Albany International Corp (AIN) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Albany International first quarter 2007 earnings conference. (OPERATOR INSTRUCTIONS) At the request of Albany International, this conference will be webcast and recorded. Our host today is President and Chief Executive Officer, Dr. Morone. Please go ahead.

Thank you. Good morning, everyone. Welcome to our Q1 2007 earnings call. As always, I will open with some comments and then turn the call over to Michael Nahl our Executive VP and CFO who will make some amplifying comments on a particularly -- on a scene that we think might be particularly important this quarter.

In our Q3 2006 earnings release, I discussed our short-term objective of returning by Q4 2007 to the profitability levels of Q2 2006 excluding the effects of cost reduction and process improvement initiatives. In our most recent earnings release I told you that the operating results and market conditions that we experienced in Q4 2006 suggested that we were indeed on trend for meeting that objective. Q1 2007 provides further evidence that we remain on trend.

As I also discussed in our last two earnings releases, this trend toward gradually improving profitability is shaped by three distinct components. Recovery and paper machine clothing revenue, from the Q3 2006 bottom, companywide cost reduction and process improvement initiatives and continued growth of the emerging businesses. In Q1 2007 we made good progress on each of these three fronts.

Turning first to PMC revenue, excluding the effect of currency, Q1 net sales were down 3.7% compared to a year ago. However, PMC revenue is on trend toward our 2007 Q4 objectives. In Western Europe with volume increases more than offsetting lower average prices, revenue rose 3.9% over Q4 2006 which in turn had been 8.6% higher than the Q3 2006 low point. Orders in Western Europe are also strong. Revenue in the Americas also grew compared to Q4 2006 and Q3 2006. And orders remained firm. Pacific Corridor sales were soft in Q1, but orders are strong there, and we continue to make good progress towards of the completion of our plant expansion in Korea and our new plant in China.

We remain cautious in our outlook for PMC revenue, on the positive side orders are strong, especially in Europe and Asia, and several new products are beginning to have an impact on the market. Our view of these positive indicators is tempered by the knowledge that our customer base in PMC continues to consolidate in both the Americas and Europe and as we saw in 2006 the PMC industry remains highly competitive. It is precisely this sense of caution that provides motivation for the second contributor to the trend towards gradual improvement, companywide cost production and process improvement initiatives.

As we discussed in the Q3 2006 earnings release, we've been undertaking three sets of cost reduction initiatives, reduction of administrative costs, consolidation of manufacturing capacity, and restructuring of our global procurement practices. In Q1 our earnings were reduced $0.24 per share by costs associated with these and other performance improvement initiatives. We've incurred a cumulative total of $0.40 per share for costs associated with these initiatives over the last three quarters. Consistent with our earlier estimates, we still expect total annualized savings from these initiatives to reach $0.45 per share by year's end. We also expect to take additional charges in Q2 and Q3 that should lead to additional savings in 2008 and beyond.

The third contributing factor to the gradual improvement in earnings is the growth in the emerging businesses. Compared to Q2, 2006, and excluding currency translation effects, composite sales grew to 30.2%, filtration by 9.4%, door systems by 8.9%, and PrimaLoft by 7.9%. Orders in each of these businesses were strong. The one drag on growth in the emerging businesses this quarter was Engineered Fabrics which accounts for roughly half of the revenue in the Applied Technologies segment. Compared to Q1 2006 and once again excluding the effects of changes in currency translation rates, Engineered Fabrics revenue declined by 3.2%. Orders in Q1 were also slow. We do not believe this slowdown in Engineered Fabrics is due it to any structural or competitive factors, and we do expect a rebound later in the year.

More generally we continue to be especially encouraged by developments in the composites business, and we are making steady progress in our efforts to build a manufacturing and engineering base required to sustain rapid and profitable growth. We're also encouraged by our exploration of ways to accelerate growth in the door systems business and by the sales and orders growth in our filtration business which is being driven by the requirement for environmental control, particularly in the power generation market in China.

