Albany International Corp (AIN) 2011 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 Thursday, May 5, 2011 will be webcast and recorded.

I would now like to turn the conference over to Chief Financial Officer and Treasurer, John Cozzolino, for introductory comments. Please go ahead.

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.

And for purposes of this conference call, those same statements also apply to our verbal remarks this morning. And for a full discussion, please refer to that 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. Joe?

Thank you, John. Good morning, everyone, and welcome to Albany International's Q1 2011 earnings call. As always, I will provide a quick summary and interpretation and then we will turn to your questions.

As we described in our release, Q1 2011 was another very good quarter for the Company. Sales and profitability were strong. Orders kept pace with sales and backlog remained steady.

We reduced net debt by another $20 million and we saw good performance across the board in every business, driven by a combination of new product and business development, strong customer and strategic relationships, successful efforts to offset inflation and control costs, and clearly we also benefitted from economic growth. Perhaps most encouraging, each business is doing what it needs to be doing to further strengthen itself, both operationally and competitively, so both internally and externally. We are feeling a good deal of momentum right now in each of our businesses.

Now let me take just a minute to interpret the results for you. We reported $252 million in sales and $43 million of EBITDA. Once again, currency had a big impact, reducing EBITDA by nearly $6 million. So if currency had been stable EBITDA would have been about $49 million.

However, there were a number of unusual positive factors in the quarter, the revenue recognition change in Doors and in PMC the unusually strong end of March that probably pulled forward some revenue from April, the favorable sales mix and the very high levels of plant utilization. So when you take all of these positive factors together they pretty much offset the negative impact of those currency effects.

In other words, when all is said and done the way we think of this quarter is it had a run rate of about $43 million of EBITDA. That's $43 million of EBITDA on when you take all the unusual factors into account, sales of around $245 million.

As for our outlook, as the year progresses the year-over-year costs will certainly get tougher than they were in Q1, but if you leave currency aside and if we continue to be effective at offsetting inflation then we should continue to see year-over-year improvement in performance. So overall, it was a very good quarter across the board and we see a positive outlook.

Now let's, with that as a summary, why don't we just turn to your questions.

(Operator Instructions). We do have a question from the line of Mark Connelly. Please go ahead.

Hi, Joe. How are you?

Hi, Mark.

So a couple of things. The sales pattern that you talk about in PMC is not particularly well aligned with what we saw from paper companies in the quarter. They all took a pretty big hit in February. So I am just curious. Did you see things back up in February or was the catch up you were doing in January so big that it just didn't hit you. And I'm curious what the end of the quarter looked like, whether there was any payback there?

Yes. Actually it did soften in February and came roaring back in March.

Okay.

I think it's -- I think our sales patterns were pretty well aligned with the statistics that are coming out about the industry. The big -- one of the big unusual factors for us in Q1 was we didn't see the slowdown in at the end of December and so, as a result we didn't start with a weak January. We started with a January that was pretty normal, but then, yes, it pretty much followed along industry production. It softened in February and came roaring back in March.

And can you elaborate a little bit. In your press release you talk about the wave of new products. Can you give us a sense of where these new products are doing particularly well in terms of markets and grades?

I don't want to sound over exuberant, but just across the board, Mark. So we are seeing very good performance on new products in the tissue grades, in the crafts grades and at particularly in Eurasia in the printing and writing grades. So we are -- one of the advantages we have in the market is we have strong product positions up and down the machine. And we pretty much have a pipeline of new products that are hitting market for every, for virtually every position down the machine.

That's going to -- we don't see any material change in your selling and technical spend, so I'm curious is this -- is there another spend coming or is this sort of the benefit you are getting from previous spend? Or I'm just trying to get a sense there's a shift there.

No shift, Mark. It's the benefit we are getting from previous and current spend. We're not backing away from the investment in new business development. We have during the restructuring, and I know we talked about this, we -- on of the things we did early was restructure our R&D organization to create consistently more critical mass with lower cost. And a lot of that is paying off.

Okay, okay. Jumping over to engineered composites, two questions and I ask you this question a lot. Is the current rate of spending in engineering composites going to -- does it need to change? Does it need to move up as we start to move closer to some of the bigger projects in the next year or two? Are -- I'm just trying to get a sense of whether -- a couple of years ago you ramped up spending. I'm just trying to get a sense of whether the shift and the delays that we have seen has materially changed your outlook for capital spend?

For capital spending, Mark?

Yes, within engineered composites.

Yes. So there is no change in outlook for capital spending in composites. We continue, based on extensive modeling, we continue to expect to fully fund the ramp of the composite business as we build capacity, particularly for the LEAP-X program. We expect to be able to fund all of our CapEx requirements over the next five years at or below the total amortization and depreciation.

