Albany International Corp (AIN) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter Earnings Call of Albany International. (Operator Instructions) At the request of Albany International, this conference call on Friday, May 5, 2017, 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 Albany's Q1 2017 Earnings Call. As usual, I'll summarize the quarter. John will then go into more detail, I'll follow with our outlook and we'll close with Q&A.

In Q1 2017, both businesses continued to perform well and in line with our short- and long-term expectations and objectives. Machine Clothing once again generated strong income and strong new product performance. And Albany Engineered Composites once again generated strong growth, executed well on each of its key programs and continued to position itself for both improved profitability and additional new business.

In Machine Clothing, sales were essentially flat both sequentially and in comparison to Q1 2016. There were no significant deviations from recent market trends during the quarter. Once again, we offset a significant decline in publication-grade sales with incremental gains in the other grades, most notably during Q1 in tissue. By the end of Q1, the publication grades accounted for 23% of total sales compared to 25% a year ago, 27% 2 years ago and 30% 3 years ago. Our new product performance continued to be strong across all product lines, especially in tissue. And while competitive pricing pressure remained intense, particularly in Europe and Asia, the top line impact was offset by volume growth in Asia.

Machine Clothing profitability was once again strong in Q1 2017 due to incremental productivity gains and good plant utilization. Gross margin, segment net income and adjusted EBITDA were all in line with the very strong comps from Q1 2016.

Meanwhile, AEC continued on its growth trajectory. Q1 sales grew to $56 million from $27 million in Q1 2016, which was the last quarter before we acquired our Salt Lake City division. Excluding Salt Lake, Q1 sales grew by 34% compared to Q1 2016.

The year began slowly for the AEC but revenue accelerated as Q1 progressed, and we entered into Q2 with this business right on track toward our full year target of 25% to 35% revenue growth over full year 2016.

The growth in Q1 was once again led by LEAP. AEC continues to execute well on the very aggressive LEAP ramp schedule, while in the marketplace, the LEAP engine continues to perform well. The order backlog for LEAP exceeded 12,000 engines at the end of Q1 with no signs of market softening. CFM delivered its 100th LEAP engine during the quarter, and the LEAP engines now in service are operating well and meeting all their performance targets.

Q1 sales in Salt Lake were flat compared to Q4, but as with the rest of AEC, we expect a sharp increase in Salt Lake sales for the balance of 2017. It has been a full year since the acquisition and our experience to date, particularly our experience with Salt Lake's customers, validates our view of the growth potential that motivated the acquisition in the first place. For all of Salt Lake's key growth and legacy programs, we are meeting customer expectations and the near- and long-term demand outlook is strong.

Of particular note since our last earnings call are 2 recent developments in the CH-53K program. Salt Lake was informed during the quarter that it was selected by Sikorsky from more than 200 suppliers as the Supplier of the Year for the CH-53K program. And in early April, the CH-53K was officially approved by the Department of Defense to enter into production and deployment. At full rate production next decade and assuming no additional content, this program has the potential to generate as much as $150 million per year of AEC revenue.

As for AEC profitability, adjusted EBITDA as a percent of sales improved to 9% in Q1 compared to 8% in Q4 and 5% a year ago. Profitability was held back by a still substantial effort to complete the integration of Salt Lake into AEC. For example, although our ERP systems successfully went live in Salt Lake in February, the typical inefficiencies associated with learning a new system and modifying work processes will continue to be a drag on productivity well into the second half of the year. Shortly after the end of the quarter, we announced a significant restructuring at Salt Lake, which coupled with continuous improvement in operations, should result in gradual improvements to profitability by the end of the year.

Q1 was also marked by a significant increase in new business development activity in AEC. As John and I have often discussed with all of you, AEC is pursuing new business opportunities on 3 fronts: On existing aerospace platforms, on new aerospace platforms and through diversification outside of aerospace.

The most notable developments during Q1 were again on that first front, existing aerospace platforms. AEC received a significant number of formal requests for proposal and more preliminary expressions of interest from a broad cross-section of OEMs, largely prompted by AEC's execution and emphasis on lean manufacturing in its existing programs with those OEMs.

