Albany International Corp (AIN) 2016 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. At this time all participants are in a listen-only mode and later we'll conduct a question-and-answer session. Instructions will be given at that time. At the request of Albany International, this conference call on Thursday, February 9, of 2017 will be web cast 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 10K.

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. Greetings from snowy New Hampshire and welcome to our Q4 2016 earnings call. As always I'll start with an overview of the quarter. John will follow with more detail. I'll then review our outlook and we'll finish with Q and A. In Q42 016, both Albany businesses again performed well as AEC generated strong growth and Machine Clothing continued to generate strong profitability.

Unfortunately we had to take a $2.5 million charge in the quarter due to a third party theft in a small operation in Japan. Even so, the Company ended the quarter and the full year with strong sales growth with adjusted EBITDA comparable to Q4 2015 and well ahead of full year 2015 and with AEC poised for rapidly accelerating growth and Machine Clothing continued strong profitability in 2017 and beyond.

Turning first to Machine Clothing. Q4 sales were essentially flat compared to Q4 2015. From a regional perspective, Q4 year-over-year sales were stable in every major geographic market. From a gray perspective, Q4 year-over-year publication sales declined by another 10%. But the decline was offset by incremental growth in the other grades. We continued to be encouraged in Q4 by new product performance and especially by the potential of the new technology platform in the tissue, non-wovens, pulp, building products and corrugated grades which together accounted for 35% of our total Machine Clothing sales in Q4 2016. Machine Clothing gross margin in Q4 once again held close to 47% due in large measure to good plant utilization despite year end slow-downs.

Adjusted EBITDA for the quarter was $47 million which was slightly behind Q4 2015 and right in line with our expectations. As a result, full year adjusted EBITDA came in at $195 million, right at the high end of our normal $180 million to $195 million range. Turning to AEC, sales grew to $68 million in Q4 compared to an average of roughly $50 million for the previous two quarters.

Virtually all of this sequential quarterly growth was driven by the LEAP program. Sequential sales from our newly acquired Salt Lake City operation were stable at $21 million. For the full year, including nearly three-quarters of Salt Lake, sales were $198 million.

Excluding Salt Lake, full year sales grew from $101 million in 2015 to $131 million in 2016. Again, driven mostly by LEAP. In addition to LEAP, Q4 performance was particularly strong in the F-35 JSF LiftFan and Boeing 787 fuselage frames programs. More generally, AEC remains on track for the ramp-up in all of our major growth programs. Although demand has reportedly softened in some segments of the aerospace industry, the near and long-term outlook for our major growth programs remains robust.

Meanwhile, R&D and new business development continues to progress on each of the three fronts that I discussed on our last call. Incremental new sales, on existing aerospace platforms, development of opportunities on potentially new aerospace platforms, and our probe into the automotive market. AEC profitability continued to improve during Q4 with adjusted EBITDA growing to $5.5 million for the quarter and $16.5 million for the full year.

Q4 adjusted EBITDA included costs of roughly $1 million associated with the integration of Salt Lake and the consolidation of those legacy AEC programs into our Texas operation and another $1 million in increased R&D spending to support a number of our growth programs and initiatives. We made good progress during Q4 on the integration of Salt Lake into AEC, particularly in a major effort to integrate ERP systems which resulted in Salt Lake going live on February 1st.

All business wide functions such as finances, human resources, procurement, information technology and business development are now fully integrated and our focus is now shifting almost exclusively to strengthening operational execution. While much remains to be done on the operational execution front in 2017, our experience in Q4 suggests to us that AEC is firmly on track toward our objective of 18% to 20% EBITDA margins by 2020 on at least $450 million of sales.

So in sum, this was a strong quarter for both businesses with Machine Clothing meeting our Q4 expectations and thereby ending the full year at the top of our normal adjusted EBITDA range and with AEC demonstrating strong growth and making good progress on integration.

Now, for more detail on the quarter, let's go back to John. John?

