Albany International Corp (AIN) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first quarter earnings call of Albany International. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. At the request of Albany International, this conference call on Tuesday, May 5, 2009 will be webcast and recorded. I would now like to turn the conference over to our host, President and Chief Executive Officer Mr. Joseph Morone. Please go ahead.

Thank you Mary. Good morning everyone. Welcome to the Albany International Q1 2009 earnings call. As always, I will begin with some commentary and then we will turn the call over to Michael Nahl, CFO and Executive Vice President, who will provide some amplifying comments and then we will turn to your questions.

In our Q4 2008 earnings release, I wrote that we were confident that even if 2009 sales declined 13 to 15% we would, quote, exit the year as a fundamentally more profitable business with the capacity for sustained and growing free cash flow in 2010 even if the recession extends beyond 2009. End quote.

One quarter later, this much is clear. First, because of the sharp deterioration of the European and Asian economies, sales in Q1 2009 were much lower than anticipated, declining 23% compared to Q1 2008 and 16% compared to Q4 2008. Second, the accelerated restructuring activities that we described in our Q4 release had a significant impact on profitability, which was stronger than would have been expected given the decline in sales.

Excluding costs associated with restructuring and performance improvement initiatives and the gain on extinguishment of debt, the company still generated $25.5 million of EBITDA. Third, the buyback of convertible debt announced in April improved the company's liquidity and will have a significant beneficial effect on Q2 debt levels and related debt covenants.

Looking forward, the company's outlook for 2009 hinges on two major questions. First, has sales bottomed? And second, will profitability continue to strengthen?

Turning first to sales, the outlook variance from market segment to market segment and region to region. In the PMC, the Americas, there are some indications that in the paper industry demands for craft, tissue and pulp grades has bottomed and is beginning to turn. However, demand for newsprint, which affects roughly 10% of our PMC sales in the Americas, is still declining.

In Asia there are also signs of early recovery, particularly in China. PMC orders in Asia in Q1, while still below pre-recession average monthly order rates, were well above Q4 lows.

And in Europe, PMC orders in Q1 were flat compared to the low point in Q4. However, the general economy and the paper industry in Europe continued to deteriorate. This suggests that despite the flattening of order trends there remains some significant downside risk for PMC sales in Europe.

It is important to note that the company's share across the globe in most of our high-priority market segments and customers is either stable or growing. So we would expect that the trends we are experiencing in PMC are either similar to or better than those experienced by the rest of the PMC industry.

Turning to doors, we currently expect that sales in Q2 and Q3 should be comparable to Q1 2009. The primary uncertainty in this business relates to Q4. It is still too early to determine whether the historical seasonal pattern of flat sales in the middle of the year followed by strong increases in Q4 will continue in this recession. (technical difficulty)

It is still too early to determine whether the historical seasonal pattern of flat sales middle of the year followed by strong increases in Q4 will continue in this recession.

In engineered fabrics, orders are a little bit lower than sales in the nonwoven segment suggesting that sales have not quite hit bottom. However orders in North America have rebounded from the Q4 2008 lows in the fiber, cement and corrugated product lines.

In composites, the recession has dramatically weakened the business in regional jet markets. OEMs in this segment of aerospace have retrenched sharply, both in prospective near-term sales of existing platforms and longer term development of new platforms. However, particularly on the development side of AEC, the weakness in the business and regional jet markets is being offset by increasing activity in the defense and larger commercial aircraft segments.

Net sales declined 5% compared to Q4 2008 as increased revenue associated with R&D activities in that defense and larger commercial aircraft segment helped to offset the decline in revenues associated with business and regional aircraft lines.

And finally in the PrimaLoft product segment, orders strengthened as the quarter progressed and finished only slightly behind Q1 2008 levels. Even though the retail markets to which we sell remained soft, our customers were able to deplete their inventories through sharp discounting during the Q4 2008 holiday season. The replenishment of their inventory is now driving the recovery in our orders.

