Albany International Corp (AIN) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the first-quarter earnings call for 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, May 5, 2015, will be a webcast and recorded.

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

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. Joe?

Thanks, John. Good morning, everyone, and welcome to our Q1 2015 call. As always, I will start with a quick summary of the quarter. John will then go into more detail. I will follow with our outlook, and then we will turn to your questions.

This was a good quarter for Albany International. Compared to Q1 2014, which represents a strong comp, sales excluding currency effects improved 7%, and adjusted EBITDA improved 10%. Machine clothing performed very well across the board, and AEC continued to make good progress toward both the LEAP ramp and the next generation of new products.

As John and I have discussed many times, in a normal business cycle, because of seasonal factors, the first half of the year for machine clothing is usually stronger than the second. Sales tend to be good in Q1, peak in Q2, and then weaken in the second half of the year. Gross margin typically peaks in the first quarter and then drops in the second and third quarters. So we would expect machine clothing to perform well in Q1.

But even against this expectation, this was a fine quarter. In comparison to the strong Q1 of last year, sales, again excluding currency, were up 3.5%, and adjusted EBITDA was up 7%. There were a number of contributing factors, most notably the relatively healthy US economy, improvement in the European economy, strong new product performance in every major product line, a favorable product mix, and our continuing efforts to reduce costs.

Q1 was also a good quarter for AEC. Sales were in line with our expectations. LEAP orders continue to grow. We made important strides toward LEAP production readiness. Two legacy programs in Boerne that have long been in development finally entered into production. And we continue to advance development of new applications for aircraft engines and airframes and our probe into the automotive market.

So this was a very good quarter, highlighted by strong performance in machine clothing in just about every respect, and continued progress against critical checkpoints and AEC.

And now, to give you a bit more insight into the quarter, here is John.

Thank you, Joe. I would like to refer you to our Q1 financial performance slides. Starting with slide 3, net sales by segment, total net sales in Q1 increased 7%, excluding the effect of currency rate changes. On the same basis, MC net sales increased 3.5% as sales were strong in every major region. AEC net sales increased 42.8% compared to the same period last year. Most of the increase was related to LEAP production activities, as sales in Q1 2014 were affected by a temporary lag due to start-up and inventory effects.

As shown on slide 4, total Company gross margin percent increased to 42.3% in Q1 compared to 41.5% in Q1 of last year. MC gross profit was $75.3 million or 47.5% of sales in the quarter compared to $73.9 million or 45% last year. Despite a negative impact from currency effects, MC gross profit improved due to higher sales volume, favorable product mix, and the impact of cost reduction activities.

In addition to that, gross profit as a percent of net sales at current currency levels is higher than we have seen in the past, as a stronger US dollar had more of an effect on net sales than on gross profit.

Turning to slide 5, earnings per share: we reported net income attributable to the Company in Q1 of $0.38 per share compared to $0.33 per share in the first quarter last year. Foreign currency revaluation gains once again had a significant impact on current earnings, as Q1 2015 EPS includes income of $0.10 per share for revaluation compared to income of $0.01 per share in Q1 2014.

During Q1 2015, the Company recorded a restructuring charge of $0.18 per share principally related to the Company's plan to discontinue MC manufacturing operations in Germany. Other EPS effects in one or both periods related to tax adjustments and a gain in investments sale are noted on the slide. Excluding the effects of the adjustments, EPS this quarter would be $0.45 per share compared to $0.37 per share last year.

Adjusted EBITDA details for Q1 2015 and 2014 are provided on slide 6. Adjusted EBITDA in Q1 2015 increased to $41.5 million compared to $37.8 million in Q1 last year, due to improved operating results in MC. MC adjusted EBITDA increased to $52 million in Q1 compared to $48.6 million in Q1 last year. AEC adjusted EBITDA was essentially flat in the quarter compared to last year.

Lastly, slide 7 shows our change in total debt and net debt. Despite improved EBITDA in Q1, net debt, which is our total debt, less cash, increased approximately $19 million to $112 million. As we have experienced in the first quarter of past years, Q1 net debt was negatively impacted by incentive compensation payments. Net debt also increased due to higher accounts receivable in inventory and the negative impact on cash of unfavorable currency rate changes.

Now I would like to turn it back to Joe for some additional comments before we go to Q&A.

