Albany International Corp (AIN) 2009 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the third 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, November 3, 2009 will be webcast and recorded. I would now like to turn the call over to over to Senior Vice President and Chief Financial Officer Michael Burke for introductory comments. Please go ahead.

Thank you operator and good morning everyone. As another reminder, I would like to refer everyone to the detailed press release we issued last night, with particular reference to Safe Harbor notice contained in the text of the release about forward-looking statements and the use of certain non-GAAP financial measures and associated reconciliations to GAAP. And we note that for purposes of this conference call, those same statements also apply to our verbal remarks this morning. For a full discussion please refer to today's earnings release as well as our SEC filings including our 10-K.

Now before turning the call over to Joe Morone, I would like to mention that we've changed the formatted the conference calling little bit. Given the detailed disclosures contained in the press release which includes prepared remarks by Joe as Chief Executive Officer and me as Chief Financial Officer, we have determined that the best use of time for all the participants listening in on the call is not for us to verbally reread the prepared remarks contained the press release, but rather goes straight to the question and answer portion of the call. And that is after very brief opening remarks by Joe Morone.

And with that I will turn the call over to you, Joe.

Thank you. Michael good morning everyone. I think if you have read the release by now you know Q3 2009 was a good quarter. Let me just give you some good highlights and then as Michael said we'll turn to questions.

As all of you know, our near-term goal is to generate strong free cash flow in 2010 and what Q3 tells us is that we are right on track with that agenda. Now, let me give you a few highlights.

Number one, sales were stable for the second consecutive quarter. Still down 18% compared to the comparable period in 2008 but they are up incrementally from both Q1 and Q2. All of the growth in sales was in Asian PMC, which was up 13% against Q3 2008 and 37% against Q2 2009. That's 13% against the comparable period last year, up 37% sequentially.

Number two, the sequential improvement in profitability was especially encouraging in this past quarter. Adjusted EBITDA grew from $28 million in Q2 2009 to $34 million in Q3. Gross margins improved, SG&A was lower and operating income at PMC was especially strong.

All of this is the result of our restructuring, which we talked about a great deal. We're not seeing any significant one timers that are influencing the results. And we think there is another $3 million in cost reductions which we're washing gradually, will not take full effect until third quarter of 2010.

Number three, restructuring is just about all behind us. There's still a good deal of movement of equipment next year which could cost as much as $3 million. And SAP, which is progressing well, will continue at the current quarterly rate of about $1.3 million through 2010 and into 2011. But the restructuring is almost completely behind us. No new news you'll be hearing about on restructuring.

Number four, looking forward business by business, let me begin with PMC. It is still looking like an L-shaped recovery and in the Americas and Europe and very clearly a V-shaped recovery in Asia. Because of seasonal and inventory effects, we still think there is risk in a soft Q4 but the longer-term trends all look to us like L in the Americas and Europe, V in Asia.

In composites, it's back to rapid growth with potential to double sales over the next 8 to 10 quarters and with very promising prospects beyond that. In Doors, we don't expect that strong upturn in Q4 that we would get under normal economic conditions. I think recovery will be slow and will follow with GNP and capital spending recoveries. In 2010 we're turning our attention back to the steps we can take to accelerate growth in the aftermarket and in Asia.

Engineered fabrics, the prospects for sales really vary depending on the product line. Our largest product line, non-wovens, is now starting to look like we're going to see a V-shaped recovery over the next 12 to 18 months and we'll be turning our attention there as well to growth in Asia. And finally, PrimaLoft recovery depends on the seasonal factors and on the general economic recovery.

Number five on cash, as I think you know there was strong cash generation in this quarter with $23 million of cash from operations after restructuring payments and a $20 million contribution to pension. Finally regarding debt, the leverage ratio dropped from 2.4 to 2.28. We purchased back another $30.5 million in bonds and we made the decision to systematically eliminate our pension liability over several years and allocated $20 million in cash to the pension fund.

So, in sum, this is a very encouraging quarter. Sales have stabilized. EBITDA and cash flow are recovering and the three-year restructuring program is nearly complete. There's still some short-term downside risk for sales in PMC because of inventory and seasonal effects.

Overall, these results leave us very confident about strong cash flow in 2010 and we're beginning to turn our attention once again to the challenge of managing rapid growth in composites and the steps we can take to accelerate growth in Doors, Engineered Fabrics and PrimaLoft. Michael, back to you.

