Albany International Corp (AIN) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth-quarter earnings call of Albany International.

(Operator Instructions)

At the request of Albany International this conference call on Tuesday, February 9, 2016, 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 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 the 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

Thank you, John. Good morning everyone and welcome to our Q4 2015 earnings call. As always I will begin with an overview of the quarter, John will go into more detail, I will follow with our outlook for 2016 and beyond and then we will go to Q&A.

Q4 2015 was another good quarter for Albany International as both businesses continued to perform well. Machine clothing again generated excellent margins, AEC continued to grow and progress toward the LEAP ramp and cash flow was again strong with net debt declining $18 million in the quarter and ending the year at $81 million.

Turning first to machine clothing. Q4 sales excluding currency were down 5% compared to when year ago, primarily because of three factors, the weak economy in Brazil, that much larger than normal decline in the North American printing and writing market that first hit us in Q2 of last year and stronger than normal year end slowdowns in the packaging market in the US. Nonetheless for the full year, sales were essentially flat and profitability was outstanding.

Adjusted EBITDA for both Q4 and full-year 2015 was 9% ahead of 2014. Roughly half of this increase was due to the favorable impact of the strong dollar on currency translation which we have discussed in previous quarters. The rest of the improvement in profitability was due to a combination of restructuring, higher labor productivity in several of our plants, and lower material costs.

Also during Q4, we implemented an early retirement program for our salaried employees in the US which accounted for most of the restructuring charge in the quarter. As for our new technology platform it continues to gain momentum at the high end of the tissue and towel market and we are encouraged by the R&D progress on applications aimed at the packaging grades.

Finally during Q4 we successfully completed contract negotiations with two of our largest customers, one in the US and one in Europe. Although we continue to experience competitive pricing pressures in all of our markets around the world, our prices were for the most part stable in Q4.

Turning to AEC, sales excluding currency grew about 14% for the full year. The growth was driven by a combination of the LEAP, JSF LiftFan and GE9x fan case programs. More importantly AEC continued to progress toward the LEAP ramp which begins late this year.

Meanwhile in R&D and business development we are working simultaneously on three broad fronts. For the near-term continuing to support advances in the LEAP program. For the long-term, positioning ourselves for content on both the engine and airframe of next-generation single aisle aircraft. And for the medium-term, that is for opportunities that have potential to generate initial revenue either later this decade or in the first half of next decade, we are focusing our efforts on the following platforms: Boeing 777x, the new midsize airplane that Boeing has reported to be considering, the joint strike fighter, the long-range strike bomber and new supercar and premium sports and luxury vehicles in the high end of the automotive market. In sum, it was a good quarter and a good year with excellent profitability in machine clothing, good growth and progress toward LEAP and beyond in AEC, and strong cash flow.

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

Thank you, Joe. I would like to refer you to our Q4 financial performance slides.

Starting with slide 3 Net Sales by Segment, currency rate changes compared to last year continued to have a significant effect on net sales. Excluding those currency effects, total company net sales in Q4 decreased 3.2% and are essentially flat for the full year.

Also excluding currency effects MC net sales were down 4.9% in the quarter and down 1.3% for the year. AEC net sales increased 5.5% in Q4 and 13.9% for the year due to continued growth in the LEAP program.

Turning to slide 4, total company gross margin percent stayed strong as it increased to 40.4% in Q4 compared to 38% in Q4 of last year. MC gross profit margin improved to 47.4% in sales due to lower raw material costs, improved productivity and the effect of restructuring programs. The continued weakness of the Brazilian real and Mexican peso once again had a positive impact on MC gross profit margin.

Moving on to slide 5, Earnings Per Share. We reported net income attributable to the company in Q4 of $1.17 per share compared to $0.25 per share in Q4 of last year. Q4 2015 EPS includes favorable tax adjustments of $0.93 per share mostly due to a US tax benefit related to the company's write off of its investment in its German subsidiary. The company expects that most of this tax benefit will be utilized to lower cash taxes related to future repatriations.

Q4 2015 EPS was also reduced by $0.21 per share for restructuring, principally related to an early retirement program in the US and ongoing plant closure costs in Germany. Other EPS effects in one or both periods related to restructuring, foreign currency reevaluation, a pension settlement charge and a gain on an insurance recovery are noted on the slide. Excluding all the adjustments adjusted EPS in Q4 2015 was $0.46 per share compared to $0.35 in Q4 2014.

Slide 6 shows adjusted EBITDA for both the quarter and the full-year. Adjusted EBITDA in Q4 2015 increased to $38.7 million compared to $36.3 million in Q4 last year. Bringing full-year 2015 adjusted EBITDA including the $14 million BR725 charge to $141 million compared to $144.8 million in 2014.