So in sum, this was a good quarter for both businesses with stable market trends, good product performance and strong adjusted EBITDA in Machine Clothing; and in AEC with continued strong growth and good performance on all of the key growth and legacy programs, combined with encouraging progress in new business development and important steps toward gradually improving profitability.

Now let's turn to John for a more detailed look at the quarter. John?

Thank you, Joe. I'd like to refer you to our Q4 financial performance slides. Starting with Slide 3, net sales by segment. Total company net sales in Q1 increased 15.6% compared to Q1 2016. Excluding currency effects, net sales increased 17% compared to last year.

MC net sales in Q1, excluding currency effects, were essentially flat compared to Q1 2016. Q1 is the second consecutive quarter of flat year-over-year sales because, as Joe noted, declines in publication sales were offset by incremental increases in other grades.

AEC net sales in Q1 increased by just over $29 million, with about $20 million of that increase due to the Salt Lake City acquisition. The remainder of the increase in AEC sales was due to growth in the LEAP program.

Turning to Slide 4. Total company gross margin as a percentage of net sales was 38.1% in Q1 compared to 42.1% in Q1 2016. The lower gross margin percent reflects the change in the business mix due to higher AEC sales. This trend, as you can see in the chart, started in Q2 2016, and we continue to expect this trend to continue as AEC growth accelerates over the next few years.

MC gross profit margin in Q1 was very good at 48.5% of net sales and somewhat better than the last 4 quarters. AEC gross profit margin increased to 12.1% of net sales in Q1 compared to 11.5% of net sales in the comparable period last year.

Slide 5 shows net income and adjusted EBITDA by segment for the quarter. Adjusted EBITDA for the total company in Q1 2017 was $43.5 million compared to $41.3 million in Q1 last year. MC adjusted EBITDA was $48.3 million in the quarter compared to $49 million in Q1 last year. AEC adjusted EBITDA improved to $5.2 million in the quarter compared to $1.5 million in Q1 last year as the acquisition added $2.9 million to adjusted EBITDA in the current quarter.

Moving to Slide 6: Earnings per share. We reported net income attributable to the company in Q1 of $0.34 per share compared to $0.42 per share in Q1 of last year. Adjustments for restructuring, foreign currency revaluation and tax adjustments as well as acquisition expenses in Q1 2016 are noted on the slide. Excluding the adjustments, net income attributable to the company was $0.46 per share in both Q1 2017 and Q1 2016. The restructuring in Q1 2017 was centered in AEC and represents an important step in AEC's efforts to gradually improve profitability.

Lastly, Slide 7 shows our total debt and net debt. Total debt dropped just over $4 million to a balance of about $480 million at the end of Q1. However, with the decline in cash balances of approximately $38 million, net debt increased $34 million during the quarter.

Net debt typically increases in Q1 due to incentive compensation payments, seasonal increases in accounts receivable in the inventory and high first quarter income tax payments. Those typical cash flow effects for Q1 were compounded by sharp increases in receivables and inventory and capital expenditures associated with multiple program ramps in AEC. Payments for all capital expenditures in Q1 were about $25 million, consistent with our expectation of full year capital expenditures of between $95 million and $105 million.

As we have mentioned previously, we expect 2017 and 2018 to be peak years for capital spending due to aggressive program ramps in AEC. At this rate of spending for capital expenditures, we expect additional quarterly increases in net debt for the remainder of the year but at a considerably lower level than Q1.

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

Thanks, John. Turning briefly to our outlook. In Machine Clothing, the market appears stable and we entered Q2 with a good order backlog. So even though we've been anticipating and are seeing some inflationary pressures, Machine Clothing remains on track toward its full year objective of annual adjusted EBITDA in the middle of that $180 million to $195 million range that we've discussed on numerous occasions. For AEC, again, we expect -- we continue to expect full year 2017 revenue to be in the 25% to 35% range higher than full year 2016 and for adjusted EBITDA as a percentage of sales to slowly improve.

And for the longer term, the intensity of new business development activity in Q1 suggests that there is more upside than downside risk to our current estimate of $450 million to $500 million of revenue by 2020 and that there is considerable potential for substantial growth beyond 2020 as well.