Operator, at this point we would like to open up the phone lines for any questions the participants may have. And also if you could please remind everyone of the necessary steps to signal their request for a question.

(Operator Instructions) Arnold Ursaner, CJS Securities.

Good afternoon. It is actually Jason calling in for Arnie. Congratulations on the strong quarter. In Q2 you talked about three major developments, the third of which was EBITDA improvement and we outlined the case from a Q2 run rate to Q4 and then into 2010. That has obviously happened faster than we anticipated. So do you think you could give maybe an updated outlook on that?

We think the easiest way to think about this is take the Q3 run rate as our new baseline. So, $34 million of EBITDA. If we don't see -- if everything else is equal, we should see another $3 million of cost savings washing in over the next few quarters.

Now, again, everything else being equal, if we see a significant weakening of the dollar or if sales take a dip then obviously those additional $3 million don't wash in, don't get reflected in earnings. But basically use the $34 million as a baseline. I think that's a good way to start, and then add $3 million.

Okay. And the new facility in China, you speak about it being fully operational. What type of utilization is that running? And do you have an internal goal on when the plant can be fully utilized or is timing kind of dependent on just more orders coming in?

It's a slightly complicated question because we built this plant in a way that capacity keeps growing as we move more equipment in. And so we are today running at full capacity, but by later this year we'll have additional capacity which we think will gradually run up to full capacity by the end of 2010. And then we will add more capacity by moving some other equipment in and gradually the volumes will pick up and absorb that capacity as well.

So, we think that plant is doing very well. It's right on track. It's performing really up to our -- it is actually exceeding our expectations in terms of performance right now.

Okay. And in composites, you discussed the V-shaped recovery and the potential to double revenue from the current levels in kind of a 2 to 2.5-year period based on the current projects, but you did not mention profitability. I know you previously disclosed divisional operating profit, kind of breakeven maybe in like a $45 million revenue range. So would we expect breakeven profitability well within this 2 to 2.5-year timeframe?

That number is pretty good; maybe a wee bit high from an EBITDA breakeven. It's probably in the low $40 millions. On the other hand, we're going to be doing a lot of ramping up of people and capacities, so EBITDA may take a bit of a hit in the short-term. We think that between $40 million and $45 million is a very good expectation for where EBITDA breakeven is.

Last question from me before I go back in the queue. In Doors you talk about leveraged earnings growth relative to sales as they come back with GNP in 2010. How levered is profitability in that segment through an economic recovery?

Highly. If we see if we were to see sharp returns in sales there would be a lot dropping down. The breakeven on that business is quite a bit lower than anticipated.

Would it be a multiple of GMP?

I'm not sure I understand. Try to restate the question.

If you saw 3% GMP growth in Europe. (multiple speakers)

That's right. If GMP were to grow by 3% in Europe we would see sales grow by anything in the range of 3 to 6 times that. And there is a lot of leverage, a lot of fixed cost leverage on those sales.

You said 3 to 6% or 3 to 6 times?

3 to 6 times.

Mark Connelly, Sterne Agee.

A couple of things. I wonder if you could give us a sense of the impact that your China operations sales had on sales and profitability over there. Clearly we've had a nice V-shaped economic activity. But can you break out even in rough terms what the impact of having local production was, both in terms of potential incremental sales and in terms of the profitability of that area?

It is big time, Mark. It's dramatic and it's dramatic on all counts. It is enabling us to get stronger sales. It's enabling us to get stronger margins. It is enabling us to get stronger share. It's having a big time effect.

In every way that you think about competing in a growing market, this has really helped.

So would you call this a repeat of your Korea experience? Or is it better than that?

Well, I wasn't around then. That was about 10 years ago. But this is a much bigger impact than that because this is a much more important market. As you well know, there is no more important market in the paper industry going forward than China. We're hearing about 20 new machines coming into western China over the next 12 to 24 months and these are world-class machines. So this is an absolutely critical market and we're feeling very (multiple speakers)

Two more questions. First, you mentioned taking engineered products into China with new production there. Is that going to cost much?

No. That is us really taking advantage of the investments we already made in China. Same for Doors. We're -- when we talk about trying to accelerate growth in Doors and Engineered Fabrics, the investments to take it to try to break into the Asian market is already in place.

