Albany International Corp (AIN) 2008 Q1 法說會逐字稿

Welcome to the Albany International first quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS). At the request of Albany International, this conference call on Monday, May 5, 2008 will be Webcast and recorded. I will now turn the conference over to our host, President and Chief Executive Officer Joseph Morone.

Thank you. Good morning, everyone. Welcome to the Albany International Q1 2008 earnings call. As always, I'll start the call with a commentary, and then I'll turn it over -- turn the call over to Michael Nahl, our Executive Vice President and Chief Financial Officer, who will make some amplifying comments about our balance sheet and cash flow. And then we'll turn the call over to your questions.

Q1 2008 results were depressed by a slowdown in all of our North American operations, except for Engineered Composites. By far the largest effect was in PMC. Despite continuing strength and market share, the successful conclusion of several important contract negotiations in 2007, and unusually strong orders, sales in North America were down 12.9% compared to the same period in 2007. This decline in PMC sales reduced operating income by an estimated $3.5 million. There are a number of reasons for this decline, the most significant of which was the impact of the general economic slowdown on an already weakened paper industry.

In most publication grades, paper mill operating rates dropped well below their 2007 levels. At the same time, some mills ran their paper machine clothing longer than is customary, and the net effect was lower consumption of paper machine clothing. The weakness in PMC sales was most pronounced in the third month of the quarter, just as it was in Q4 2007.

We saw further evidence of this economic weakness in sales of Engineered Fabrics to the US building products and fiber cement industries, sales of PrimaLoft products to the US home furnishing retail market, and sales of doors to some construction-sensitive market segments in the US.

Apart from this economic weakness in North America, there were no significant deviations from our expectations for Q1. Each of the emerging businesses performed to plan. Albany Engineered Composites increased net sales by 43% compared to Q1 '07, made excellent progress in manufacturing efficiencies, and continues on trend toward becoming profitable in Q3.

Fueled by continuing growth in the European markets, doors had another strong quarter in both sales and orders, and Engineered Fabrics was strong across the board, except for its North American construction-oriented product lines.

As for the three-year process of internal restructuring, launched in Q3 2006, it continued on plan in Q1 with the announced closures of the Mansfield, Massachusetts and Montgomery, Alabama operations. The effects of this process are beginning to become apparent. Combined headcount in North American and European PMC is down 11%. Gross margins are increasing in the PMC product, lines where the most significant restructuring has already taken place, dryers in the Americas, and press in Europe. And average cost of finished goods inventories in those product lines are declining.

Meanwhile, several new products in the R&D pipeline are approaching market trials, or had successful initial trials during the quarter. The expansions in Asia and South America remain on schedule, and we are progressing toward the toughest and most important milestone in our SAP implementation, the July 2008 go-live for the North American PMC and Engineered Fabrics operations. We thus remain on trend toward the strong cash generation that we have been projecting for 2009.

Looking forward to Q2 and the balance of 2008, the economic slowdown in North America, coupled with the possibility of a European slowdown later in the year, adds an element of uncertainty to our short-term outlook. Orders are strong across all of our businesses. Market share in PMC is strong and getting stronger. And based on current orders, we expect our PMC pricing to be stable in Europe through the rest of 2008. And even though the increases in oil prices are putting upward pressure on our materials cost, we expect to mitigate the effect of those increases through the balance of the year. With all of these positive factors at work, we would ordinarily be optimistic about the prospects for the next few quarters, but the continuing economic weakness in North America tempers our optimism about the short-term outlook.

Finally, yesterday we announced that we have agreed to sell our filtration business, which manufactures filtration products for a variety of industrial processes, most notably power generation. We have reached a point in the growth of our emerging businesses where we are starting to make choices and how we allocate capital among them. While the filtration business has very appealing growth prospects, its basis for competitive advantage, and thus for long-term, sustainable, profitable growth, is not as tightly connected to Albany's core competencies as that of our other emerging businesses. We will use the proceeds of the sale to fund planned capital expenditures outside of the US, and for general working capital purposes.

Michael?

Thank you, Joe. First, a reminder that our comment about forward-looking statements contained in our news release applies equally to the contents of this conference call.

