Albany International Corp (AIN) 2013 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. (Operator Instructions). At the request of Albany International, this conference call on Thursday, May 2, 2013, will be webcast and recorded.

I would now like to turn the conference over to the 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?

Thanks, John. Good morning, everyone. As always, I will provide a quick overview of the quarter, I will amplify what we view as the most important aspects of our recent performance, and then we will go to your questions.

Q1 2013 was another good quarter for Albany and a good demonstration of how our cash and growth strategy is playing out in the short term and what it promises for the future.

As we have mentioned many times, Q1 is normally our weakest quarter. Because of slowdowns at the end of December, shipments flowing into Q1 are usually much weaker than shipments flowing into our other quarters. The Chinese New Year, Carnival, and the short month in February compound this seasonal effect.

What this means is that particularly for our first two quarters, year-over-year comparisons are typically far more meaningful than sequential quarterly comparisons. This year our Q1 year-over-year performance was particularly strong. Sales were up 4% compared to Q1 2012 and adjusted EBITDA was up 32%.

However, keep in mind that Q1 2012 was a weak quarter, so please don't get carried away by these year-over-year comps. In our minds, the key message to take away from this quarter is that both businesses performed well, and their performance was in line with our expectations and consistent with our outlook, which, as you will all recall, is for flat full-year adjusted EBITDA in Machine Clothing and continued LEAP-driven growth in AEC.

Now there are a few aspects of the quarter that I'd like to highlight. First of all, in Machine Clothing, our business in North and South America continues to excel on just about every dimension of performance. Our share is growing substantially, and we are the dominant supplier in the growth segments of tissue, pulp, and packaging and on nearly every new machine that has recently been built in the region.

Meanwhile in Europe, Machine Clothing sales appear to have stabilized. To give you a bit of context, a year ago our Q1 sales in Europe dropped 17% compared to Q1 2011. This year our Q1 sales dropped 2.5%, and orders were actually up slightly.

More over, the recent wave of contract negotiations in Europe has now been successfully completed, successful in the sense that we maintained if not strengthened our competitive position with our strategic customers. And so even though the European macro economy remains weak and the European paper industry continues to retrench, the evidence available to us suggests that those double-digit sales declines in Europe are behind us and that it is reasonable to expect the long-term sectoral trends of a much more gradual erosion to take over from here.

The one area of Machine Clothing that did not meet our expectations was Asia where both sales and orders were softer than we had anticipated. Sales in Q1 and for the previous two quarters also were lower than the comparable periods a year earlier.

Now according to industry association data and our own data and observations, we are holding or gaining share in Asia, and our recent order trends show improvement. Nonetheless, our general impression is that the macroeconomic weakness in Europe is taking a total on Chinese exports, which, in turn, is slowing down our sales.

Turning to AEC, as I think all of you know by now, the story for 2013 and for the next several years is all about the LEAP brand. In Q1 AEC sales increased by 22% compared to Q1 2012. Once again, virtually the entire increase was accounted for by growth in the LEAP program, which remains on schedule.

Our first LEAP production plant in Rochester, New Hampshire, is on track for completion in July and for initial very low rate production late this year. Plant two in Commercy, France is on track for completion in Q2 of 2014 with initial production to begin -- scheduled to begin in the second half of 2014.

While our primary focus today you see is on the LEAP ramp in Rochester and Commercy, we are also working closely with our customers to clean up the remaining problematic legacy programs in our operations in Boerne, Texas. AEC EBITDA in Q1 was reduced by losses and write-offs associated with one of those programs, and we are likely to see additional charges in Q2. We do expect EBITDA to then improve quickly and to increase as AEC revenue increases.

Finally, as we explained in the release, our outlook for both Machine Clothing and AEC for both near and long term remains unchanged. This means stable annual adjusted EBITDA for Machine Clothing, driven by our strong competitive position and steady productivity gains, and accelerating growth from AEC, driven by the rampup of the LEAP program, and then late this decade by new applications both on and off the engine.

So in sum, this was a good quarter. Performance in both businesses met expectations and in the process reinforced our outlook for the balance of the year and beyond.

So with that, let's go to your questions. Cynthia?

(Operator Instructions). Jason Ursaner, CJS Securities.

Congrats on a very good quarter and the debt amendment. Just want to concentrate first on the Machine Clothing performance in the Americas. You talked about the exceptional performance that you are seeing there, and I guess I just want to hear your view on sustainability from a cost perspective. Is there any risk of one step forward, one step back as costs come out and then that you are sort of losing it over time to the gradual need to keep pace with inflation?

Well, at this point in the Americas, our ability to maintain costs where they are is all about productivities, and we've talked about it many times. We have to find a way of beating inflation year over year, and we are pretty confident we can do that. We have a strong organization in place. They are heavily into lean production.

At the same time, our procurement organization -- procurement of materials represents roughly half of all of our costs. So absorbing inflation is both a matter of labor productivity and also procurement productivity. And we think we have systems and organizations and talents in place to both -- that is a material challenge for us in the Americas and across the world.

Okay. And from a demand perspective, in the US in particular, you've talked before about overcapacity in Europe. Just wondering how that picture looks in the US and what else you see that is giving you confidence in stable to low growth in demand for the US going forward?

Well, you have to go grade by grade, as you know. And we are over exposed to the grades that are essentially linked to the GNP -- packaging and tissue and pulp, and that's for the Americas. In the US, packaging and tissue. And not only are our sales overexposed to those grades, but our competitive position is particularly strong in those grades. And our customers are particularly well positioned and have done what they needed to do in the way of consolidation. So our customers tend to be in strong positions in those grades.

