Albany International Corp (AIN) 2006 Q3 法說會逐字稿

Welcome to the Albany International third quarter investor call. [OPERATOR INSTRUCTIONS] At the request of Albany International, this conference will be webcast and recorded. We'll now turn the conference over to the President and Chief Executive Officer, Dr.Joseph Morone. Please go ahead.

Good morning, everyone, welcome to the third quarter earnings call for Albany International. As usual, I'll start the call with some comments about the third quarter and also some comments about what we're seeing going forward. And then I'll turn the call over to Michael Nahl, our CFO and Executive Vice President who will provide his usual amplification and then we'll turn the call over to your questions.

In our second quarter earnings release I indicated our results for the next few quarters could be negatively affected by pressure on European PMC revenue because of competitive pricing patterns at a time when the paper industry in Europe is under intense financial pressure. This was certainly the case in the third quarter. Global PMC revenue declined 5.6%, excluding currency effects compared to the third quarter of 2005. This decline was due entirely to a reduction in your European revenue that was much sharper than expected. In the Americas and Asia, revenue grew modestly, in fact, in the Americas, even as shutdowns at paper machines continued, our market share increased as customers continued to respond to our efforts to provide them ever greater benefits for our products and services.

The decline in European PMC revenue is due entirely to a reduction in volume, our average PMC prices for the quarter actually increased modestly. The decline in European volume resulted from three factors, shutdowns of paper machines, and industry-wide slowdown in PMC shipments and a wider gap in PMC pricing between Albany and our competitors. That is, as the gap between our prices and our competitors' prices grew, we lost sales for our least differentiated products. We held and in fact gained sales for our newest and most differentiated products.

Going forward, the third quarter should mark a low point in operating results for the foreseeable future. Excluding the fourth quarter effect of the change in inventory practices that we mentioned in the release, and excluding expenses associated with cost reduction and other process improvement activities, we are hopeful that the trend forward is for gradual improvement in revenue and operating income. We are also hopeful that the operating income impact from the decline in European PMC revenue will be fully offset by the fourth quarter of 2007.

We see three primary factors that should contribute to this gradual improvement. First, we are hopeful that PMC revenue will gradually improve from third quarter levels. In the Americas this improvement will be driven by our continued competitive strength. In Asia, the improvement will be driven by our growing competitive strength although the earnings impact during 2007 should be offset by startup costs associated with our new investments in the region, those investments, by the way, are right on track.

Going forward in Europe, we do expect the pricing gap to narrow, and volumes to increase and we are cautiously optimistic that the combined effect should lead over the next few quarters, to flat or slight improvements in PMC revenue from the third quarter levels. Second, along with the gradual improvement in PMC revenue in the next few quarters, we also expect to see a gradual positive impact on operating income from the accelerated cost reduction and process improvement activities that began in the third quarter and will continue through year-end and throughout 2007. In the third quarter, we reduced capacity in the Americas in two locations, launched the global procurement initiative and reduced corporate overhead expenses.

During the fourth quarter, in addition to more general cost-reduction activities, we are launching two major process improvement initiatives. We're initiating discussions with our works councils in Europe about a proposal to centralize our administrative functions for the European PMC business, and we plan to migrate our global ERP system to SAP. We believe that the migration to the new ERP system will lead to significant efficiency improvement in the long term but will result in cost increases in 2007. The switch over to SAP will begin early in 2008 and will be substantially completed in 2009.

The third quarter 2006 charge associated with the initial cost reduction initiatives was $0.10 per share. We estimate that the additional cost of all of these initiatives over the next five quarters will be approximately $0.30 per share, the largest portion of which of is likely to be incurred in the first half of 2007. The positive effect of these cost reduction and process improvement activities should be $0.45 per share in 2008. These positive effect of these cost reductions and process improvement activities should be $0.45 per share in 2008. These positive effects will begin in the first quarter of '07 and will be fully in place by the end of 2007.

The third contributor to the anticipated gradual improvement in revenue and operating income is expected to be continued growth of the emerging businesses in our Applied Technologies and Albany door systems segments. In the Applied Technology segment, Albany engineer composites including the businesses acquired during 2006 have recorded year-to-date sales of $16 million. Without any acquisitions or additional new projects, we believe that this business has the potential to maintain a compound annual growth rate of at least 25% over the next five years. Assuming that our customers realize their commercial expectations and we execute the plan. By 2012, our work with Snecma on composite fan blades should be making a significant additional contribution, assuming commercial development continues as we anticipate.