In sum, although there is evidence that in some market segments sales bottomed in Q1, the continuing deterioration in newsprint in the Americas and the overall paper industry in Europe, leads us to the conclusion that it is premature to expect in Q2 a recovery from Q1 sales levels and that some downsides risks to sales remains.

Turning to profitability, the impact of our restructuring efforts was clearly visible in Q1 2009 particularly in PMC. Excluding costs associated with restructuring and performance improvement initiatives, and despite the sharp decline in sales, PMC gross and operating margin percentages improved significantly. With the operating margin improvement from 18% in Q1 2008 to over 20% in Q1 2009, again this in the context of a sharp decline in sales.

Restructuring activities will continue in each business segment for the next two to three quarters. The impact of these activities on profitability will grow gradually over the next five to six quarters. If sales were to hold at the Q1 level of $209 million and assuming no significant shift in currency effects, these restructuring activities should improve quarterly EBITDA by $2 million in Q2. Growing to about $4 million in Q4 and to a total improvement in quarterly EBITDA of about $6 million by Q2 of 2010.

For this reason, even with a much lower than expected Q1 sales and even with our very cautious outlook for sales and our skepticism about a recovery in the near-term, we remain confident in our ability to exit the year as a fundamentally more profitable business with the capacity for sustained and growing free cash flow in 2010.

Now, before I turn the call over to Michael who will provide more detail about the buyback of our convertible debt, there is one additional piece of news that I would like to discuss with all of you. We will be issuing an 8-K about this shortly after the call.

When I began my tenure at Albany in August 2005, Michael told me he was planning to retire in a year when he reached 65. Of course, by that time he had trained four previous CEOs and he figured, yes, one year would be enough to get me up to speed.

As the year progressed and it became clear that we would have to launch the three-year restructuring process that is now drawing to a conclusion, I asked Michael to stay on and help guide us through it. Out of loyalty to the company and friendship to me, and he agreed to put off retirement for couple more years. Well, now that we can see the light at the end of the restructuring tunnel and as he approaches his 67th birthday, Michael has decided that now it really is time for him to retire. And so we have launched the search for Michael's successor and our next CFO.

Once we find the right person we will have an orderly transition period and then Michael will retire. But he will not be leaving, at least not completely. He has agreed to continue to serve as on a consulting basis after retirement as a senior advisor to me on the high-level strategic and finance issues for at least two more years.

Those of you who have met with Michael and me during our many investor conferences surely know how we feel about each other. It is a pure pleasure to work with this man. I speak for the board, all 5500 of Michael's colleagues around the world, thousands of Albany retirees and of course all of us who are investors in this company in saying that Albany International is deeply grateful to Michael Nahl for his long and skillful stewardship of this company's financial and strategic fortunes.

This might well be the last earnings call that he will be participating but that the mark leaves on this company will endure for a long, long time. Michael?

Thank you Joe. Thank you for those generous words. I will have to take a drink after hearing such nice words Joe.

Thank you not only for the words Joe, but especially for the friendship and the partnership that we have shared. At the end of my comments I plan to say a few words about the orderly succession underway and I will leave it to that to continue the response. But again, thanks for everything. It's meant a lot to me, the partnership we have shared.

I will start with some financial highlights this morning. In the fourth quarter conference call in February, we described the (technical difficulty) sharply lower sales we were observing and the steps we were taking to manage proactively through the recession, to reduce costs and strengthen our balance sheet and to protect and enhance our liquidity.

One of the steps we took to assure liquidity was to agree with Prudential Capital to increase the interest rate we pay them in return for their raising the maximum permitted leverage ratio from 3 to 3.5. Similarly in the first quarter 2009, with sales coming in even weaker than expected, we began to implement various contingency measures we had previously identified to assure we would be able to successfully navigate through the current economic storm.