Thanks, John. Turning very briefly to our outlook, in machine clothing, the same factors that contributed to the good Q1 sales should hold in Q2. As we mentioned in the release, the one soft spot is China. But otherwise, we expect Q2 to follow the normal seasonal pattern -- which means that once again, excluding currency effects, we expect Q2 machine clothing sales and adjusted EBITDA to be roughly comparable to a strong Q2 2014 results.

In AEC, our outlook for the year is unchanged. We continue to expect full-year revenue to be 5% to 10% ahead of last year. And preparing for the LEAP ramp continues to be our overwhelming priority.

In sum, Q1 2015 was a very good quarter, marked by strong performance in machine clothing and good progress in AEC. Our short-term outlook for Q2 is for comparable performance to Q2 of last year. And given the growth in LEAP orders, the progress toward new applications in AEC, and the encouraging new product and technology performance in machine clothing, we continue to be optimistic about the long-term outlook for both businesses.

So that's a quick overview. Let's go to your questions. Operator?

(Operator Instructions) Jason Ursaner, CJS Securities.

Great quarter. The organic growth of almost 4% in machine clothing -- maybe you could walk through some of the factors that drove that by geography and grade in the quarter? And when you talk about the seasonal peak next quarter, talking about comparable sales, other than the softer environment in China -- I guess you are basically saying organic trends should stay relatively similar in -- kind of other than currency there? I'm just talking about what would be driving organic -- yes.

Exactly. So let's assume currency stays roughly where it is. So just control for that. Everything else equal, you would expect Q2 sales to be a little bit better than Q1. That tends to be the seasonal trend. But margin drops. And so that's what we would normally expect. The most important variable right now, as we?ve talked about before, is economic -- macroeconomic. And so if you see reasonable health in the US economy and some signs of a pulse in Europe, those are all reasons to expect a continuation of what we saw in Q1.

It should be softer in China for the reason we described. Brazil is clearly in recession, and Brazil is a very important market for us. On the other hand, there's enough going on in the rest of South America, enough positive momentum in the rest of South America that we think we can -- we think there's a reason to expect that we can offset the softness in Brazil. We are not seeing, right now, any variable that would lead us -- significant variable that would lead us to deviate from the normal seasonal expectation.

Okay. And anything specific by grade in the quarter? Or just pretty broad-based strength relative to the past couple --.

Well, again, for our model to work, for us to have a good quarter in a normal business cycle, we need the GNP-driven segments, packaging and tissue, to be healthy enough to offset the constant steady structural decline in the printing and writing grades. And that's what we saw. There's a lot of action, in particular, in tissue that was very encouraging.

Okay. And margin in that business looked to be well ahead of last year. Any kind of balance between the manufacturing absorption, product mix, and maybe this new technology platform that is starting to come in -- in terms of how those combined in the margin performance in the quarter? And when you look forward to Q2 and kind of the balance of the year, what stays in that versus what goes into the dropping off?

Well, let me take a whack at it, and then John can dive in to clean up the mess I make. So if you look at the slide that John used -- I think it was the second slide, gross profit margin by quarter -- you can see -- and if you were to stretch that out a couple of years, you would get a continuation of that same curve. So Q1 to Q1, that tends to be the high point for margin. So, in that sense, it was right in line with the seasonal expectation.

Now why the big -- you are asking, why the big jump year over year? And let's start with the absolute numbers rather than the margin. If you start with gross profit rather than gross profit margin, it increased -- machine clothing gross profit increased by about $1.5 million. And that's in line with the sales increase, excluding currency. So the drop-through was more or less what you would expect from the increase in sales. So there's nothing particularly unusual going on in the absolute gross profit. The big change is in the percentage of -- in the margin. So the percentage of sales, gross profit as a percentage of sales, that's what jumps.

And why did it jump? It jumps because the numerator improved a little bit -- gross profit -- and with the currency effect, sales declined. So you get an arithmetic effect of a higher percent of sales just because the denominator didn't move much, and the numerator moved.

Got it.

If currency stays at this current level, then you're going to see, quarter over quarter, a slightly higher -- a somewhat higher gross margin percent in this business. If currency goes back to where it was a year ago, then at this level of gross profit, our margins will slip back to more or less where they were a year ago, maybe a little bit higher.

Okay. Got it.

