Albany International Corp (AIN) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Albany International first quarter earnings call. 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 star then zero and at the request of Albany International this conference will be webcast and recorded.

I would now like to turn the conference over to our host, President and Chief Executive Officer, Dr. Joseph Morone. Please go ahead, Doctor.

Thank you, Cathy.

Good morning. Albany International had a good first quarter. Performance rebounded from the fourth quarter 2005 and compared favorably to a strong first quarter 2005. Our top line continued to grow, driven primarily by improvements in price and product mix, and gross margins improved to 41.4% of net sales from 37.5% in the fourth quarter of 2005 and 40.8% in the first quarter 2005.

The continuing strength in the top line reaffirms our strategic focus on growth in each of our business segments. In PMC we continue to emphasize the broad spectrum of internal initiatives intended to increase the value we provide to our customers. We made modest progress in these initiatives in Quarter 1 and expect additional gains late in 2006 and in 2007.

Despite continuing consolidation and restructuring in the paper industry, we remain bullish about the future of PMC because of the inherent value create by Paper Machine Clothing for paper makers. Our challenge is to continue to deliver ever-improved products at ever-higher quality and ever-shorter cycle times, and to demonstrate the resulting value to our customers.

The cloud on the horizon in PMC, and it is for so many industries, is the continued increase in petroleum prices and the resulting impact on the cost of raw materials, transportation, and utilities. Our top line growth in Quarter 1, 2006, enabled us to overcome the impact of the petroleum-related cost increases that we discussed in our last earnings conference call, but additional increases are already in the pipeline, which we will once again strive to overcome through the initiatives I mentioned earlier.

But there is a silver lining to this cloud. For some time now, Albany has been intensely focused on helping our customer achieve energy savings. For example -- and it's just one example -- an important new product called Aeropulse is delivering dramatic reductions in steam usage and, therefore, energy consumption in the energy-intensive drier section of our customers' mills.

In Applied Technologies we continue to focus on new product and business development and we continue to make excellent headway, as evidenced by the 21% increase in sales in this segment. Sales growth was especially strong in engineered fabrics and Primaloft, two increasing important members of our family of advanced textiles and materials businesses.

Meanwhile, the integration of the former Albany Techniweave and newly acquired Texas Composites into Albany Engineered Composites is proceeding well and we continue to make progress in the development of new business opportunities in the aerospace composites market.

Our third segment, Albany Door Systems, also performed well in Q1, with strong growth and earnings. Of particular note was the healthy performance in the all-important European market.

In sum, in each of our segments the first quarter results suggest that we are on plan, that we are focused on the right issues, and that we are making steady if modest progress against those issues.

Finally, as the balance sheet-related transactions described in our earnings release make strikingly clear, we continue to reduce our cost of capital and increase our strategic flexibility while remaining committed to maximizing long-term returns to our shareholders.

Now let's turn to Michael Nahl, Albany's Executive Vice President and Chief Financial Officer, who will cover more of the details, and then we'll open this call to your questions.

Thank you, Joe.

Good morning. During the course of this conference call we will make statements that constitute expectations, beliefs, or similar forward-looking statements. We would like to caution you that the Company's actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional information concerning the factors that could cause actual results to differ materially from the information we'll share with you is set forth in the earnings release itself, which has just been filed on EDGAR under form 8-K.

For the past 6 years we have demonstrated that we can generate a lot of cash. In the 6-year period from 2000 through 2005, we reduced our net debt as defined in our revolving credit agreement by $442.5 million. We also bought back 2.9 million shares of our own stock during that period at a cost of $82.7 million and paid $34.1 million in cash dividends. The sum of the cash devoted to those three purposes -- stock buy backs plus dividends plus the reduction in net debt during that period -- was $559.4 million or $93.2 million per year.

The period in which we generated that cash was not a particularly easy one for companies serving the paper industry. Our focus on improving our financial strength has created a very strong and sustainable balance sheet and the capacity to support the strategic shift which Joe has just described of accelerating growth in each of our business segments.