So in sum we think we're still on the right track toward our short-term target of by returning by year's end to the operating income levels of Q2 2006. We remain bullish about the long-term Albany cash and grow business model and cautiously optimistic about the short-term. Our optimism stems from growing competitive strength in PMC, progress in cost cutting and process improvement initiatives and continued growth in the emerging businesses. While our caution stems from the recognition of those underlying conditions that hit the top line in PMC in Q3 are still in place.

Now to amplify some on some of these comments and particularly on what we've been doing on the cost reduction and process improvement initiatives, I will turn the call over to Michael Nahl our Executive Vice President and CFO.

Thank you, Joe. Good morning. We refer you to the comment about forward-looking statements which is contained in the press release, and we note the same statement applies to our remarks in this conference call. This is a copyrighted presentation of Albany International Corp. and any unauthorized rebroadcasting or transcripting is strictly prohibited.

I would like to add a few comments about the effect of the cost reduction and process improvement initiatives on our financial results and outlook. The specific initiatives Joe referred to are reduction of administrative costs, consolidation of manufacturing capacity, and restructuring of our global procurement practices. The costs already incurred for those purposes since the second quarter of last year had the effect of reducing profits during that period by a total of $0.40 per share and $0.24 of that effect was in the first quarter of 2007. Clearly we have moved quickly to implement the programs we announced so far.

For the three-program categories that Joe was discussing, we anticipate only about $1.2 million additional charges this year all in the second quarter with the effect of reducing earnings per share by $0.03 in that quarter. In addition to those charges we will continue to incur some costs for which there will be some obvious future benefits but for which we are not going to publish any specific earnings per share benefit. For example, our new China press fabric manufacturing facility which is under construction and which is on budget and on schedule for a start-up in the first quarter of 2008 will incur start-up costs of $800,000 in the second quarter, $900,000 in the third and $1.2 million in the fourth.

Expenses in connection with our conversion to our new SAP global information system, reduced pre-tax profits this year in the first quarter by $1.3 million, and are estimated to reduce second quarter, third, and fourth quarter by $1.5 million, $1.1 million, and $3.9 million respectively. We expect that when we have completed the current and planned initiatives we will realize total annualized savings of $0.45 per share. In fact, it now appears that the savings from those same programs may in 2008 exceed $0.50 per share.

While we are completing our initiatives faster than anticipated, the benefits to our income statement are not going to become significant until the second half of the year, and the full run rate of $0.45 or $0.50 per share is not likely to be fully in force until the end of the year. When Joe mentioned that we expect to take additional charges in Q2 and Q3 which should lead to additional savings in 2008 and beyond, he is not referring to any of the effects that I just covered. He is pointing out the reality that as we have implemented the programs previously announced we have identified other opportunities to reduce our costs and increase our competitiveness. We will implement them as quickly as we can. We know that everyone would like to know exactly how big the charges will be and exactly when. Here is the best guidance we can provide at this time.

There are a lot of variables involved in calculating the results of the cost reduction activities. As a rough general approximation, for every dollar of cash we spend for a restructuring activity in North America, we can generally expect roughly $0.80 to $1 of annual cost reductions beginning a year later. For similar restructuring activities in Europe, we would expect somewhat less, perhaps from $0.50 to $0.90 for every dollar spent. In both cases these costs may include writedowns of assets that will not have any important cash flow consequences. Whatever the charges are, in most cases larger charges means that there will be larger savings.

Although we can't give you as much quantification today as we would like, we will try to be as helpful as possible in explaining the potential effects of those additional actions as they are announced in the second and third quarter. In the last quarterly conference call I discussed our outlook for cash flow over the next few years. Based upon everything we know today, I remain convinced that our shareholders will be well rewarded by the potential substantial cash flows I described in the last call. I am also convinced that Joe Morone and this management team are emphasizing the right strategic initiatives, namely TMC growth in the Asia Pacific region, accelerating growth in Applied Technologies in Albany Door Systems, continuing to strengthen the power of our product portfolio which is the most effective focus on R&D I have seen in my years with this company. And taking the difficult steps required to drive down our costs and improve our processes throughout our company. I believe the result will be very attractive increases in cash flows beginning sometime next year. We'll be happy to take any questions now.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Mark Connelly with Credit Suisse.