One of those steps was to permanently reduce debt, to further increase our liquidity. One small transaction in the first quarter was followed by a large one in the second quarter. We initiated each transaction in a two-step process in which we first paid a cash amount and issued new notes in exchange for some of our convertible notes.

The new notes had essentially equivalent terms except that they were not convertible. We then purchased the new notes back from the holders for cash. The combined effect of the two transactions, including the large one done in April, is that we have $100 million less par value of convertible bonds outstanding. We used $750,000 cash as part of the consideration in the exchange for notes. And we financed the remaining $56 million cash required to purchase the new notes by borrowing under our revolving credit agreement.

The effect of the first smaller transaction on results for the first quarter was a pretax book gain of $2.8 million and a reduction of book debt of $2.9 million. The larger second-quarter transaction is expected to result in a pretax gain of $36.6 million and a reduction in book debt of $29.2 million. We will initially be paying less interest on the portion of the revolving credit agreement debt that we used to finance the purchase than we were paying on the notes, which carried a 2.25% interest rate on $101 million.

Interest on the revolving credit agreement is based on a margin over LIBOR. The breakeven rate for current interest payments would be for LIBOR plus the credit spread to equal approximately 4%. We would have to see three-month LIBOR rise over 150 basis points above their current level before we would be paying as much interest on the portion of the debt under the revolver of the cost of new notes as we were previously paying on the notes.

Our leverage ratio under our principal credit agreements was 2.82 in the first quarter. We would anticipate that our leverage ratio at the end of the second quarter is likely to be below 2.50.

As Joe mentioned, we are in the midst of an orderly process to identify my successor as Albany's CFO. I am hopeful we can announce my successor soon. We have identified some very good candidates. And with a little luck, this will be my last participation in our quarterly conference calls. I will retain Albany stock and options and with that shareholder perspective, I will continue to offer advice and counsel to Joe and the management team with regard to financing and strategic transactions.

I have really enjoyed the honor of advising five chief executive officers of Albany International over the past 27.5 years. One of the most fun parts of my job since Joe became CEO has been our many strategic discussions. I believe there will be a number of these in the months ahead after my retirement.

I've also enjoyed my relationships I've built with many of you on this call and I hope those relationships will continue long after this transition. I can assure all of our investors, our financial partners and our employees that the leadership of Albany International remains in very strong hands with Joe and with our very talented business and functional leaders.

Mary, I would be happy to take questions now.

Mary, before we do, we refer you to the forward-looking comments in our earnings release and note that the same applies to our comments during this call. That is usually Michael's statement but I think I threw him off his game today.

(Operator Instructions) Arnie Ursaner, CJS Securities.

Good morning. Joe, a couple of questions. It sounds from the tone of your prepared and other remarks that March was materially worse than you had thought than the November through February period. Can you give us a feel for the regional differences you are seeing in PMC? It sounds like it is quite different whether it is the US or Asia versus it Europe. And moreover the trends you have seen in April, if you could comment a little bit more on those as well. Thank you.

In our last call we talked about November and December seeming to be a bottom that continued into January. We didn't talk about February; February was awful. Across the board, across every region of the world, across all of our product lines February was unspeakably bad. It is always the weakest month of the year for seasonal, cyclically, but it was much, much worse.

March came back off of February lows and later in the month was stronger than earlier the month. There was a lot of activity at the end of the month, products being shipped that revenue it didn't get recorded on. And that continued into April.

As far as the regional variations, it is interesting. We are seeing patterns in our orders and sales and outlook that are now very well aligned to the general commentary you are getting in the business press about economic recovery. We are clearly seeing signs of -- there are early signs; we will see if they're sustainable -- signs of recovery in Asia, especially China.

We are clearly seeing signs in several important paper grades, in the Americas that a bottom has been reached. It hasn't really trickled into our orders yet. But we can see from what our customers are saying that in critical grades the bottom is reached.

The big concern in all of our businesses really is what is going on in Europe. And that tracks with the general economic trends, where it is clear the recession will last. It started later, will last longer in Europe and the response is more constrained. The government and company responses are more constrained in Europe than the rest of the world.