MC adjusted EBITDA was once again strong in Q4 and grew to $47.5 million compared to $43.7 million in Q4 2014. For the full-year MC adjusted EBITDA increased $16 million to $198 million which is above the normal range of $180 million to $195 million which we discussed last quarter.

Lastly slide 7 shows our change in total debt and net debt. Q4 was a strong quarter for cash flow as net debt total debt less cash decreased approximately $18 million compared to Q3 to $81 million.

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 outlook our near and long-term expectations for both businesses remain unchanged.

Let's start with machine clothing. Even though adjusted EBITDA improved 9% in 2015, as John just described, as we emphasized last quarter we continue to view this business as capable of generating steady year-over-year adjusted EBITDA in the range of $180 million to $195 million per year depending on the currency environment. If currency stays at the Q3 and Q4 2015 levels we are more than likely to be in the upper half of that range. If currency reverts back to 2014 levels, we are more likely to be in the lower half.

Now we are still going to see those year-to-year and quarter-to-quarter fluctuations in our performance. Adjusted EBITDA full-year 2015 was a bit above the range. In 2014 it was at the low end of the range and in 2013 it was closer to the middle.

Likewise Q1 2015 was unusually strong whereas Q2 2015 was unusually weak. But over time across those fluctuations under normal economic conditions we view machine clothing as steadily generating adjusted EBITDA in that $180 million to $195 million range.

What this means for 2016 is the following: We are likely to see a slower start to this year than last year, partially because Q1 2015 was so strong and partially because of this year's economic headwinds. Nonetheless, for full-year 2016 our margins and continuing productivity improvements should keep adjusted EBITDA well within that $180 million to $195 million range, unless of course there is a serious deterioration in the global economy.

As for AEC, we anticipate annual revenue growth of at least 5% to 10% with upside depending on a number of variables related to the LEAP ramp. EBIDTA should also improve and at a steeper rate than sales. But the real significance of 2016 is that this is the final year of preparation for the LEAP ramp. So as you would expect, our highest priority will be on continuing to improve yields, reduce cost, and increase capacity.

The market for LEAP continues to look very promising despite the collapse of oil prices. At the production rates for the A320neo-in the 737MAX that Airbus and Boeing have recently announced, AEC will need to be manufacturing by 2020 over 40,000 fan blades and 2,000 fan cases a year, compared to roughly 2,500 blades and 100 cases in 2015. That means that LEAP revenue should grow from $50 million in 2015 to close to $200 million by 2020 and all AEC revenue without any new programs beyond the ones we have already secured, overall AEC revenue should grow from $100 million in 2015 to close to $250 million in 2020. That is assuming no new wins for AEC which obviously we think and hope is a conservative assumption.

The steepest ramps in LEAP production and therefore in AEC revenue and income will likely be in 2017 and 2018. 2016 should also be a pivotal year for AEC's legacy operations which accounted for 40% of AEC's 2015 revenue and were responsible for a significant drag on AEC profitability. In January we announced internally that we plan to consolidate most of our legacy programs which are currently spread over two plants into our facility in Boerne, Texas. At the same time we are finalizing with Rolls-Royce a long-term supply agreement for production of composite parts for the JSF LiftFan. The expected growth from JSF as demand begins to ramp in 2017 coupled with the consolidation into Boerne, should lead to significant improvements in margins from our non-LEAP programs by the second half of 2017.

So in sum, performance in both businesses was strong in Q4 and for the full year and we expect performance to remain strong in 2016 despite the significant economic headwinds. Barring further deterioration in the macro economy, we look for machine clothing to generate adjusted EBITDA well within its normal range and for AEC we expect at least 5% to 10% revenue growth coupled with improving profitability in this the final year of the lead up to the LEAP ramp.

With that let's go to your questions. Kathy?

(Operator Instructions)

John Franzreb, Sidoti and Company.

Good morning guys.

Good morning John.

Joe, it seems like you're going out of your way to temper expectations on adjusted EBITDA and machine clothing, on a constant currency basis though it seems like the other half of that benefit that you got was really structural and shouldn't go away. Why are you tempering those expectations?

Well, we think it's important for investors not to over interpret an unusually good period of performance in this business. Just as we think it's important, really important not to interpret poor performance outside the range and that's why we keep trying to emphasize these bounds. Remember the big picture here -- it's important to keep in mind and to not lose sight of when we have a unusually weak quarter like Q2 last year and an unusually strong period, as overall 2015 was.

There are -- the big pictures this. There are three downward pressures facing this business for the long haul. The structural decline in the printing and writing grades, which regardless of what's happening in the economy are going to continue in the 4% to 5% range with larger spurts when there is a cluster of shutdowns. So that is always with us.