Thanks. You just gave us a lot to digest. I am just curious, when you add up all these costs in the short run, are you concerned about the current consensus numbers that are out there? Clearly you're telling us there is a lot out then in '08 and '09, but I am just curious if you want to comment on how you feel about '07?

I think what we have said going into '07 and what we're trying to say with the comments we made is don't get carried away with '07 numbers which are really irrelevant to the cash flow implications of what's going on. What we're saying is that there are enough other costs that are going to be incurred in this transition that we've described over the last couple calls that we are urging people to not increase any short-term quarterly projections just because we got off to a very strong start in the first quarter because there are all sorts of costs and we tried to give you as much detail as we possibly could with regard to some of the things that are going to be the drag as we are changing over. You just take the China start-up costs, for example.

I don't think there is much risk of that with the list of costs you just gave us.

Okay.

A couple more questions. First by the way, we really like the revenue and FX table, if you just add operating profit to that, we would really be running. Looking at PMC, you gave us, Joe, a piece of it, but I am just wondering on a global basis whether you could give us a sense of price versus volume in the impact on those PMC numbers, in local currency terms?

Good morning, Mark. As you know, we take it quarter by quarter, and for us right now the benchmark is that low point in Q3, and let me start the answer by saying compared to Q3 the Americas are growing, Western Europe is growing. We had softness in two areas, in some regions of the Pacific, most notably Australia and new Zealand and in a product line which is important to us which we don't talk much about which is the Belts business but in both of those areas where we had softness in Q1, we're seeing very strong orders. So compared to Q3 and particularly if you take into account the order picture, PMC revenue is a very -- be as safe statement to say that it is on trend.

In Europe, West Europe, the growth in revenue basic pattern is increasing volume offsetting the lower average prices that resulted from our overt decision to shrink the price gap which had gotten too big. In Asia the primary phenomenon at work is a growing market, and so growth in volumes is the primary phenomenon. In the Americas as has been the case historically, volume has been -- sales revenue has been driven more by combinations of price and volume than by any particular pattern like we have seen.

Okay.

For the most part more in pricing volume.

That's helpful. Can we just follow up on Asia for a second? You guys have said in the past that margins in Asia are lower. Is that -- in PMC. Is that simply a function of too many people chasing too few customers?

I think if we said that, that was a misstatement or was a statement that was misheard. Prices -- I think the issue here that you may be referring to is when we are shipping from Europe--.

Okay.

Let's talk a little about this. Prices in Asia are lower, but when we make in Asia and sell in Asia, our margins are very good. In fact, our margins if you take comparable product lines, say dryers, when we make and sell in Asia the product we make in Asia, quality is very good, world class good. Margins are better than we see in our highest margin.

Okay. Okay. So the more you make in Asia the better off you'll be there?

I think the confusion is, Michael just alluded to is there has been confusion since we haven't had enough capacity in Asia to meet the growing demand we've had to ship it in from Europe and North America, and you don't -- we just don't as you expected we don't see nearly as good margins when we ship it in than when we do when we make it there. The key for us and maybe what has changed in the Asian market is quality that we're producing in our existing Asian plant which we're expanding, and the quality that we will be producing in our new plant is world class.

Okay. Okay. Joe, again, just a couple more. Could you clarify the comment where you said that Q3 conditions at PMC are still in place? Some of the Q3 conditions were pretty lousy in terms of price competition. You guys were reducing that price gap and earnings estimates were falling. Can you talk a little bit more about the conditions that you're talking about there?

First of all, it is really important to keep in mind how different the different corridors are and different market dynamics, different competitive dynamics, different customers. We talk a lot about global customers. But by and large customers are still primarily regional as you well know, so I know some people worry about the patterns in Europe spreading over to other parts of the world, and we need to pick them as rather different market dynamics. That said, I don't think a spread occurs. The underlying structural factors that led to the Q3 difficulties in Europe were consolidation in the paper industry, A, and, B, this is really important. We started gaining competitive strength, and as we gained competitive strength in the market, some of our competitors reacted with price actions. Now, we look around at what's going on in the world today from our vantage point at PMC, and we see in every one of the major corridors, in every one of the major regions, we're growing competitive strength. Our competitive addition is growing, stronger in each quarter, and at the same time there is still as you well know consolidation, for example, in the Canadian market.