In sum, this was a good quarter for both businesses as MC generated strong adjusted EBITDA and AEC strong growth. And again, both businesses remain firmly on track toward both their short- and long-term goals.

And with that, let's go to any questions. Kevin?

(Operator Instructions) The first question is from the line of John Franzreb of Sidoti & Company.

I'd like to start with the paper mix. You kind of referenced it twice in the prepared remarks. You gave us what the publication grades were. Can you kind of talk to what the mix is for the other grades, a? And b, can you talk to where you think we're going kind of to bottom out in the degradation of the publication market? Or it's something you think you may want to exit completely?

If you take all of the -- let's take the first question, which is the mix, if I understood it correctly, besides packaging. And it's about 35% of our sales if you take tissue, pulp, all of the non-wovens and closely related grades, like corrugator belts, it's about 35%. Stable to growing. All of the pieces of that have some elements of growth in the marketplace. The -- this -- the -- and -- I -- if you assume that the demand for those grades in aggregate, and really the demand for packaging as well, they're GNP-type of demand growth out in the marketplace. That tends to translate to slightly lower demand for Machine Clothing growth. But if you figure any aggregate, all of those non-publication grades are growing on the order of 1% from the Machine Clothing consumption. That's a pretty good estimate. We -- there are some -- as for decline in publication, there are some analysts out there who expect some sort of flattening. We have seen no sign of that at all. That you look at Q1 -- for example there's, you could -- some people argue that, well, most of the shrinkage in magazine consumption has already taken place and that there's going to be some plateau of consumption of business magazines or fashion magazines. But if you take Q1, look at the trends in advertising in magazines, they were down another 15%, which is a very good predictor of where that industry is going. So our model does not assume a flattening. It assumes, at some point, there's going to be a slowdown in the growth -- in the shrinkage, but just because it's becoming such a small piece of the remainder. For us, we're just assuming 5% to 10% declines of publications offset by flat to 1% growth in the other grades. That's what gets us to more or less volume stability over time. Gradual diminution of the top line decline being replaced by more or less flat top line.

Okay, got it. And switching over on AEC. You had some restructuring charges at SLC now in the quarter you just reported, but you also said there's some in the current quarter. Could you just provide some color as to what these charges are for? When do you expect to realize the benefits of these actions? And numerically, how much are we talking about in relative savings going forward?

John, I think the right way to think about this is to go back to our objectives for this business, which is to get EBITDA margin from 8% at the end of last year to 18% to 20% by 2020. And that improvement will be driven by a combination of learning curve efficiencies as we ramp the program, which would be reflected in greater labor and material productivity, fixed cost leverage both at the gross margin level and in SG&A, plus some synergies associated with combining these 2 organizations. And if you model out a steady ramp in EBITDA margin between now and 2020 and just spread it out evenly and assume all of those forms of productivity improvement are gradually being implemented, you get -- I think you get pretty close to what we're expecting. And these steps in Salt Lake are one of the planned measures along this steady improvement journey that we're anticipating and conferring about over the next 4 years.

Okay, all right. Well, how about in regards to the ramp at SLC. Revenue, I believe you said it was flat year-over-year, but you're expecting their legacy programs to grow significantly this year. Could you talk about which programs are going to hit first? And what kind of growth rate you're alluding to just at SLC?

The Boeing fuselage frame program is going through the steepest ramp right now. And the -- following behind that in terms of ramp is the JSF program. It's starting to ramp a little later than the Boeing program. And then among the legacy programs, the missile program of Lockheed JASSM is also showing some growth. The CH-53K program, which, when all is said and done, will be the largest program with a big ramp doesn't really ramp until the end of the decade. So it's -- the sequence is Boeing, JSF and then CH-53K. But we are seeing, also in the important legacy program, the missiles, we're seeing some growth potential there as well. We're not ready at this point to give you a more precise growth estimate other than the aggregate 25% to 35%. But first approximation, both LEAP and Salt Lake are -- look like they're growing at that pace.