Thank you, Joe. I would like to row you to our Q4 financial performance slides. Starting with slide three, net sales by segment, total Company net sales in Q4 increased 20% compared to Q4 2015 bringing the full year increase to about 10%. Currency effects compared to the comparable periods in 2015 were minimal. MC net sales were flat in Q4 and down about 4% for the year.

As Joe mentioned, this was primarily due to those declines in the publication grades and weaknesses in South America. AEC net sales in Q4 increased by almost $36 million bringing the full year net sales to $96 million. The increase in AEC sales was due to both growth in LEAP and the impact of the acquisition. Without the acquisition, Q4 sales would have been $47 million compared to $32 million in Q4 2015 and full year AEC sales would have been $131 million compared to $101 million last year.

Turning to slide four, total Company gross margin as a percentage of net sales was 36.3% in Q4 compared to 40.4% in Q4 2015. The lower gross margin percent reflects the change in the business mix due to higher AEC sales. We expect this trend to continue as AEC growth accelerates over the next few years. MC gross profit margin in Q4 stayed strong at 46.8% of net sales and relatively consistent with the last four quarters.

Due to higher sales, AEC gross profit increased to $94 million in Q4 2016. Moving to slide five, earnings per share, we reported net income attributable to the company in Q4 of $0.49 per share compared to $1.17 per share in Q4 of last year. Q4 2015 earnings per share included favorable tax adjustments of $0.93 per share primarily relating to the elimination of the value of the Company's investment and it's German subsidiary.

Other adjustments for restructuring and foreign currency evaluation as well as Q4 2016 tax adjustments are noted on slide. Excluding the adjustments net income attributable to the Company was $0.36 per share in Q4 2016 compared to $0.46 per share in Q4 2015. Net income attributable to the Company in Q4 2016 on both and as reported and excluding adjustments basis, reflects a charge of $0.05 per share related to a loss in Japan and a $0.01 per share charge for integration costs. The loss in Japan was due to a theft of funds by a third party but the majority of the loss occurring in Q4 2016.

We are currently evaluating the impact of this loss on our internal controls assessment and we're implementing a remediation plan to help prevent future losses of this nature. Slides six and seven show net income and adjusted EBITDA by segment for the quarter and full year. On slide six, adjusted EBITDA for the total Company in Q4 2016 was $38.3 million including that $2.5 million loss in Japan and $0.8 million of integration costs compared to $38.7 million in Q4 last year. MC adjusted EBITDA, was $46.6 million in the quarter compared to $47.5 million in Q4 last year. On slide seven you can see that the strong Q4 in MC brings full year 2016 adjusted EBITDA to almost $195 million.

AEC adjusted EBITDA improved to $5.5 million in the quarter compared to $1.6 million in Q4 last year but full year 2016 EBITDA of $16 million. Lastly, slide eight shows our total debt and net debt. With cash decreasing about $15 million in the quarter to pay down debt and cover significant capital expenditures, the result was a $7 million decrease in total debt to a balance of $485 million at the end of the year and an $8 million increase in net debt to $303 million. Capital expenditures in Q4 were $25 million bringing the full year 2016 total to $79 million.

With the continued ramp of AEC programs and the carry over of a number of projects from 2016 we currently estimate capital spending in 2017 to $95 to $105 million.

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

Thanks, John. Turning to our outlook in Machine Clothing we expect recent market trends to continue in 2017. Publication sales will likely continue to decline but now that they comprise 25% of total sales, and as the other grades hold steady or grow incrementally, we expect an easing of the trend of downward year-over-year Machine Clothing sales.

As for profitability, after two years of favorable currency and inflationary environments, we expect some regression toward the mean in 2017 and as a result we expect full year adjusted EBITDA to pull back toward the middle of our $180 to $195 million range. The primary risk to this outlook continues to be global macro economic conditions which could be exacerbated in 2017 by geopolitical uncertainties.