An examination of the quarterly sales data over the past several years suggests to us that our new strategy may be beginning to take hold on the top line. For example, after 3 years of uninspiring sales through 2004, our total sales began to grow faster in 2005. Specifically, excluding the effects of changes in currency translation rates, sales in the last 5 quarters have grown at rates of 0.9% in the first quarter of 2005; then 5.0% in the second; 6.5% in the third; 6.7% in the fourth; and 6.7% in the first quarter of 2006.

We know that four strong quarters does not assure that a new trend is in place, and we fully expect occasional weak quarters at unpredictable points in the years ahead. In fact, the increasing importance of our emerging businesses may be to increase the susceptibility of our earnings, the volatility from economic conditions. But the quarterly data supports the hypothesis that we we may be in the early stages of a successful transition to higher growth at attractive returns.

It is noteworthy that all three business segments have shown accelerated growth in comparison to prior periods excluding the effective currency exchange rates. In PMC, the corresponding quarterly sales growth figures, starting in the first quarter of 2005, were 0.3%, 4.7%, 7.5%, 6.5%, and 4.2%. The figures for the Door Systems segment were 0.8%, 3.8%, 2.2%, 4.7%, and 7.8%. And in the Applied Technologies segment, we can find even earlier signs of faster growth. Again, excluding the effective currency exchange rates, starting with annual sales growth of 7.2% in 2003, 8.8% in 2004, 11% in 2005, and the strong start in 2006 with 21% in the first quarter.

We believe that the data validates our strategy to grow Albany into a family of advanced textile and materials businesses. Through our Applied Technologies and Albany Door Systems business segments, we are greatly increasing the range and depth of market opportunities for future growth.

We have begun to demonstrate that we can successfully transfer our core competencies to entirely different customer groups, substantially increasing our potential for growth and attractive returns on investment. It seems to us entirely plausible that, even as we accelerate our growth in PMC, we might eventually have as much or more sales and earnings from our Applied Technologies plus Doors Systems business as from PMC.

We are in a very strong financial position to support such growth initiatives. In our news release we described steps we have taken recently to both lower our cost of capital and to increase our long-term capital availability on favorable terms. We believe that our new capital structure provides us enormous strategic flexibility to achieve our new strategic vision.

Each of the four actions listed on pages 3 and 4 of our news release had the effect of reducing our cost of capital. The three debt initiatives significantly reduced the average cost of our debt and increased it's availability. The $150 million, 10-year average life notes that we issued at 5.34% compare favorably to this morning's 10-year treasury rate of 5.01%. The $180 million convertible note offering carries a coupon of 2.25%, and even after calculating the cost of all of the funds and all of the costs, including the call spread, which substantially reduces the potential for future dilution, our effective pre-tax interest rate on the net funds generated from that offering is only 2.53%, pre-tax.

Our new revolving credit agreement, entered into just this month, reduces our spreads over LIBOR by 15 to 50 basis points compared to our prior agreement. The applicable interest rate for borrowings is currently 40 basis points over LIBOR, a cost of 5.5% based on this morning's 3-month LIBOR.

The fourth financing initiative addressed equity. If we execute our strategy effectively, equity capital will be by far the most expensive portion of our capital base. By buying 2,741,280 shares of our stock in the first quarter we have brought our total purchases of our stock since March 10, 2004, to 5,612,196 shares. At the end of 2005, we had 32,362,000 shares outstanding. At the end of the first quarter of 2006 we had just 29,752,000 shares. And even after spending $101.1 million to buy shares in the first quarter of this year, we still have a very low leverage ratio of just 1.3.

The 5.6 million shares of stocks that we purchased over the past 26 months represents 18.9% of our current 29.75 million shares at the end of the first quarter, and represents 15.9% of the shares that we would have had at the end of the quarter without those purchases. As a result of buying our shares, our shareholders will enjoy a correspondingly higher share of our future earnings and cash flow.