The primary risk in this aerospace composites business is one of execution. That is, given our unique technology, we believe this area of business is opportunity rich. The realization of its full growth potential hinges on our ability to build a manufacturing and engineering infrastructure required to manage high growth, while delivering high quality. We expect a fairly high rate of capital investment in this business and that the returns on this investment will exceed our cost of capital. The other businesses within Applied Technologies apply the core advance textiles and materials technologies of PMC to other industries. In the past, these businesses have been undercapitalized, relying in part on excess PMC capacity.

The Company is now investing in both new product development and dedicated manufacturing capacity. For example, in the past 12 months, the Company opened a new Applied Technologies plant in Zhangjiagang, China and announced plans to construct a new engineered fabrics plant in Kaukauna, Wisconsin. We believe that without acquisitions these businesses have the potential to grow at least at a 5% compound annual growth rate for the next decade. Albany Door Systems continues to perform well on its current trajectory, we believe it has the potential to grow at a 5 to 7% compound annual growth rate. We see a potential for acceleration of this growth rate, assuming we can develop new approaches to the very large aftermarket. We have begun to explore these new approaches and will have a more definitive sense of whether we can achieve the accelerated growth rate by the end of 2007.

In sum, over the next five quarters, we look for gradual improvement in revenue and operating income, with the full effects on operating income of the PMC revenue decline in Europe offset by Q4 of 2007. And for the longer term, we believe that the steps we are taking today are, on the one hand, significantly enhancing our already strong competitive position at PMC and, on the other, positioning the emerging businesses so that they have the collective potential to grow over the next 10 years to a size comparable to the PMC segment. And now I'll turn the call over to Michael Nahl, our CFO and Executive Vice President. Michael?

Thank you, Joe. Good morning. First, just a reminder that the comment about forward-looking statements, which is contained in the press release applies to our remarks in this conference call. This is a copyrighted presentation of Albany International Corp. and any authorized rebroadcasting or publication of transcripts of it is strictly prohibited.

I'd like to point out a typo in the net sales table on page 2 of the release. The Applied Technologies net sales for the three months ended September 30, 2006, should read 35.241 million instead of 35.251 million, which is shown in the table. We will correct this in the 10-Q.

This was a very disappointing quarter. We knew we were heading into rough waters in European Paper Machine Clothing and we alerted you to this in our last earnings release. But those waters were even rougher than we expected. In our press release last night, we described in pretty complete detail all of the most important reasons for the decline in earnings. We've discussed in previous releases, both the impact of sharply rising material costs and the short-term dilutive effect of the Texas composite acquisition. In the third quarter, the effect of higher materials costs reduced pretax income $6.8 million in comparison to the same quarter last year. We expect material costs to increase again next year, although we would hope that the recent easing of petroleum prices might lead to a lower growth rate in materials costs over the next year.

The Texas Composite effect is both temporary and the kind of problem we like. It's the result of having a high and increasing order backlog. The integration and manufacturing costs to meet Texas Composites backlog reduced pretax income by 1.5 million in the third quarter. But the biggest story this quarter, and the largest contributor to the reduction in pretax earnings is the decline in PMC volume in Europe. Joe has covered in considerable detail what has happened in the PMC business and what our management team is doing about it. In my comments, I'd like to put these developments in European PMC in a bit more context. First, in the context of near-term financial results and then in the context of the long-term attractiveness of the PMC industry.

The lower PMC volume in Europe reduced third quarter pretax earnings by $8.7 million in comparison to the third quarter of 2005. The worst is probably over and in the press release we've identified the steps intended to increase profits over the next year. We expect to regain lost volume in Europe. In every prior instance of regional loss of market share, we have gained it back. We are confident that this time will be no different. We believe that the combined potential effect of regaining PMC volume, implementing cost reduction initiatives, and continuing growth in Applied Technologies and Albany Door Systems should result in gradual improvement in revenue and operating income as described in the release.

