Albany International Corp (AIN) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter earnings call of Albany International. At this time, all participants are in a listen-only mode. Later are 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, August 9, 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 noticed 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?

Thanks John. Good morning, everyone. Welcome to Albany International's Q2 2001 earnings call. As usual, I will provide a quick overview of how we view the quarter, and then we will get right to your questions. Overall, Q2 was another solid quarter for Albany International, contorting our string of year over year performance improvement, and we look for more the same continuing year over year performance improvement in the second half of 2011. As for the specifics in Q2, sales are up 7% compared to Q2 2010, however, excluding currency effects, they were only up 2%, but keep in mind the 2 factors we talked about in our last earnings call. The soft start to the quarter at PMC because of that very hot finish at the end of Q1 and the sharp temporary ramp-down of what happened in our composite business; largest program, the 787 landing brace, which slowed down because of delays in the production schedule that Boeing announced early in Q1.

Turning to EBITDA, excluding currency revaluation and restructuring, EBITDA was a little over $39 million, about 8% ahead of Q2 2010, and again, in line with performance over the last 2 quarters once you factor in that soft start in PMC and the ramp-down of the landing brace, and as John described in his commentary in the release, despite an inefficient quarter from a working capital perspective, we generated strong cash flow again and reduced net debt by another $20 million. So excluding currency and restructuring, sales up 2%, EBITDA up 8%, net down another $20 million. As for the individual businesses, PMC continues to perform very well on all strategic fronts, composites were, once again, slightly above EBITDA break-even, even with that big ramp-down in the brace program, doors had a very good quarter, and appears to be running at its 2008 pre-recession rate.

PrimaLoft, which hits its peak seasonal peak in Q2 continued its strong performance, and really, EF was the only soft spot in Q2 from our vantage, but we are expecting better operating income margins and higher sales from EF in the second half of the year. Of course, the big news since our last earnings call was a nearly 1000 orders for the LEAP-X extension from Airbus A320 yield customers, and that will happen at the Paris Air Show, and Boeing's decision to re-engine its 737, exclusively with LEAP-X. We described in a separate release what this means for AEC revenue potential in the second of the decade, but the bottom line is this, if you take the announced production rates for Boeing and Airbus single aisle aircraft, that gets you to an annual revenue potential of about $150 million per year, once those Boeing and Airbus production lines have shifted completely over to their re-engineered crafts.

Now, we see significant potential upside to this $160 million per year estimate as CFM introduces upgrades to LEAP-X,, if Boeing and Airbus increase their production rates, and depending on how well the comac 919 sells, as well. Turning back to the near term outlook, as I mentioned, we're looking for a continuation of year over year performance improvements in the second half of 2011 for the company as a whole. Those overall improvements should be made up of stable year over year performance in PMC and PrimaLoft, which will be up against strong inventory restocking comps, coupled with improvements in year over year performance in the other businesses. So that's a quick summary. Let's turn to your questions. Linda?

Thank you.

(Operator Instructions)

We do have a question from the line of Jason Ursaner with CJS Securities. Please go ahead.

Good morning, Joe and John.

Hey.

Just starting with PMC demand in your commentary on the start to the year. If I look at it sequentially you had that very strong January, and then March took a little bit of sales from April. So the fact that you didn't get a normal seasonal bump Q2 to Q1, is it more the strength of Q1, or did you see any additional slowdown as the quarter wore on?

It is much more about Q1 than Q2. Q2 had all of the normal seasonal patterns, except for the soft April. Ordinarily, we would expect Q2 to be stronger than Q1 as we have discussed before, but that's primarily because January, Q1, is usually a seasonal low, because of the effects of the holiday shutdowns at the end of the year. So there's just fewer shipments flowing at the beginning of the year. So this year what we got was the opposite effect. We had a strong January and then we had that very hot March, which pulled forward sales from April. So that's what leads to the absence of the normal seasonal pattern.

And then I guess, continuing with that, the expectation for second half sales to be roughly comparable to first half, it is implying low single digit growth, are there any macro indicators you are seeing to give you confidence that the business is reverting to these long-term secular trends we talk about and not slowing down for economic reasons?