We believe that the steps that we have taken to accelerate growth and strengthen our strategic flexibility will lead to attractive returns for our shareholders over the intermediate and long term.

That completes the formal part of our review. We would like to take your questions at this time. Cathy?

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from Scott Hoina with CJS Securities. Please go ahead.

Good morning, gentlemen. Congratulations on a great quarter.

Thank you.

A couple of quick questions. Overall organic growth, ex-currency, I guess, was 5.9%. Can you just give me a sense of volume versus pricing in that number?

We think the most important contributors to the top-line growth this quarter were price and product mix more than volume.

Could you just maybe give me a sense on was volume was up or was it down, just a general sense.

Volume was up. Volume was up quarter to quarter, and first quarter '05 to first quarter '06, it was also up fourth quarter '05 and first quarter '06.

Secondly, just in terms of the your pricing initiative in Europe, it seems like you guys made some good progress in the first quarter.

I would say we made some initial modest first steps. We're far from being out of the woods on this, and we're just getting started. But we did make some progress, yes.

So when you say additional positive effects in '06 and '07, is this sort of a continued steady improvement? Or should we see -- is this more back-end loaded? How should I look at it in terms of my modeling?

I think your first interpretation is probably the better one.

Got it. Okay. Great.

Also, too, in terms of the one-time inventory adjustment you guys have mentioned we should look out for in the first quarter, it looks like that has been pushed out now. You did say that the timing and the amount is uncertain. Is 8 million and 3 million sort of around the right number I should be looking at? Or could that change drastically?

Yes, it's in the range. We think it's in the midpoint of the range. The greater uncertainty is on the timing of this thing. We were pretty sure it was going to happen this quarter , but the negotiations are going on and we're no longer sure exactly when it's going to happen.

Especially in terms of your Applied Technologies, you had really good growth there. Has the Composite opportunity there, has that started to impact the numbers?

No, it's really more of -- the optimism that we're expressing about that business is based more on the capabilities we're developing today that will likely have an effect in year three, four.

And lastly, in terms of your expansion into, I guess, expansion into Brazil and Korea, and then also your new facility in China. Can you just give me a quick update on the progress you've made there so far?

We're on plan. We're -- I'll leave it at that. We're on plan, progressing well, no surprises.

I would just like to amplify Joe's comment with regard to the Albany Engineered Composites situation. We're really very encouraged by the integration of our business with that of Texas Composite. The customer reactions that we have experienced over the last quarter have lead us to believe that we're really right on plan with regard to our ability to grow this business. Joe mentioned the three or four years down the road effects, which, of course, are the most exciting ones. You're not going to have to wait three or four years in order to see growth in this segment. In fact, you'll be seeing it by late this year and early next year.

But the impacts that we get excited about, the ones that really alter the structure of this company, you're going to have to be patient for.

Now, just to follow up on that, just in terms of if your designed [into new planes], they'll be shipping later this year, so the contracts probably have already been on -- or is that true?

That's correct, and that's why Joe's point is that -- for the new planes, that's the period of 3 years, 4 years down the road. What we're finding, though, is that the customer interest in our capabilities is going to lead to some increased volumes on existing planes in manufacture by length this year and beginning early next year and, on a percentage basis, suggests that we should see some pretty decent growth rates of, say, even in 2007 in this business. But again, Joe said it exactly right: the exciting part comes about three or four years down the road with regard to what can be generated at that point.

But I think you are heading in the right direction if you think in terms of new aerospace platforms. We'll get incremental growth from additional participation on existing platforms, but the step change occurs with the next wave of platforms, which is what you were talking about.

And it is too early to give me an indication of those potential revenues per chipset?

Yes.

Yes.

All right. Thank you very much, gentlemen.

Our next question is from Mark Connelly with Credit Suisse. Go ahead, please.