Joe mentioned in his comments that we remain on trend towards the strong cash generation that we've been projecting for 2009. In the period 2006 through the end of 2008, we will have invested and spent a total of over $450 million towards fundamentally restructuring our businesses and to assure our leadership in our core Paper Machine Clothing business for the future. The $450 million is comprised of $375 million of capital expenditures, of which the PMC portion was about 300 million, and 75 million of expenses for all of the other transformational costs, which we have been identifying for you, and which started in the third quarter of 2006. These include SAP, procurement, setting up the procurement organization, plant shutdowns, machinery relocations, termination costs, (inaudible) startup, integration of acquisitions, and idle capacity costs. We also invested to begin growing our Engineered Composites business, and to support our other emerging growth businesses.

2009 is expected to be a year in which we transition from net cash use to substantial net cash generation. Our highest priorities for applying that cash will be to reduce debt and to invest in growing our Engineered Composites business, in which we believe we have unique and important sustainable competitive advantages. The Engineered Composites business is not particularly capital intensive. But when it is growing as fast as we have been and are projecting, we will continue investing in plant expansions, equipment, increases in working capital, increasing research and development, and we will continue to add highly-skilled people to support our customers' needs.

We will also be growing our Engineered Fabrics and our Door Systems and PrimaLoft products businesses, although these three businesses should be net cash generators over the next several years, excluding the effect of any possible strategic acquisitions. Our PMC business is expected to be a very substantial generator of cash.

In the context of the three-year process of fundamental restructuring of our businesses that Joe has described, we are now at a phase where we are expending the maximum amounts of cash, and it may be useful to review the impacts of this on our net debt and our leverage ratio.

The effect on our company's balance sheet in the first quarter has been that the Company's net debt, as defined in our revolving credit agreement, increased from 363 million at the end of 2007 to $391 million at the end of the first quarter. The Company's leverage ratio, as defined in that same agreement, increased from 2.49 to 2.82. The maximum leverage ratio under our revolving credit agreement is 3.5, whereas the maximum on our 5.3% long-term fixed-rate notes with Prudential Securities is 3.0. If the sale of our Filtration Technologies business closes in the second quarter as we expect, our leverage ratio is likely to decline to an average of about 2.5 for the rest of 2008, and to be approximately 2.0 for the first half of 2009, and to be comfortably below 2 for the second half of 2009, assuming that there is not a prolonged global recession, or that we undertake any acquisitions that require any significant amounts of debt.

If we were to make any such acquisitions, it would be only if both our bank group and Prudential were fully supportive of the transaction. We're very fortunate to have a strong and very supportive bank group for our revolving credit, and to have placed our fixed-rate long-term debt with Prudential. When we agreed to placed our long-term notes entirely with Prudential, we established an interest rate that at the time was clearly higher than we could have achieved through a syndication. But we knew and continue to know the people at Prudential very well, and are confident that they'll support us in any logical business transaction for which we have a compelling plan to delever quickly, which is exactly what we've done on a few occasions over the past 25 years we have taken our leverage ratio over 3.0. It's exactly at times like this that it's important to partner with people you know and trust instead of (inaudible) to rely upon a syndicate of many unproven counterparties.

From the start of the fundamental strategic restructuring we have been implementing, every key decision we have made has been viewed through the lens of its impact on future value creation for our shareholders and maintaining a strong balance sheet. We will continue to apply that discipline, and we remain optimistic that our investors' patience through this transition will be well rewarded.

That completes my comments. We'd be happy to take calls from our listeners.

(OPERATOR INSTRUCTIONS). Mark Connelly, Credit Suisse.

Joe, when you look at this quarter, we certainly have seen a lot of paper companies missing. I'm curious how much of a surprise this was to you, and what we should make of sales being down and orders being up. We don't typically hear Albany talk much about order flow.

It's an interesting pattern. In Q4 of last year, we were tracking in October, November, as we always track all of our indicators, and they all showed that we were going to have a strong quarter. And we got halfway through December, and then everything went upside down in North America. Exactly the same pattern repeated itself in the first quarter of this year. January looked good. In fact, it was a little bit ahead of schedule. February looked good. In fact, it was a little bit ahead of schedule. And in March, the thing just slid right down hard and fast. So we didn't -- did we see it coming? No.

Now, interestingly enough, the pattern is repeating itself again. First month of the new quarter, looking good. And the reason we're somewhat cautious in the face of very strong orders is we don't know what's going to happen in the third quarter until it happens, or doesn't happen. We ordinarily don't make a big deal about orders, Mark, as you well know. But they're so strong; we haven't seen them like this in a long time.