So, if it weren't for our sense of unease about the general economic conditions in Europe, which clearly affected the general paper industry in Europe, we would be feeling more bullish about Q2 clearly being the bottom -- as climbing off the bottom.

One follow-up to that, you mentioned you continue to expect restructuring type charges for several more quarters. Should we assume that you have not finished the rightsizing or geographic positioning you would like and we should expect some additional plant activities to better position your company for future growth?

You know, if you think of this over a three-year context, Arnie, it's definitely coming to a close. And basically the steps we had been planning to take are now underway. They haven't -- certainly the impact on cost has not all yet washed through, as I've tried to indicate. And not all of the restructuring charges have washed through yet but we are getting close.

Specific question on the financials, one of your key customers, Abitibi, did file for bankruptcy in the quarter. Did you to have any bad debt write-off or exposure specifically to Abitibi?

We are well reserved, adequately reserved for anything going on at Abitibi. They were flirting with bankruptcy for a while. We, over the past several months work closely with them. It was actually a really good partnership. They helped us reduce our exposure and we helped them as best we could to get through a difficult time for them.

So, the -- we are well reserved there. Moreover, they have a stake, several important newsprint plants where we have strong share that were not included in the bankruptcy. So I think we are in good shape with Abitibi both in terms of the strength of our relationship and in terms of our ability to minimize the exposure of the reserve against it.

My final question, after your glowing comments about Michael, I'm a little worried about letting it get to his head even more. But Michael has been just a tremendous resource for Street analysts and investors. He has been very accessible. It really has created a sense of comfort in working with him with the straightforwardness and honesty and ability to communicate.

I assume you have hired an outside search firm. Can you give us a sense of the critical criteria you have asked the search firm to consider to try to make up for some of Michael's strengths that will be missed?

You know, everything you say from my vantage applies quadruply. His been a wonderful partner and so this is a search we are taking very seriously. We're working with Korn/Ferry and with John Johnson in Korn/Ferry. John might even be on the call; he usually is on our calls.

We have been working closely with him for the past 3.5 years, as long as I've been CEO and he knows the company well, he knows Michael well. He rattles off of statistics about PMC and composites and doors and engineered fabrics. So he knows us well, number one.

Number two, we're doing an exhaustive search and Michael is not going anywhere until we get somebody who really satisfies all of our criteria, and let me talk a little bit about those criteria. There really are -- this is a bit of an oversimplification, but not much.

There really are two traditional pathways to the CFO position. One is through the controllership of a company, so it is more internally oriented. The other is through the more transactional treasury/balance sheet side. We have the more conventional approach is the first, through the controllership.

We have very deliberately shaped this search to go down the second path, the path oriented toward somebody who's had deep and extensive experience on the treasury side, on the balance side, experience with both public and private markets, both debt and equity. And so that is how we are skewing the process. Exhaustive search, internal and external; we will have seen dozens of candidates before we're done.

I've spent as a first -- after John Johnson has screened dozens and dozens, when they finally get to me I spend at least four hours with each candidate. If they pass through the initial screen, we put them through another one. If they pass through that then we turn them over to Michael. And if somebody passes that screen then we will be ready to present them to the board for a final.

Michael, best of luck to you.

Thank you very much Arnie.

Ned Borland, Next Generation Research.

Good morning. First I would like to say, Michael, it has been a pleasure working with you over these years and best of luck to you. You will be missed on these calls.

Thank you Ned.

Secondly, Joe, I was wondering if you could give us a little color on pricing. I know the second half of last year we were sort of talking about pricing stability and -- given a bunch of critical negotiations that occurred. And I was just wondering how pricing is holding up and what the outlook is there.

The hotspot as always is Europe, because of the challenge of eight competitors fighting in a shrinking market. Now, just put that in context. If our overall sales were down 23%, they were down substantially more than that in Europe. It was all volume. But if it hit us that hard and we are diversified out of Europe, we are able to handle that kind of a decline, but a lot of our competitors in Europe are mostly focused in Europe. So this has to be hitting them very hard.