So we should take that as basically a statement of caution because the kind of conditions that led to the situation are more or less still out there?

Exactly right.

Okay. Okay. That's fair. One last question and I will let someone else talk.

It was particularly important to inject that note of caution after results that we knew were going to be better than what you guys -- what people were expecting.

Okay. That's fair.

I want to remind you that those basic factors are still lying there.

Okay. Okay. One last question, I promise. You talk about filtration in China. If my memory serves, filtration is a business that Albany nearly got out of about ten years ago, and in the last year or so you started to talk more about it. Is there a meaningful amount of spend that goes with this and can you give us a little more color on what the is growing and where that business is headed?

As a general rule, I am sure you picked this off, we try not to say very much about the emerging businesses until we really feel like we have a fix on them on where they're heading and a pretty good feel for what the prospects are and the strengths and weaknesses. We haven't talked too much about the filtration business. It is rapidly growing, particularly in the power gen market, it has got a management team that really understands that market very well. The flip side is if the business, their margins tend to be lower than say PMC, and we're still not yet -- our view of the future isn't completely clear yet on how the margins play out in that business, we feel like clearly we have superior product, we clearly have competitive advantage, it is a rapidly growing market, but we're not yet ready to start speaking conclusively about it because we're still trying to sort out how sustainable the margins are all the time. Did that give you what you wanted, did I answer your question, Mark?

He's been put back in the conference, I can pull him back if you like.

No, that's fine.

Thank you. Our next question will be from Arnie Ursaner from CJS Securities.

Good morning.

Good morning, Arnie.

A couple of questions. One, in the entry node fabrics you had a little revenue decline, a little surprising. Could you perhaps comment a little more on what caused it and what steps you may be taking to improve it?

The Engineered Fabrics business is another one of those emerging businesses that we haven't talked much about, Arnie, as you know. It is on the one hand it shares a lot of similarities to PMC, and on the other hand it is completely different, and the similarities are it builds off the same technology base. The manufacturing equipment is in many ways similar. It overtly builds on the technological competencies we have developed over the years in PMC.

On the other hand, this is a business where we supply belts, permeable belts to customers, for example, and people who make swiffers and wipes, customers who have developed highly proprietary manufacturing equipment, typically working closely with original equipment manufacturers, so our products are custom developed for these proprietary pieces of equipment. We tend to get if you look at our top ten accounts we'll have anywhere from 70 to 100% share in those accounts. It is a much more custom developed tightly integrated with proprietary processes type of business. So the reason in this case that we had weaker sales in Q1 than we were expecting is some of the OEMs didn't sell or didn't start up as many of these unique proprietary kinds of machines as we were expecting. That's still going to occur, so it is purely a timing issue. There is nothing fundamental going on in this business, nothing fundamental difference.

The other way that this business is different from PMC is the markets are still growing, and, A, the markets which we currently serve are still growing, and, B, it is a business that has growth potential because as we continue to find additional process industries that require permeable belts of the sort we make, and if we can displace their existing medium with ours, you get incremental growth in chunks of 2 to 4 to $5 million a pop as we break into a new one of these proprietary manufacturers. Does that give you a little more color.

That's very helpful. On door systems you had pretty good results there and also the backlog quite strong. Can you give us a little more feel for what is driving some of this, whether it is some of the new programs you have spoken about in the aftermarket seem to be working and sort of what the outlook might be for the balance of the year in that segment?

