Albany International Corp (AIN) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth-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, February 9, 2010, will be webcast and recorded.

I would now like to turn the conference over to Senior Vice President and Chief Financial Officer Michael Burke for introductory comments. Please go ahead.

Thank you, operator, and good morning, everyone. Before we get started I would like to refer everyone to the detailed press release which we issued last night with particular reference to the 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 reconciliation to GAAP.

And we do note 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 remind everyone that we changed the format of the conference call last quarter. And 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 continue to believe that the best use of time for all participants listening in on the call is not for us to verbally reread the prepared remarks contained in the press release, but rather go straight to the question-and-answer portion of the call following some brief opening remarks by Joe.

So with that, I'll turn the call over to you, Joe, for those opening comments.

Thank you, Michael. Good morning, everyone. Welcome to our Q4 2009 earnings call. Just three quick points -- three quick highlights on our release and on Q4 that I would like to emphasize and then we'll get on to your questions.

Number one, the primary lesson of Q4 2009 is the impact of our three-year restructuring program on profitability, that a small increase -- relatively small increase in sales can lead to a disproportionately large improvement in earnings. So we saw in Q4 a 6% increase in sales, which lead to a 20% increase in adjusted EBITDA.

And so that's really the primary message from Q4. That we have -- because of the fundamentally lower cost structure, we have powerful fixed-cost leverage. And going forward, as we see small percentage increases or for every small percentage increase in sales, we'll see a disproportionately larger increase in EBITDA. So that's point number one.

Point number two, which I addressed in my commentary in the release, is really about a question that I'm sure is on all of your minds. Are the strong results from Q4 sustainable? Are they repeatable? If we had comparable sales and comparable product mix with a comparable currency environment, would we get comparable earnings?

And as I described, there are about $3.5 million of new costs that will flow in in Q1; $2 million associated with the pension expenses, $1.5 million associated with increased fixed costs in R&D and engineering in our composites business. If you take those into account, then basically yes we think that if we had comparable sales and mix and currency environment you should expect to see -- we expect to see comparable adjusted EBITDA.

That leads to the closely related question, which is should we expect that the sales environment of Q4 is sustainable? I tried to point out that there were seasonal effects in Q4 that helped us on our top line, particularly in Doors. We -- if you go back in history, you will find that in Q1 in PMC there is usually some down-side seasonal effects.

But if you leave seasonal effects aside and you focus on the underlying sales trends and order trends through into 2010, you look at the underlying consumption and production and inventory and capacity patterns in our end-user markets, what we see across the board is a pattern of markets stabilizing, recession coming to an end. Still some uncertainty about the precise nature of the recovery in different markets, but what we see across the board is that concern we had of another step-down in sales, that down-side risk, that concern is dissipating. It has dissipated through Q4.

And then point number three, as we leave recession and three years of restructuring behind us, where do we go from here? Our focus shifts back to cash and growth. And as I have discussed with you many times and as detailed in the release, we see three components of cash and growth.

First, cash generator. Paper Machine Clothing, we think because of the restructuring and the successful ramp-up of our new plants in Asia, South America, expansion of our plants in South America, this business is very well positioned for sustained, long-term cash generation.

Second component of cash and grow is the cluster of three businesses that generate cash as they grow -- Doors, Engineered Fabrics and PrimaLoft. Each is sensitive to the economy. And so if we're in for a period of slow GNP growth over a sustained number of years these businesses should do well and should be major contributors to performance improvement for the Company over that stretch of time.

And then of course the third component of cash and grow is what we consider a future core business, Albany Engineered Composites, where we expect sharp growth in the near, medium and long term. The big news in quarter four was the launch of the LEAP-X engine. We tried to provide in my commentary a conservative lower-bound estimate on the -- our content, the value of our content on each LEAP-X engine.

So overall very strong quarter, illuminating the fixed-cost leverage now in place. Recession appears to be receding, and we're shifting our focus now back to cash and grow. And with that, let's go to your questions.

So, operator, at this point we would like to open up the phone lines for any questions that the participants may have. And if you would please, please remind everyone of the necessary steps to signal their request for a question. That would be helpful. Thank you.

Thank you. (Operator instructions) Arnold Ursaner, CJS Securities.

Good morning, Joe. Good morning, Michael.

Good morning, Arnie.

Good morning, Arnie.

A couple of quick questions, if I can. I'll start with a real quick one for Michael. How should we think about tax rates for the upcoming year, please?