I think the one characteristic feature of the orders that was intriguing to us, that it appears that our share of orders is looking very good.

If you look at -- from everything we can tell, our orders against industry trends are looking very strong.

It strikes me that there's two possible explanations here. One, if you look historically at the paper industry, for many businesses there is one month that sort of makes or breaks the quarter. In the first quarter it's March, and in the second quarter it's April, and in the third quarter it's September, and in the fourth quarter it's October. That doesn't sound right. That doesn't seem to be what's happening if your April is strong. But, certainly for a lot of paper producers, if March is weak, it really didn't matter what happened in January and February.

The second issue is with respect to what your competitors are doing, you don't have a lot of competitors with balance sheets out there right now. And I'm just wondering whether what we might have seen is some drawing down of inventories from competitors, and now you're picking up some of that slack. Do you have any indication, beyond what you said about market share, that that maybe happening?

We'd just be speculating. It is interesting that the third -- the third month effect that we've seen now has occurred in other industries as well. If you go from GE, to Whirlpool, to the retail industry, we're seeing indications of this kind of effect, which again points back to a more general economic phenomenon going on. We build into our models and our expectations weakness in the paper industry. We know it's there. We quantify it. We have a list of every paper mill in North America. We have some of them on a watchlist. Some of them are healthy. And all of that we build into our planning. What beats our planning are these uncertain, unpredictable -- to us, unpredicted swings that happened in the third quarter that seem to go beyond the trends in the paper industry.

I would love to see that watchlist. On the portfolio, and the decision to get out of filtration, should we think of this as a one-off? You've talked about filtration in the past being a fast growth business in China. Now you're exiting the business. Can you help us think about some of these other things? I know everybody except me has asked you to sell doors at one time or another. I'm just wondering, when you look at composites, Engineered Fabrics and all that stuff, is there other stuff that's going to go here?

Let me try to come at this from two different directions, and they're both very compatible with what Michael was saying before. They really build on what Michael was saying. The fundamental premise behind our cash and growth strategy is that we want to get to a portfolio of businesses that are self-sustaining; that is, that we're able to generate the cash and generate the growth within -- with CapEx levels within the total for depreciation and amortization, so that the portfolio is self-sustaining. You can reinvest back in the core and drive all the growth you need to drive without exceeding our bogey of 70 million a year. That's the whole point of this model. That's what leads to the combination of free cash flow plus exiting growth.

To get -- to preserve that fundamental premise, $70 million CapEx per year, roughly, going into the out years, we have to start making choices among these businesses. They're all growing to the point where we have to make some choices. Three years ago we made some investments in the filtration business, which are -- particularly in China, which are having a lot to do with the current wave of growth. But, if this business were going to be a keeper for us, we have to start investing now and next year and the year after for the next wave of growth three to five years out. That's where we have to start making trade-offs. And we'll start making those trade-offs. A portfolio of PMC, plus composites, plus doors, plus Engineered Fabrics and PrimaLoft -- it gives us the ability for the self-sustaining cash and growth, more so than having filtration replacing one of those others. We're left with a portfolio two to three years from now that has a healthy long-term cash generator in PMC, a powerful growth business in composites, which will be absorbing cash, a doors business that still has a lot of potential, a lot of growth opportunity, but that generates cash as it grows, and an Engineered Fabrics business that complements Paper Machine Clothing, that has a lot of the attributes of Paper Machine Clothing, and that generates cash. That's a really nice portfolio. That's one that's sustainable.

Now, when we get to that point, when we've exploited all of the growth opportunities in doors that we see, and we see a lot of (inaudible) when we've finished the story with PMC and finished the restructuring, when we have completely laid the foundation for long-term sustainable growth in composites, at that point, which is 2 years from now, 2.5 years from now, then we have a portfolio that gives us a lot of interesting strategic options. And you can imagine what those are, but they're a half-dozen big, major strategic options that you can think of mixing and matching. For us, it's all going to be about which is the combination that maximizes the net present value of the future cash flows.

Let me just ask you two more questions and then I'll shut up. First, you've broken out Engineered Fabrics for us a little, the technology business, and you've given us some detail on Engineered Fabrics. Can you just sort of walk us through, from your perspective, how cyclical those businesses are, and whether the cycles tend to be -- lay right on top of each other, or whether they spread out a little bit (inaudible) textiles versus fiber cement? I'm trying to get a sense of how cyclical we should think about that piece of the business being.