And I think you -- the conditions are clearly present for competitors scrambling to try to grab share in a sharply declining market by offering to drop prices. One of the reasons we were not confident about saying that sales have bottomed in Q1, and there is a downside risk, is because and it Europe the conditions are present for price pressure to be sure.

Okay. And then on the SAP implementation, I was just wondering if maybe you could let us know what still has to be implemented, what operations. I know you are live in North America. But are there some other units that you have not rolled out SAP to yet?

We've done North America, we have done composites, we've done doors and the next step will be Eurasia and PMC. But by then we will have pared down the team working on SAP. So it will really be our normal internal IT group doing the work, with maybe a few consultants to supplement here and there.

But we expect that by next year, total -- or the year after, our total IT costs will be comparable to where they were in 2006 even with any additional SAP activity. The peak was last year. Q2 expenses will probably be lower than Q1. And so even as that work continues, we are trying to work the expenses associated with it into a normal ongoing run rate.

Okay. And then on China, it sounds like the plant was a little bit underutilized in the quarter. Given order trends seem to be improving over in Asia, how do you see the utilization of operations in China picking up?

The underutilization declined sharply over the course of the quarter. By the end of the quarter the underutilization was gone, which means it was pretty much at a run rate associated with capacity. So now it's really a matter of orders.

That plant is ready. All three plants that we spend so much energy on and money on expanding, they are ready to roll and they are rolling. We are feeling very good about the work that that team has done. They've done an outstanding job.

So is it fair to assume that the China utilization has picked up markedly, could profitability even improve sequentially even if sales don't?

Well we tried to fold in all of those affects even into that estimate I gave, Ned, of profitability, EBITDA improving by $2 million this quarter, Q2 to $4 million to $6 million by additional EBITDA.

So, if sales don't pick up, if sales stay at this abysmal level, which is hard to imagine, but say they do through Q2 2010, and there is no material change in currency effects, that $25.5 million of EBITDA, adjusted EBITDA, would grow by an additional $6 million. We would be in the $31.5 million, $32 million range of EBITDA at this level of sales, assuming we don't get whacked by any wild shifts in currency.

Okay, thank you very much.

Mark Connelly, Sterne Agee.

This is (inaudible) and thanks. Obviously in an environment like this where volumes are getting hit so hard, it is probably tough to benchmark. But as you think about the cost reduction programs you have put in place across Europe and the US, how do you feel about where you are competitively? Do we need to see more restructuring if business bottoms out relatively soon volume wise?

Just trying to get a sense, you got caught a little bit flat-footed in Europe a couple of years ago, but my sense is you that put that back together. And you've done a lot of work since then. So I just wonder if you could talk about the competitive cost position of your facilities.

We think, Mark, that we are awfully close. Certainly from a production point of view, manufacturing footprint, we have to be awfully close to being in the low cost position in the industry.

And the way we have been approaching, as you know, all of this restructuring before the recession hit, and then as the recession hit and we started to accelerate, was to focus on permanent structural change rather than temporary one-time. Because our goal is to come out of this thing stronger, which means maintaining our ability to differentiate, maintaining our talent, maintaining our ability to provide superior service out in the field and better products. But also, getting to a low cost position.

Because if you look at -- if you try to get past the recession and try to speculate about what the markets -- almost every the supply chain is going to look like once we're through the recession, there are going to be much fewer, larger, more demanding customers, all of whom are going to be under intense price pressures. So you have to get to a low cost position and you have to be able to serve demanding customers, which we can differentiate as well. And we think we are well positioned for that.