One last question and I'll get back in the queue. You talked about your optimism for some formal requests for proposal. You didn't mention where is it coming from. Was it coming from the Albany, let's call it, the legacy business versus the Albany business that's tied to LEAP? Or is it the SLC side of the business? Could you kind of tell us where -- what's the underlying demand profile in the company?

Yes, this is -- I think you could tell from the tone of my comments, this is a pretty big deal. And it's -- I would say it's one of the biggest surprises of the acquisition. We knew the acquisition would elevate our profile in the industry because it took us from primarily an -- a Safran shop with some good programs and Rolls-Royce, so mainly an engine shop, to really now one of the prominent suppliers in the composites industry. And we knew that we were well positioned on important growth platforms. What we didn't fully anticipate was that the timing of that acquisition lined up really well with the timing at which a number of our major OEMs were getting ready for their own ramps and trying to put their own supply chains in order. And the net result is, coupled with their need to ramp coupled with our increase in visibility coupled with outstanding execution in that -- our Boerne operation in Texas, so legacy, plus really strong execution on each of the key programs in Salt Lake plus high visibility and good execution in LEAP. All of those together have just increased our profile with all of our key OEMs. So whether it's Boeing, whether it's Lockheed, whether it's Sikorsky, whether it's GE, whether it's Safran, it's that kind of convergence of their focus on their supply chain and we're executing. That's was really triggered these conversations. We keep saying the risk to this business is execution and ditto for growth, that this is -- this works if we execute. And that's why we just put so much emphasis on operational execution.

And next question is from the line of [Steve Levinson, Paper Rock Research].

In your remarks and in the press release, you mentioned there's more upside than downside related to LEAP, and I'm wondering if that's a richer mix of 737 MAX and A320neo. Or do you expect a contribution from the Chinese COMAC's C919 which flew for the first time this morning?

Yes, that was significant. We -- as you know, we -- LEAP is the sole source on COMAC, sole source on the MAX, which is also, according to the CEO of Boeing, entering into service, the first engine deliveries are this month. And then of course LEAP is being generated, is being delivered. It's probably flying on about 45 aircraft now, perhaps more on the NEO side. I didn't mean to suggest that there's more upside on LEAP per se. This is just really strong execution on LEAP. There's -- we're ramping, too. There's been no deviation from CFM on their expectation to ramp to 2,000 engines per year from this year, a target of 450 to 500. The one really interesting -- or a couple of interesting pieces out there that suggests there's still upward market pressure is Boeing's CEO, on their earnings call, made it clear that they are overbooked at their current production -- planned production rate ramping to 57 planes per month, and that there is enough market demand out there to go above 57 planes a month. There's also clearly pressure on the Airbus side, given the problems that the geared turbofan is having, clear pressure on the Airbus side for CFM to deliver more engines. CFM, to its credit, has been resisting all pressures from Boeing and Airbus to date to ramp up production because they feel their supply -- rightly, their supply chain is pushed to the limit now. And what is distinguishing CFM in the marketplace and LEAP in the marketplace, it's actually delivering what they've promise. So they don't want to push their supply chain too soon to go to higher rates because the last thing they want to do is compromise their validation of their well-earned reputation, that when they promise something, they deliver.

Okay. You answered, really, a couple more of the questions. If it's not from volume, then can you comment a little bit, and I know you can't go into exact figures, but on the yields you're seeing out of your factory on the production of the blades and cases.

We're really happy with the yields. And if you look at any historical standard of composite parts being introduced onto the engine -- and we're talking rotating parts. These aren't secondary parts. These are primary parts. This is a real success story. Now we still have more improvement to go, and on a daily basis, we're working with our customer on those improvements. But this is a good story and we're delighted with the progress so far. I'd say we're right on track for what we need to do to hit the ramp.

Okay. And you talked about CFM resisting pressure. Do you see any weak links? Do you hear anything about weak links in the supply chain that could constrain the production ramp at all?

Well, no. But the way that translates to us would be are we seeing any diminution of pressure to ramp at a breathtaking speed? And the answer is no, we're not. So our 2 data points are, number one, we're watching CFM's customers agitate for more output; and on the other hand, we're feeling -- we're not feeling any diminution of pressure for us to meet the targets that we've been handed.

