Albany International Corp (AIN) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter Earnings Call of Albany International. (Operator Instructions)

At the request of Albany International, this conference call on Wednesday, August 2, 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, 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, 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.

(Operator Instructions)

Please note that it is important for you to identify yourself when logging in so that we can refer to you accurately on the call.

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, welcome to our Q2 2017 earnings call. As always, I'll start with an overview of the quarter. John will then go into more detail, and I'll follow with our outlook. I'll also add a few comments about my retirement plans and the succession process that we announced last night, and then we'll go to Q&A.

Aside from the charge associated with those projected future losses on the BR725 and A380 programs, which we described in an earlier release, Q2 was another strong quarter for Albany International. Machine Clothing again generated stable sales and strong income while AEC grew sharply and took another incremental step toward improved profitability. Both businesses are now trending a little ahead of our expectations for the full year and remain firmly on track toward their longer-term objectives.

Turning first to Machine Clothing.

Q2 sales were again stable, slightly ahead of the preceding 3 quarters and slightly behind the strong Q2 2016. The market trends of recent quarters continued. Publication sales again declined on a year-over-year basis, this time by nearly 8%. And once again, the decline was almost completely offset by incremental growth in packaging and tissue. And this pattern held in every major geographic region.

Meanwhile, pricing was stable across all regions. New product development and performance were again very strong, particularly in tissue, packaging and nonwovens. And gross profit margin improved slightly above Machine Clothing's already exceptional levels due to business-wide continuous improvement efforts.

As for AEC,

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cost.

AEC operating income declined in the quarter principally due to the charge associated with the BR725 and A380 programs. Aside from this charge, AEC took another tangible incremental step in Q2 toward our target of 18% to 20% adjusted EBITDA as a percent of sales by 2020. To put this improvement in context, for full year 2016, AEC adjusted EBITDA as a percent of sales averaged a little over 8%. In Q1 2017, it improved to a little over 9%. And in Q2, excluding the charge, it improved to a little over 10%.

New business development activity continues to be strong on all fronts, with AEC actively exploring opportunities in both civil and defense markets and on both engines and structures, on existing aerospace platforms, emerging aerospace platforms and outside of aerospace.

The biggest new business development news in the quarter came from the Paris Airshow. Orders for LEAP were very strong, and the order backlog now exceeds 13,100 engines, which represents over 6 years of full production. And as a result of the still growing demand for LEAP, GE and Safran are now publicly exploring additional increases in LEAP production rates.

There was also a great deal of discussion at the airshow by Boeing about the new midsize aircraft that it's considering, the so-called 797 or NMA. NMA is for New Midsize Aircraft. CFM and Safran expressed their clear intent to compete for the engine that would power such an aircraft.

A decision by Boeing to launch the 797 could come early as 2018 and would create potentially significant opportunities for AEC on both airframe and engine. Entry into service, should Boeing decide to launch the program, would likely be into 2024 or 2025.

So in sum, in Q2, we saw good operating performance in both businesses. In Machine Clothing, the top line was once again stable and income was once again very strong. And in AEC, we saw sharp sales growth, encouraging new business development activity and, excluding that charge, another incremental step forward in profitability.

And now over to John for more detail on the quarter. John?

Thank you, Joe.

I would like to refer you to our Q2 financial performance slides.

Starting with Slide 3, net sales by segment. Total company net sales in Q2 increased 6.1% compared to Q2 2016. MC net sales in Q2, excluding currency effects, were down 1% compared to Q2 last year as declines in publication grades were mostly offset by increases in other grades.

AEC net sales in Q2 increased by just over 27%, with the increase primarily due to the growth in LEAP.

Turning to Slide 4. Total company gross margin as a percentage of net sales was 29.2% in Q2 compared to 38.5% in Q2 2016. The lower gross margin percent reflects an impact of 7.3% related to the $15.8 million AEC charge discussed in the release. The lower margin percent also reflects the change in the business mix due to higher AEC sales, a trend we expect to continue.