The Paper Machine Clothing business has been a very good business for a long, long time. Even in the third quarter, when you analyze the components of the cash from operations, you'll see that this business provides excellent cash generation. Net cash provided by operating activities excluding the pension contribution and the termination of the accounts receivable program was $36.1 million. We've carefully analyzed the Paper Machine Clothing business dynamics that resulted in such a sharp decline in volume in Europe and we've concluded that while the swiftness of the decline is unusual, and there's clearly a global geographic capacity shift among our customers the PMC industry dynamics do not appear to have changed. We've successfully managed through other occasional price gap widenings before.

Paper Machine Clothing remains a strategic product for our customers, the paper manufacturing companies. PMC represents less than 2% of the costs of making paper, and yet it can affect papermakers profits by a multiple of their cost of Paper Machine Clothing. PMC affects papermaker profits in several ways. It's the only element of the paper making process that is in constant contact with the sheet from the forming section through the dryer section. It has a major direct impact on the quality of the paper produced. It can have a large impact on the cost of running the machine. And, it can substantially improve paper machine productivity.

PMC industry consumption seldom falls sharply, even in an economic recession, while our sales in Europe fell sharply in the third quarter, we fully expect that some of our competitors' sales gained. PMC industry sales volumes remained pretty steady with slow growth in good economic times and small declines in recessions. It seems unlikely to me that any competitor that grabs some share of market from us in the third quarter is likely to enjoy it for long. We'll make a few adjustments and continue to build our business by creating increasing value for our customers. We welcome competition within our industry. And we're confident that Albany International and other global PMC suppliers can continue to demonstrate the value PMC provides to papermakers.

I'd like to close my remarks by emphasizing this management team is working on a range of shareholder value creating efforts. We have been aggressively implementing new cost reduction and efficiency improvement initiatives and equally important, we've been focusing on growth initiatives. While the efficiency improvement efforts are essential, and the positive results will begin to show up fairly quickly, the most substantial value creation will come from profitable growth initiatives. It's clear that we have substantial attractive opportunities to invest in people and capital for growth in both the PMC business and the emerging businesses.

We purchased 3.5 million shares of our own stock so far this year, 6.37 million in the last three years. And we remain authorized to buy up to 2 million more. We remain convinced that the shares we have purchased have and will continue to create value for our shareholders. We do not discuss publicly when or under what circumstances we are or will be in the market for our stock. Those decisions are always based on the range of our available alternatives to create value. We will let our track record regarding stock buybacks speak for itself. That concludes our formal remarks. We'd now be happy to take your questions.

[OPERATOR INSTRUCTIONS] First, Arnold Ursaner with CJS Securities, please go ahead.

Hi, good morning.

Good morning, Arnold.

Wanted to try to focus a little bit more on what I would call the swing in potential earnings. If I've heard you right, you obviously are talking about some cost-saving initiatives, but they're going to actually hit you by roughly $0.10 -- they did hit you by roughly $0.10 and another $0.30 or so over the next five quarters. And you indicated you hope to see an improvement of $0.45 somewhere in '08. But can you drill down a little bit more on what is likely to be an $0.85 swing in potential earnings? Because to the extent people believe that, I think your stock could trade a lot higher over the next year or so. Can you drill down a little bit more into that process, please?

Well, Arnie, this is Joe. If you, the short-term effect of the $0.10 and $0.30 are the costs associated with various cost reduction activities. So if you imagine than the remaining $0.30 all hit in Q2, I'm speaking hypothetically, let's just say they did. The beneficial impact of those cost reduction activities are gradually bleeding in, we'll start seeing some effect in the first quarter of '07. The full run rate of those effects should be fully in place by the end of '07. The full run rate is a $0.45 positive. So if you go Q2 '08, you get the kind of swing that we're -- that you just referred to. So the low point, if you assumed all the costs hit in Q2 '07, and by Q2 '08, all of those effects are in place, then that's the swing that we're talking about, yes.

And is there anything -- obviously you're going to try do this in an orderly manner. But is there any reason it would take quite that long to implement some of this?

Well, it is precisely that we're trying to do it in an orderly manner. If you look at the items that we refer to, they take a while to be fully in place. These tend to be process improvement and organizational changes and they just take time to be fully in place. And we're trying to do it the right way, Arnie.

Going to the same issue of timing of things, I've heard you describe your general strategies in the door systems area, the types of actions you hope to take to go after the much larger $1 billion after-market market opportunity. You've been looking at this and actually I thought had even run some tests already. I'm a little surprised to see your view that you won't have a definitive sense of whether it works or can accelerate growth until the end of '07. What have you seen so far in your trials and, again, why do you think it would take that long to get a feel for the success of it?

