Albany International Corp (AIN) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third-quarter earnings call of Albany International. At this time, all participants are in 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, October 28, 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.

Thanks, John. Good morning, everyone, and welcome to our Q3 2015 earnings call. As always, I will begin with an overview. John will follow with more detail. I will discuss our outlook, and then we will go to your questions.

As you can see from the release, this was a strong quarter for Albany. Compared to Q3 2014, sales excluding currency improved by 5%, and adjusted EBITDA improved by 25%. And compared to the end of Q2 of this year, net debt declined by $21 million and is now back down below $100 million. Both businesses performed well and are firmly on track toward their long-term strategic tips of steady annual adjusted EBITDA and cash flow in machine clothing and rapid profitable growth in ADC.

Turning first to machine clothing, sales excluding currency effects were 4% ahead of Q3 2014 and adjusted EBITDA was 24% ahead. Year-to-date through Q3, sales excluding currency were flat compared to 2014, and adjusted EBITDA was 8% ahead.

Every geographic segment performed well in Q3. Even though the publication grades declined everywhere, those declines were more than offset by good performance in the growth rates, which, as we discussed many times, is completely consistent with our long-term view of this business.

On a year-over-year basis, Asia and South America grew modestly despite the economic weakness in those regions; North America rebounded back to normal levels, despite much lower publication great sales; and Europe was stable.

Margins were outstanding thanks to continued productivity improvements and the effects of the most recent round of capacity consolidation in Europe.

It's also worth noting, as we have the last few quarters, that the strong dollar, particularly the strong dollar against the Mexican peso and Brazilian real, contributed to the improvement in gross margin and adjusted EBITDA. So on balance, we are benefiting from the strong dollar.

As for AEC, it also performed well in Q3. Sales were 11% ahead of Q3 2014, while adjusted EBITDA continued to hover slightly below breakeven and behind last year. However, until LEAP production begins to take off late last year, the most important metrics for AEC right now are performance to schedule, manufacturing yield, manufacturing cycle time and, of course, overall market demand for LEAP engines.

Against those four metrics, AEC's Q3 performance was very strong.

Meanwhile, in research and development, we continue to make progress in each of our major areas of application -- aircraft engines, airframes and the high-end of the automotive market. We passed a milestone of particular note in Q3, the production and delivery of the first three prototype fan cases for the GE9X engine. As far as we know, these are the largest fan cases, let alone the largest composite fan cases, ever built.

Another less dramatic but still notable product development milestone in Q3 was the start of the transition out of development into initial production of a family of woven semifinished components that are used to connect the skin of aircraft to their underlying structure in a variety of defense applications. While this family of components is not a particularly large opportunity -- it has revenue potential of roughly $5 million to $10 million per year by the end of this decade -- it represents the first of what we hope will be several emerging opportunities in the defense aerospace market.

So this was a good quarter on every front with excellent performance across the board in machine clothing, good progress toward the LEAP ramp and continued advancement across all of our application spaces in the AEC development pipeline.

Now let's turn to John for some more perspective on the quarter.

Thank you, Joe. I would like to refer you to our Q3 financial performance slides. Starting with slide 3, net sales by segment, currency rate changes compared to last year had a significant effect on net sales. Looking at the numbers excluding those currency effects, total Company net sales in Q3 increased 4.7%, bringing the year-to-date increase to 1.9%. Also excluding currency effects, MC net sales were up 3.8% in the quarter and are flat year to date. AEC net sales increased 11.2% in Q3 due to continued growth in the LEAP program with year-to-date sales up 18.4%.

Turning to slide 4, total Company gross margin percent was strong as it increased to 42.4% in Q3 compared to 38.2% in Q3 of last year. MC gross profit margin improved to 48.4% of sales due to good capacity utilization and higher sales volume. Gross margin percent was about 2 to 3 percentage points higher than it has been in comparable periods, due to changes in currency rates.

As shown on slide 5, earnings per share, we reported net income attributable to the Company in Q3 of $0.30 per share compared to $0.37 per share in Q3 of last year. Q3 2015 EPS was reduced by $0.07 per share for restructuring, principally due to a non-cash charge to write down the value of our plant in Goppingen, Germany, as we proceed with our objective of selling that plant.

Tax adjustments reduced Q3 2015 EPS by $0.12 per share. This was mostly due to a non-cash discrete tax charge related to the expected outcome of our tax appeal in Germany where the Company is attempting to recover some portion of taxes that were paid to pursue that appeal. Other EPS effects in one or both periods related to restructuring, foreign currency valuation, tax adjustments and a gain on insurance recovery are noted on the slide. Excluding all the adjustments, adjusted EPS in Q3 2015 was $0.47 per share compared to $0.31 in Q3 2014.

Slide 6 shows adjusted EBITDA for both the quarter and on a year-to-date basis. Adjusted EBITDA in Q3 2015 increased to $42 million compared to $33.5 million in Q3 last year, bringing year-to-date 2015 adjusted EBITDA, including the $14 million BR725 charge to $102.3 million compared to $108.5 million in 2014.

