Albany International Corp (AIN) 2010 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 Friday, February 11, 2011 will be webcast and recorded.

I would now like to turn the conference over to Vice President and Acting Chief Financial Officer John Cozzolino for introductory comments.

Thank you, operator, and good morning everyone. As a reminder for those listening on the call, please refer to our detailed press release issued last night regarding our quarterly financial results, with particular reference to the Safe Harbor notice contained in the text of the release about our forward-looking statements and the use of certain non-GAAP financial measures and associated reconciliation of GAAP.

For purposes of this conference call those same statements also apply to our verbal remarks this morning. For a full discussion, please refer to that the earnings release, as well as our SEC filings, including our 10-K.

Now I will turn the call over to Joe Morone, our Chief Executive Officer, who will provide some opening remarks before we go to Q&A.

Thanks, John, good morning everyone. As always, I will provide just a few brief -- a few comments and then we will get right to your questions.

Q4 2010 was another very good quarter for Albany International. We closed out 2010 with a momentum that has us optimistic about the short-term outlook and confident about our long-term strategic positioning.

Compared to Q4 '09 performance improves strongly on just about every dimension -- sales, orders, operating profit, operating profit margins, EBITDA, EBITDA margins, net income, liquidity.

The operating highlights were strong performance across the board in PMC, especially in China; strong Q4 for Doors, which confirms once again that tight linkage between this business' performance and the economic cycle; and continuing progress in our Composites business both toward short-term profitability and long-term growth potential.

Now just a few points of elaboration and then, as I said, we will get to your questions. First, if you're trying to understand our profitability at this level of sales, at the $245 million in sales, here is how we think about it. Start with EBITDA, take out gains from currency and the sale of the building, also take of the negative impact of the material write-offs, restructuring, that last chunk of equipment relocation, and the unusually high health claims. Weave in the $2.7 million increase in quarterly pension expenses, and that puts us in the low $40 million of EBITDA. And that is really how we think about profitability at this level of sales, low $40 million of EBITDA.

As to whether we can sustain this level of profitability for the long haul, as we discussed before, it will come down to how effective we are at offsetting inflation. Our take is that inflation is going to be a big part of everybody's story, not just ours, starting in the second half of the year. We see it coming; our job is to offset it.

Turning to the outlook, our order trends for Q4, and really in Q3 for that matter, indicate a promising short-term outlook. If you leave aside AEC, the order backlog for each of our businesses is more than 10% ahead of the order backlog at the end of Q4 '09, which suggests the potential for continued improvement in year-over-year performance for the next couple of quarters.

Once you go out to the second half of the year beyond the visibility provided by the order backlog, it gets fuzzier. On the one hand, year-over-year growth in paper production is fairly clearly slowing down. It is still growing on a global basis, but the growth rate is slowing back to that 2.5% to 3% range.

But on the other hand, the economy is clearly improving. So how those two forces play out in the second half of the year really isn't clear to us yet.

A final point. This quarter gives you good insight into how we are thinking about cash generation. We reduced net debt by more than $20 million this quarter and by $50 million for the year, while paying out the dividend, investing in AEC and reinvesting in PMC and our other businesses.

That is the pattern we expect to see over the long haul. This Company should generate a combination of steady cash flow from PMC and profitable growth from the other businesses. That enables us to invest in growth, reinvest in the core, pay out dividends, pay down debt. That is really the story for Q4 and the story going forward for the long haul.

So with those comments, let's go right to your questions.

(Operator Instructions). Jason Ursaner, CJS Securities.

PMC performance obviously continues to improve, and you seem more confident in a stable near-term outlook. I was just wondering how the shift to more strategic integrated relationships with key customers has influenced this change over time, and if you could provide any details on what this means in certain key geographies?

Well, I think the -- I made reference to strategic relationships in my commentary in the release. This was really an important part of our long-term strategy in this business that when you look at each major paper grade and each major region of the world, we try to focus on the strategic customer, the most important papermakers in each of those grades in each of those regions.

Our goal is not just to have disproportionately high share with those customers, but to develop the kind of long-term strategic partnership that allows you to get into a more stable relationship over the long haul.

Now how that strategic partnership plays out will vary from customer to customer and region to region that it might have something to do with R&D. It might have something to do with field service. It might have something to do with a broader supply agreement. But if you think about modern procurement practice there is a clear shift away from the tradition of playing a large field of suppliers one off the other to best practice today, which is you narrow your field of suppliers and then develop deeper, more integrated relationships with them. That is exactly the mode we are trying to work with our strategic customers.