Right. As you saw in the quarter, a couple of things that happened, but in terms of the effective rate really what occurred is in Q4 effectively a true-up to reassess against prior quarters. Though -- as we think about going forward, though, we would expect to be in the range of about a 20% effective rate.

Joe, on the PMC side, you historically have not broken out geographic detail on PMC, but obviously Asia and South America, Latin America are showing very strong growth. Can you give us a better feel for the percent of your revenues or profits coming from Asia and South America or Latin America now?

And it is more a deterioration in the US and in Europe that we're seeing that are accelerating the trend, or is it a flattening in those mature markets and faster than anticipated growth in the newer markets that's driving the growth?

The Asia and South America represent about 30%, 31%, 32% of sales in Q4, and that is up substantially from Q4 a year ago. And the -- it is all of the above, Arnie. It is real growth; real and rapid growth in Asia and South America. And sequentially, in North America and Europe, flat to slightly down; year-over-year down quite a bit.

So the long-term trends in this business are gradual erosion off the current base, gradual erosion in North America and Europe, steady, sometimes sharp growth in South America and Asia.

I'm sure you have many others on the call, so I'll try to ask one brief question if I can on composites. Maybe two related questions.

One is, I believe in the past year you have talked about when you can get to $40 million of revenue you believe that you could achieve a breakeven. You were at roughly $10 million this quarter and obviously we're in a major ramp-up phase over the next eight to 10 quarters. So want to freshen that up.

Do you still have that breakeven of $40 million, given the costs incurred on some of the development contracts? And also you highlighted in your prepared remarks five years of negative cash flow, which has some people concerned. Perhaps you could expand on that as well, as you have this tremendous opportunity in front of you.

If you look at EBITDA breakeven, which does not include R&D, composites is at about -- is at EBITDA breakeven. And we expect it to hover around EBITDA breakeven through the year even with the increase in fixed costs and the sharp ramp-up. That would be our expectation. We're hovering around EBITDA break-even.

Division operating income breakeven, which loads in all of the corporate allocations like R&D, it probably doesn't hit breakeven until about 2012. Cash flow breakeven is farther out because of all of the investment required in new plant and equipment. But the key in our thinking is if you think of total capital investment for the Company, through the period of rapid ramp-up of composites we still expect total capital investment to be roughly equal to depreciation and amortization through the entire period that composites is cash flow negative.

Okay. I'll let someone else go. Thank you very much.

Okay, Arnie. Thank you.

Mark Connelly, Sterne, Agee.

Good morning, Mark.

Can we talk about the competitive environment in PMC? Obviously your results are good. You talk about the risk of pricing pressure as you get into the contract season. What are you seeing in between?

Obviously there is not a whole lot of big business up for grabs right now, but your competitors are also not in particularly good financial shape, either here or in Europe. So can you give us a sense of what the competitive outlook -- competitive market feels like right now as we head in to that contract?

It's an interesting question, Mark, and it's kind of uncertain, but there have been some important changes which I'm sure you are familiar with. Tamfelt, which is a strong regional European competitor, as it ran into trouble during the recession and as it faced up to the magnitude of the investment required in Asia to keep up with what we have been doing, they sold out to Metso, a machine builder.

A while earlier, Kufferath, a small forming fabric supplier, who was -- who typically was pricing at the bottom of the market and dragging down the low end of the market, was acquired by the other machine builder, Andritz. So one of the big changes over the recession is that as PMC companies started to struggle, it created an opportunity for the machine builders to forward integrate. So now we're all three machine builders; Voith, Metso and Andritz have forward integrated.

It's hard to say at this early stage how the Metso ownership of Tamfelt will effect Tamfelt's behavior. If they approach the business the way Voith, the other major machine builder, has approached the business and the way Andritz has approached Kufferath, they are much more inclined to emphasize value and performance and value-based pricing, which is exactly, in our view, how PMC suppliers should complete because this business generates a ton of value for our customers.

So there is a change in the competitive environment. How it actually plays out in the day-to-day competition remains to be seen. But if you analogize from Voith's behavior and an Andritz's behavior to Metso and assume they behave the same way, what has changed is the introduction of competitors who understand the value of paper machine clothing.

Joe, did you have the opportunity to look at them -- at the Tamfelt assets before they went? I know that in years gone by that was an asset that Albany might have had some interest in owning.

In the -- Mark, as you would expect, in the -- in a turbulent environment like the one we just went through, we looked at every conceivable alternative. We were constantly and are constantly tracking developments in the industry as you would also expect. I can't say anything more than that.