Got it. One other question related to LEAP is there's been some chatter and a few trade journal articles about Boeing and the thinking on a new midsize aircraft, and that CFM is beginning to think about the engine that it could supply, which they said is not a LEAP, but I would imagine is some derivation from the LEAP. Would you expect them to use composite fan blades and cases or even more material in a new engine that can pair with a plane that size?

Well, it does feel -- Steve, you've seen this a number of times already, but they're -- we're clearly in the multidimensional chess, the stage of the multidimensional chess game now where everybody is positioning against everybody else. So clearly, Boeing is trying to position again -- itself against Airbus for that gap in the market. I think it would be a mistake to not underestimate the impact that COMAC's emergence is having in Boeing's thinking as well. It's not just about Airbus. And like -- so that's number one. Number two, it's clear that Boeing is trying to, when it's emphasizing the development costs associated with its business plan, that it's clear it's trying to signal to its suppliers, both engine and airframe, that they expect if you're going to play on the new middle of market aircraft, you're going to have to pay part of the development cost. And it was interesting that Safran's CEO clearly upped the ante on his earnings call by saying, "Yes, we're interested; yes, we're in; yes, we're talking to Boeing about this; yes, it fits within the CFM agreement." All I can tell you about whether there will be composites on that new engine and what that new engine would look like is Safran has -- in CFM, is responsible for the fan module and the low-pressure turbine. It has made a big bet on 3D woven composites for its future architectures in the fan module. So if Boeing pulls the trigger and CFM wins or is one of -- if there's going to be 2 engine suppliers, as 1 of the engine suppliers, any advanced composites on that engine has to go through -- any 3D woven composites on that engine has to go through Albany Safran Composites. It would have to be manufactured in our division.

Got it, sounds great. And one last question related to Machine Clothing. Since you still see declines in the publishing grade, do you think you'll get to the point where the demand for packaging and tissue exceeds the decline in publishing grades such that there will be a little growth in that business?

We think it's -- we really like this business. It's a great business with a long-lived installed base, it generates a lot of cash because of the value created for the customers. But we just think it's a trap for investors to think of this as a growth business, that the other grades will have some growth, but publication will continue to decline. But more importantly, even where the grades have growth, there's enough innovation going on in our industry that the lives of our products extend just enough with innovation to wipe out whatever incremental growth there might be from the growth in those grades. So we -- we're very careful to always tell investors think of this as a flat adjusted EBITDA business in that range of $180 million to $195 million. And a piece of that flat going forward is stable volume, but we -- stable top line or stabilizing top line. We just think it's a trap to think that's going to grow. And if it does, that's upside.

(Operator Instructions) And we do have a question from the line of John Franzreb, Sidoti & Company.

Just sticking with the PMC side of the business. Joe, can you talk a little bit about the competitive landscape? Are there any sizable material contracts that are up for bid this year? And what your take is on industry capacity right now? And the pricing environment, while I'm at it.

We're not seeing anything right now that would alter the dynamics of industry. I mean, you never say never. But right now, it's all of the patterns that we've seen over the years, from publication being displaced by digital media, packaging, tissue and pulp and nonwovens growing to offset that, long-term growth in paper production in Asia, all those trends continue. The pricing pressures, we think, are heavily driven by industry structure both in our customer and in our Machine Clothing industry. So downstream in those geographies where there's overcapacity in our customer base, that translates to pricing pressure on our industry. And then in our industry, where there's overcapacity, that in turn translates into pricing pressure to us and our competitors. When those 2 line up together, overcapacity in our customer base plus overcapacity in our industry, the pricing pressure is most intense. So that's Europe. Asia, there is strong pricing pressure, but at least -- as I tried to allude to in my commentary, it's at least somewhat mitigated by volume growth in Asia, particularly in packaging. The -- there is less -- the paper industry has -- is more consolidated in the Americas. The machine clothing industry is more consolidated in the Americas. So while it's really a struggle to get any kind of price relief in the Americas, there isn't the same tooth-grinding price pressure that there is in Europe and Asia. None of that has changed. That's where we've been really since we came out of the recession. And that's just the way of life. We don't see anything right now that would alter that dynamic either for the good or the bad.