Well, everything we're seeing is reinforcing the notion that there's a big market out there. In the aftermarket. What remains to be seen is whether we can successfully come up with the business model that is sustainable over time. And we are starting to run experiments in the marketplace now. But it takes time, when you're trying out a new business model and trying it out in various regions, to really get definitive answers. I was very deliberate of putting that word definitive in there. Right now, I'd say it's still a hypothesis. But we're not seeing anything to discourage us yet, Arnie.

Final question if I could to just clarify and again, perhaps make sure the expectation bar is set fairly. You talk about at least 25% growth in your engineered composite segment over the next 5 years.

Per year, compound annual growth

Correct. But you also speak to some programs that could accelerate that -- I guess what I'm trying to get a feel for is, do you actually expect to deliver 25% each of those five years or will there be years where it would be much lumpier or the growth rates could be materially higher than the 25 and other years perhaps a little lower?

Arnie, this is Michael. The implication in your question is certainly correct. These growth rates are certainly not going to be a constant 25% per year. We'll certainly have some years that are well above that. And there will be other years that will tend to plateau. But we're feeling very comfortable that just based upon the programs that are under way right now, and the current efforts that we have made with our existing customers, that that growth rate over that period of time is highly probable. And in fact, if anything, in the year 2007, I would be disappointed if that's the kind of number we saw.

So you're hoping '07 to actually be above the 25?

Correct. I'll jump back in queue and we look forward to having you at our conference in January. Thanks very much, Arnie.

Thank you. The next questions will come from the line of Mark Connelly with Credit Suisse.

Thanks. Michael, I was sort of struck by your comment that the worst is probably over. I have a number of questions around that, but it all comes back to this pricing gap issue. In 2004, the pattern was that when the price cutting started, the first quarter wasn't the worst quarter, the second, third quarters after that were the worst quarters. So I want to just make sure I understand what you mean when you say the worst is over. And more broadly, I wonder if you could give us a sense of whether this, this feels like 2004 felt, which was pretty catastrophic in terms of what happened to earnings and earnings expectations.

This is Joe, good morning.

Hey, Joe.

Let me try to take a stab at that and then Mike can jump in if I don't completely answer the question. There are really two parts to that question, the first is the -- are the second and third quarter effects going to be worse than the first quarter? We are very deliberately trying to suggest that, no, we think that in effect, we absorbed the full effect of the gap on PMC revenue in Europe in the third quarter. And that, going forward for all the reasons that I described, we do, we are hopeful that we'll start seeing gradual improvement. We think it is, you got to be really careful about comparing the experiences of the Americas' PMC with the European PMC.

As I think we've discussed before, the structures of the industry in the Americas and Europe are dramatically different, much, much more competitive in Europe with more competitors, fighting in their home markets than in the Americas. In '04 in the Americas, and in past times, earlier in the decade in the Americas, when a price cap grew and competitors tried to grab share, we -- because of the strength of our presence in our home market, we were able to wait for our customers to come back to us. In Europe, we've followed the same kind of behavior and I think our competitors have become accustomed to us waiting when they would, when the price gap would open up and they would try to grab our customers from us. That's now changing. We're going to hold onto our business. And that is a changing pattern.

Okay. That's very helpful. And it would be nice not see 2004 repeat. Second question, this is somewhat related, I suppose. You talk about paper machine closings as one of the reasons for the weakness here. And I'm curious, from your perspective, how much has the deterioration in the paper business and all the closings that we've seen since, say, 2000 or 2001 in the paper industry, how much has that actually affected Albany's earnings potential in your mind? I'm trying to get a sense of whether -- the paper industry being a lousy industry, has had a bigger or small impact in the long run, rather than in this quarter.

In the long run, the growth, we're very confident the growth in Asia at least offsets the impact of the consolidation in the Americas and Europe. And, you know, I think--. So you get these consolidations and they have localized effect, localized both in terms of geography and in terms of time. And in the aggregate, in the long term, we don't think it has an impact on the long-term potential of this business, which is the point that Michael was trying to emphasize. There is one difference, though, that we think is very important. In this swing from over time from Europe and Americas to Asia. I think I've mentioned this before. We are in a very strong competitive position in the Americas. Europe, we're in a strong position, but it is a very competitive market. We think, because of what we're doing in our investment in Asia, that we will be in an even stronger competitive position there than we are in the Americas. So as capacity swings from North America and West Europe to Asia, we are very well positioned.