Turning to our short-term outlook for AEC. Driven by accelerating ramps in LEAP, Boeing 787 fuselage frames and F-35 JSF air frame components, we look for AEC sales to grow by 25% to 35% for each of the next two years. And driven by the effects of integration, STG and our leverage and learning curve effects, we expect gradually strengthening margins through the period. The primary risk factor for AEC continues to be execution, especially during this period of ramp-ups across multiple programs and multiple sites.

In sum, apart from the theft in Japan, this was a strong quarter and full year for both businesses with continued strong competitive performance and profitability in Machine Clothing, accelerating growth in AEC, and good progress on the integration of Salt Lake. For 2017, in Machine Clothing, we look for adjusted EBITDA in the upper half of our normal $180 million to $195 million range and for AEC we look for rapidly accelerating sales and gradually improving margins. With that, let's go to your questions. Justin?

Certainly. (Operator Instructions). Our first question comes from the line of John Franzreb, of Sidoti. Your line is open.

$2.5 million, Joe you have to stop leaving your wallet lying around.

Yes. That was a real hit.

I'm sure. I would like to start with PMC. You kind of suggested that the downward trend would kind of flatten a little bit. Can you kind of address the seasonality that you expect to play out particularly in the first quarter relative to the fourth?

Well, I think the first step, John, is just to keep in mind that because the supply chain has shortened so much since -- and the order cycle has compressed so much since the recession, as everybody tries to manage cash really tightly. The better measure of performance really is full year. Are we full year on track to somewhere in that range between $180 million and $195 million?

So while there still are seasonal effects except for Q2, now there is for example the Chinese New Year in Q1. There's typically a slow start-up after the holidays. In Q3 there are the summer effects and Q4 there are the holiday seasons. They're still there but they tend to be masked by the greater volatility from quarter-to-quarter that results from the shorter supply chain. So the underlying seasonal factors are still there but they're less visible than they used to be. And we think it's much more important to stay focused on are we on track or are we not on track for our full year expectation.

Okay. Fair enough. And switching to AEC, the accelerated ramp, it not only occurred in the fourth quarter but that you alluded to of the 25% to 35% over the next two years.

Per year.

Right. Could you talk to how much of that is solely driven by LEAP and how much of that is maybe better performance in other programs and maybe being pulled forward or not?

We're not seeing any particular pull forward. The LEAP ramp is continuing as mapped out by CFM now for the last year. There isn't really a change in that. The ramps in Salt Lake are a little bit staggered as we have been expecting, so this year is a big year. 2017 is a big year for the Boeing 787 fuselage frames. It's a pretty significant year for the F 35 components, air frame components. And those three will be the major ramping programs over the next two years. And then as we get further out in the decade, the CH-53K program begins to ramp up, the GE9X begins to ramp up and the growth rate on these other three big programs, the rate of growth off a much larger base begins to slow down. We haven't really seen any material pull forward of any of our programs. Nor have we seen the opposite.

Great. Great. That's perfect. Against that backdrop then, when does AEC become truly break even, meaning cover the costs of corporate expenses and interests from the Harris acquisition? When does it really start to contribute to the bottom line?

Well, you've got to add in CapEx. And in 2017 and 2018, we're going to be in our peak capital spending years precisely because of those ramp programs. We've been saying before the acquisition that average CapEx was $70 million for total Company after the acquisition, average CapEx would be $80 million. And so in 2017 and 2018, CapEx is going to be over our average. And then in 2019 and 2020, unless something new and unexpected comes along that requires immediate spending, we're going to see CapEx spending rapidly drop below that average. So as the CapEx drops below that average by 2019 we should be all in with corporate expenses allocated, we should be very close to break even. We should be break even.

That's all I have.

Now the other way of looking at this and the metric that we track very tightly is assume corporate expenses don't really grow through the period or maybe they grow a little bit for inflation. So the variable that drives the improvement controlling for CapEx is EBITDA margin. And that's why we've been saying EBITDA margin we need to drive that to 18% to 20% and we're on track to do that. And the reason we focus on EBITDA margin, more than for example gross margin, is because through the period, there's going to be rapidly accelerating depreciation on the one hand which will depress gross margin. On the other hand we should see very significant SG&A leverage.