Okay. And your take on the capacity in the industry? I think it's closer to...

I think there is -- the industry, it has -- our industry, machine clothing, has overcapacity in Europe. There's a lot of competition in Asia. It's hard to say overcapacity because there's so much growth, but there's -- there are a lot of competitors there, including emerging competitors. So -- and that's the predictor of pricing pressure.

Okay, got it. And can you just -- can you update us on the composites initiatives in view of the automotive market? I don't think we spoke about it in some time. Maybe an overview for some people or a brief (inaudible) might be helpful in where we stand.

Yes. So we keep talking about these 3 categories of growth opportunity. And so new business potential on existing aerospace platforms, on new aerospace platforms and then via diversification. The surprise, as I mentioned before and as I've expressed in the last couple of quarters, is how much potential there is on the first of those. Because we would have expected that to be pretty much washed out, and it's not. There's a lot of growth potential there. Steve in his questions pointed to what we see as the single biggest potentially very large opportunity in the second category, which is the potential for a Boeing new middle of market aircraft. And that -- it's when you get a big new commercial platform that you get the opportunities, ways of opportunities of growth, and there's a scramble amongst suppliers to position themselves when that occurs. And there will be opportunities both of the airframe and on the engine. On the diversification, we keep seeing opportunities to diversify across a diversity of fields, from down-well drilling to body armor to applications in space, but you keep -- we keep coming back to the same reality. Nothing is as big a market for lightweight impact-resistant composites. Just think of a side-impact beam in a car, if you can make that lighter weight but still impact-resistant, just the way a fan blades -- our fan blades can resist a bird strike, you can see the potential application for the same kind of composites that we make on-the-automotive -- in the automotive industry. The challenge in automotive, as we've discussed before, is you have to get to a significantly different price point in order to break through in serious ways. So it's the R&D we've been doing over the last 2 years in collaboration with people in the automotive industry has been to understand how far down we can drive cost, particularly cost of materials, and how much degradation of material -- of performance, that is of impact resistance, do we get as we drive down the cost curve. We are making good technical progress in that exploration. We are not yet at the point where we think it's worth pushing hard on the commercial application. We see potential applications at the very high end, but they are -- they're one-offs. And given every -- given all of the opportunity that we're seeing now in the aerospace side, a one-off application in automotive isn't worth it. So we -- and this some of the advice that we're getting from the automotive, from the big OEMs, too, is what will turn their heads is when we can show a clear pathway from that high-end super-performance vehicle down to the middle of market. And right now, our -- we're -- our view is let's continue to push on the cost performance through R&D until we see a pathway down into a larger part of the market before we start seriously considering the capital investment required on that side. So this is still R&D probe mode. We -- I think if anything has changed in the past year, is on the one hand, we have made technical progress; but on the other hand, the opportunity cost over on the composites on the aerospace side look a lot bigger now than they did before. That is this -- there's a target-rich environment in the space we're already in. And so it gives us more patience, if you will, on the automotive side. So we're probing, but it's looking more like a mid-next decade commercial application than anything immediate. And we think it would be a trap right now to go after the early applications because they're feeling like one-offs.

The next question is from the line of Greg Vasse, TimesSquare Capital.

Are you guys willing to, I guess, provide any color on the progression of AEC sales through the quarter? It seems like comps might get a little bit more difficult by the fourth quarter. And additionally, should we see AEC revenue growth remain fairly linear from 2017 to 2018? Or should we start to decelerate into the end of '18 as we start to comp some larger numbers?

Well, what we've said so far is 25% to 35% full year growth between '16 and '17 and then another 25% to 35% full year growth from '17 to '18. And there should be -- we haven't guided, but that doesn't get you to the $450 million to $500 million with upside by 2020. So there's clearly -- so if you take those 2 numbers and then project out to 2020, you'll see there's still more growth there. So there will be positive comps. We're -- it's a little difficult to map this business on year-over-year quarterly comps. We think it's much more reliable to look at full year comparisons, 2016 versus 2017 versus 2018, because the actual flow through the year can be a little bit lumpy. As we've seen in the past, Q4 has been a big quarter, and I think that will become less of a factor. And really, just the demands on the particular timing demands on the ramps will become more of a factor that drive the sequential projection. For this year, clearly, if we're reiterating our 25% to 35% growth guidance and we had $56 million of sales in Q1, we're going to have to be -- to hit our guidance, we're going to have to be in the $65 million to $70-plus million per quarter range for the rest of the year. And yes, we reiterated that guidance. I reiterated that guidance several times today. So yes, that's -- we do expect to see a step up from Q1.