The last question -- again, I'll shut up -- with respect to the PMC restructuring, several years ago you were selling PMC out of Canada into Asia. Now you've restructured and restructured and restructured. I'm wondering -- when your China expansion is done, and the CapEx number comes down, will you be more or less producing PMC where you want to be producing PMC? Or is there more restructuring after that?

Let me take the second one first, the restructuring. This is -- we've said repeatedly, this is a three-year process that we started in the third quarter of '06. When we're done, we will be producing PMC where we want to be producing PMC. We should by then have optimized the global structure of this business. At that point, it's less about structure and more about -- almost entirely about execution. Did that answer your second question?

Yes. That's fair.

We're not imagining that the restructuring goes on forever. We're halfway through. But, once we are done, we think we're done. Then it will -- if there is more investment that's going to be expansion of capacity for growth, restructuring of the sort we're (multiple speakers), and if that were to occur, it would be occurring in the growth markets of Asia and South America. Now, the first question was about cyclicality --

Within the Engineered Fabrics business in particular.

Within the Engineered Fabrics business, the Engineered Fabrics business is best thought of as an aggregation of about six different product lines that all share one common attribute; they're really taking Paper Machine Clothing-like structures, made with Paper Machine Clothing-like manufacturing equipment, but selling into industries outside of paper. In some cases right next to paper, adjacent to paper; some far afield. So to figure out the cyclicality, we'd have to go segment by segment. The biggest segment right now is the non-wovens business, which is the business that makes diapers, surgical gowns, swiffers. That market right now is certainly vulnerable to economic pressures, but it's also heavily driven by demographics. In that sense, there's a lot more growth to it than you would expect to see in paper machine clothing -- in the paper industry. Fiber cement, on the other hand, is completely driven by the housing market dynamics, because it's entirely selling into construction-related markets. We would have to go into a long explanation here and go segment by segment. Suffice it to say they don't all line up -- the cycles don't all line up; they're being driven by very different underlying factors -- construction in some cases, demographics in others.

That's helpful. Thank you.

Arnie Ursaner, CJS Securities.

(multiple speakers) follow-up to Mark's question on EFC. It's a lumpy business, and you showed dramatically stronger growth this quarter than you have in several quarters. Was there a single order or two that accounted for the strong growth?

No. Engineered Fabrics? No; I don't think it was a single order as much as -- again, you've got to go segment by segment. We did have -- if you go back and look at our earnings call a year ago, it had a weak Q1 in sales. And then we said a lot of this top-line is driven by OEM business; that is, the original equipment manufacturers build customized machines that run our fabrics, and there was a temporary slowdown in that construction. That picked right up, as we had expected. So, there isn't anything fundamentally new or different going on in that business, and a lot of the big quarter -- I hate to say this -- a lot of the big quarter this time was due more to a weak comp than it was to anything fundamental going on.

Shifting gears to filtration, you gave us the earnings contribution for this quarter. But, obviously, you're going to be -- it's going to be a discontinued operation. Can you give us a feel for perhaps the '07 total revenue contribution, total earnings contribution, so that we can build our models excluding this? And I assume when possible you will provide an 8-K with pro formas?

The latter is absolutely true, and you'll have the exact numbers out in that 8-K. Let me just give you a general guideline. David Pawlick is here with me, and you can fine-tune anything that I put out here. With regard to 2007, the operating income was around $4.3 million. That would be equivalent at last year's tax rate to about $0.11. I just used the 25% tax rate on that. The earnings in the first quarter of last year were around $0.01, just as they -- $0.01 per share -- as they were in the first quarter of this year.

So, obviously, the earnings grow during the course of the year.

Correct.

And the proceeds -- what sort of interest rate should we assume that you'll be able to invest that at, or pay down debt at?

I think for working purposes, you should assume that it would be somewhere between 4% or 5%. Remember, we do have debt in place. Our average interest rate in the fourth quarter is around -- in the first quarter was around 4%. So you could use that number. Let's just use a net cash of something in the range of $40 million on the $45 million purchase, and that would, coincidentally, come in at around $0.04 per share, which would be less than the amount of operating income that it earned last year. However, that begs the obvious question that the whole point of this is the portfolio strategy that Joe has, I think, nicely articulated here, that we have a (inaudible) better use for the capital with regard to that strategy he's outlined.