And don't get blinded by the arithmetic artifact over the currency. Basically, sales were hurt by currency, but gross profit wasn't.

Got it. And for composites, just EBITDA there was a bit below where I was thinking at this level of sales. Just wondering how you're looking at that number internally and where you see profitability trending before the inflection point. And then, I guess, maybe just more reiterating the long-term view of profit after the inflection point.

The biggest change in profitability is a nearly $600,000 increase in R&D. So that accounts for much of the lower-than-you-would-expect EBITDA for that level of sales. There was a little bit of erosion in Boerne, but the main thing is the R&D.

Our view of the business is unchanged, that as we start seeing top-line growth, you should assume that $0.15 on the $1.00, more or less, falls all the way through for every incremental dollar of growth.

Okay. Sounds great. Thanks, Joe.

John Franzreb, Sidoti & Company.

Just to backtrack to the gross margin question a little bit: I don't think you touched on any benefit from the closing of the Germany facility, or maybe it did not impact the quarter. If that is the case, when do you expect to receive some of those benefits?

Yes, correct. It did not impact the quarter. They should be -- those benefits should be all in by the beginning of next year. They will start flowing in slowly the second half of the year. And if you go by historical standards, you should expect about $1 million to $1.5 million of positive effect per quarter starting next year.

Now, remember, that might not all fall through -- or that might not all be visible, because some of that winds up being offset by inflation and possible price erosion in Europe. But it's reasonable to assume $1 million to $1.5 million higher profit per quarter than we otherwise would have had, had we not taken that action.

Perfect.

Starting next year.

And you walked into my next question about the pricing environment, especially given the changes in the euro. Can you just walk through what you're seeing out there in the competitive landscape in pricing?

Well, the pricing environment is, as we've discussed, is really driven by structural overcapacity primarily in Europe, and secondarily in Asia. And that -- to first approximation, that's not really influenced by currency. The biggest influence on price is really how healthy the economy is.

So if there's a lot of economic activity, if there?s strong economic activity, there's more demand for paper. There's more demand for paper, the machines are running harder; if they are running harder, there's more demand for clothing. There's less pressure from that overcapacity. So that's the real pressure relief valve on pricing in Europe and Asia is economic growth.

Asia is slow -- particularly China -- so we are not seeing any relief of pricing pressure in Asia. The problem in Europe remains the same. There's still a lot of overcapacity. And even though there is some economic improvement, it's not enough to really offset that overcapacity. So I would say, no change in the pricing environment in Europe and Asia.

Okay. And just sticking with the PMC, Joe, can you provide color as to the new technology platform -- what it is, what it's doing, what your expectations are, what the reception has been like? It's kind of a little bit of a black hole right now.

Yes. Well, there's only so much -- John, as you can appreciate, there's only so much we can say about this because it's proprietary technology, and all our friends in the industry are on the call. But the simplest way to think about this is, think of basically applying composites to the production of clothing. So it's, you know, in some ways, our aerospace business derived from our clothing business. And now we have a feedback loop back.

And what that does is it creates the potential for a way of making these permeable and impermeable belts. That has the potential to provide interesting performance advantages and at lower cost. So the challenge, as you start introducing a whole new platform -- the same thing that's going on with our aerospace business -- is you've got to pick off the -- you have to identify the early applications that -- where the cost/benefit ratios are most beneficial. And the temptation is to spread yourself thin, like you are spreading peanut butter, over a lot of applications. And you wind up not getting the impact.

So the art in this is to nail the early applications that give you the biggest bang and then spread it from there. And we are quite encouraged by the performance of this different way of making belts in the early applications that we are looking at. We had a really nice trial this quarter, for example, that was very encouraging.

Okay. All right. And then shifting over to EC, the 737 MAX and the neo are falling short in some of those fuel saving targets -- the MAX by 4% to 5%, the neo less by 2%. Is that any cause for concern in the supply chain?

Well, it is -- John, there are a few bloggers who have alleged those numbers. And so you've got to take those publications with a grain of salt. So let me tell you what we are seeing. Number one, on their recent earnings call, the CEO of Safran addressed those rumors and said he is quote/unquote 100% confident that LEAP is going to be on target and on schedule.

Number two, since those rumors are out there, Boeing just landed a huge order for another family of MAXs. And number three, all of the pressure on us, and it's intense, is to be prepared to make more parts sooner. There's no -- we are not getting any whiff of a pullback or a pulldown of the future demand for this engine.