Hi, it's actually Sam McGovern on behalf of Mark.

Hi, Sam.

Hi. How are you? Just a quick question. When you look back at the last 12 months, the capacity closures that we've seen in the U.S. and Europe, can you give us a rough estimate as to how many were meaningful customers of yours?

Well it's tough to give you, off the cuff, a rough estimate. What I can give you is a general picture that -- it's -- the capacity closures are almost a random event -- almost have a random impact. In some cases we were a large supplier. In other cases we were a small supplier. It's very difficult to predict in advance what the impact is going to be.

I think our way of looking at it is as follows: long term, this restructuring doesn't really alter our view of the industry, where globally we're seeing steady incremental growth in production and consumption, and what these closures do is -- it's really a shift in capacity from lower efficiency mills to higher efficiency mills, so the second long term impact is an increasing premium being put in our business on being able to provide ever-superior products with higher quality, because the machines that capacity is shifting to are higher efficiency machines.

What these closure do affect us is it adds an element of short-term volatility. Long term, we don't see -- it doesn't change our picture, but short-term, there's a lack of predictability if one of the mills that shuts down, as has occurred in Canada several times recently, if one of the mills that shuts down is one where we have a strong position.

If you need more precision than that, we can get back to you later, but the rough answer is, shorter -- it adds to shorter term volatility, as do the petroleum price increases. Doesn't really alter our long-term view.

Right. And in terms of sort of that short-term volatility and sort of the increase in sales that you guys saw, what do you guys think is happening to your market share in the U.S. and globally?

We think that our share, based on what we saw on the top line, is probably strengthening.

And then also just -- and lastly, on PMC, I know that Europe is sort of lagging right now, but is there any product or sort of region in the world where prices are being sort of passed through better?

Well, in general in this industry, pricing is strongest in the Americas. We're working hard on it in Europe, and we are barely beginning in Asia.

Also, then, in doors, the sales growth that we have seen: is it concentrated in any single industry?

No. The demand came from a broad range of customers, and clearly these are principally industrial customers, as these doors have the material advantage of rapid openings for industrial plants, both internal and external facilities. Europe was clearly the strongest growth contributor in the first quarter.

At this stage in the development of the business, we view the regional variations as a more significant way of thinking about the business than vertical industry segments. That may change in time, but that's where we are right now.

Okay. And then in implied materials, how important are sort of additional acquisitions to the plan, relative to sort of organic growth?

Our -- where we are in the applied technologies segment is we are at the front end of the growth. Our focus is on building capabilities that will be a sustainable foundation for growth. So if we make acquisitions, they'll be small, complementary acquisitions that add a key capability to our basket of capabilities that we think is critical for long-term growth. So the Texas Composite acquisition is the kind of complementary capability-enhancing capability -- acquisition that we're -- that reflect our current thinking. So our mode right now is build sustainable foundation for growth. We're not looking for big acquisitions that would catapult growth at this point.

Okay. And your balance sheet had been underlevered for a while and you guys have done these financings. Have you guys accomplished what you set out to do with these?

Clearly, we have accomplished what we intended to accomplish with regard to assuring that we have a wide range of strategic flexibility with regard to initiatives to support the vision that Joe has described. Clearly, even with the 1.3 leverage ratio, we clearly could take on a significantly greater portion of debt and we -- I would be surprised if we have seen the last of the stock buy-backs in the next year or two, even as we support that strategic growth through the investments that are necessary to sustain it.

Got it. And then just some block and tackling. I just wanted to get a sense as to overall CapEx expectations for 2006, including the $150 million CapEx program.

We're still on track with what we had described earlier, 90 to $100 million of capital spending in '06.

Okay. And then, what was the share count at the end of the quarter?

The share count at the end of the quarter was 29,751,756 shares. And of course the reason Sam is asking the question is that that's how you are going to figure out how accretive it is in the quarter that's going forward. We take an average share count and so it becomes increasingly important in consecutive quarters going through the year.