Okay, that's fair. Can we talk about the Asian business? I assume those assets are running pretty well. They were running or getting up there last quarter. Can you give us a bit of an update there in terms of margins and your outlooks for margins in Asia relative to your other PMC businesses?

The -- there -- we have three plants in Asia. Two had been preexisting and we expanded by several factors their capacity, and one is a greenfield plant. All three are up and running, are performing very, very well. The teams out there are doing a great job. High-quality product with dramatically better margins than comparable plants in other parts of the world. We're very happy with how that is playing out.

And just one financial question. Obviously over the last couple of years Albany has taken a lot of restructuring charges. It sounds like, in your release, those charges are more or less coming to an end. Can we assume that the restructuring charges are pretty much over with, and that we can start to see cleaner numbers coming out of Albany over the next year?

Absolutely. We're -- the three-year restructuring program is done and there are some residual activities and residual costs still playing out. For example, we'll still be moving equipment to the tune of a few million dollars in the first half of the year, but our expectation is that we will now start reporting EBITDA, not adjusted EBITDA. It will create a little bit of complication, because we'll have to compare EBITDA back to adjusted EBITDA in the previous year. But our -- as we come out of restructuring and recession, we want to return in Q1 to earnings releases that do comparisons year-over-year rather than sequentially, and that emphasize EBITDA.

Perfect. Thank you, Joe.

Thanks, Mark.

(Operator instructions) Paul Mammola, Sidoti & Company.

Hi, good morning, everyone. Joe, could you speak a little bit to your market share over the past few quarters and if participates are still price rational? It sounds like the machine manufacturers are participating well, but obviously some of the competitors who might be in more difficult financial circumstances, are they pulling on price?

Well, we try to focus share -- our thinking about share on the grades, regions, and customers and machines that we think are strategic. And in those -- in that respect, we're doing really well on share.

On pricing, I don't want to get into specifics, but let me just give you a general rule of thumb. For customers who think in terms of total cost of ownership, think in terms of trying to optimize their system, the efficiency of their system, paper machine, we do really well. We get disproportionately high share.

For customers who really think of paper machine clothing as a commodity and are trying to just minimize the cost to them of their material purchases, we get disproportionately low share. And so that's the way it typically lines up. Then our competitors who are more oriented toward gaining share by dropping price will do better with those customers.

Okay, that's fair. So if I can piggyback to your first statement, would you say that you have gained share on the containerboard side in Asia over the past few quarters?

I would rather not get specific, but I'll say that we're feeling good about how we are performing relative to our competition on our strategic accounts and strategic segments.

Okay, fair enough. And I know there's a long lead time for costs to flow through P&L, but are polymer costs steady for you right now?

They are steady to increasing, and our challenge going forward is to find ways continuously year-over-year to offset inflation with other productivity.

Okay. And then similarly on the cost side, I mean, do you think you're at an employment -- at the low for employment and you may have to rehire sometime in 2010?

In PMC, if we do, it's going to be in the growth markets, but overall employment should be relatively constant.

Okay. And then finally, maybe for Michael, do you think there's room -- as we look at cash flow for 2010, do you still there's room in inventory and receivable accounts to pull down?

Yes, we do. We think there's continued opportunity within PMC, both within how we're managing receivables, but also within inventory.

Okay. Great. Thanks for your time, guys.

Thanks, Paul.

Arnold Ursaner, CJS Securities.

Back a little bit, if I could, on the composite business. You obviously have the COMAC contract or award, but you haven't spoken very much about the retrofit opportunity. So a couple of questions related to that. One is I think this is the first time you have disclosed the dollar content of what you believe to have on the engine. Is that fair?

That's fair, Arnie. We have not yet completed our negotiations on price, terms, and conditions with the SAFRAN group, our partner, for the components we are making for the LEAP-X engine. So we can't give any kind of a precise range, so what we decided to do was provide a conservative lower bound on what the content -- what our content on each LEAP-X engine will be.

(multiple speakers) I'm sorry.

So that's point number one. On the question about the re-engining opportunity. That is not something that is our call. It is some -- it will be determined by negotiations between Airbus and Boeing and the engine manufacturers, but here is a way of calibrating it.

There are today the joint venture of GE and Snecma -- Snecma is our partner. That joint venture makes about a thousand engines a year that go on the 737 and A320. The joint venture of GE and Snecma intend the LEAP-X engine to be the next generation replacement engine for the current CFM56 engine that they sell about a thousand a year of. So that gives you a sense of the potential scale for the LEAP-X market if it plays out the way GE and Snecma hope it will, which is that those engines come to replace the older, less fuel-efficient engine, the CFM56, on all new 737s and A320s sometime in the decade.