So I think the right way to think about this, and the way we are thinking about it, is in every engine test program, it's never the case -- I don't know of any case -- where the engine hits right on its performance targets in the early tests. There are always some adjustments and tweaking to the design after the initial tests. It's always like that.

The results that -- as far as we can see, and as far as everything that's being published, the tests for the LEAP engine are well within the normal range of test results that you would get at this stage in an engine development program.

Okay. And I don't know -- I may have missed this. But is there any update on your non-aerospace initiatives; or, even more so, the other potential aerospace programs that you have out there?

Yes. Our probe into the automotive industry is doing exactly what we hoped it would do. And our relationship with Ricardo is doing exactly what it hoped it would do. We are having very useful explorations and testing of possible applications. We are having useful and interesting conversations with OEMs. We are encouraged. And I think we are going to know, in the next year to year and a half, we're going to know whether the cost/benefit package from our technology is going to -- is mature enough that we can get on a real platform at the high end of the industry, by this decade.

The year, or year and a half, of the kind of interactions we've been having -- and we will know either, yes, it's mature enough now; or no, we need to go back to more fundamental research on low-cost materials before we can take another stab in two or three years.

And I will say this: we had thought, going into this, that the automotive industry would discount our experience in aerospace, that we would bring them a -- show them our experience with bird strikes on a fan blade, or fan blade out onto a fan case that they would say, well, what's that got to do with a car?

But instead, we are finding that that really leading-edge experience in the aerospace industry is validating to the automotive folks, that they are being hit -- barraged -- with all sorts of companies coming to them with new technology ideas, and they have no way of validating those new technology ideas. And here we are bringing them a technology that has been validated.

So then it comes very quickly down to: is there an application where the cost/benefit ratio works? We know we are lighter. We know we are as strong as metals and a lot stronger than conventional composites. The question is, can we get to an application without so much cost penalty that we get knocked out of the box? And that's what we are probing. So it's very encouraging.

On the engine and the airframe sides, the game is to think of this development process like a funnel. You start with a lot of possibilities, and as the technology matures, the range of possibilities begins to shrink. So what you would like to see is steady progress through the various toll gates as you move from the fat part of the funnel toward the thin.

And at the same time, as possibilities drop off, you want more possibilities coming in to the front of the funnel than are possibilities dropping off. And we are seeing both of those. We are seeing some nice progress toward the thin part of the funnel with some very interesting applications. And, at the same time, we are seeing more stuff popping into the pipeline.

Okay. Great.

So the word remains -- encouraging progress, is the best way we can describe it.

Great. Thanks for taking my questions, Joe.

Steve Levenson, Stifel.

Based on your comment that you're going to have some pressure to make more parts sooner on LEAP, will there be any other capital expenditures required? And if so, are you able to use the strong dollar to take advantage of some accelerated spending in Europe?

We will have a better fix on whether there's more CapEx spend required in the next few quarters. But for now, we still think that estimate we gave all our investors of $70 million a year, on average, through the decade -- for now, it looks like there's enough cushion built into that estimate on average -- you know, sometimes it will be over it by quite a bit, and sometimes it will be under it. But on average through the decade, that still looks like a good number. And by later this year, we will have a more refined estimate of that.

Okay. Thanks. You haven't mentioned anything to do with ceramic matrix composites on this call. I just wondered if there was something you might want to mention.

No. I would just take the comment I made to John about progress through the funnel as applying to that, as well.

Okay. Thanks. And last sort of housekeeping question, yesterday you had the 8-K announcing the second-quarter charge. Is that expected all to be cash related to severance? Or is there a non-cash portion?

Yes, that number that we disclosed yesterday in the 8-K was related to severance. And that was cash. So that will be cash most likely paid out in the second quarter. And we also -- we may have some non-cash charges down the road as we analyze the equipment and property in Germany. But that is not included in that number that was disclosed in the 8-K.

Got it. Thank you very much.

(Operator Instructions). Gentlemen of the panel -- and ladies, if there any present -- there are no questions in queue at this time.

Okay, great. Thank you. Thanks, everyone, for participating on the call. And we look forward to seeing you in the months ahead. And for those of you who will be at the air show, see you in Paris. 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 services. You may now disconnect.