MC adjusted EBITDA recovered in Q3 and grew to $53.3 million compared to $43 million in Q3 2014. Year-to-date MC adjusted EBITDA is running $11.7 million ahead of last year.

Lastly, slide 7 shows our change in total debt and net debt. Q3 was a good quarter for cash flow as net debt, total debt less cash, decreased approximately $21 million compared to Q2 to $99 million. Total debt declined to $270 million as the Company repatriated $30 million from its non-US operations.

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

Thanks, John. Turning to our short-term outlook, in machine clothing in Q4, we expect the normal seasonal year-end slowdown to be magnified by economic weakness in our key markets. So we're expecting Q4 adjusted EBITDA to be, at best, comparable to Q4 2014 and quite possibly a bit lower. Even so, for machine clothing, full-year 2015 adjusted EBITDA should be well ahead of full-year 2014.

Now, our expectation that full-year adjusted EBITDA will be well ahead of last year does not in any way change our long-term view of this business, just as the relatively weak Q2 results did not in any way change our view. Performance in machine clothing can fluctuate from quarter to quarter as was certainly seen in 2015 and from year to year and across the business cycle.

But our long-term view of this business has not changed. We continue to view machine clothing as capable of generating steady year-over-year adjusted EBITDA and cash flow with annual adjusted EBITDA ranging from $180 million to $195 million depending on currency translation effects. If currency stays at Q3 2015 levels, we should be in the upper half of that $180 million to $195 million adjusted EBITDA range. If currency reverts back to 2013 and 2014 levels, we should be in the lower half of that range.

As for the short-term outlook for AEC, it is, not surprisingly, all about preparation for the LEAP brand. Over the next four quarters before the rent kicks in, AEC revenue can be subject to a good deal of quarter-to-quarter volatility as the rate at which Safran pulls parts out of our finished goods inventory fluctuates with their short-term need for parts during these last stages of development, testing and certification.

Assuming LEAP stays on schedule, production will begin to ramp in Q4 of next year and will then accelerate very rapidly, growing from roughly 200 ship sets in 2016 to at least 1800 ship sets a year by the end of the decade.

So that's the summary. This was a good quarter. Both businesses performed very well and both remain firmly on track toward their long-term objectives of steady adjusted EBITDA and cash flow in machine clothing and rapid, profitable growth in AEC.

And with that, let's go to some questions. Shannon?

(Operator Instructions) John Franzreb, Sidoti & Company.

Good morning, guys. Nice quarter. I was wondering did any machine clothing volumes shift from Q2 into Q3? Was there any benefit from that?

Well, it certainly was volatile. We had an unusually strong Q1, then it regressed, as you are referring to, in Q2, and then we had an unusually strong Q3. And so it regressed in Q4.

We are a little reluctant to say that it's pulling forward or pushing back volume from one quarter to another because we think what's going on that has led to the increased volatility is that, as we've made this move over the last couple of years from consignment to just-in-time shipments, the buffer we used to have that helps to reduce some of the volatility is gone. And so now we are much more closely reflecting the fluctuations in demand from our customers.

On the other hand, that said, the underlying premise of your question makes good sense to us, that typically, if we have a strong first quarter, we will have a weaker second quarter, and the same thing happens in the second half. But usually the halves tend to level out. The first half tends to be a little stronger than the second half. But the quarters in each half tend to average out.

I just thought, with some of the seasonality in Europe, that I expect a little bit weaker Q3. But it seemed to hold up relatively well, and I was just wondering if Q2 balanced it out. That's kind of where I was going with that.

The way we think of it is Q2 balanced out Q1, just as Q4 will balance out Q3.

Okay. All right. And were there any grades that were particularly or notably stronger in the quarter that helped to offset the continued weakness in publication?

That is the term -- the question of grades really tells the whole story of the quarter, and it was just a striking pattern across literally every major market region in the world. Publication was down in the other grades, either offset or slightly more than offset the decline in publication. And even in the long-term growth markets like Asia and South America, publication was down fairly significantly. But our long-term theory of the case played out perfectly in this quarter. Everywhere there was enough growth either in packaging or in pulp or in tissue or in the nonwoven segment to offset the publication decline.

The other thing, John, the other key part of the story is that as we get these big steps down in publication, that we're successfully offsetting our exposure to that gravitational downward force in publication keeps shrinking. So in the Americas now, combination of North and South America, our sales are less than 20% in publication grades, and in Europe they are around 40%. In Asia they are around 30%. Those are all much lower numbers, much lower exposure than we had even just a few years ago. I'd say two years ago our total sales publication probably accounted for a third of our total sales, and today it's more like a quarter. (multiple speakers) -- exposure is reducing.

Against that backdrop, then, when you look at the margin profile, is the good gross margin you are getting, is it more a reflection of the change in mix and grades, or is it more a reflection of the restructuring actions you have taken? Can you parcel out the benefits, one versus the other?

It's actually -- that turns out to be another really interesting theme through the quarter and the year. The publication -- machine clothing for the publication grades tends to be higher-margin than for the other grades because the clothing is bigger because the paper machines are wider and bigger. And so, when you replace the publication grade sale with one of the growth grade sales, you are actually typically replacing higher margin with somewhat lower margin. So all of the gains you are seeing in margin are really because of productivity and consolidation and, to a small extent, as we discussed, currency.

