Albany International Corp (AIN) 2015 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, 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 Wednesday, August 5, 2015 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. Joe?

Thanks, John. Good morning, everyone, and welcome to our Q2 2015 earnings call. As always, I'll begin with a summary of the quarter. John will follow with more detail. I will close with the outlook, and then we'll turn to your questions.

Even in isolation, Q2 was a (technical difficulty) quarter for Albany, with sales and adjusted EBITDA considerably lower than in Q2 2014. But even in the context of the first half of the year, our performance in both businesses is right in line with our expectations, and firmly on track toward our full-year outlook of comparable year-over-year adjusted EBITDA in machine clothing, and 5% to 10% growth in sales in AEC. And, viewed in the context of the longer-term, there were several important developments during the quarter, the most important of which was our decision to respond to the growing demand for LEAP engines with a third joint plant with Safran -- this one to be built in Mexico.

Turning first to machine clothing, excluding currency, year-over-year Q2 sales were down 7% and adjusted EBITDA down 4%. The decline in sales was centered in the publication grades in North America and Europe where both the market and our sales were sharply lower than in Q2 2014. In all other respects, machine clothing performed well during the quarter. The other grades in North America and Europe, packaging, pulp, and tissue, performed as expected.

Sales and orders in Asia and South America were stable, despite the recent economic issues in China and Brazil. Gross profit margins were strong. New products were strong. We made good progress in the shift of our sales mix away from the publication grades. And in our new technology platform, we ran successful trials with important customers in tissue, scheduled initial trials in packaging, and are seeing encouraging results from early prototypes across all of our product lines.

As for year-to-date performance in machine clothing, sales for the first six months of the year, excluding currency, are 2% behind the first six months of 2014, while orders, excluding currency, are 3% ahead of last year, and adjusted EBITDA is 1.5% ahead -- which, again, suggests that despite the soft Q2 in sales, we are right on track in machine clothing for our full-year and longer-term objective of flat year-over-year adjusted EBITDA.

Turning to AEC, apart from that $14 million charge that we disclosed in early July and described again in our earnings release, AEC performed well, and is also on track toward our full-year forecast of 5% to 10% growth in sales, toward the LEAP ramp that begins late next year, and toward our longer-term R&D objectives. The most important development during the quarter was the decision to build that third LEAP plant.

Annual production of the LEAP engine is now projected by CFM to reach at least 1,900 engines by 2020. And Boeing and Airbus are publicly pressuring CFM to increase production to even higher levels. The addition of the GE9X fan case, which we will produce in New Hampshire; the much higher than expected production rates for LEAP engines; and the possibility of still higher production rates by early next decade, all led to the decision to move forward with plant 3 as soon as possible. Groundbreaking is scheduled for next year with initial operation targeted for late 2017.

We are not at this time altering our projection of total capital spending for the Company. We are still expecting an average of $70 million of CapEx per year for the full Company through the decade. The likely impact of the higher LEAP demand in the third LEAP plant will be to stretch the years of peak spending for LEAP by one or two years, rather than to increase peak spending significantly in any one year.

As for R&D, we had a very encouraging quarter, with progress on a number of potentially important airframe and engine projects. Some of these projects, if they reach commercial fruition, could have an initial impact on sales by the end of this decade. Others would have an initial impact next decade.

While significant uncertainties remain in all of the projects, several are approaching important development or commercialization decision points. Likewise, on the automotive front, we are actively engaged with a number of automotive OEMs in technical assessments of the viability of our technology for specific applications in the high-performance, super-luxury segment of the market. We expect to have developed a clear understanding of the near-term commercial viability of our technology for this high end of the automotive market within the next 6 to 12 months.

So, that gives you a sense of the quarter. To summarize, looked at narrowly, Q2 is a tough quarter; but viewed more broadly, we are right on track to our full-year and longer-term objectives in both businesses.

Now, let's turn to John for more detail. John?

Thank you, Joe. I'd like to refer you to our Q2 financial performance slides, which can be easily accessed from a link on our website. Starting with slide 3, net sales by segment, you can see that changes in currency rates had a big effect on net sales. Looking at the numbers excluding those currency effects, total Company net sales in Q2 decreased 5.6%; while on a year-to-date basis, net sales are up 0.5%.

As Joe discussed, MC net sales were down 7.1% in the quarter and down 1.9% year-to-date. AEC net sales increased 6.9% in Q2, due to growth in the LEAP program, while year-to-date sales are running well ahead of last year.