I thought it was interesting, Michael, that you went through a pretty extensive discussion of your leverage, and the covenant, and other various issues that would get in the way. Should we, therefore, assume that your hope, or goal, is to reinvest in acquisitions rather than just paying down debt?

Our hope -- our explicit goal is to be in the position to seize the acquisition opportunities that make sense once they come around. I don't think there should be any surprise here. We view doors and AEC as significant growth opportunities. There's plenty of opportunity for organic growth, but we want to be prepared for the right opportunities if they come around.

Next question, hopefully, is a relatively quick one. On the SAP, you have mentioned you're going to go through an important start-up phase. Are the expenses on SAP unevenly balanced when you do something like a start-up? In other words, we now what your impact was in the current quarter; does it grow when you actually do a major start-up?

The portion that is expensed, which is what we talk about, will go up during the start-up phase. Yes.

Any sense of a quantification of that?

We don't have anything that we can cite right now.

The guidance we have given you before on general assumptions to make about SAP spending are still good.

In the 10 million range?

Yes.

Shifting to composites, you had dramatically faster growth this quarter than you had last. You had mentioned last time there were some timing issues. How much of the 43% growth was from timing of past products? Why don't we start with that question; then I'll have a follow-up.

I think it's the nature of the beast that we're going to -- that there will always be some timing issues. So, the general trend is very positive. But if it's 45% one quarter ahead of last year, and 25% the next quarter, that's really timing. If you just look at our big landing gear project with Boeing, a quarter ago they were pushing us real hard to accelerate. Now they're pulling back a little bit. All of those sales are going to come, but exactly when they come is purely a matter of time.

I guess where I'm heading with this is, to the extent you had much better than expected, or stronger revenue this quarter, which helped reduce the loss to 1.8 million from 3 million the prior quarter, as we look towards the back half of the year, is the key to getting the profitability goal you spoke to better execution, or more volume?

First, although the second certainly helps, let me just break down the profitability question. There are two factors driving that. The first is manufacturing efficiencies. We turned the corner on that in Q1. The team in (inaudible) Texas that is doing most of the production now, and their biggest project is the Eclipse project, really did a great job in Q1, getting ahead of the manufacturing efficiencies (inaudible) productivity measured as parts per week, chipsets per week, the amount of rework. Productivity is way up; the amount of rework is way down. They are doing exactly what they should be doing. I think through some very strong implement leadership and implementation of lean principles, we're feeling like we've turned the corner on manufacturing efficiencies.

The second big driver of profitability is how much are we spending, and are we willing to spend, to fuel development of next-gen projects? That will become going forward the driver of how much -- how profitable this business is. I can tell you that every month we're talking about another new opportunity -- I've got a list of five of them on my desk that Michael and I were talking about this weekend that just came in from the head of the business, [Brian Cofinbery] -- that are ex budget, that we haven't been anticipating, but they're knocking on our doors. The issue is if we take these on, we're going to have to spend more on R&D; we're going to spend more on engineering; it will hurt profitability. Is it worth doing? Absolutely. Can we still get to our target of going profitable by Q3? Yes.

Even with these incremental expenditures.

Yes.

Thank you very much.

Paul Mammola, Sidoti & Co.

A question on pricing. (inaudible) CEO, [Stephen White], on their fourth-quarter conference call, said that people had pointed to them saying they're the reason for the bad pricing in PMC. But, to sustain their business going forward, they can no longer be that low-cost provider in terms of price. To me that would signal that maybe there would be an improvement in pricing. Has any of that transpired, from your eyes, so far?

There are lags, and the lags in this industry can be as long as a year, year and a half. Let's just play it out. If he concluded that -- if a competitor, or we, concluded we wanted to change how we price, the first opportunity to do that would be in a new contract negotiation. There'll be a round of contract negotiations in the second quarter, both in Europe and North America. So the contact negotiation, say, is in June. The new contracts don't go into effect until September or October. And then the products that are priced at the new level will have to flow through inventory. And so, from just that first contract, you could see a six to nine-month, even a one-year lag, before a new pricing policy starts to flow in. Then there will be second-order effects, next wave of contracts that are influenced by contract negotiations that are influenced by the first one. So the whole pricing effect can be as long as a year and a half before it really washes through. We have some very good evidence of this. The contract negotiations in Europe in 2006 -- this is before you were following us, Paul -- that really brought price to the top of everybody's radar screen, the middle of everybody's radar screen. Those contract negotiations took place in June of '06. The first and second and third order effects of those lower prices in Europe only finished washing through in Q1 of '08, which is why we said we expect price stability in Europe for the rest of '08, because that last wave of negotiations has now washed through -- the next wave of consequences of contract negotiations won't begin to hit until '09.