Number two, constant price pressure around the globe and since -- because of that price pressure since it's -- you almost never get price relief labor inflation and material inflation which we have to offset every year. So that's always downward pressure on our business. Now we respond to that near and long term with three counter-bailing moves. Number one, we invest in putting ourselves in a position to be underexposed to the printing and writing grades and over exposed to the growth grades.

Number two, growth grades and growth regions. Number two, we invest in technology and in talent in order to be able to differentiate ourselves in the marketplace to offset those price pressures. And number three, we are constantly trying to adapt our capacity to the market to geographic shifts in demand. That is why you see these periodic restructurings. Now what's going on right now in the macro economy is because China is under pressure, because Brazil is under pressure, because Europe is under pressure and even the US economy isn't exactly humming, the growth grades and regions aren't performing particularly well. So there is more pressure on us to offset those downward pressures with margin improvements.

That's all a long-winded way of specifically answering your question. The reason we are trying to pull investors back into our normal range after a very strong year is because we see a lot of macroeconomic headwinds out there. So we stay within our range but Brazil is weak, China is weak, it's hard to make the case that we are going to be north of that range given the economic climate.

My point Joe is that I wouldn't call last year unusually good. Surprisingly, weak print and writing results and you just -- this is off the macros. I don't know if I would say 2015 was an unusually good environment?

It was -- we did not really get hit with the effects of Brazil in 2015 nor did we really get hit with any serious slowdown in Asia in 2015. So we think this will be a tougher environment and we hope we are wrong. If we're wrong that you are right and we will be banging up against the upper end of that normal range. But from everything we are seeing and reading and I'm sure you're seeing and reading, we think the more prudent place to be is back inside the normal range.

Okay. Sticking with machine clothing, the Verso Paper bankruptcy, does that impact you in any way? How exposed are you to them? And, if not, could you comment on what that does to maybe capacity out there? What your thoughts are on that front?

Yes. Everybody in -- related to the paper industry saw this one coming from a long distance. We have done all the normal measures to reduce our exposure to receivables. The share we have in Verso is pretty normal for us. It's pretty consistent with our overall share in North America and we would view what's going on in Verso as part of the long-term structural decline in printing and writing.

It's going through the bankruptcy process and it's running it's continuing to run its operations and we continue to support those operations. Trying to be a good supplier. Odds are at some point down the road there will be closures as they restructure themselves. But that's certainly something we've built into our long-term -- short- and long-term plan, that expectation.

Okay. And then switching over to our composites. Another big jump in CapEx this year and I guess John you also alluded to next year. Could you talk about when that spending kind of rolls in, the bulk of it and what's maybe the biggest challenge as you tool up?

We have been saying for the last few years that on average, the second half of this decade total-company CapEx would be about $70 million. Sometimes lower, sometimes higher but it would be in that range and it will be -- the precise timing year to year and the precise amount year to year will be driven pretty much completely by the timing of the LEAP ramp.

And so in 2014 and 2015 we are under that range, that average and in 2016 and 2017 we are going to be right at it or a little bit over because this will be the peak investment time for LEAP. This is when the plants -- two of the three plants are already built, but this is the capital requirement for us is to load those plants with equipment and we are timing the loading of equipment with the loading of demand. So a few months before demand hits the equipment has to be in and qualified. This is the surge, this year next year. After that, assuming total-LEAP demand is in the range that we've talked about, we're going to see a pretty sharp fall-off on LEAP CapEx spending and therefore on overall spending unless there is a new program that comes along to demand more capital.

Okay. I'll get back into queue.

(Operator Instructions)

Steve Levenson, Stifel Nicholas.

Thanks. Good morning Joe and John.

Good morning Steve.

A couple items please. Yesterday Airbus announced that they are going to do the test flights of the A2021. With LEAP engines were originally the competing engine. These are to be expected to be used on the first flight and I know some of the early deliveries with the competing engine have been delayed. What are you hearing about the schedule and demand for LEAP? We know that Boeing had its first flight and it could be a little bit earlier than third-quarter 2017 if everything keeps going right. But it sounds like there's a potential for an earlier ramp in demand and just curious what you're hearing and what you expect to see?

We are reading and hearing the same things you are but the -- as I think what we've been conveying for the last few quarters, despite what's happening to oil prices, what we are seeing on the ground is constant pressure to move forward with our ability to produce and to ramp. So 2017, as reflected in our CapEx this year and my last answer to John, 2017 looks like a big surge. We are not seeing any counter-availing forces. We are just seeing more and more pressure to surge. And the developments you just described are completely consistent with that.