No. We haven't seen yet slow-down for economic reasons. So everybody is speculating now about what the effect of the craziness over the past week will do, but what we saw through Q2 and into Q3 were the normal long-term secular trends that we have talked so much about. North America is moving sideways, and it is moving sideways in the aggregate. You break it down and you see growth in tissue and growth prospects in packaging and continuing 1% to 2% erosion in printing and writing, and Europe is moving sideways, it is stable, and again, the same underlying pattern with that likelihood that there is going to see capacity consolidation in Europe, particularly now that UPM has gotten approval for the Myllykoski deal, and UPM has been very upfront about their plans to do some consolidation, now that they have firmed up the deal with Myllykoski, and then Asia is behaving as Asia, and particularly China, and South America as well. So we are seeing the re-emergence of those long-term trends, and simultaneously, the end of the early cycle flurries up and down the supply chain of the inventory restocking. It is coming out of a recession, the seasonal pattern gets messed up a little bit because of that inventory recycling, inventory restocking, but all signs to us point back to the long-term state in the paper industry.

And then margin in PMC, low 20% operating margin this quarter, whereas it had been trending higher. In the past, I know you have spoken a lot about the need to outpace inflation. Is this a sign that you aren't fully passing through some of the rising raw materials and labor? Is it just volume without the inventory restock, or are there some other things going on below the surface?

I think that's a really good question, and our margins in PMC, slipped a bit in Q2, and our first thought was, we are losing our grip on inflation, and as we looked more carefully at it, there's about a 1 point drop in margins that really come from some negative variances in a couple of plants in North America, that just for number of reasons ran into some inefficiencies, and we don't expect that to continue. So we expect a reversion back to the normal 24%, 23% operating margin, 24%-ish operating margin in PMC, 43, 43.5% gross margin PMC, 30%, 31%, 32% in (inaudible)

And have expectations changed it all in terms of incremental profitability?

No. We are still the same place. We think if you start at this level, and every dollar of incremental sales should drop through about $0.50.

So I think, I guess this may have been what you tried to say, but overall, if I look at that soft April, short-term variances in PMC and the impact on Engineered Fabrics in the brace program, is it a little light on the service, but yet a number of things sort of sound, just rounding down the quarter and it is much more normal, and that sort of what's building for your expectations for the second half?

Yes, I think that's a good way of putting it. I mean, as Q1 everything rounds it up, Q2, a bunch of things round it down, but when we look at it, and we look at the details. It is essentially a normal quarter with a couple of things missing.

And then just last question for John. Actually, I guess it is a little bit for both you. Joe, you mentioned the strong demand that came out recently on the narrow body programs and surprising, it seems to be almost everyone, on the upside. Is this changing the capital spending plans you have talked about in the past at all for AEC?

The guidance we've given is that we believe for the next 5 years we can meet all of the capital requirements for the Company. So that would include AEC. By spending CapEx at, or slightly below, the total of amortization and depreciation, and that hasn't changed. Now if, and so we had built into that projection the assumption that Comac would go LEAP-X,, Airbus would go 50/50 LEAP-X/Pratt, and that Boeing would re-engine and go 100% LEAP-X. So we built all that in. Now, what has changed is the demand for narrow bodies that emerged at the Paris Air Show was much stronger. That re-engined narrow bodies was much stronger than, I think, anybody had been anticipating.

Airbus had been anticipating 500 orders by the end of the Air Show, and they got closer to 1000 orders. So there is pressure, there is market pressure, to move production to the left closer toward mid-decade. There's also pressure to expand the production of narrow bodies by Boeing and Airbus. Both have publicly stated that they are looking at expanding production beyond 42, 44 a month, which they hope to get through by 2014, to 50 to 60 a month. Now, if that happens, then the market, our revenue potential grows substantially. On the other hand, at that point we would have to add more investments. If that occurs, it is not going to occur until well after the 5-year Period. It would occur in '17, '18, '19 range, 2017, 2018, and that would be a good thing. It would be good return on investment.

Great. Thanks for taking all my questions. Appreciate it. Sounds good. Thanks a lot.

We have a question from the line of Mark Connelly with the BLSA, please go ahead.

Good morning. Maybe we can start with a question for John. As I look through the model, there are really no surprises here, because I think you pretty clearly telegraphed what was coming. The only significant divergence I have is this inventory number, and you talk about securing supply, and as you know I cover most of the chemical companies. Securing supply seems like a funny thing to have to worry about right now. Is that a regional issue? I'm just curious, what's on your mind. I mean, when I look around, I don't see a lot of shortages of resin.

Mark, as you know we make a good portion of our own raw materials for the PMC business and the resin part of that, there was some opportunity there to secure some of that supply. It was both securing some supply and a price issue that led us to make some additional purchases during the quarter. I mean, this was not a really significant purchase. It was enough to explain some of the increase in inventory, but, as you say, I mean, there is availability there, but this was a key purchase for us.

And we work it down over the course of the second half.