Okay. That's helpful. One of the things that I find striking about this happening in Europe is that when I look around the world right now, on the paper industry side, Europe is actually a healthier paper market than the U.S. or probably Asia in most people's mind. And yet this deterioration in business is happening there. So it feels very much like a PMC industry problem, which sort of goes along with what you're saying, I guess.

It really is. Our view is, as Michael said very explicitly, we welcome the competition in Europe and our view is if you can compete well in the most competitive market in the world, it just makes you stronger.

All right. Now, let me change to a topic that worries me a little more. SAP. I know that in CFO magazine there's always some CFO who gets up and says I like SAP, but I've never met one of those CFOs myself. So I'm curious how you're going to manage what most people in the investment community see as an investment, and a process risk, because SAP doesn't have a lot of big fans in the investment community.

Right.

And I'm also curious what all this is going to cost you, is this because you need to integrate disparate systems or to replace an old one?

All of the above. We're going into this with our eyes wide open after at least a year of very deliberate conversation and analysis within the Company. Let me make several points. Number one, the costs associated with this project are fully built into those estimates that we gave you and I talked about in just a little while ago. Number two, the pain that's usually, if not always associated with a switch over to SAP or any other ERP system, is really because the switch over is more about redesigning, reengineering business process and organization design than it is having anything to do with IT And we're well aware of this. We're in fact using the switch over as an opportunity to accelerate the leaning down of our business processes that we've had to do anyway. We talk a lot internally about the dog wagging the tail, rather than the other way around. For us, the dog is business process and the tail is the ERP system. When companies get in trouble it's because the ERP system tail wags the business process, dog. We're ready for it, we've got great people around the Company working on this and we know their are going to be bumps along the way, but we think we've got them pretty well calibrated. The reason for taking it on is really several fold.

Number one, as I think I've mentioned before, we're trying to, in the process of getting this company to perform at its optimal level, we're making the transition from an organization structure that was fragmented around the world, reflecting our historical emergence through a series of mergers and acquisitions of regional businesses, we're making the transition to a unified simplified global business. And we need a stronger ERP platform to fully pull that off. Number two, we're going through dramatic growth in PMC in Asia. We need an ERP platform that will accommodate that growth. Number three, we're growing a series of new businesses, several of which, the growth -- in several of which, the growth is going to be accelerated by acquisitions and we need a powerful enough platform to handle all of that as well. So we view this as a very deliberate, cautious, wide-open investment in the infrastructure we need to handle our growth. If we were in retrenchment mode, we probably wouldn't be doing this right now.

That was a pretty complete answer. Thank you. Just one last thing on the PMC side. You had some equipment relocation costs in here and it reminded me back to when the Geschmay deal was done and there was talk that equipment relocation there was going to save you some money on future CapEx and I'm wondering whether you're done with equipment relocation or what you're doing in Europe is going to involve more of this kind of stuff and whether we should be viewing equipment relocation as a good or a bad thing.

In this instance, it's equipment relocation from the plant in Canada that we, that we shut down in the third quarter. And it is a good thing. It will lead to significant savings in CapEx. Significant. So it's a good thing. But this is entirely movement -- well, mostly movement within the Americas. It's got nothing to do with Europe.

Okay. And the European stuff that you're working on is not going to involve this kind of equipment relocation?

The initiative that we are, as we speak, talking to our work councils about in Europe is about administrative consolidation.

Okay. And one very last question. Last quarter, you talked about the door business growth and gave us some geographic color on that. I wonder if you could just give us a sense of where that business is working this quarter.

Right on track and the strongest growth was in the markets where we have our strongest presence, which is in Europe and Germany in particular.

Okay, perfect. Thank you very much.

Thanks, Mark.

Ned Borland with Next Generation.

Hi, Ned.

Let's see. Two quick ones here. On the raw materials commentary, you're expecting them to be up next year, I'm assuming that's certainly not a -- I'm just trying to get a sense of the magnitude of the increase that you're expecting versus last year, clearly it won't be up as much as '06 over '05 -- but if you could just sort of walk me through your thinking there.