Now that's on average. There may be a year where it goes above that, but that will be offset by years where it's below, so no change in outlook on that. We continue to expect to fully fund reinvestment back in PMC plus the growth of AEC with capital spending that will gradually rise up to the $65 million level total amortization and depreciation.

Okay, okay, and then a question on the door business. Is the strength you are seeing happening on both sides in Europe and in the US because those are pretty big numbers and --

They are pretty big numbers and, yes, the strength we are seeing is across the board, but in this business the real -- the core of the business is in, is centered in Germany and so the German export economy has a big impact, has the single biggest impact on the health of this business, but we don't think that you can explain the big move in doors just on GNT movement. There was also a lot of new product development activity that was -- that has been hitting over the last couple of quarters.

We are -- that business is ahead of where we thought it would be and, as you know, we're -- we have a high degree of confidence that as you get into a positive economic cycle this thing starts running at a multiple of GNT, but it's already running now at 2008 rates, which was at the peak of the last economic cycle. So this was a really -- this was positive surprise.

Okay. Super, that's all I got. Thank you.

Thank you. And the next question comes from the line of Jason Ursaner, CJS Securities. Please go ahead.

Good morning. Congratulations on the strong start to the year.

Jason, good morning to you.

In PMC we can clearly see the operational leverage at this level of sales, but given that orders were pretty much in line with sales, can you talk about your expectations for normalized growth in PMC and your sense for how long it takes maybe to moderate some of these longer term trends?

Well, that's a really interesting question that we spend a lot of time wrestling with. And, well, let's just try to take this in pieces. First of all, 2010 growth rates in the paper industry, well, across the world exceeded the background rates because of the recovery from the recession and inventory recycling. And in addition, in North America and Europe we were expecting L and it moved up a bit before it started to plateau.

So but that's over. That -- those strong year-over-year increases in both year-over-year and quarter-to-quarter sequential increases in paper production are now moderating. And the post recession recovery part of the cycle is over and so the background structural trends start to take over.

Now, and let's just try to break those into pieces. Asia and South America, which now represent about 30% of our sales, and that percentage will continue to grow, are behaving exactly the way everybody has been expecting them grow, strong growth in Asia fueled by China, good growth in South America fueled by Brazil. Then there's North America and Europe.

We had been assuming continued steady decline in North America and Europe that would off, be offset by the growth in Asia, slightly more than offset by the growth in Asia and South America. We are seeing a slight, maybe, it's a little early, but we're seeing slight change in that outlook.

North America is looking stable. There is still the erosion for sure in the printing and writing grades, but we are starting to see indications that maybe that will be fully offset by growth in the tissue and packaging grades. And that would be really good news if that holds.

Great. Those are --

Europe is the soft spot, as always. Europe is the soft spot --

Right.

And the industry has always understood in Europe that it had overcapacity in printing and writing to the tune of 10%, 15%, 20% over capacity that has always been hidden by their ability to export, but with the strong euro that overcapacity is now being exposed. And so there's a lot of talk in Europe on earnings calls about the need to consolidate capacities.

So even though consumption of paper in Europe looks to be flat there will be almost certainly consolidation of productive capacity in Europe over the next couple of years. So you aggregate across that. It's looking right now flat in North America, down in Europe, up in Asia and South America. Asia and South America for us now are a larger chunk of the pie than Europe. They are likely to grow faster over time than Europe declines. So that guidance we have given before, a long term of flat to 1%, that's still good. Maybe it's even, depending on North America, that might even be slightly conservative.

Those are -- appreciate those details. And you have already spoken a little about the need for inflation and to offset it over time. So when I look at the gross margin performance in Q1 can you speak a little bit about the growing inflationary pressures and maybe the lag before some of the petroleum-based resins start to hit

Well, first of all you can't for all it because of those special factors that we talk about in the release and I mentioned in the commentary, you can't take those gross margins as at face value. You need to ratchet them down a little bit to get to a sustainable level.

The -- for us the big -- the -- while the inflationary pressures are both on the material and purchase side and on the labor side outside of the US there are real. They are across the board. They are in all of our businesses.

The single biggest exposure to inflation isn't PMC, where 25% to 35% of our cost of goods sold are in the raw materials, the fibers that go into making paper machine clothing. And they are ultimately petroleum derivatives.

We have seen this coming and have worked hard in a variety of ways to offset that impact. It was pretty successful in Q1. We know there are higher prices for those raw materials in the pipeline, but again we see those coming too and it's up for -- it's up to us to mitigate the impact as best we can. We will -- time will tell if we pull it off. So far we have.

And are you being helped at all maybe by a little bit of pricing given some of the supply/demand dynamics in North America right now in terms of capacity and other reasons?

I would just as soon not get into pricing on this call, Jason.

Okay.

Our job is to offset inflation.

Sure. And cash flow has been very strong, even with the working capital investments in this quarter and capital requirements were pretty telegraphed, given in your commentary. So can you maybe elaborate on priorities for excess cash flow over time?