This is, I think it is fair to say that the growth that we're experiencing is more the result of good performance on our existing business model particularly with the introduction of an important product or product platform than the result of early penetration into the expanded business model. So this is really sales from the core business model or the core business. We are making good headway, maybe even excellent headway in thinking through sorting through, starting to take initial actions on how to expand the business model. One of the things we learned very quickly is that ironically sort of like PMC the market dynamics and therefore the appropriate business model in the different regions of the world are very different. So the business model for Europe is going to look very different, the expanded business model for the expanded business model in the Americas which will look very different from the expanded business model in Asia. We're moving to expand the model in all three of those corridors but haven't yet seen -- it's way too early for results to show up. What you're seeing is momentum from the existing business, and the order backlog suggests that that momentum will continue through what is ordinarily the slow quarter in this business.

Okay. And on Applied Tech, as it relates to the composite area, you obviously have been ramping capacity. We've had quite strong demand, and I think one of the issues was your ability to ramp production. Can you give us a feel for how that process is unfolding, where we think we are and despite the strong growth are you increasing your backlog in that piece of the business?

We're feeling increasingly confident about our efforts to build that manufacturing and engineering base. We're making good progress. The long-term outlook just keeps getting better and better as we keep coming up against new opportunities for additional growth. The short-term outlook continues to look strong. We have resisted the temptation to up the short-term growth projection we gave in Q3 last year, the 25% per annum for the next five, but if there is uncertainty there is uncertainty on the upside. The big unknown on how fast short-term growth will be or how much more short-term growth we'll see above that 25% projection, the big uncertainty is our rate of sales is really dependent on the rate of sales of the OEMs we supply, and if they're moving their projection forward or projection forward or backward that affects our short-term results. But basically the guidance we gave in the short-term is probably conservative and for the long-term we're just getting more and more confident.

A final question from me if I could is a little more strategic, Joe, you talked in the past about the PMC business where you already are the market leader in your goal of perhaps further expanding your market leadership, can you highlight or update us on sort of the key steps you're taking to perhaps expand your 40% share to 50% or whatever it may eventually be? What are some of the actions or plans currently under way to do that?

Well, Arnie, thanks for the promotion, but our global share is closer to 30% rather than 40. We'll happily take the 40, but we're not there yet. For us it will all starts, always, always, always with the underlying premise of this business and the underlying reason why we view this as a very healthy cash generator for a long, long time is the value that the clothing supplier provides to the paper machine maker is that gap between the cost to them of what we sell to them and the benefit to them is large, and our underlying business model is do whatever you can to expand the gap, increase the benefit that we deliver.

At the moment the primary focus that we have for increasing value delivery is products and that will in one-way or another reduce total costs of operation or improve quality or reduce energy consumption. For example with I think we've talked before about a product that's getting a lot of visibility in the marketplace that's called Aeropulse, and it addresses precisely the problem of energy consumption in a section of the machine, the dryer section, which as the name suggests consumes a huge amount of energy. That, from a paper machine clothing point of view, that section of paper machine has always been viewed -- dryer product fabrics have always been viewed as commodities. Here we have introduced a product that is anything but a commodity is generating a lot of value. We're excited about it. That's an example. If you look across every product line you'll see a very encouraging pipeline of new products, each of which has the potential to add additional value to our customers.

I would add that there are a couple other things, obviously that we've referred to that are critically important, to how we can achieve our goal of increasing our market leadership. One Joe has talked about many times which is building the strongest PMC industry capability in Asia, fastest growing PMC market in the world, and there is no competitor who has announced anything remotely on the scale of what we have done there. Second, the whole discussion in some detail on costs is part of that attempt also because clearly if we are going to continue to increase our market leadership, we have to continually drive efficiency and effectiveness. That's what a lot of the activity has been about over the last year.

Thank you very much.

Thanks, Arnie.

Thank you. Our next question comes from Ned Borland with Next Generation Equity Research.

A couple follow-ups on some of the discussion about PMC. One, from your comments about reaching your goal of sort of second quarter '06 profitability, am I assuming from your comments that you're going to be able to get there just through cost reduction and volume without any help from pricing?

We can't -- Ned, what we've been trying to say is we need good performance on all three of those variables we keep talking about.

Okay.

Covering PMC revenue, cost and process improvement, and the emerging business world and a combination of all three gets us back in Q2 '06. We can't do it just with PMC alone.