Turning to slide 4, total Company gross margin percent decreased to 31.7% in Q2 compared to 38.9% in Q2 of last year. As shown on that chart, the $14 million BR725 charge for AEC reduced the Q2 2015 gross margin by 8.1%. MC gross profit margin remained strong at 45.2% of sales. As is typical, the margin declined from the Q1 seasonal high. As discussed last quarter, it's important to keep in mind that at current currency rates, MC gross profit margin will be higher than it has been in past periods.

As shown on slide 5, earnings-per-share, we reported a net loss attributable to the Company in Q2 of $0.07 per share compared to income of $0.35 per share in the second quarter last year. The BR725 charge reduced Q2 2015 earnings-per-share by $0.28 per share. Other EPS effects in one or both periods related to restructuring, foreign currency revaluation, tax adjustments, and a gain on an insurance recovery, are noted on the slide.

Adjusted EBITDA for both the quarter and on a year-to-date basis are provided on slide 6. Including the impact of the $14 million BR725 charge, adjusted EBITDA in Q2 2015 decreased to $18.8 million compared to $37.3 million in Q2 last year, bringing year-to-date 2015 adjusted EBITDA to $60.3 million compared to $75 million in 2014. As shown in the tables, most of the decline in year-to-date adjusted EBITDA is due to the BR725 charge, including AEC, as MC adjusted EBITDA is running 1.5% ahead of last year through the first six months of the year.

Lastly, slide 7 shows our change in total debt and net debt. Net debt increased approximately $8 million compared to Q1 to $120 million. Capital expenditures in Q2 included a cash outflow of $9 million related to the lease buyout of a building in Rochester, New Hampshire that houses the Company's headquarters and AEC's R&D center. As noted in the release, during Q2, the Company entered into a new $400 million revolving credit facility. This facility provides an additional $70 million of available financing and extends, through June 2020, essentially the same favorable terms contained in the previous agreement.

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

Thanks, John. Turning to the second half of the year, as I mentioned earlier, our full-year outlook remains unchanged. We still see macroeconomics, both domestic and global, as our primary source of risk. And with recent developments in Brazil and China, that downside risk seems to be growing. Nonetheless, unless we see additional deterioration, and especially if that macroeconomic deterioration starts to filter back into the US economy, we still expect machine clothing adjusted EBITDA for the second half of the year, and thus for the full-year, to be comparable to last year. And for AEC, we expect a strong second-half with full-year revenue at least 5% to 10% ahead of 2014.

In sum, this was a weak quarter due to lower machine clothing sales and the publication grades in North America and Europe, compounded by the charge for the BR725 program. But in the larger picture, we remain firmly on track in both businesses -- in the short-term, toward our full-year outlook, and for the longer-term, toward our strategic objectives of steady EBITDA and cash flow in machine clothing, and a decade or more of double-digit growth in AEC, driven primarily by LEAP and, additionally, by new projects emerging from the pipeline.

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

(Operator Instructions) Steve Levenson, Stifel.

Just a question. At the recent Paris airshow, Airbus was talking about 60 A320s a month. And I guess with some of the issues that have come up on the other engine option, the LEAP is gaining share there. And while Boeing didn't mention a particular number, they did say the pressure on single-aisle rates is up.

And I guess at some point, there's going to be pushback. So I wondered if you could comment on what you think about where the limit is? And where you would start telling Safran or Boeing or Airbus that you don't want to make the investments to make more? Obviously, I think it's good news and it's great to hear about the third plant.

Yes. Right, I think this is a very -- well, you saw it firsthand at the airshow. It seemed like there was this vicious ping-pong match with all of the supply chain as bystanders and Boeing and Airbus serving into CFM's court, saying we need more engines, and CFM saying not so fast, we need to execute on the initial ramp -- back and forth, back and forth. And at one point, the -- John Leahy, the Head of Marketing for Airbus said, well, if CFM can't provide us more engines, we'll just have to turn to Pratt.

So, it's clearly a game going on. As we have seen over the last few years, the -- all of the pressure we are seeing -- and you observed full-hand at the airshow -- is for more engines sooner. And I think it's reasonable to interpret our decision to build a third plant to handle the announced target of 1,900 engines per year, but also to create the flexibility to do more than that -- the footprint would handle more than that if CFM does indeed decide to go beyond 1,900 engines per year.