I will ask one last question and let someone else come in. But just switching over to AEC, could you just talk a little bit about the legacy programs? They seem to continue to be hurting the profit profile. What's going on there? What can you do to fix it? Or is it just going to -- just talk a little bit about that.

There's two -- right now, we have five major facilities, and soon, with Mexico, it will be six, in composites. There's the two LEAP plants, one in New Hampshire, one in France. There's our corporate headquarters and R&D facility, which is a pretty big facility at this point. And then there are two smaller plants, one in Texas, one here in New Hampshire, that where we have our legacy products. And both of those plants are suffering from the same two issues: underutilized capacity as the plants are partially empty, and they are producing, in part, a set of small subscale, at-the-end-of-their-life products.

Both those problems, both the underutilized capacity and the unfavorable product mix, should get solved over the next two to three years. So we should see a positive trend in profitability both from the rapid, the intensely rapid growth in LEAP, coupled with improvement in profitability in those two legacy operations, which will be last -- we will refer to them less and less as legacy and more and more as non-LEAP, as work comes out of the R&D pipeline into those operations and starts replacing the smaller phasing out, quote-unquote, legacy parts. A good example of that is the joint strike fighter. That program is ramping, and as it ramps, it is going to start utilizing excess capacity in Texas.

Got it. Okay. I'll get back into queue for someone else. Thanks.

(Operator Instructions) Steve Levenson, Stifel.

Sorry, didn't hear anything about ceramics today. Is there any update on what's going on with making substructures for ceramics parts as they seem to be getting a lot more news coverage?

Yes. Well, I think you might remember from actually the Paris air shows two shows ago, Safran has disclosed that they are working on CMC low-pressure turbine blades, and we are working with them on that. That's an aggressive application, and it's a longer-term application. So yes, we continue to work on high-temperature composite applications for the higher-temperature zones of the engine. And also I think, as you know, given our family of agreements with Safran, any work we do in high temperature on the engine we do in partnership with them. And so there are a number of projects going on in that direction.

Got it. And do you see any pull forward on LEAP in relation to the problems that the competing engine seems to be having?

Well, if you read between the lines in all of the public dialogue between CFM, Boeing and Airbus, you can clearly see there's intense pressure to grow the volume beyond, so far, the stated levels of 1800 ship sets per year by the end of the decade. And I think the most we can say at this point is all of the pressure is upward and forward.

It's a high-class problem.

Despite the occasional speculation to the opposite, we are not seeing anything heading in the opposite direction. It's all intensely pushing toward more.

Got it. Thank you very much.

John Franzreb, Sidoti & Company.

I'm back already. Could you just give us an update on new product development, the project in machine clothing that you have been talking about for the past couple quarters now?

Well, we -- again, if you go back to the great perspective of looking at this business by grade, which really is a very helpful way of looking at the business, we have had very good success that is already starting to translate into initially sales in, call it, the high-end of the tissue segment of the industry, and that's looking very promising.

In our R&D, we are seeing potential applications in all of the grades, different -- how it plays out in the different grades plays out differently as you go grade by grade and region by region. But we see promise across the board.

The big test, as I think I've mentioned before, is can we demonstrate that this new platform can provide real benefit to the customer in the packaging grades. And we are running a couple of trials this quarter. Our expectation is we will get partial success in the trials, but we will learn a lot from them. And that's really the big test now is we are pretty confident that this platform is clearly going to differentiate us and work to our benefit in the higher ends of the tissue grades, the new kinds of tissue machines that are coming out, for example.

So now the question is, can we get this to penetrate into a segment of the market that represents 30% to 40% of the market and two-thirds of our future growth? That's really the big question is can we break through there. And we will know more over the next couple quarters.

Okay. And what went into the decision to repatriate some cash this quarter?

Well, John, we have been doing that over the past several years. The machine clothing business, as you know, is a strong cash generating business that generates cash really throughout the world. And so to do an effective repatriation plan over time, you really need to stay at it to make it tax efficient. So it really was just part of our long-term plan to bring cash back over time and pay down debt and cover US cash flow requirements.

There was, related to that, as you go through the details of the release, one of the surprises you will see is that our CapEx spend is coming in, looks like it's coming in for the year lower, maybe $10 million lower than what we have been expecting. And we are still in the same place, that the right way to model it is, on average, as we are ramping LEAP, we should be in the $70 million total CapEx for the Company range.

But what we are starting to see is some early signs that the equipment we are investing in, in LEAP, is proving to be more productive that we had initially modeled. So, while there's going to be a spike in investments as this ramp takes off, we are feeling even more confident of the basic thesis that we're going to be able to hold machine clothing and grow AEC while we are still generating free cash.

Very good. Okay. Thank you very much, gentlemen.

There are no further questions. Please continue.

Okay. Thank you, Shannon. Thank you, everyone, for participating on the call. We will look forward to seeing you in the months ahead, and if not, we will talk to you again next quarter. Thank you.

Ladies and gentlemen, a replay of this conference 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.