Okay, and last question, you talked about prices being stable in Europe which is more -- we historically have seen the most volatility. Can you give us a sense of pricing around the rest of your business, Mexico, Latin America and US?

I think the word for now is stable, but again as you well know you can't ever rest easy. In Europe there are no major new contract negotiations coming up in the next 12 months and the prices of orders have been relatively stable.

On the other hand, there still is PMC overcapacity in Europe and so that is what I meant in the release when I said the underlying conditions are still there for price instability.

In South America, again, pricing is stable. In North America, pricing is stable. There is a big contract negotiation coming up next year with International Paper. And so that, as we've discussed before there is always a window for instability when major contract negotiations come up.

Okay, I'll get back in line. Thank you.

Ned Borland, Next Generation.

Great quarter. I guess sticking with China for a second here. Maybe more of a philosophical question here, Joe, but we've always sort of focused on the competitive landscape in Europe and the pricing environment over there. How long do you think you guys have a favorable pricing environment in Asia, given that that seems to be the only -- where all the action is right now demand-wise? At what point does that start pulling in competitors into the area? I guess how long does the honeymoon last?

The competitors in Asia are the same competitors in Europe. They're all in. The difference is in Europe it's everybody's home market and they all have well-established capacity.

In Asia if you look across all of the competition, the two competitors that clearly have a large lead on investment capacity and physical presence both in terms of talent and modern equipment (inaudible). So in that sense it is quite different than it is in Europe. Even though Asia has always been served by the European PMC industry, so all the people we come up against in Europe are in Asia. But there's a big difference in capacity and presence.

Okay. And then Michael on SG&A, being on an adjusted basis just below $60 million, I mean that is the lowest I have seen it in a while here. Where were the savings in SG&A versus prior periods?

I think it's really, if you think about it across the board, it really is a result of restructuring that is taking place and taking cost out to really balance in terms of right-sizing the organization. So there wasn't any one particular line item, but really across the board results of restructuring.

Okay, thank you.

Paul Mammola, Sidoti & Co.

Good morning everyone. Joe, when we look at sequential operating improvement in PMC, I think Mark was alluding to this as well, is that all leverage from Asian sales or are there other factors from the developed regions in there as well?

When we look at the improvement in EBITDA?

[So sequentially] with PMC.

It is really all cost that the Asian growth pretty much offsets declines in sales elsewhere. So if you look at topline it is relatively flat. The real impact is cost.

Okay, I think you alluded to a softer 4Q. I actually think China GDP is supposed to tick up slightly sequentially. When you talk about a soft 4Q in terms of PMC does that include Asia or would you say no?

No. What we're really referring to is something we have talked about on previous calls. There's been a pattern over the past couple of years that seems to have been exacerbated in the recession of slow down by our customers in the backend of every quarter. And it was dramatic; it fell off a cliff last December.

We're anticipating that the same could happen again -- this is North America and Europe -- in the back end of Q4. That kind of seasonal slowdown, people are shutting down machines and trying to get their numbers at the end of the quarter and the end of the year. We saw the pattern in September. It's a pattern that has been repeatedly there every quarter and [most of the year] in the fourth quarter.

That's fair. You commented briefly on inventory. I guess what are your thoughts?

More point on that. In the past, in a normal economic cycle, we would see a strong fourth quarter in Doors that would help to at least offset some of that December slowdown in PMC. We don't think we're going to see that this year in Doors just because the GMPs and capital spending in the major markets are pretty flat.

Okay, understood. Again you commented briefly on inventory and PMC. What are your thoughts our surrounding how long it might take for the channel to be somewhat normalized or be lower to benefit you guys?

It's really -- it is where our visibility is the lowest right now. We can look out to end user patterns, production and consumption, and we can see quite a -- we can see stability there. And the evidence we're looking at, the evidence that is available in the industry, that is what leads us to say L-shaped recoveries in Europe and North America.

What is much less visible to us are the short-term pipeline effects in PMC and then also paper production. I'll just give you one data point which I may have mentioned last quarter. The length of time between when an order is delivered to us and when a shipment is expected by our customer has basically cut in half in North America during this recession. So, all of our normal benchmarks about lag between order and invoice, about seasonality patterns, you kind of have to throw them out the window and we are flying a little blind here. So it's uncertain. That's the best we can say right now.