Got it. Okay. Thanks. A question on machine clothing just so I can understand properly. I know there was some revenue related to sale of tooling and -- more towards the composite side, I'm wondering if that's a normal course of business thing and if the expense related to that item also fell in the same quarter or do these things sort of balance out over the year?

No. It's on AEC side and its development programs and so we incur the expense and then we get reimbursed for it. There is no margin attached to it. So, yes, they hit at the same time. There's a bump in AEC revenue above what it would have been in Q4. That was a reimbursement for expense so there was no margin associated with that bump.

Got it and based on that would it be right to guess that was related to the molds for the GE9X fan case?

That is a pretty good guess. Yes.

Okay, and will you need more tooling like that? I know we're still a few years away but I don't know how quickly you can make those parts and how many tools you will actually need?

Yes. There will be some more of that tooling-related reimbursement in 2016.

Got it. Thanks very much.

Thanks Steve

Thank you and we do have a follow up from John Franzreb, Sidoti & Company.

John, can you talk little bit about the decision to repatriate cash. How much are you looking to repatriate this year and do you need the money in order to do your budgetary plans for 2016?

Well John, we don't need to do the repatriation. We've reduced our total debt quite a bit. We have plenty of capacity on the revolving-credit facility. So we don't need to do it. We've tried to have a disciplined approach to the repatriation over the years. We tend to target $20 million to $30 million per year. We probably hopefully maybe towards the lower end -- we probably will be towards the lower end of that range this year. To try to limit the cash-tax impact of doing it, we try to target that amount each year.

Okay. And maybe Joe, in machine clothing the new platform. I understand it's still in trials. When do you expect to see any kind of meaningful revenue contribution from that program or can you just update us on it completely?

We are seeing -- we are starting to see meaningful revenue contributions from it in the upper end of the tissue and towel market. If overall tissue and towel, which is one of our growth segments is ballpark 15% of sales, we are starting to see a real impact in the upper end of those sales. In the new tissue and towel machines that are being built, we are doing really well because of that new-technology platform.

And it's a case where the tissue and towel market with the upper end, the customer really cares about performance. There's a big market impact for our customer if the tissue is softer and fluffier. And this platform for a number of reasons allows us to make belts than enable the customer to make higher performing, softer and fluffier tissue and towels. So that is really helping in that segment, with new machines. So it will be a slow impact on revenue. It awaits the higher performing, new construction of higher performing, new machines, but we are doing really well on those.

We haven't yet -- as I think I've mentioned before, the prize here is to see if we can break out of that segment and use this platform either to improve margins or to improve customer performance or some combination to see if we can break into a bigger segment and that would be the publication -- the packaging grades. And we've got some -- we had a couple of early trials that are very preliminary that are -- show some interesting performance improvements and so now this year will be running some more trials to see if we can build on those early, call them partial successes.

So as you improve the quality at the customer level, is the consumable portion for you still the same or does that change in the new platform?

Unclear. The key is -- a different way of asking that question is what shape -- what is the -- in what way does this new platform create value? Either the value for the customer through improved performance and one of the improved performance features could be longer life. And for us how does that translate into higher margin? And the answer to that two-sided question, what is the value proposition here for the customer and for us, it appears to vary from application to application. So as I said on the tissue and towel side, the primary value of the new platform is better performance for the customer. Which if we do this right should translate into better price for us.

In other applications it might be -- it might look differently. It might be something that just enables us to resist price pressure. It might be something where we are able to offer the same product -- the same performance but at lower cost. Or some combination of lower cost to us and longer life to the customer. There are a variety of ways it plays out and I can't give you a generic response because it depends on application to application.

We will revisit in six months. Lastly, you highlighted five potential revenue items for later in the decade or the beat up next.

Those mid-range opportunities.

Could you take those five items and reshuffle them into the ones you think are the most probable on a near-term basis to strike?

Probability rather than magnitude.

Correct.

Well, you know we are on the 777X with the fan case and we are on the JSF with -- and we are right on the verge of signing an LTSA to cover the production period, a long-term supply agreement. Those are certain. The question is, is there upside there that we can expand. If you flip the question and say which is the one that would be in this particular time frame that would have the biggest potential opportunity, that is tough but it's probably -- if Boeing actually introduced a new midsize aircraft, that's a big opportunity.

Okay. I appreciate you reshuffling in my questions for me, Joe. (Laughter) That's all for me now. Thank you for taking my questions.

Gentlemen, we have no further questions. Please go ahead with any closing remarks.

Thank you everyone for participating on the call and as always John and I will look forward to seeing you over the course of this quarter and talking to you again next quarter. Thanks again for participating and we will talk to you soon. Thanks, Kathy.

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.