So you have to look at the combination of improvements in gross margin without depreciation, increases in depreciation and SG&A leverage to get to an EBITDA margin that we think should be driving upward to 18% to 20% through the period.

Is there some sort of revenue threshold you have laid out that would get you to that 18% margin?

We've been saying at least $450 million by 2020 and 18% to 20% EBITDA margin. If we get more than that, and again just focusing on SG&A leverage, that should lead to better improvements. But we haven't suggested that there's significantly more than that.

Since you left the door open, I'll ask one last question. John, what kind of tax rate will you be thinking about for 2017?

Yes John, we finished the year at 35%. And we think we will be in that area in 2017. Give or take a little bit but mid 30s.

okay. Thanks for taking my questions. I'll got back in the queue.

(Operator Instructions). The next question comes from the line of Anthony Young, of Macquarie. Your line is open.

Just a couple of questions here. On the ramp, you sort of addressed this but just to put some numbers around it, I think in the past you've talked about 100 ship sets in 2016 and 500 in 2017 and up to 1,000 in 2018. Is that still the cadence that we should be thinking about?

Yes. Yes, and the guidance that we go by is the publicly stated ramp expectations by CFM.

Okay.

Now keep in mind revenue doesn't align with that ramp. Revenue for us because as our volume is growing, our cost per ship set, our price per ship set is coming down. So you have to factor that in.

Right.

We're not in any way suggesting that our suggestion of $200 million by 2020 for that program, that's still a good number.

Okay. And then with respect to next generation projects or work that may come your way, I mean the publicly the government is talking obviously about a new bomber and a new trainer. Are those projects already set as far as their content? Or is there still possible work for you guys to win on that, or is it really like things after that that may be (inaudible).

No, the supply chains are not set for that.

Okay.

You know, I still think the one to watch most carefully, the one that's most significant is the middle of market for Boeing. Are they or are they not going to make a decision this year or next year about a new aircraft in the middle of that market?

Okay. (inaudible) much speculation on that but even if they do go with a larger 737, is there stuff for you guys to do on that also?

Well, I think they have said they are going to do a larger 737. But that's going to use the existing LEAP engine that are on all of the Boeing 737 max's. So the only effect that would have for us would be the consequence of them gaining more share because they have tried to create a more competitive aircraft at the high end of the narrow body market. Remember, they are losing, Boeing is not doing well against Airbus at the largest end of the max neo families.

Boeing has strong share in the middle, the max-8 versus the A 320 but they're not doing well in the max-9 versus the A 321. So they stretch max, the max-10 is an attempt to compete more effectively against the A 321. Since we have about 50% shares in the A 321 and 100% share on the max, if in fact it helps them get greater share, that helps us get -- if it helps Boeing get greater share up there, it helps us get more engines. But I don't think it's a material change.

In our minds it doesn't materially change any of our outlooks. What would change, would add incrementally to our outlook in a big way would be if they go middle of market. Which would be a whole new aircraft between the top of the 737 and the bottom of the 787.

Okay. And then just the last one. You said that 2017, 2018 would be peak CapEx for you guys. I mean does that mean that the 2019 period may be a time when we start to think about corporate actions as far as a split goes or things of that nature?

The right way to think about this is just follow the logic chain of what you just described. A CapEx should come down sharply in 2019 so that should be a really good year for free cash. And anything beyond that is speculation.

okay. All right. Appreciate the questions, guys. Congratulations on a good quarter.

Thanks, Anthony.

At this point we actually have no further questions here in queue.

Okay. Thank you everyone for participating on the call and as always, we'll look forward to conversations with all of you in-between our calls and those of you who are being buried in snow, be safe and see you soon. 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. We do thank you very much for your participation and for using AT & T's executive teleconference service. You may now disconnect.