Okay. And then also on the Asian discussion--?

Just think about this. We're getting volume growth in Europe, and revenue recovery, but that lower -- we have to close the price gaps up, and getting lower prices, with these other activities.

Okay. And then on the Asia, you said that you get a good margin on serving Asia from Asia. I was just wondering what part of your Asian customer base is served not from Asia right now?

About 40 to 60%. I think it is closer to 60% of the products that we sell in Asia are made in Europe and North America. Now, let me just double check that. I am pretty sure that it is about 60%. 40%?

And then just as a follow-up to that, once the Asian facilities are up and running, what would you imagine that would shrink to?

Obviously we're shooting to shrink that to as close to zero as we can. The question was what do you expect that to be in the future. Well, as we've announced, we've got forming, pressing, and drying efforts under way in that region, and the intention is to serve the region from the region.

Right. Okay. That's what I thought. That's all I had. Thanks.

You know, if you look at where we were -- to answer your first question, look at where we were fourth quarter of '06 and first month of '07, about 60% of our product was sold in the Pacific Corridor is still made in Americas.

Thank you. Our next question comes from John Emerich with Iron Works Capital.

Hi, John.

Hi, Michael. How are you?

Good.

A couple of quick clarifications on the charge comments, Michael. First, the SAP conversion. Is the $0.013 in Q1 and the expenditures going forward were you trying to say that those were, are those part of the $0.24 that you break out or not?

They are part of the $0.24 that we break out. These are costs that show up as costs. These are not capitalizable expenses.

I understand. Okay. They are broken. And the $1.2 million quote unquote of additional charges in Q2, were you saying that those are additional charges relative to what you thought you were going to take a quarter ago for the second quarter?

No. Those are part of what we originally said would occur in the first half of this year and which most analysts had spread roughly equally between first and second quarter. Clearly what's happened is we've beaten the expectations in terms of how quickly we could do it, so a lot less is going to occur in the second quarter.

Got you. So literally the $0.24 equates to about $9.3 million pretax. That $9.3 million that you experienced in Q1 is going to -- that type of number is going to be only 1.2 in the second quarter?

Of the three categories that is Joe was describing--.

Right.

1.2 million additional costs will show up in the second quarter, and then I also talked about the China start-up and the SAP costs.

Let's back up here. Of the initiatives that we've announced, John, there is a remaining tail net 1.2, so if there are any additional initiatives that have not been announced, would be above that 1.2.

That's fine. What I was trying to confirm was that the 1.2 was much lower than I had expected because as you guys pointed out you were ahead of the curve on getting this stuff done?

Right.

What has so far been announced.

Right. Of the $9.3 million pre-tax this quarter, order of magnitude, can you just give me a little guidance on what was in COGS and what was in SG&A?

I will turn that to -- okay. Our controllers are telling us that it is all SG&A.

All SG&A. Very helpful. What would you think again just kind of order magnitude a tax rate for the rest of this year?

That's the one that we'll use in there. It is 25%.

25%. Why did I have it down -- I had 31 for this year.

That's what we've been telling you.

We would be delighted have to [Mary Lindsay], our Director of Taxation give you a short course on it if you would like.

Well, Mary, just said the fact that it is going from -- why is it going from 31 to 25 for the year, that's great news.

Well, it is all driven by the fact that as you can see compared to last quarter, the first quarter of '06, we've got a lot less pretaxable earnings, and it is just the effect of loss of earnings and a mix of the income around the world.

Okay. So with our vastly improved profitability in '08, I should probably assume it is going to go back up to 31?

That's a good assumption.

Great. That's all I had. Thanks a lot.

Thank you, John.

Thank you. We have a question from [Walter Shennaker] from Titan Capital.

Thank you. Two questions actually but should be quick. The improvement in Western Europe is -- what's going on industry wide, are you gaining share?

Walter, in general nothing good happens in this industry when we talk about share, so we'd rather not talk about it, but.

Was the industry up in the first quarter as best you can determine?

We were up. The industry was up. We were probably up more than the industry was up.

