation rates.

Our focus on growth in each of our business segments allowed us to build on the efficiency gains in our operations with solid revenue improvements. However, in the Engineered Fabrics segment, there is increased concern about sustainable paper and paperboard demand in the current energy influenced economic environment. Because of the continuing restructuring by some global paper manufacturers, ongoing weaknesses in the North American market and recent announcement of some of our customers regarding production curtailments in Europe, we are unlikely to maintain recent rates of PMC sales growth in the near-term. Despite the short-term outlook, we remain committed to growth in the Paper Machine Clothing business.

Albany Door Systems will continue to pursue growth strategies that lead to innovative customer door solutions, valued focused sales and increased service and support activities. In addition, continuing efforts to improve efficiency should further contribute to earnings.

Growth in the Applied Technologies segment should result from our continued investments in new products and application of existing technologies in new markets. Our opportunities for filtration products and power generation applications and for composites in advanced materials and aircraft are encouraging. In addition, we are pleased by the increased demand in PrimaLoft personal insulation products and expansion of our engineered products in the nonwoven industry.

We expect that investments in growth will increase in the coming quarters and will impact our capital expenditures and people cost in 2006. These strategic investments will likely include new hires in key areas, capital expenditures for all business segments and potential acquisitions in the Applied Technologies segment. These investments support our long-term growth and may positively impact operations as early as 2006.

Our growth strategies include the continued focus on important value drivers for our customers which improve their operations and increase their profitability. In doing so, we believe we're providing superior value for our customers and creating value for our shareholders.

As with all our customers, increased costs resulting from higher energy prices will continue to impact our operations in the first quarter. We do not expect these increases to exceed 12 million for the full-year 2005.

And at this time, I would like to thank all of our employees at Albany International around the world for a fantastic third quarter and for your efforts during the year 2005. And I appreciate your efforts very very much. Thank you. Michael?

Christina, we are ready for questions and answers.

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

This is Dohyun Cha (ph) subbing in for Mark. Good morning. I just have a quick -- first with a strategic question on Applied Technologies and areas of potential investment. Can you talk a little bit more specifically about those areas and what the core competencies within that business segment that you're looking to expand upon?

Joe Morone will take that one.

Well, we have -- we have been nurturing over the past decade or so a number of businesses that build off our core capabilities in advanced materials and textiles, and we see four serious candidates for growth. We think in every instance a combination of organic growth with complementary acquisitions that add to our bundle of capabilities is the strategy we are pursuing.

In each of those four opportunities, we are looking at a number of possible acquisitions, and when we find the right one for the right price, we are going to jump. But they are not going to be huge acquisitions probably. They are much more likely to be complementary acquisitions that fill out our capabilities.

What kind of payback or return criteria do you use for those potential acquisitions, Joe?

This is Michael. Specifically we have publicly stated in the past that for a strategic acquisition it must be accretive to earnings in the second 12 months of operation in combination with us. And, of course, we have a very rigid discipline with regard to looking at all investments, whether acquisition or not, with regard to the creation of shareholder value, whether we are talking about the EVA increment associated with it based upon discounted projections. Whether we are talking about the present value of the future cash flows, each and every measure that we use in this very disciplined approach is designed pure and simply for one purpose, and that is to assure that we add shareholder value.

I might add that inasmuch as we have aligned our management compensation with creating shareholder value, you may work under the assumption that the entire management team is very mindful that we are not interested in investing any money that is not going to do exactly that.

Let me add one thought to that. In these non-PMC businesses, the watchword is growth. So we are looking for acquisitions that would clearly accelerate rate of growth in those (inaudible).

That is helpful. Thanks. And then another question about Q4 relative to Q3, I mean we know that Q4 can sometimes be a seasonally weaker quarter, but your comments about the slower pace of sales growth, I'm just wondering if you were expecting a bigger relative decline in Q4 versus Q3 this time around? And then if you could comment a little bit about transportation costs and resins and how that impacts Q3 versus Q4?