Great, great. And given the AEC won't really hit its stride until the end of the decade, once you're up at full production, valuing this segment's a little bit more of a DCF exercise at this point. So if such, what kind of EBITDA to free cash flow conversion should we be shooting for at full production?

Well, the 2 -- to think about the free cash flow, I think you can take our guidance we've given on EBITDA to map out where EBITDA comes out in 2020. We've given you a range for Machine Clothing and we've said 18% to 20% EBITDA margins on $450 million to $500 million in sales by 2020. So the variables to work with are essentially CapEx and changes in working capital, but the big one is CapEx. And unless we're seeing big waves of new investment as new programs come on, we're sticking with our estimate of average CapEx between 2016 and 2020, total company, of $80 million. And '17 and '18, it'll be above $80 million; '19 and '20, it should be below $80 million. But just be conservative. Take our projections of CapEx -- of EBITDA for 2020, subtract out the $80 million of CapEx, make some -- interest will be coming down, the taxes will be going up, dividends will probably be up a little bit if the board wants to go there. So you put all that together, there should be substantial free cash after dividends, after CapEx, after taxes in 2020 if we hit our targets, if we perform.

Excellent. Great color, guys. Last one for me. We're starting to reach a nice level of contract diversity within AEC. And given there's still a fair amount of applications that can switch to composites in the future and you have a nice runway to higher content per plane or whatever it is that you'll be putting the composites on, would you be strategically disadvantaging yourself if you ever were to split these 2 businesses in the medium term? And lose that PMC cash generation that could be rolled into AEC development? So I'm just wondering, should we think about, if the opportunities are even richer for you, would that maybe prolong the amount of time that it would make sense for both of your segments to stay together as a unified business? Maybe just provide some color on that.

Greg, first of all, thanks for getting on the call and asking the questions. But as John and I have tried to describe to pretty much every investor we talk to over time, is that question about the future structure of the company is premature for now. At some point, you can model it. If you do your models, it's pretty clear by the end of the decade, AEC will be cash flow positive and ready to stand alone. And our board will view those questions, as it constantly does, through the lens of what -- how do you maximize the net present value of future shareholder returns. We're all shareholders, that's how we think about the question. And you can't judge today where everything will play out in 2020, but I'll -- or 2019 or 2021 or whenever it is. But 2 key points that are very clear in our minds. Machine Clothing is a great business. We have -- it is a long-life business with -- where you have an opportunity to generate serious value for your customers, which translates into recurring cash flow. And the second concept that is firmly embedded in our heads is we believe outsized growth compared to market is the best pathway to share -- long-term shareholder value. And so the more pressure, the more opportunity we see for growth on the AEC side, the better the marriage between the 2 company -- the 2 businesses feels. And I'm not trying to prejudge where we go or how the board would decide out there, but it's -- this, we like the cash flow and grow combination. And if you can sustain the one and accelerate growth in the other, that so far has led to really good returns for our shareholders over the last 5 years.

The next question is from the line of Jim Foung with Gabelli.

Came into the call late here, so I apologize if the question's been asked. But Joe, I was just wondering if you could just talk a little bit about the LEAP engine forecast. Has CFM kind of made any changes to the engine forecast expect to build in 2017 and '18? Or...