Yes. It has to be a more moderate effect. What complicates this a little bit is there are a couple of lag factors in here, the contracts that we negotiated for materials prices last year are the materials prices that we see this year. And so the contracts that we negotiated this year will affect our materials prices next year. The second lag effect is just an inventory effect. And takes a while for the product to get through inventory. But in general, we do expect to see a moderation of the impact of materials priced. I keep asking our guys, why don't we see a reduction? And the answer I keep getting back is, we'll see a moderation.

Okay. And then on the pricing gap again, this narrowing, I mean, is that sort of a sense of some of your competitors, in an effort to quickly gain share and then all of a sudden realizing that they got to cover their costs in a more efficient manner? Does the narrowing of the gap more come from them or you is what I'm--?

Well, I think you're on the right track. There are multiple ways to create a gap and then to close a gap. And I think I'd rather leave it at that. The primary position that I'd just like to leave on the call is we're going to hold onto our business.

Okay. Thanks.

And we'll next go to the line of John Emerich.

Thanks, two quick questions. One, in the release you said engineered composites is basically the equivalent of 14% of overall Applied Technologies in the last nine months, has that percentage been pretty consistent throughout the nine months or has it been growing sequentially so much that it's a higher percentage in this quarter than it was in the beginning of the year?

Well, hi, John, good morning.

Good morning.

A short answer is yes, that we expect engineered composites to be a grow significantly more rapidly than the rest of the Applied Technology segment. The specific question you asked about the first three quarters is confounded by the acquisition of Texas Composites which significantly added to the size of our composites business. But the short answer to your question is, yes. It will be growing at a substantially faster rate. In fact, if you look at the two components of Applied Technologies which I referred to, we're basically saying that the composites business we expect to grow at a 25% compound annual growth rate.

I forgot that. When did Texas come into the financial.

The beginning of the year, basically.

In the beginning of the year. So, okay. But it's been growing faster so it's a higher percentage of -- it's more than 14% of engineered composites in this quarter? Applied Technologies is?

Yes, yes.

Right. And secondly, just broadly, can you speak to whether or not PMC is a growth industry around the globe? Or is it a flat industry with a lot of shifting sands kind of underneath and moving around from one geography to another? That would be helpful.

The best way to think of it is is it's a GNP industry shifting around, around the world. And part of the point I tried to make in my response to Mark was that those shifts are not competition neutral. That as the shifts occur from one region of the world to the other, it works to the advantage or disadvantage of different PMC competitors, depending on how well positioned they are in those parts of the world. We think the shifts are working to our advantage.

I see what you're saying, yes. Yes. You're -- okay. I guess but GNP is a global business. Global GNP would be, I don't know, would be at least a midsingle digit growth rate, would it not?

Well, then if that's the case, then that's probably, that's -- figure 2%. 1% to 3% over time each year.

Yes.

But again, as you correctly point out, the story in this business in the future is really about the shifts in capacity and, therefore, shifts in demand from the Americas and West Europe to Asia, to South America, and to East Europe.

When that shift is done, your market share will be even in higher than it was coming into this mess?

We feel like we're really well positioned in Asia, will be really well positioned. We've done the things that need to leave us well positioned in Asia and in South -- Latin and South America.

Right. Okay. Thank you very much.

Thank you,.

[OPERATOR INSTRUCTIONS] We'll go to the line of Mark Connelly with Credit Suisse. Please go ahead.

I just have a couple of small things. This, this Eclipse 500 is, as I understand it, one of these small vanity jets that are getting popular. Can you tell us what it is you're doing on that plane? And I'm assuming that this is all Texas Composite technology? And as a related question, when will we start to see Albany composite technology hitting or getting meaningfully important in this process? Aside from the fan blade?

Hey, Mark. The landing gear sales to Messier-Dowty will begin in '07. That's a very important application of the Albany -- unique Albany technology. In some ways a path-breaking application. So that begins in '07. The Eclipse project is indeed based on Texas Composites activity. I guess we should stop calling it Texas Composites and start calling it Boerne Texas, which is part of our engineering composites business. Michael, you want to amplify that?

Sure, the Eclipse 500 is a new and very attractive entry into the very light jet market as implied by Mark. It weighs only 3 ,550-pounds empty and it seats six. And this is the hottest segment of the small jet market. It's very lightweight and we are making component parts using traditional composite manufacturing methods for multiple applications in the plane.