Sure. Okay. Just wanted to make sure there wasn't anything funny going on regionally or something. Can you talk about where you think your customers' PMC inventory levels are? I mean, you have a much clearer sense of that these days than you used to. My sense is that producers got a little bit bullish, paper produces got a little bit bullish at the end of the first quarter, so maybe they are sitting on a little more inventory as we go into whatever abyss we are heading into?

Let's hope the abyss is narrow and shallow, Mark, and maybe not an abyss at all, but we are not, I don't think we have more clarity on it than you do. We are not seeing anything particularly dramatic or funky on the inventory site for our customers.

Okay, and related to that, then, when you say that the second half of PMC will be flattish, as you see it, Joe, given that we have had some unusual seasonality is this a return to a normal second half, or is this a weaker second half in your view? Just trying to get a sense of how much the seasonality may or may not be changing.

The first half would typically be comparable to the second half, and the first quarter and third quarters would be lacks of seasonal effects, second and fourth quarters would be a bit stronger.

So then you are saying that this is a pretty normal second half, then?

That's the way it feels right now. So we will see the full summer effects in August, and we will see, should have a good fourth quarter, and if feels like the normal cycle and the long term secular trends are re-asserting themselves. Now, as they are re-asserting themselves, we have this sudden injection of economic uncertainty.

We don't worry about that. No, that's helpful. I just wanted to make sure I understood what you base scenario was. Joe, can you give us a little bit of a geographic tour of the PMC markets? You used to do that years ago on a regular basis, walk us through all the different geographies. I'm just curious if you could give us a sense of where you are seeing markets that are relatively stronger or weaker outside of the United States right now?

Exactly what you'd expect, and It is almost as if, with all of the turmoil out there today, we are feeling kind of boring, because everything is more or less as you'd expect. We still see a lot of strength in China, and Asia in general. We continue to see strength in South America.

What about Mexico?

(multiple speakers) mentioned still feels sideways. The grades are what we've talked about before. Tissue feels really good, craft feels really good, printing and writing feel soft, and the wild card, I don't need to tell you this, the wild card is Europe, and we know, with a high probability, that there will be consolidation of paper capacity in Europe, even if only UPM acts, and that's a good thing. It will create some bumps in the short-term, but long-term that leads to a healthier customer, which we are all in favor of. Does that answer your question, or are you trying to drill?

No, that's fine. I just wanted to make sure you haven't see anything that's changing too much. So can we talk about Myllykoski and UPM a little bit? I mean, obviously the coded market in Europe is an absolute train wreck, not to mention the newsprint market, not to mention the rest of the white paper market, and container is not that great either, but leaving that aside, UPN is actually talking beyond Myllykoski about the need for further restructuring. I think this is the third or fourth CEO who is talking about maybe trying to make some money too. That would suggest more machine closures, beyond just Myllykoski. We saw Sappi's results looking pretty shabby in Europe. So it sounds like all of the majors are under quite a bit of pressure. So probably more machine closures beyond just the Myllykoski stuff that's happening. As you think about the structure of the European business, which you have pointed out many times, is not as concentrated or as, necessarily as healthy as the US. Do you think that Albany is especially well positioned to deal with this problem. Or is everybody going to take it on a chain because we are talking big companies and those big companies tend to be your big customers?

Well, first of all, part of the reason that we did all of that restructuring for 4 years was to re-balance our footprint to a much greater emphasis on Asia, and we are not far from Asia and South America being as large as our exposure to Europe. So in that sense, our exposure has been reduced, and we are well positioned in that respect. We also have a very different footprint in Europe than we used to, and it is a pretty efficient footprint, and if there are other steps we can take if things get really bad, but right now we are feeling well positioned from up 3%. Number 1, we have very strong relationships with the customers and the mills who are likely, who will be the survivors in Europe, and who will be the foundation of the paper industry going forward. Number 2, we are less exposed there, relatively speaking, because of our growth in other parts of the world, and number 3, we're feeling very good about our footprint there.

Joe, we have moved back and forth over the last couple of years between hoping for more European PMC consolidation and expecting it. Are we more in the hope or expecting category these days?

We are not operating as if we are expecting it. Our attitude at this point is, focus on the strategic customers, focus on the strategic machines and grades, and outperform, both on product and service, and the rest will take care of itself, and like I keep saying this business is performing very well strategically, that's what I mean.

Okay, and just 2 more questions, sorry to be so long, but your engineered fabric business, diapers and personal care markets are obviously good, but the cynical view of the engineered fabric business is something to do with excess loom capacity. How are you thinking about the sort of medium- to long-term outlook? Let's forget about this economics stuff for a minute. As you think about the build-out of that business, how much of the new revenue that comes from the Engineered Fabrics segment do you expect over the next couple of years to be coming from businesses that are actually growing?