As I said, if sales stay at this abysmal 23% down annualized compared to 2008, we will be in a very good position, assuming nothing crazy with currency. If sales deteriorate further and we become convinced that it is not a blip, but that there is a bottom that will last for a while, then we have to do more. And you know our bias; our bias is to try to preserve our ability to differentiate. Try to preserve our talent base, but see what you can do to take out permanent costs. So that would be our bias going in. We have some ideas. We rather not go there.

That's helpful. And then along with fewer, larger and more demanding hopefully you will get some smarter ones too.

Just a couple of additional comments. If you look at the spending and investment you have made in applied technology to ramp up for the business, some of which is not going to be there, is there a write off coming? Or are those -- are you able to pull back expenses out of that to keep margins from deteriorating as volume falls off?

There are two pieces to this business, as I'm sure you will recall, there is the short-term work that was driving a lot of the revenue that was a legacy from our acquisition of Texas Composite, and then there is the longer term more advanced technology.

And what's really been hit hard is the shorter term projects, particularly in the small jet, business jet, regional jet market. We are not anticipating any more write offs. The big write off was Eclipse.

What is happening is the sales mix is shifting much faster than we had imagined before the recession to the more advanced technology. And that as -- we will probably hit bottom -- if things stay the way they currently look, which is a risky proposition in this environment, we probably hit bottom on EBITDA in aerospace in Q1. We will probably hit bottom in sales in Q2.

And then we start recovering. The recovery is shaped much more by the advanced technology than we had imagined. How steep the recovery curve is, it's too early to tell. It is not going to be that 35% that we had been enjoying. How steep it is will depend on a couple of really interesting possibilities that are percolating right now and that will play themselves out over the next year.

One last question, in the door business, when you did the R-Bac acquisition you talked about changing some go to market strategies as well. How far along are you in that process?

The R-Bac acquisition was in the North America. That has been fully integrated and it is -- that model was based more on just a fundamentally more efficient business model for producing doors. The change in our go to market strategy has really been in Europe, where we have put much more emphasis on expanding our presence in the aftermarket and building our own channels of distribution and service. That continues to go well and it is has clearly been -- our experience has clearly confirmed that pushing forward in the aftermarket is a pathway for long term sustainable success in this business.

Do you need to do that in the US too?

It is much harder to do in the US market because the there are strong -- there is a strong third-party presence in the channels in North America. So, we really have to -- we work through distributors. As just historical accident, they were well established before the high-performance market emerged. So you have to work through third parties in North America whereas in Europe we are the third-party.

(Operator Instructions) Mark Connelly, Sterne Agee.

Let me ask one more. If we look back over the last 10 years, you saw substantial benefits when currency markets got out of whack in Mexico and in Brazil. As we start to see a little more strength in the US dollar, how is that affecting your local production footprint and the decision to move production closer to customers that you have been doing over the last couple of years?

It is a really interesting phenomenon. But the effect you see on the top line of currency is actually, tends to be for a variety of reasons the opposite of the effect on the bottom line. So as the dollar strengthens, we are hurt on the top line and we are helped on the bottom line.

The easiest way to think of this is -- let's take the example you gave, the relationship between the peso and the dollar. As I think you probably recall, we had three plants producing dryer fabrics, one of our four product lines that PMC. In the Americas we had one in Canada, one in Europe and one in Mexico.

In total we were producing about 550,000 m of dry fabric. We now have one plant in Mexico producing around [550,000 m of] dryer] fabrics. So all of our production is now concentrated in Mexico. All of our production costs are peso based.

So, as the dollar strengthens and all of our sales except for sales in Mexico, all of our sales in that plant are in dollars up and down North and South America. So as the dollar strengthens against the peso, the costs are in peso, revenue is in dollars and we get a benefit.

Helpful, thank you.

And we have no more questions in queue.

Okay, thank you all for participating. We will see you in upcoming investor conferences. Michael is not getting off the hook that quickly. He will be with me on the next few. And if we don't see you in between calls we will talk to you next time.

Thank you ladies and gentlemen. A replay of this conference will be available at the Albany International website beginning at approximately noon Eastern Time today. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.