So there is no change in our thinking on that. We will continue to have as our highest priority right now to continue to drive down net debt, and that as we get back down to a comfortable level then the priority shifts. And the highest and best use of new, of capital investment that we see will be in composites and beyond that there is always one of the issues that the Board considers every meeting is returning capital to shareholders as well.

Okay, great. I'll jump back in the queue. Thanks for taking my questions.

Thanks, Jason.

Thank you. And we do have a follow-up from the line of Mark Connelly, CSLA. Please go ahead. One moment, please, looks like your line isn't opened.

Can you hear me?

Now I can hear you, sir.

Okay. Sorry about that. So just two small questions, Joe, it looks like your working capital efficiency is back to peak levels. Is that something we should expect to stay? And I am just looking at cash conversion efficiency which looks like you are back all the way to '04, '05. So I'm curious. Is that something that you guys think you can sustain or is that somewhat related to all the onetime items that we had?

Mark, why don't we -- let me go to John for that.

Hi, Mark.

Hi, John.

Mark, if you look at the different businesses I think is the best way to answer that question. When we look at PMC we definitely should be making small improvements going forward in that business. I don't really look for any large changes in working capital, but we should be able to sustain the improvement and make smaller ones as we go forward.

And the other businesses, particularly thinking of composites and doors, but even, yes, in PrimaLoft, as those businesses grow we will probably be increasing working capital a bit, but from an efficiency standpoint should be holding the efficiency levels that we have. But I would expect that whole numbers to go up as we, as those businesses grow.

That's pretty good news. I was thinking you might have had something more onetime in here. Two more questions, first, the decision to fund profit sharing in cash rather than stock, is that a new approach you are going to take? And is that something we should start factoring into our cash flows?

Yes.

So is it fair to say that the 2.4 is something I should just keep using? Is that a reasonable rate?

Yes, Mark. This relates to the US profit sharing and the 401k match.

Right.

It's about $5 million per year --

$5 million, okay.

-- and $2.5 million of that being the profit sharing.

Got it.

We made that decision this year and that will be ongoing.

Okay. That's perfect, and then just one last question with respect to PrimaLoft, which you didn't really talk about this time. You introduced PrimaLoft yarn. Can you talk about how that product is moving in the market and whether it's going to change dramatically the seasonality of that business?

I don't think it would change the seasonality of the business, Mark. I -- that would be selling to the, in the same cycle to the same kinds of retailers that we sell now, so I don't think it has an effect on seasonality. What it does is expand the range of products that we are selling into and so it -- so the most significant impact of the yarn business is flat out growth. A lot of the growth that we hope to see in this business over the next few years should come from that.

Okay. And is that -- do you have any update for us in terms of who is using it and how well it's being accepted? Are you still tweaking the product I guess is my real question?

I -- yes, with a lot of expressions of interest.

Okay.

So we will have more to say about it as the thing starts taking off, but we're pretty excited about that one.

Super. Thanks very much.

Mark, just one -- to just elaborate on a question you had asked earlier, I should give a caveat on the AEC, on my response to AEC capital spending. If there is a major new opportunity that we haven't planned for, if it pops up, which it could, there are a number of things we are working on, then it could lead to greater CapEx spending than what is currently planned. So of the programs that we currently know about and we are currently planning for, the answer I gave you holds.

Okay. And just to follow up on that, how good is your vision through that pipeline? When you think about what you see in the pipeline over the next couple of years how different is it from a year ago? I'm just trying to get a sense of how well you can actually predict what's coming? There's pretty long development cycles here and you are not going to know if everything is actually going to hit, but do you have pretty good visibility two and three years out about what's coming, x bolt-ons?

We have very good visibility in the programs where we have contractual obligations. For example, on our LEAP-X program we have models that go out through the decade and we have modeled out capacity requirements and the investment requirements for that program through full ramp up. The uncertainty will be -- let me give you an example.

We disclosed that a couple of quarters ago that we are working with Boeing on its so-called clean program where we are providing them with some ceramic composite materials that they are trying to use to make a new kind of nozzle for the back of engines. Now that program will be demonstrated in flight, assuming it's successful, in 2013.

If it is successful and it does the flight demonstration works, presumably we then enter into commercial negotiations with Boeing about starting to make this stuff. That's not in our plan. That's not in our CapEx plan. And if it were it would be total speculation because we don't have a commercial agreement yet.

Right. And but when you got to an agreement then you would adjust the plan, but you have got pretty good visibility on that. That's -- I'm not so concerned about you telling us what the numbers are, just more curious about how good your own visibility it. That's very helpful. Thank you.

(Operator Instructions). There are no further questions in the queue at this time.

Thank you, Kate. Thank you, everyone, for participating on this call. As always we will look forward to meeting you sometime during the quarter and, if not, talk to you again in a 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.