That is great. Then in Engineered Fabrics it recovered nicely from the blip in Q3. And you talked about orders and backlog being well ahead of where they were last year. What type of long-term revenue growth is reasonable to expect from this segment, given some of the opportunities in emerging markets?

We have always said for Engineered Fabrics that we think this business has the potential to grow at about 5% per year. And the reason -- there are really two basic reasons for that. One is there is a fair chunk of the sales in this business, say 20%, that is tightly tied to construction markets. And so when you get into a positive economic cycle that part of the business will grow with the economic cycle.

Then there is another much larger chunk of the business, 40% to 45%, that serves the nonwovens industry, which globally it is still growing at a fairly good clip. So you add all that together, this still looks like a business that has the potential to be a 5% business per annum.

What are the key variable costs associated with incremental volumes in that segment?

It is really the same as PMC except that -- well, no, it is roughly -- think of the drivers as quite similar to PMC.

Then at AEC with a slowdown in 787 reduction that you mentioned could go into the second half of 2011, given this is almost a quarter of the current revenue in Composites how do you still plan to meet your goal of positive segment EBITDA?

It certainly reduces our cushion, but we feel that we made significant progress in Q4 in moving this business to sustainable profitability, and more progress than we anticipated making that quickly.

So we would have been extremely confident about that objective of EBITDA positive in 2011 if there hadn't been a slowdown in 787. With the slowdown we have lost some of our cushion, but we still feel like it is a very achievable -- very achievable objective.

As you look out beyond a couple (multiple speakers).

I think this is a really key point, and I'm glad you brought it up. The prize in this business, and the reason that we view it as so critical strategically is the inflection in growth in the second half of the decade.

And what we are focused on right now, and I think it is the right place to focus, is to make sure that this business is a contributor to profit now, as soon as we can get there, and then a growing contributor to profit. So when that inflection -- big inflection in revenue hits, it is a real contributor to the Company.

So what is more important to us than the short-term slippage in revenue is the discipline associated with getting to profitability. So this is a very important objective for us in 2011.

And as of some of the recent announcements over the past year in LEAP-X and the nozzle concept for Boeing, have these changed your view of the long-term timing and magnitude of that eventual step function from what you have previously (multiple speakers)?

It reinforces our confidence that long-term this business is a very appealing business for us. And that the real prize is not the first half of the decade, it is making sure this business is humming in the second half when these major developments come to fruition.

Okay, great, thanks a lot for taking my questions. I will jump back in the queue.

Ned Borland, Hudson Securities.

Just a question on the sustainability of that EBITDA. You have commented in the past about how there aren't any major pricing negotiations in PMC, at least near-term, yet raw materials are popping up. I know you spoke to that in your remarks. What are the other weapons at your disposal that you can sustain -- if pricing is essentially locked in, what else can you do to sustain the margins at current levels?

In the end it is productivity, but it is productivity over a broad array of activities from where we produce, to what we produce, to how fast we introduce new technology that contributes to lower cost, to what we can do in managing our own supply chain to offset some of the inevitable increases.

So there is no silver bullet, but there is many individual movements associated with -- that can contribute to productivity. And we are looking at all of them, because it is interesting, I think this would be a theme for everybody. Over the next couple of years as the economy strengthens, we are past the recession and we were past the kind of thought process you go through in recession. We have now, all of us, has to get ahead of inflation, which is coming right at us.

So the most explicit statement I can make you is this is right in the middle of our radar screen. We see it coming, and we have to adjust before it gets here.

Is there anything on the raw materials side that you can do to defend against inflation?

We have good relationships with our raw material suppliers. We work with them closely. We also have an in-house captive supplier of raw materials, which figures heavily in our ability to work with our suppliers and try to balance some of the price pressures that hit us. But there is no silver bullet here, because there is no magic solution here, because in the end our raw materials are petroleum-based.

I have been saying for -- as we came out of recession really for a whole year now that our ability long-term to sustain these margins will depend on how effectively we are at offsetting inflation. Some of that -- very little of it, will be increased prices. So the rest has to be improved productivity. That is our job to do that.

Then on your commentary about the backlog of 10%, I am assuming that is total Company and not just PMC, but how much of the backlog growth came from Asia?

So the more than 10% growth in backlog is in all of our businesses and it certainly includes -- except for AEC, where backlog is a lot more complicated. And it certainly includes -- the more than 10% certainly includes PMC.

Asia is a big part of that. The performance in Asia, and China in particular, is just very, very, very, very encouraging right now.

Okay, thank you.