They are certainly getting hit hard with the demand for it. And I think -- but on the other hand, they are rightly saying, given CFM's reputation for great reliability, they want to make sure that they execute on the initial ramp before making a commitment for any more than the 1,900 per year. And it only takes -- as they know only full well -- it only takes one supplier in the supply chain, or one link in the supply chain, to slow things down.

From our point of view, Steve, to get specific to your question, from our point of view, we're not limited in our ability to continue to ramp. The key for us, as we've discussed before, is to get to high-yield, highly-repeatable manufacturing in the next year. And as we do, as long as we maintain control on all sources of variability, whether it's 1,600 engines a year or 1,900 or 2,200, we should be able to do the ramp.

It's all about managing our yield. We certainly have the cash for it. And one of the reasons that cause-engineered this refinancing of our credit agreement with more capacity is really to position ourselves to do whatever we need to do to execute on organic growth in AEC.

Great, thanks for the detail on that. And a machine clothing question. Do you see the mix permanently shifting away from publication grades to more packaging type materials?

Yes. Yes. Packaging, tissue, pulp -- around the world, even in North America and Europe, are we -- all the evidence suggests those are long-term, GNP-driven growth grades. And in the Americas, we're already well overexposed to those growth grades and increasingly underexposed on the publication grades. In Eurasia, we are slowly moving in that direction. We're not as far along as we are in North and South America. But yes, it is a permanent shift for us.

Okay, got it. Thanks very much.

Thanks, Steve.

John Franzreb, Sidoti & Company.

Just sticking with machine clothing. Joe, compared to three months ago, I think it sounds like you were a little bit surprised by the magnitude of the drop in the publication grades. Can you give us a sense of how much volumes were down? And why is it down so much?

We were taken aback. I mean, it's -- as we've discussed many times, Q2 tends to be the strongest sales quarter. Now, when we had such a strong sales quarter in Q1, you could get some regression toward the mean thesis. But nonetheless, you expect, across the grades and across the world, Q2 to be pretty good.

And it was pretty good across pretty much everything. But publication really took a nosedive. And it was -- if we were ordinarily expecting 4% to 5% decline in publication, this was much, much bigger than that. Much bigger. And it was a combination of factors -- machine shutdowns, significant curtailments, which means slowdown of the running machines. We were up against a tough comp. But even apart from that it was a much bigger step-down in one quarter than we had been anticipating.

We saw some of it coming. There were five big machines have been closed by our customers in Europe in the first six months and some of that occurred in Q1. So we knew that was coming. But the magnitude was a surprise to us.

So, in that reversion to the mean thesis, would you expect the publication bouncing back in the second half of the year? Or maybe even seasonally strong?

We would expect it to be -- publication grade to be in its more normal decline, year-over-year decline mode, rather than this -- if you have a 3% or 4% decline in the publication grades year-over-year, that's kind of normal 3% to 5%. But it was much bigger than that.

Okay. And --

So another way of looking at it is if it was a normal publication decline, our adjusted EBITDA would have been right there compared to last year.

Right. And Cozz had mentioned earlier that the machine clothing gross margin had benefited from the currency. But you have been doing some restructuring actions also in MC. I wonder how much benefit is in the gross margin from restructuring in MC?

Well, if you take cost-cutting and restructuring together, it's probably about 1 point of that 3-point delta; 1 percentage point of that 3 percentage point year-over-year delta, that's from cost-cutting. So if you were going to normalize for currency, the gross margin was probably in our normal range of -- our historical normal range of 43-ish. And so the currency inflated it.

Okay. And it sounds like with the increased borrowing capacity, that you might not be able to internally fund some of the CapEx. Is that what you are implying here? Or is it something else?

No. We're -- our highest and best use continues to be organic growth in AEC. And we -- the $70 million of CapEx per year assumes LEAP and nothing else -- LEAP plus reinvestment back in -- into machine clothing in this [decade]. So, if some of these other opportunities kick in, we just want to be ready to pounce. And if -- that's all that's going on.

So you're not worried that cash generation from machine clothing will degenerate at a faster than anticipated rate while you are ramping up on AEC?

No. It's a great business. It generates a lot of cash.

Okay. All right. That's all my questions for now. Thank you.

Sure.

(Operator Instructions) We have no further questions in queue. You may continue, Mr. Morone.

Okay, thank you. It's -- thanks, everyone, for participating on the call. And I'm sure we will be seeing a lot of you during the course of the upcoming quarter. And so, until then, have a good summer, and talk to you next 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.