That's helpful. You've touched on before that if there is price stability or instability, you would let investors know. So, given there could be a lag, will we know how the negotiations go in the second quarter, maybe on the second-quarter conference call (multiple speakers)

If you go back to our Q2 '06 call, we started warning investors that pricing was getting funky in Europe. And we actually caught some heat from investors because they weren't hearing the same from others. And sure enough, it played out the way we said it would. So, there is -- and there is -- in Europe, there will be a very important wave of contract negotiations. I'm not sure they'll be completed by the end of Q2. It looked like they were, but now it might be more like Q3. That's the next big wave of negotiations in Europe. We had been looking at a big negotiation here in North America, AbitibiBowater, but they've put that off until Q1 of '09. So, there are no big -- there are no big jolts -- big opportunities for changes in price parameters, really, for the balance of this year. To us, the big uncertainty this year for the balance of this year is going to be economic.

That's fair.

That's really what I tried to -- those are the parameters I was trying to lay out for you in my commentary, that in the past, what have been the big effects on our results in PMC? It was materials prices due to oil, oil price increases, and it was pricing. And those are feeling stable right now for the balance of the year. Orders look strong. So, the only element of uncertainty, but given recent experience, a big element of uncertainty, is the general economics, in North America in particular.

What can we look forward to, or just some color on Hangzhou coming online in the back half of '08?

Same old same old. It's on track. We hope to start producing the first fabrics in Q3. They will be -- we're trying to lay out the start-up costs for you each quarter. Once it starts up, there will be some major idle capacity costs as the -- a large plant with big depreciation is gradually ramping up. So, the flip side of the free start-up costs is the post-start-up ramp-up, which will have a negative effect, which we'll continue to explain to investors. But right now it's on track.

Thank you.

Ned Borland, Next Generation Equity Research.

Just one question here on market share orders, sort of a follow-up to one of Mark's questions. Where are you in the various geographies in terms of market share versus compared to your expectations when you started out the restructuring program?

I think we're a little better than we had expected when we started on the restructuring program, both in Europe and in North America.

Looking at the order growth you had in North America, it seems if you've got a down market and the orders are that strong, is it possible to infer that you've been taking some share back?

I think it is. As I said, I just want to -- I'll say it again. We'd be very optimistic right now, except for this general economic weakness. And it's great to have the orders in hand. I don't think -- we don't ordinarily make a big deal about it, but the order-to-sales ratio is at a rate that we haven't seen in a long time. I keep asking Michael and [Rick Costron], who have been here for at least 100 years collectively --

Collectively

-- if they've seen this before, and they say no, this is very unusual. I guess they're hedging their bets saying there was at some point where they saw these kind of order-to-sales ratios, but they haven't seen them in a while.

That's great. That's all I had.

(OPERATOR INSTRUCTIONS). John Emerick, Ironworks Capital.

What are the discrete tax adjustments? The tax rate was 20% in the quarter, but I'm guessing you're still looking at 25% for the rest of the year. Two questions, and that's it.

I'm going to give you a non-answer to the first part, and then I'm going to confirm that 20% is the tax rate that we believe will be effective for the year. The reason we don't go into answers to a discrete tax item is that it is not particularly helpful in negotiating outcomes with various parties that may be involved. So we're just not going to go into it.

Actually, just -- I apologize -- explaining it the way you did just helped me understand at least what you're doing. That's fine. Thanks. And then you said -- 20% is the rate going forward?

20% is the rate that we're comfortable with for the year.

Did I miss the prior disclosures (multiple speakers) slight decrease from --

No, I think (multiple speakers)

The new lower rate.

(multiple speakers) explicit enough.

What's playing out is the consequences of some of the restructuring going through in Europe. Not why we did what we did, but it's one of the second-order effects.

Understood. Thank you very much.

Arnie Ursaner, CJS Securities.