We can see the stable trends in our end markets. We can see that the -- our products, the number of installations of our products are growing. But we're still unclear about what is going on (inaudible).

Okay. And on AEC, do you have a rough sense of what overall capital spending would be like for 2010 and how much and how much would be for expanding AEC?

Well, let me give you two answers to this question. In our planning we are able to handle reinvestment back at the PMC to keep it healthy, investment into composites and paying down debt pretty handily in all of our models. We're still looking at -- if you figure CapEx spending going forward is roughly equal to or slightly below depreciation, we can handle normal reinvestment requirements in PMC and investment required in AEC if it's growing at the rates I described to you in the release.

Now, the wildcard in here is there is potential for significant upside beyond that doubling after 2012, beyond that rate of doubling I talked about in the next 8 to 10 quarters. If that occurs we're going to have to invest more substantially. We're probably going to have to build a couple of plants if that occurs.

I'll explain -- I'll give you an example of how it could occur. So, that would be a good problem to have to invest more. Not right now; it doesn't look like we would have to make investments beyond what we're imagining at depreciation levels before 2012. Let me give you an example of some of the upside that we're waiting for and are ready for.

I think I have mentioned this before. If you go to the publicly disclosed literature in composites and do a search on LeapX, which is the next generation single aisle engine that we're working with (inaudible), you'll find two very interesting and for us important references. One is to the new single aisle aircraft that a Chinese company, Comac, has announced and is developing and is expected to make its first flight in 2014 and they expect it to be in production in 2016.

As we speak, Comac a decision about which company will provide the engines for that aircraft, for that new single aisle aircraft that will be going into competition with Boeing and Airbus. Snecma is, with its joint venture partner GE, one of the leading contenders. Pratt-Whitney is the other.

If Snecma is selected, Snecma/GE combination is selected, they're going to have to do a program launch of the LeapX engine right away in order to be ready to outfit the Comac C919 -- that's the name of the aircraft -- once it hits production in 2016. That would mean we would have to ramp up more than we have talked about and have projected when we talk about CapEx being within depreciation.

In those same articles, if you do a Google search, you will also probably find a reference to how Boeing and Airbus might respond to this Chinese entrance into the single aisle aircraft market. They're not in a position to introduce their own -- Boeing and Airbus -- their own single aisle aircraft in the near-term. They have got their hands full. So it's in their interest to push out into the end of next decade or early the following decade, early in the 2020s, their introduction of a single aisle aircraft.

So they're going to be under a lot of pressure to respond to the new Chinese entrant. And the likely response is to put more fuel-efficient engines on the existing 737 and A320 single aisle aircraft.

Well, one of the contenders for the re-engining, so-called re-engining of the single aisle aircraft would be the LeapX engine. So, if Boeing and Airbus, one or the other or both, conclude next year -- speculation is they make a decision next year -- to go ahead and upgrade the engine on the 737 and A320, then that is even more ramp up of our program associated with LeapX engine that we would have to take on.

That is all good problems. It does mean more capital spending and we're certainly prepared for that if it comes.

That's good to hear. Thanks for all that color and everything you provided in the release regarding AEC. Finally, Michael, what's left out there to convert now?

It's about $28 million or so is what is remaining.

Okay, thanks for your time guys.

(Operator Instructions) Mark Connelly, Sterne Agee.

Thanks. I have a couple of questions I guess primarily for Michael. You've talked in the release about idle capacity cost being on a downtrend, but in Joe's comments you also talk about the ramp of capacity in China.

I'm wondering, how do you think about not idle capacity but about excess and total capacity in your system? You closed down several assets or are in the process of closing down several assets. How do you think about the balance of capacity in your system today versus where you would like it to be?

Let me take that, Mark, Joe. We've gone in PMC from about 24 plants worldwide to 14. And the 24 did not include the new greenfield plant in China; the 14 does. And we're now at the point where each of the plants, each of the 14 plants are well sized to their markets, are efficient, are well-equipped and there are no more -- there's no more inefficient capacity.

So, we don't imagine any more changes in our manufacturing footprint with PMC for the foreseeable future. Foreseeable means in our planning horizon and you know we have a pretty long planning horizon.