Okay. Also on PMC, you spent a substantial amount of money over the last few years on R&D to create this product differentiation which you are now starting to go give us more specifics on. Are you happy with, comfortable with, as you introduce these new products that you can get -- are you going to get it more in volume or I realize they all go to profitability or an enhanced pricing for enhanced products?

Historically and we think going forward the single best way to grow prices is with better products, and so if these products do in fact deliver greater value and just about everyone we're introducing does, you can always introduce a product at lower costs, but we're really focused on products that increase value to our customers. They should drive price.

So to the extent you can get better price for an improved product, that would not necessarily or surely shouldn't create a competitive reaction by people who may have not lost business but eventually I guess they'll lose business if you have better product and we'll see how it plays out.

I think that's the did dynamic we have to watch out for and what we have seen has led to short of fluctuation. What I was trying to say with the growing competitive strength part because of this pipeline, that suggests good news for the long-term but in some ways it evaluates the risk that competitors will react to price in the short-term.

Okay. Thank you.

Thank you.

Thank you. We have a follow up question from Mar Connelly with Credit Suisse.

Just another nine and I promise I will be short. Coming back to the earlier questions on the door business, Joe, you talked about different market facing approaches in different markets. In the past you've talked about needing to take a close look at that business strategically in the growth. I can't quite tell whether you sound excited about that business or whether you're still sort of in the experimentation stage to see is this going to pan out? Can you just give us a little bit better sense of what's really happening there?

Somewhere between those two.

Okay. Okay. So maybe you're not quite as on the fence as you used to be.

I am coming off the fence.

Okay.

Let me try to state it this way. We now -- when I talked about this before, I had this -- we all had this sense of there's opportunity here if we can expand the business model. We weren't exactly sure how to do it. We now see how to do it. But there is always the question of execution. So we now see the pathway forward, but we're not yet executing the pathway forward, and so that's why if there is still a note of caution is what I am trying to say.

Okay. Okay. That's fair, and again back to an earlier question on the Engineered Fabric business. That business is a bigger proportion of the total Applied Technologies than I had been assuming it was. You see you talked about what's going on in the short run, but given that those are more specialized products and maybe more custom even than your PMC, can you give us a sense of the relative economics? Is that a better business than PMC or is it more or less the same?

Comparable margins.

Okay.

Comparable margins with roughly if you look at the markets we're serving, 5% growth, whether there is growth beyond 5% depends on whether we can break into new niches of these 2 to $5 million chunks where we're supplying these kind of belts for a process industry that maybe is in the line of a metal belt, or on a cotton belt we're able to provide one that offers better performance and better alignment. That's the name of that game. Remarkably, when you look at process industries around the world, you see conveying and dewatering and filtering belts all over the place, so how fast we grow the top line in this business is really a matter of how good we get at penetrating new segments and displacing existing technology with our technology.

Okay.

A number that I like to gie for people who are outside this industry, if you think of how engineered plastics over the years grew by replacing glass and metal containers with plastic containers of various sort or glass and metal components on cars with plastic components, that's essentially what we're trying to do with belts that convey and need water, inch by inch.

Okay. That's helpful. Very last question. Michael, I wondered if you could talk about working capital in terms of the full year, and I guess I am wondering whether the issues you had in the third quarter of last year have changed the way you're managing working capital in any way or if there is anything else that we should be looking out for whether you can give us any sort of guidance on working capital?

Well, we clearly are depending -- we're paying a lot of attention to working capital. The one thing that I would simply say is that it is likely that we will carry inventories at somewhat higher levels this year than we normally would as we are going through some of the transitions that we have already publicly announced and to make sure that the ability to supply the customers in a timely manner are not impaired. With regard to other aspects of working capital, we're going to be as aggressive as we can possibly be.

Okay. Thank you very much.

Thanks, Mark.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Thank you all for participating in this call, and we look forward to seeing you again soon, if not at the next call. Thank you.

That does conclude your conference for today. Replay for this conference will be available at the Albany international website. Thank you for using AT&T executive service. You may now disconnect.