So the grades where we are overexposed are the ones that are linked to the GNP. Customers are healthy. Our competitive position is very, very strong. You add all that together and even with the steady 3%, 4%, 5% erosion in the printing and writing grades, our model says, if you look at the Americas in combination, North and South, we think flat is a reasonable place to be given the growth in South America and our strong position in the healthy grades in North America.

Okay. And just last question for me. In AEC, I realize the long-term view is pretty much on track, but short-term, the legacy programs in Texas, how much of the quarter impact was the writeoff versus just ongoing challenges with those programs and maybe when time-wise that could begin to fix itself?

I think the best way to look at this is, unlike Machine Clothing where there is this dramatic seasonal effect and you could really get yourself tied up in knots if you look sequentially, in AEC sequential comparisons are actually pretty useful. And if you look at Q4 sales -- and they were roughly comparable to Q1 sales; I think it was $20 million in Q4 compared to a little over $19 million Q4 compared to a little over $19 jump in Q1. And so if you take Q4 as a benchmark of where our EBITDA should be, that's not bad. That's not a bad benchmark since it's roughly comparable to sales.

Now remember, at that kind of a run rate, a $78 million, $80 million run rate, we're loading in a lot of fixed costs because we are managing this business of getting ready for it to grow 3 times, 4 times its size fast. So there's a lot of fixed costs in that -- loaded into that $19 million, $20 million run rate. So we think once -- so if you assume Q4 is a reasonable benchmark, incremental revenue over that level or over the Q1 level, we should start seeing incremental profit or the occasional small write-off.

Got it. Great. Appreciate the commentary, and I'll jump back. Thanks.

Thanks.

(Operator Instructions). John Franzreb, Sidoti & Company.

You seem to suggest that Europe is stabilizing in the press release. Could you just expand upon that? Is the worst over in Europe?

Well, it is -- a year ago we were saying the bottom was falling out of Europe, and it wasn't showing up yet in the macroeconomics. And now we're saying Europe is stable, and the opposite seems to be the case with the macroeconomic. So to be clear, we're not seeing any evidence yet of a catalyst in the macro economy. Everything you are reading is what we're seeing.

Likewise is, if you listen to the earnings calls of the major paper makers in Europe, they are heavily into retrenchment mode. So that's on the one hand.

On the other hand, remember, we took at the beginning -- we took last year a 17%, 18% drop in sales, and we don't expect that to come back. So it's a big step change down. And our thesis, which was strongly supported in the 2008/2009 recession, and we think we're seeing it again in this round of the European recession, is we get the full impact of the downturn upfront. And then it flattens for us while all the capacity that got slowed down is now actually being taken out. But the effect to us already took place.

Okay. Fair enough. And similarly, on a geographic basis, Asia was disproportionately weak. Are you a leading indicator of what's going to happen in Asia?

Probably a good bet. I mean, we're not saying it was disproportionately weak; we are saying, compared to what we were expecting, compared to last year, it was weak, and it's got nothing to do with our competitive position. It has to do with what we see and feel is a general slower pace of economic activity there. And then you grope around to try to understand why that is the case. And the obvious explanation, which seems to now be getting borne out by the latest round of data from China, is manufacturing activity is slowing down. Why is it slowing down? It's slowing down because exports to Europe are slowing down, primarily.

Okay. And last quarter we talked a little bit about the sustainability of the gross margin profile in Machine Clothing. Again, it's another real good quarter as far as the profit and profile for the segment. Fair enough now to reset our expectations in that [mid-40] range, Joe?

Yes, I think a year ago we had been saying [42-ish], and I think now after four quarters in a row, it's reasonable to say [44-ish]. You've got to remember, as you know, there are all sorts of moving parts that make up gross margin, so there will be variability there. But I think [42] is a reasonable place to be.

Now why is that? Well, part of it is geographic mix, but a lot of it is the restructuring we took on when we folded -- when we integrated Engineered Fabrics with Machine Clothing two years ago has pretty much played out, and productivity activities have played out nicely. So yes, [44] for now seems like -- [44-ish] seems like a reasonable benchmark.

Very good. Thank you very much, Joe.

Thanks, John.

Rick D'Auteuil, Colombia Management.

Just a couple of things. Machine Clothing, you talked about a new technology initiative, I think, on the last call. Can you just briefly comment on the status of that?

We are starting to construct the facility, and that is all systems go. And I don't want to say much more than that. It is a technology platform that we are applying to a number of product lines, and we're pretty enthused or we wouldn't be investing $15 million in a facility to scale it up so we could do some market trials.

So none of the capacity is necessarily spoken for during this construction phase, or what commitments do you have out there? Is it just a couple of people that are willing to trial it or what?

Yes, all of the above. Right.

Okay. And then I don't know, you didn't really call out anything on the facility rationalization for Machine Clothing. Is there -- what if anything is currently being --?

We are making good progress in our conversations with our Works Councils. And when we have a concrete development, we will certainly issue a release.

That's obviously Europe-based?

Yes.

Okay. That's all I have. Thank you.

Thank you.

(Operator Instructions). And allowing a few moments, I'm showing no questions in queue at this time. Please continue.

Okay. So if there are no additional questions, thank you for participating on the call, and I'm sure we will be seeing a lot of you in the next few months at conferences and, if not, perhaps on individual calls. So thank you and I'll talk to everybody 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.