Joe, in your prepared remarks you spoke about new products in R&D that are in or approaching trials. Since you put it in your press release, perhaps you could expand on it. What's the sense of timing, and sort of what are the advantages of some of these new products, and are they impacting your orders?

I think it's a little too early for them to be impacting the orders. Our product pipeline right now for each product line in PMC is looking better than it's looked in a long time. And in -- I am just scanning down the list mentally. In each case, the impact is primarily performance to the customer more than it is cost savings to us. So, in every instance, in each of our product lines, there's a new product -- or product platform is a better way of thinking about it -- that has the potential for significant improvement in performance, which will have -- if we do this right, will have a positive effect on pricing. Whether that means it just prevents erosion or actually leads to positive price impact remains to be seen. But typically for a new product with new performance advantages for the customer, that's the single best vehicle in the Paper Machine Clothing business to alter pricing dynamics. I would prefer not to get into the specifics of what the product enhancements are. I would not be talking about them if we didn't believe that they offered significant performance improvements for the customer. More -- the larger the performance change, the longer it takes for the product to get introduced into the market. The paper industry is very conservative when it comes to paper machine clothing and changing paper machine clothing, because as we've talked about before, you can't -- you can't run the machine unless the paper machine clothing is running stably and effectively. So if they are running well, they're loathe to run a trial on a new product that we're claiming will provide advantage. But we do get the opportunities. It's an industry where major innovations wash through slowly. We're -- to us right now, we've gone over a two-year period from being concerned about the pipeline to now being concerned about what's our strategy of for rolling out these new products, in what segments, at what positions, at what rate.

Another comment you made in your prepared remarks, that you hope to offset the higher cost of oil, I guess the question I'm grappling with is if you have a signed contract in place, and oil spikes up as it did in the last quarter, how do you offset the higher oil price?

The context -- the right context for that one is -- remember that as part of this restructuring effort, three-year restructuring process, we're going from what was essentially a $750 million business in PMC with 12 different independent profit centers, to one global business. And that meant that we had 12 -- in effect, 12 different -- this is slightly overstated, but not by much -- 12 different negotiations with raw material suppliers, and we're now making the conversion to one set of negotiations with professional -- with a professional procurement organization. So the offset is really more about our buying practices than it is about details -- and the leverage we're able to get through those buying practices that result from the restructuring, than having to do with the particulars of contracts and absorbing raw material increases.

Shifting gears to composites, a couple questions related to that. You mentioned the Eclipse on this call, and in your annual report you showed the 787. As we think out over the next two years, other than -- you obviously are the landing gear braces in the 787, and I don't think you've told us what you do on the Eclipse.

About 60 different parts on each Eclipse. 45 to 60 different small parts in the fuselage.

Is the only exposure you have to the 787 the landing gear braces?

There's one other small project. But clearly, the big one is the landing gear. We've talked about this before. It takes typically four to six to seven years of joint development with the OEM to get onto a new platform. This landing gear project materialized and came to fruition in two years. It's just kind of unbelievable that we're even on the 787. We missed -- this business was too young to really -- it wasn't existing for all intents and purposes when all of the development work was going on for the 787. For us, the prize is still the next wave of platforms, particularly around the single-aisle aircraft.

Again, staying on composites, can you give us any feel for the number of facilities, the square footage of these facilities, the number of employees you have? The reason I'm going down that path is in your CapEx guidance, it does not build in additional spend for new facilities or further expansion in composites. Yet it sounds like you have quite a few other opportunities that you're (multiple speakers)

In our current CapEx plan, we have a significant expenditure for a major expansion in our Boerne, Texas plant. Correct me if I'm wrong, but I think it's a doubling of capacity down there. In last year's CapEx spend, there was a significant expansion in our Rochester plant, Rochester, New Hampshire, which has already filled up. So, there'll be further expansion in both locations. But, to just reinforce the point, those expansions we can finance within that $70 million bogey that we view as a fundamental premise to the cash and growth model.

Thank you.

Mr. Morone, I will turn the call back to you for any closing remarks.

Thank you all for participating on the call, and for the questions. Michael and I will look forward to seeing you at the various investor conferences over the course of the next few months. Thank you.

Thanks, everybody.

Ladies and gentlemen, the replay of this conference call will be available at the Albany International Web site beginning at approximately noon Eastern Time today. With that being said, that does conclude your conference. We do thank you for your participation, and for using AT&T's executive teleconference service. You may now disconnect.