Mark, the landing gear from Messier-Dowty, using our proprietary technology, is an important component of that 25% annual compound growth rate.

Okay. Okay. Now, related to that, when you look at the Texas Composites or the Boerne Texas backlog, how affected is that business by what's happening to Airbus? Because you talk about hitting these targets, means that other people have to hit their targets and at least one big company is not hitting their targets.

Not affected at all.

Okay. So you're not a player there in any meaningful way. And then one last question for Michael. With respect to your accounts receivable, I thought it was just sort of interesting that accounts receivable is no longer your low-cost source of financing, which says something about you relative to your customers. And I'm wondering over time, do you think that this might come back as an attractive source of financing, potentially with the Applied Technologies side of things?

It's possible, Mark. It's just we have a remarkably strong bank group, very supportive bank group, we've worked with the group for many years. And the financing we have on our balance sheet right now is very competitive and provides us access to a substantial amount of money at very attractive rates. I think this is probably not appreciated by people who aren't actually involved in the financial world. But we're very fortunate to have a strongest part of bank group and Prudential Securities which has been just marvelous to work with.

Just giving you money for nothing. That's great, okay. Thank you. Thank you.

Thanks, mark.

We'll next go to the line of [Darren Heichtman] with [Cooke and Peter].

Thank you, good morning. I'm not, as you know, I haven't been following the Company that long. So I'm wondering if the talk of more capital expenditures for the Applied Technology division is a change and do you talk about what range of CapEx you expect over the next few years?

Well, the change has taken place over the past year, really, as we start to make a concerted effort to screen our family of non PFC businesses for serious growth opportunities. When we see a vehicle for growth where we believe we have sustainable advantage, we start systematically looking for ways to accelerate the growth. Within the Applied Technologies segment we see two clusters of growth opportunity. One is in engineered composites, serving the aerospace market, and with the kind of growth rates we talked about, we've got to be investing in capacity in order to be able to ramp up production.

But outside of engineered composites, there's a family of businesses that have a very deliberate mission of trying to apply the technology that we've developed in PMC for developing, conveying and dewatering, and filtering media. Applying that technology to a variety of other process industries. And we're starting to feel like there's a fair amount of untapped growth, untapped opportunity around the world that we're not going to be able to aggressively pursue again, until we fully capitalize this business, until we invest in the productive capacity required to take advantage of those opportunities. So I think in both cases, we're going to have to invest more than we had before if we wanted to grow those businesses. In both instances, we're feeling that they're opportunity-rich. That we're not going to have a problem getting a healthy return on our invested capital.

Thank you. That's helpful. Are you willing to share what you're capital expenditure plans in total will be over the next few years?

Not yet, we're not.

Okay.

We're in the process of working through our 2007 operating plans right now. We'll have a little better fix on this in the fourth quarter conference call.

I guess it's probably fair to assume it's going to be something higher than '06. And I guess we'll wait to find out how much higher.

That's already, the fact that it's going to be higher is already baked in. When we announced the 150 million investment in capacity in PMC around in the emerging markets in the world in Asia and in South America, mostly in Asia, we have explained that the biggest year for that investment would be '07.

Okay, I see.

That was already baked in. And in addition, we announced late this year, late -- earlier this year, that we would be building a plant in Kaukauna, Wisconsin, for our engineered fabrics business, which was the largest of that nonaerospace composites cluster in Applied Technologies. So if you just take those two together, it's pretty, we know with certainty that our investments will be -- capital investments will be larger next year than they were this year and they're all [Inaudible] end.

Shifting gears to the European environment, in one of the past conference calls, someone asked if you felt like your European competitors were nearing break-even and at the time the answer was no, they were still pretty solidly profitable. Do you feel like pricing came down enough in the third quarter that we're getting a marginal producer close to break-even?

I don't think that we should comment on our competitors' profitability. We think it unwise to walk in those waters.

The attitude we have taken was, the best way to strengthen ourselves is to face the best competition in the world and take them head on in every dimension that matters the competition and that includes cost.

Okay. Thanks for your comments.

Thank you.

And at this time, we have no further questions in queue. Please continue.

Thank you all for participating on this call, and we'll see you next quarter. Thank you.

Ladies and gentlemen, this conference will be made available for replay at the Albany International website. That does conclude the call for today, thank you very much for your participation and for using the AT&T executive teleconference service. You may now disconnect.