But those decisions have not yet been made by -- those decisions to re-engine new 737s and A320s have not yet been made by Boeing and Airbus. There is wide-spread industry speculation about that that those decisions will be made sometime this year, but it's just speculation.

But a couple of follow-ups. On the re-engine, that would be for the future planes but what about the retrofits on existing planes? And I guess the broader question is how much of that is embedded in our view of revenue growth for the next eight to 10 quarters? How much of this has been built in to that guidance?

There is no -- that I know of, there is no discussion in the industry about retrofitting existing 737s and A320s. It's rather the re-engining opportunity is, as Boeing and Airbus build new 737s and A320s somewhere around the middle of the decade, that they would put new, more fuel-efficient engines on those new 737s and A320s.

What Boeing and Airbus are trying to do is delay the time when they have to introduce a whole new generation of single-aisle aircraft, because they got their hands full now with the Dreamliner and the A350. So they would like to push out the need to build new -- a whole -- a replacement for the 737 and A320 until the middle of next decade. Putting new engines, fundamentally more fuel-efficient engines, on the new 737s and A320s that are built allows them to do that.

There is no -- nothing in our short-term projection for the rapid ramp in AEC in the next eight to 10 quarters. There is nothing in there for re-engining. There is -- one of our largest sources of revenue is continuing development work on the LEAP-X with Snecma, but there's nothing in the sharp ramp-up that we have talked about for the next eight to 10 quarters that has anything to do with re-engining.

But that's a $25 million plus revenue opportunity, if in fact it does kick in. It is a very sizable one, given the 300-plus deliveries of 737s plus the A320s.

Yes, as I said, the way to scale it is think that if they succeed in using the LEAP-X to replace the current generation, the LEAP-X is 10 to 15% more fuel efficient. That's a replacement of 1,000 engines a year.

In a little more broad sense, you've spoken about $25 million plus opportunities, a handful of those in composites. Obviously you have got the COMAC, you've got the possibility of Boeing and Airbus. Can you give us a feel for some of the other sizable opportunities that you are at least being considered or working on developing into?

Yes, the big one right now that is just kicking in is the landing brace, composite brace for the landing gear of the Dreamliner. The first of those was put on a Dreamliner last week so every Dreamliner rolling off now should have our composite braces on. So that will ramp up over the next couple of years, and is a major contributor to the likely doubling in sales over the next eight to 10 quarters.

A second major growth opportunity during this period are components that we are making, composite components we are making for the lift fan of the Joint Strike Fighter. It is a fighter plane that behaves like a Harrier. It can move vertically so that's what the lift fan is for, and we've got a suite of critical components on that.

Those are the -- right now the three -- LEAP-X, the landing brace on the 787, and components of -- on the Joint Strike Fighter are the three biggest programs contributing to growth in the short-term. There are several other exciting possibilities that we're not yet able to disclose, but as soon as we can we will.

Things that are moving from the develop stage where you have been given a heads-up of commercial or more sizable opportunities but your client won't let you disclose them, do we have those sitting in this space?

Yes, correct. Or there are a couple in particular that -- in one case, we're right now in conversation about whether or not to go commercial and when. And in the second, where the client is telling us, yes, we want to scale, it's still a matter of working out the details. And so, yes, we can't disclose it yet.

Okay. Perhaps you or Michael could give us a better feel for maybe the next two, three, four years of capital spending as this evolves. What will it cost you to build an either add-on or new facility? And more specifically, if you are going to be doing work for COMAC in China, would you build a separate facility in China to accommodate that market?

Our customer, Arnie, is Snecma, which is part of the SAFRAN Group. So they are the engine manufacturer and they work are their JV partner GE. And so the work we do will be either done adjacent to our plant in New Hampshire or in France or both, but we wouldn't be doing -- we wouldn't be building plants in China.

And what sort of --

The other question you asked was about capital spending. The best guidance we can give you is we have been saying that after this year we expect capital spending to be at roughly our total depreciation and amortization. And that includes everything we need -- from what we foresee today, everything we need to ramp up this business.

If a major new opportunity pops up, then that would be more revenue. It will also mean more investment. But right now we think we can ramp this business without getting above amortization or depreciation -- and depreciation.

That's consistent with what we have in the (inaudible).

Great, thank you.

And I'm showing no questions in queue.

All right. Well, thank you, operator. And we want to thank everyone else for their participation on the call and for joining us today, and we look forward to speaking with everyone again very 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 your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.