Yes, we talked a little bit about it, Jim. But in essence, they have not changed. It's still 500 this year, I think 1,100 next year, then 1,800 and 2,000-plus. What's interesting is that there is market pressure to do more, and it's coming from both sides. It's coming from Boeing, which is saying they are overbooked at their current ramp rate and could support more than 57 planes a month in 2019, 2020; and Airbus, which has customers who are not being satisfied with the competitor to LEAP. And so there's pressure there for more engines. CFM, in our view, to their credit, have resisted those pressures because they know that this ramp is an unprecedented ramp and so their supply chain is already stretched. CFM's reputation is heavily built around reliability, delivery of performance that they promise. Their engines are, in fact, being delivered on time and are hitting -- the LEAP engines are hitting performance targets. So it's more important to CFM to meet their commitments, meet their obligations, preserve their reputation than to stretch the supply chain to a point where they start running into trouble. But that said, all of the market pressures are in the right direction right now. But no, there hasn't been any change to the ramp.

So that's a good problem for them and for you, it sounds.

Yes, it's a good problem.

And I was just wondering, could you just break out that $56 million in AEC sales? How much of that was just LEAP versus everything else?

$20 million was Salt Lake. $10-ish million was our legacy business. The rest was -- $25-ish million was LEAP.

Okay, right, okay. And then today, there's an article on China...

COMAC.

Yes, potentially flying the COMAC C919. And I actually am not familiar what engine they're using, if they're using the LEAP or CFM. I think they're using -- they're using LEAP? Okay.

They're using LEAP. Yes. LEAP is the exclusive supplier for the C919, which had its flight test today. So LEAP is exclusive on COMAC, exclusive on the Boeing MAX and shares the NEO with Pratt.

So that's another positive. I mean, did CFM factor in kind of engines for the COMAC? Okay.

Yes, it did.

Okay. I mean, remains to see how, if ever, they're able to keep their schedule, I think entering to service is, like, they're talking about next year or something? Or...

Yes, and you -- Jim, I think the more important impact of the C919, since CFM has built its engine ramp projections with the C919 in mind, the more important variable to watch here is if the C919 starts succeeding and starts pulling share from Boeing and Airbus, you will see a reaction from Boeing and Airbus. And the reaction is going to be in the form, I think, history teaches us, is in the form of innovation. More pressure to introduce performance improvements on their engines or on their planes, more pressure to move forward with next-generation single aisle, for example, perhaps sooner than they had anticipated. That kind of competitive pressure for a supplier like us who's got a differentiated product usually leads to good things. That creates more demand for innovation, for higher performance, so. But that will play out over next decade.

Right. That gives you an opportunity to bid on new airplanes. I mean...

And to the extent that C919 becomes a disruptor and forces Airbus and Boeing to do more than they wanted, yes.

If they became just a disruptor in China, which is most likely, what will happen versus the rest of the world, is that enough of a change for Boeing, Airbus to be more innovative? To become...

The Chinese market is the most important growth market in the aerospace industry, like every other market. But if you look at Boeing's and Airbus' projections for the next 20 years of demand for aircraft, there's replacement of existing aircraft and then there's passenger flight mile growth. And a lot of that growth, and therefore a lot of the growth in demand, is in Asia in general and in China in particular. So yes, and they have modeled in, in their forecast, the expectation that COMAC would penetrate the market to a certain amount. If COMAC overperforms and starts disrupting that market, yes, that's something to watch in the dynamics of the industry next decade very carefully.

Right, okay. And then just last one for me is just on the CH-53K helicopter. So that's been approved for -- so they got funding on that. And I'm just wondering you talk about the long-term opportunity, but is there any near-term opportunity? Like any impact to revenues in this year or next year?

No, that was -- we built into our estimate of $450 million to $500 million with upside in 2020, that assumes the ramp rate that -- for the CH-53K that the Marines and Sikorsky have been talking about, which is like 1 a year growing to 3 or 4 a year by 2020, getting to a full ramp out there in 2023, '24, '25. So our investor package estimates $35 million to $45 million of revenue per year by 2020 and growing to a lot more than that once it's fully ramped. And this year, that program will probably be closer to the $10-ish million, $7 million, that order. So there's a clear ramp from this year to 2020 and then from 2020 to 2024, '25.

Thank you. Now at this time, we have no further questions in queue.

Well, thank you, everyone, for participating on the call. And we really appreciate the questions during the call as well. And look forward to seeing all of you between now and the next call. And thanks again.

Ladies and gentlemen, a replay of this conference will be available at the Albany International website beginning at approximately noon Eastern time today. Now that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.