I think if you break that business down, about 40% to 50% of the revenue is from the nonwoven industry, which fundamentally, globally is a growth business. It is growing faster than paper. The rest of that business, much more tied to the economic cycle. There's belts that we make for corrugators plants, belts that we made for the tannery and textile industries, belts that we make for the building products industry. So those are much more tightly tied to economic cycles, but so the long-term in a healthy cycle, we would expect the building products business to be okay, but the key to that business is nonwoven, to be sure.

Okay. Super. I will stop there. That's good, thank you.

Thank you, Mark.

We do with a question from the line of [T.R. Demochecki] with Sidoti & Company LLC. Please go ahead.

Hello, guys. Congratulations on the year-over-year improvement for the quarter. I guess most of my questions were answered, but, and you probably touched on this a little bit but let me just throw it out there again. You mentioned the paper industry (technical difficulty).

You are breaking up a bit.

I'm sorry, can you hear me?

Yes,

You mentioned that the paper industry, the shift from inventory restock to growth. Can you just talk a little bit more about that again, and just a little bit of color on that, maybe?

Well, if you think about the business cycle in paper, early in the recovery, during the recession everybody worked down their inventory, and so as the market recovered, not only are we and they, everybody up and down the supply chain, meeting demand, but they are also, there's more economic activity up and down the supply chain as everybody restocks inventory, which translates to us to greater sales than we would normally expect in the business cycle. The result of a more mature state in the business cycle. Now we are in a more mature state. So that boost from restocking is gone, and the longer term secular trends, which basically means flat North America in paper consumption and production, flat Europe in paper consumption, growth in Asia, strong growth in Asia, and moderate growth in South America, that is paper consumption worldwide, and those start taking over, and then the wild card in all that is where is there overcapacity?

The papermaking capacity to meet those consumption trends, where there's overcapacity, plants will be shut down, we will be under top line pressure in those regions, because our sales are more a function of the number and location and size of paper mills than purely of paper consumption. So restocking over the long-term trends, flat in the Old World, growth in the New World, those are the consumption patterns, and now the key trends for us to watch are consolidation, particularly in Europe. We think you add all that together, and over the long haul, what that translates for us, for our top line, is flat to 1% year-over-year growth.

Great. Can you just also just touch briefly, I know you talked about it a little bit, but talk a little bit about just the temporary slowdown for the landing braces, and sort of just a little more color as far as what the result, why that was, and then just the run rate for the composites business, maybe for a couple years out type of thing?

If you go back to Q1, we had about $2.8 million, $2.9 million revenue for the landing brace. So it was a big chunk of our total revenue. If you go to Q2, that landing brace revenue almost goes away, it is like $300,000. The reason that occurred, and it is temporary, the reason that occurred is because Boeing pushed out its production schedule, all the 787s, in Q1 because of the continuing problems they were having in testing their supply chain. So they essentially pushed out their production schedule by 6 months to a year, and that forced everybody in their supply chain to ramp down. For us, since AEC is such a small program, and the brace is such a big part of that, the revenue impact and income impact was more substantial. Nonetheless, we were making enough progress in process improvements in our other programs, there was enough growth in our other programs, that basically sales were flat and EBITDA remained slightly positive. The ramp rate going forward should be positive. Now, again, it will be subject to how quickly Boeing ramps up its 787. So that's a big variable, but even with the delays in that, we should see positive top line trends in AEC, and some of that, a fair amount of that, has to do with growth (technical difficulty).

Great, and just lastly, can you just talk a little bit about the doors business? It seems like it is a great positive surprise. Just how much better it can get, and if we should keep thinking about those 3 things, the growth in Germany, the product sales, and the aftermarket business as, really, the drivers of business?

Yes, you really should, and this is a business where history teaches you an awful lot, and we've always said look at GNP, and in particular, look at the German GNP. That's really the heart of the business, and what history tells us is as you look at the German GNP. As long as that is running hot, or running well, this business will do well, and if, out of all this turmoil, there are slowdowns in the German GNP, history says we will start seeing a slowdown in this business, but right now, with Q2 totals, it is, the management team is doing a great job, and they are running on all cylinders.

Great.

But yes. Those 3 variables are the right 3 variables to focus on, and the one that's most visible, the only one that is really visible to you externally, is the German GNP. There is a lag there, so if the German GNP slows down, the business, historically the business doesn't slowdown immediately.

Got you. Thank you very much, guys.

Thank you.

(Operator Instructions)

We have no other questions at this time.

Thank you all for participating in this call, and good luck with all the craziness out there in the markets, and look forward to talking to you in the weeks and months ahead. Thank you all.

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.