This is Frank. I am cautiously optimistic about the fourth quarter. What I'm seeing out there in the paper industry is the announcements by Weyerhaeuser International Paper, Kimberly-Clark, the effect on the paper industry around the world, I'm seeing some things out there that are maybe a little bit different from before. As you know, the higher energy prices are biting people. Some of the more leveraged paper companies are getting hit with the increase in interest rates.

The apparent early signs of the economic slowing cannot help the industry in the fourth quarter. As I said, the energy impact -- I think I said the first quarter, but I meant on the fourth quarter -- the disruptions in the environment due to the hurricanes that we have been going through. And from what I understand, we've still got a few more weeks to go before that season is over.

Transportation, of course, is rising because of -- because of the energy crisis. And the other thing we're finding that are trucks sometimes are pretty hard to find because of what is happening around the country in terms of relief supplies. So, as I mentioned earlier, we don't expect it to go over the 12 million. If things continue, we may see some loosening of the energy costs in the first quarter, but I remain cautiously optimistic, and I don't think from what I have said and what I have seen that we will be able to sustain the growth in the fourth quarter that we have had before unless something drastically changes. But I think it's getting to be a little bit too late in the fourth quarter.

Got it. Perhaps these next two questions are for Michael. Can you just expand a little bit upon the SG&A rise? It was a little bit more than what we were expecting in the quarter. If you can go through some of the components of that and whether or not that would be a recurring thing and just remind us of what your targets are there?

And then secondly, on the working capital side, it was a huge source of cash in the quarter, a lot more than we were expecting. I was just wondering if there is some seasonality in that that we can expect to reverse next quarter?

First, with regard to the selling, technical and administrative, about 60% of the increase in selling, technical and administrative is directly related to the items that we explicitly mentioned in the release. And as for that reversing, I think the shareholders would be very unhappy if certain parts of it reversed because, in fact, it gets back to the fundamental point that we have aligned management compensation with creating shareholder value.

If you think about it, the senior management team has 100% of its incentive compensation, 100% of its incentive compensation, its long-term incentive compensation, its annual compensation tied to performance. Not a part of it; all of it. And not only that, there is a double hit here.

The second part of it is that that performance payment when eventually made is made in RSU, restricted stock units, which are tied obviously to the price of Albany International stock. So (a), we have got to earn it, and there will be years in which we may not be able to earn anything at all, but when we finally get paid it, we get paid based upon whether our shareholders are doing better or worse.

So as to that part of it, I certainly hope that we continue to do the right things for the shareholders.

Now there are some other issues associated with selling, technical and administrative in all of our cost categories that I would like Joe to talk about a little bit.

Well, in general from what we can see, there is plenty of opportunity there to reduce SG&A, and we have started examining several of the obvious categories where we think we can gain some significant savings without having any impact at all on performance. So it is if you leave aside that 60% increase due primarily to incentive compensation, it is too high in our mind, and we have every intention of bringing it down. We're not prepared to give you a target on how far we will take it down.

Got you. That is very helpful. And the working capital question?

Yes, as for the working capital question, I think you should assume in the fourth quarter that there will be a little increase in working capital. I think that is the prudent thing to assume. Meanwhile we are going to continue our efforts to do everything we can to keep it as efficient as we possibly can. But I think that is a prudent thing to do.

I apologize for hogging up the Q&A so much, but if I may, the last question is what kind of tax rate we should be assuming for the fourth quarter, Michael?

We will turn that over to Dave Michaels, our Vice President of Treasury and Taxation.

We have adjusted our effective tax rate, which as you know, it was announced in the press release from (multiple speakers). That is by definition annualized calculation. So you should for now assume that's going to be the tax rate for the fourth quarter before any discrete items.

John Emeris (ph), Ironworks Capital (ph).

Just a handful of unrelated questions. I will ask them separately. When you talk about the PMC growth rates unable to maintain the current growth rates, are you still expecting some growth, but just not at the high single digit rates that we have experienced lately?

I think we're not -- we really don't want to say any more than we said in our release on that, John. Let's face it for the factors that Frank talked about there is some uncertainty out there in terms of the underlying demand of our customers, the general economic conditions and so forth.