(Operator Instructions). Mark Connelly, CLSA.

A couple of things on this. To follow on that Ned's question, when I look across some other parts of basic materials, we see companies moving in the opposite direction and moving away from these longer-term close supply agreements.

Obviously, your whole value-added strategy has been to get deeper into these contracts. Are you guys committed to these contracts as you were two years ago? And do he think that doing more of them is the right thing to do, given the headwinds you are facing now on inflation?

Are you referring to the strategic relationships that we have with our customers (multiple speakers)?

Yes, sorry.

With our customers I would say we are deeply committed to them. And that it is the only way -- the only way that makes sense to do business long-term.

Let me try to paraphrase that conversation I had with one important customer, is they leave -- we can't give them the full benefit that we are capable of giving them if we are just another supplier. That is just supply chain management 101. To get the full benefit of all the capabilities of your suppliers from your R&D capability to field service capability, to the rate at which introduce new products and customize your products for them, you need to be -- you can't just be one of the crowd. You have to be one of a small number of partners.

The customers who have adopted a, I will it, best-in-class procurement practice, we tend to have disproportionately high share. And as we look at the relationship, they tend to get a lot more of the full capability that we can bring to the table than other customers who really are still in the traditional supply-chain management mode of doing everything they can to try to treat suppliers with like a commodity, play one off the other.

Joe, is there a potential within that framework to build more escalators and de-escalators in the way some of the recycled paperboard companies have basically built it around a margin model?

Yes, there is the potential for that.

Okay, so maybe that is the way you maneuver it.

A question on your manufacturing footprint. Over the last couple of years you have dramatically shifted where you're producing. When you think about the FX volatility lately, which may just be a passing thing, do you think you have got the right manufacturing footprint now or are we going to have to see another round of moving things around if the currency volatility continues?

We really lined up the manufacturing footprint to what we view -- what we see is the inexorable long-term growth trends by grade and region. So as you know full well, the growth is in Asia and South America. The growth is in tissue, packaging grades. And so we have really lined up our long-term strategy in every regard from manufacturing footprint to relationships in technology development to lineup with those longer-term trends.

So we have not tried to build our long-term strategic structure around currency fluctuation. It has been much more driven by market.

So is your European franchise now small enough to withstand what looks like secular decline there?

That is I would say designed with secular decline in mind. So we know there is an inevitability to the decline in the printing grades in North America and in Europe. We know there is an inevitability to the growth in Asia and South America.

And we know that in both North America and Europe tissue and packaging grades will hold their own. So that is how we have structured the Company. That is one of the reasons we feel long-term this business will continue to [make] good cash flow -- that we have lined it up well with the long-term 2.5% to 3% growth in paper production.

Just one more question, Joe. On PrimaLoft, we used to fall asleep when you talked about PrimaLoft, and you can't anymore, because the level of performance in that business is dramatically different than it used to be. Should we think of the introduction of yarn and the shift in your internal strategies as creating another opportunity for this growth to continue or have we reached a new plateau of performance in that business?

You have to distinguish short-term to next year or over the next five years. Over the next five years, yes, we think that this business has the potential to continue to grow substantially, partially because of the yarn product line, partially because of very interesting growth in Europe -- in Northern Europe, partially because of opportunities in the military, although clearly that is a two-edged sword given the pressure on budgets.

In the short term more than any other business, PrimaLoft in 2010 enjoyed the impact of inventory restocking. And we think so much about it in paper. It was a huge factor in the big jump in PrimaLoft from '09 to '10. So they will have a challenge to beat the quarter-over-quarter comparisons in the short-term, but long-term what you describe is how we think about it. This is an interesting growth business.

It is still small in absolute dollars, but remember it is very seasonal. Almost all of the profit they generate they generate the first half of the year, so for the first half of the year they really perform like a business twice their size.

Thanks, Joe.

Jason Ursaner, CJS Securities.

I just wanted to ask a quick question on free cash flow for John. You talked in the press release about the significant improvement in working capital in inventories. Will you likely need to build these to accommodate a rising sales environment or can you improve from the 17% full-year level?

I think when you look at PMC we should continue to see some incremental improvements in working capital. I don't think we would be planning for large improvements, but we are still -- over the long-term we should still be able to take that down a little bit. But I think for the other businesses as they grow you should be looking at adding some working capital for those.

Okay, thanks. That was it for me.

Gentlemen, there are no further questions.

Okay, thank you all for participating on this call. And as always, we look forward to meeting as many of you as possible between now and the next call, and if not then, we will talk to you in the quarter. Thank you.

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.