We do have -- so what we've got is 10, 14 efficiently scaled plants. We have we still have extra capacity in those plants, but taking down any one plant would be a big step and would cause capacity imbalances. So we have room to grow, but we're really happy with the configuration we have right now.

Okay, that's helpful. On the financial side, when we look at your credit statistics relative to your customers they look great. Relative to industrial companies I'm sort of wondering where -- your decision to pay down pension looks like a smart thing to do. But what sort of targets are you thinking about now in terms of the sustainability and volatility of your cash flow? How are you thinking about your relative financial strength?

Mark, the way we're thinking about it is that as you said we view all our liabilities in context. So, the unfunded portion of the pension, as we described in the release, we view it as a liability we want to manage down. We want to remove volatility where we can.

When we think about external funding and capital in the context of what our overall -- try to optimize our weighted average cost of capital, we know that in the markets we're about to move into with refinancing at least as it relates to the bank facility, that cost of capital is going to be higher than what it was when the transaction was last put in place.

Our objective is really to continue to maximize the generation of EBITDA and free cash flow and pay down our debt to give us the flexibility for the opportunities for reinvestment, in particular as we begin to look at, on the AEC side, composite [stepping in] to ramp up to be in a position to reinvest in that.

So, have we put a specific target in place? We're actually as part of our longer-range planning reviewing that. But the primary objective is to pay down the debt and we're going to continue to do that.

And last question (multiple speakers)

Let me just add to that because I think that is a critical question you're asking. Our whole plan of these past three years that we are now coming out of was do what you need to do to secure the long-term cash generation potential of PMC. We think we've done that. We'll continue to reinvest to keep the base healthy. But our primary investment priorities now are pay down debt and position ourselves to ramp up composites as fast as we need to.

Okay. And then one last question, you talked about neutralizing the pension volatility. Is it safe to assume that you are planning to do that over the next say two or three years? Or are you looking to try and do that even faster?

I think within sort of a three to five-year timeframe. Our ability to do it faster will be driven by, again, how much available free cash we have relative to the growth opportunities that we are going to continue to invest in. Our objective is to make contributions to that and remove that, the (inaudible) and do that within three to five years.

Three to five. Okay, thanks very much. I appreciate it.

Arnold Ursaner, CJS Securities.

Just a follow-up. On the capital spending, in the third quarter I think it was $7.5 million and you said it was on track with a $50 million 2009 estimate. What would make this jump up to $17 million in Q4?

Nothing that we can see. We're just working off the tail.

Yes, it's just timing.

And then (multiple speakers)

(multiple speakers) [Prices] suggest the only surprise that could come along in CapEx would be -- wouldn't be immediate. But it would be -- if we got some really great news on composites and we had to build a new plant to meet some rapidly expanding demand of the sort that I described, around LeapX engine or some other project. So, it would be a kind of CapEx that will be directly tied to a stream of future cash flows and would be easily justified.

Got you. And following up on the LeapX engine, I tried to do a lot of reading on the programs you highlighted and it seems the shift to the hot end is kind of based on the ability to utilize and manipulate the ceramics matrix composites. Would there be any technical reason that CMC composites couldn't eventually use an additional part? And is there any real competitor to Albany in terms of manipulating these fibers in terms of that?

Right now what we can see (inaudible) on competition but primary competition we're dealing with is metals. So most of the time when we lose important contracts it's for material competing with (inaudible) -- I don't know the case where we're losing positions because somebody is doing what we do better. There isn't really anybody out there who is talking about doing what we're doing.

Most of the CMC composites I've seen are -- the patents are assigned to GE. So would you be tied to the CFM going forward or are there other composite fibers out there that could be utilized?

There's no question that on the engine side our most important partnership is with Snecma, which is part of the Safran Group, (inaudible) absolutely critical for a successful relationship with GE [called] CFM. So our fortunes are tightly tied on the engine side.

We are participating in other engines, but that is by far the most important program on the engine side. The potential upside to sales that we are not able to talk about in the proprietary timeframe beyond 2011 are really big opportunities that are not on the engine.

Okay, thank you very much.

At this time I'm showing no further questions in queue. That does conclude our question and answer portion of the call today.

Thank you operator. Just in closing comments, we want to thank everyone for their participation today in joining us on the call. And that does conclude the formal portion of the conference call.

Thanks everyone. See you soon.

Thank you. And ladies and gentlemen a replay of this conference call 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.