You have not followed us long enough to know that we rarely make forward-looking statements at all, and we are getting extravagant in our forward-looking statements there by comparison to our traditional. So I would just say that what we have tried to do is listen to Frank Schmeler's comment about cautiously optimistic and recognize those various factors that we talked about.

If I could just amplify, the reason Frank says he is cautiously optimistic, there are two pieces of that. He is optimistic because of a confidence in our ability to compete. He is cautious because of what he's seeing out there in the general economic environment.

In the most recent period, were you growing faster than the market?

We do not disclose our share of market implications except once a year, and this is not the time. 7.5% real growth in Engineered Fabrics sounds pretty strong.

It does. When will the increase in Applied Technologies, the people cost, start, and will you be able to kind of share with us as you report each quarter what the additional investments for growth were?

Certain parts of it we certainly will be able to, and some of those increased costs are likely to begin over the next couple of quarters.

And are the expenditures more weighted towards any particular opportunity within Applied Technologies, be it filtration, PrimaLoft or Aerospace, or is it across the board?

It is -- they are carefully targeted -- this is Joe -- they are carefully targeted toward trying to accelerate growth in each of the areas that we think there's a real shot at it. So these are very much growth-oriented expenditures, and they are selective not across the board. That is they are driven by where we see some serious growth opportunity.

Are those markets that you're looking at longer-term, higher return on invested capital businesses than PMC, lower, about the same? What do you think they will end up looking like?

They are all businesses with higher growth rates and lower required invested capital. So they will tend to be higher ROI type of businesses.

Right, right. And now that you have kind of committed the investment to those opportunities, can you provide more color as to the size of the market opportunities, just order of magnitude?

We're not -- I'm sorry, we're not inclined to do that. We talked in our second-quarter conference call about three of the possible areas, and we want to avoid any indication that we are hyping anything here. Our inclination is to quietly get about doing the business -- we are tackling a couple rather substantial opportunities. As to the underlying demand, you can do your own market research on what aviation composite materials is for example.

Let's -- this is Joe -- if you understand, we cannot give you the specifics, but we will give your our strategic intent. Our intent here is to over time -- this is not going to happen immediately -- but over time we want you to stop thinking of us as PMC and a bunch of other things business, and instead as an advanced textiles and materials business with at least a handful of growing businesses, one of which, perhaps the largest of which, is PMC.

Okay. Last question, a clarification on seasonality. The question was asked earlier, reference was made to Q4 softness relative to other quarters, and if I look back over the last four years, December was always up sequentially from September. Could you clarify the seasonality of the businesses?

Sure. We will turn that over to David Pollock (ph). David?

Well, the Engineered Fabrics segment does tend to have its strongest quarter in the fourth quarter. However, I think in this case we are looking at the markets like Frank has suggested, but it does tend to be the strongest quarter in the fourth quarter.

Ned Borland, Next Generation Equity Research.

Just a quick question. I know you guys have touched on this already, but as far as the strategic investment, I mean should we be looking at that more as sort of like, you know adding heads first before the hard assets, or how should we be thinking about that in the coming quarters?

Well -- this is Joe -- there is no one answer to that. The way we're thinking about it is this. What are the investments that we feel are strategically essential in order to propel growth, either within PMC or outside PMC?

And then once we understand what the strategic levers are, then we ask what makes the most sense financially? And sometimes it will be capital, sometimes it will be people, sometimes it will be positioning for organic growth, sometimes it will be acquisition. But it starts with what accelerates growth best, and how do we accelerate that growth in a financially sensible way?

So there is not one answer to that. Other than that we are at this point building off the four and a half years that Frank led us, that Michael was referring to before, we are positioned for growth. And we're now -- our mindset is, how do we leverage all that hard work and pain for the past four and a half years?

Okay. That is really all I had.

(OPERATOR INSTRUCTIONS).

Christina, if we have no further questions, we're quite pleased with the quarter. We're glad to see the progress that is getting made, and we're delighted that we have been able to deliver value to both our customers and our shareholders in 2005. I would like to thank you all for participating in the call this morning.

Very good, and ladies and gentlemen, today's conference will be available for replay at the Albany International website.

That does conclude our conference for today. We thank you for your participation and for using AT&T's Executive Teleconference Service. You may now disconnect.