And then working capital, you guys had it, it was a use of cash in the first quarter. Are you guys expecting that for the balance of the year? That's likely to continue or is it going to be a source -- or I'm sorry, a source for the remaining 9 months?

Well in a growth mode it is not unusual for the working capital to increase for obvious reasons, both on the inventory and the receivable side. We think we have got it under pretty good control, so I don't expect any unreasonable increases. To the extent it increases I think it's quite likely that it will be for the right reasons.

Great. That's all. Thanks so much.

Thanks, Sam.

Thank you. We'll now go to Ned Borland with Next Generation Equity. Please go ahead.

Hello Joe, Michael.

Hey, Ned.

Couple questions on PMC here. Are your prices -- are they -- how much of the raw material increase are they covering now?

Well, basically, the top-line growth more than offset that $0.11 effect that we talked about in the fourth quarter. At last earnings call.

Okay. So more than offset it. Okay. And then the anticipated increase kicking in in the third quarter. I mean, are you still optimistic that your pricing strategy can handle that? Or --

Well, you know us well enough, Ned, at this point, to know that we're always going to be cautious, We're always going to be conservative. But Joe said it very well, I thought. Basically what he said was, we're working on it. You know, we said on the fourth quarter release, you know, we're working on some things that we hope will offset it, but we really can't say more than that but it's very clear to me from the programs underway that we're sure trying.

Okay. It was worth a shot. [Laughter].

What about within Applied Technologies, some of the other businesses, if you could just give us any significant color on the -- say, what is going on at Primaloft and Engineered Fabrics that's worth mentioning.

Well, we're encouraged by the progress in both. We're -- in engineered fabrics, we think most of the hurdles to accelerating growth are internal and are about expanding and rationalizing our capacity internally.

Primaloft is a very different game and it's mostly about classic new product development, greater penetration in existing segments, development of new products that create new segments. You know, we had a very interesting new product introduced that has substantial growth potential. It's Primaloft yarn as opposed to Primaloft insulation, which can be used to make clothing like socks, that sort of thing, that have all of the insulation benefits of Primaloft insulation, but now it's in things you can wear. So we're kind of -- this is -- Primaloft is very much classic new product development and new segment development, new business development. EF is very much capacity rationalization, productivity mode right now.

Okay. And I guess just finally a strategic question. The door business seems to have kind of turned around here. How does that fit with the overall strategy of the new Albany, if you will?

Well, it fits in the sense that we are trying to create a more diversified family, as Michael suggested. You know, you look way out in the future and what you would really like to see is a company with three balanced segments. So we're encouraged.

Okay. All right. Thanks.

Thanks, Ned.

Thank you. Our next question is from John Emerich with Iron Works Capital. Please go ahead.

Hi, Michael.

Hi, John.

Hi, John.

Hi, Joe. Great quarter, and love what you did with the restructuring and the way you describe it in the release and have communicated what you are trying to do. I think it's exactly what any shareholder would want you to do.

And my question is simple. I just -- you started -- I didn't have my pen ready, Michael, when you were walking through the new kind of weighted average cost of debt. You said you lowered it to 2.5? Or -- what was that number?

No. I would be happy -- why don't you give me a call after this is over and I'll walk you through it.

Okay.

The 2.53 is in connection with the effective pre-tax interest cost associated with the net proceeds associated with the convertible notes offering.

Oh, okay. I'll call you later.

Fine.

Okay. Thank you, sir.

I'll go through it in detail with you.

Okay.

[OPERATOR INSTRUCTIONS]

Okay. Operator, we thank you very much. Thanks to all of the investors who have called in today. We appreciate very much the continuing excellent efforts on the part of our employees all around the world. We're really quite excited about what we're seeing in all three of our corridors and all three of our business segments. Thanks very much for joining us today.

Thank you all.

Thank you. And ladies and gentlemen, this conference will be made 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.