MC gross profit margin in Q2 continued to stay strong at 48.3% of net sales compared to 47.6% of net sales in Q2 2016.

Slides 5 and 6 show net income and adjusted EBITDA by segment for the quarter and year-to-date. As a reminder, the 2017 total company and AEC adjusted EBITDA results include the $15.8 million AEC charge in the quarter.

Adjusted EBITDA for the total company in Q2 2017 was $30.6 million compared to $46.6 million in Q2 2016. On a year-to-date basis through June, 2017 adjusted EBITDA for the total company was $74.1 million compared to $87.9 million in 2016. The decline in adjusted EBITDA over both periods was mainly due to the AEC charge as MC adjusted EBITDA stayed strong and only slightly behind last year, and AEC EBITDA, excluding the charge, has shown incremental improvement with the growth in sales.

Moving to Slide 7, earnings per share. We reported net income attributable to the company in Q2 of $0.03 per share compared to $0.32 per share in Q2 of last year. The AEC charge reduced Q2 2017 earnings per share by $0.31. 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 $0.16 per share in Q2 2017 compared to $0.48 per share last year, with the decline mainly due to the AEC charge.

As you will see on the slide, this year the company has reported foreign currency revaluation losses of $0.07 per share in Q2 and $0.11 per share over the first half of the year compared to small gains last year. The swing in the results was mostly due to the weaker U.S. dollar against a basket of currencies, most notably the euro.

Lastly, Slide 8 shows our total debt and net debt. Total debt increased about $16 million to a balance of $496 million at the end of Q2. Cash balances decreased approximately $4 million, bringing the net debt increase in the quarter to a little over $20 million to a balance of $357 million. The increase in net debt was mainly due to investments in working capital and fixed assets to fund AEC growth. Payments for all capital expenditures in Q2 were about $22 million and $47 million year-to-date, consistent with our expectation of full year capital expenditures of between $95 million and $105 million. At this rate of capital expenditures, we expect net debt to increase over the second half of the year.

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. In Machine Clothing, because of seasonal effects, the second half of the year tends to be weaker than the first half. Year-over-year basis, given Machine Clothing's strong competitive performance, stable market conditions and a good order backlog, we think it's reasonable to expect continued stable performance in the second half of the year. Again, that's on a year-over-year basis.

Last quarter, we reported that Machine Clothing was on track toward full year 2017 adjusted EBITDA in the middle of our expected range of $180 million to $195 million. With Machine Clothing's strong first half performance and encouraging outlook for the second half, full year 2017 adjusted EBITDA now appears more likely to be in the upper half of that range.

As for AEC, we had previously stated that we were looking for full year 2017 revenue to grow by 25% to 35% compared to full year 2016, coupled with gradually improving adjusted EBITDA as a percent of sales. We now expect full year 2017 growth to be at the high end of that range and for the trend of incremental sequential improvements in adjusted EBITDA as a percent of sales to continue through the second half of the year.

One last comment before we turn to Q&A, and this one on a more personal note.

It's always been my intention to retire at 65, and I'll be 65 next April. By then, I will have served on the Albany Board for 22 years and as Albany's CEO for 12 of those years.

The board has known for quite a few years about my desire to retire at the normal retirement age and has planned accordingly, late last year established a search committee, which developed a profile for my successor. And then after a competitive process, the board selected Russell Reynolds Associates to assist in conducting a comprehensive global search. We are very encouraged by how the search is proceeding. All signs point to an impressive slate of candidates.

While the precise timing for this kind of process is always uncertain, the board expects to be interviewing finalize -- finalists this autumn, and we could be ready to announce my successor late this year or early next year.

Once our new CEO joins the company, I'll stay on the board for a transition period to ensure an orderly, successful handoff, and then I'll retire.

Speaking as both your fiduciaries and as your follow shareholders, the board and I are deeply committed to the success of this process. And we're confident about it, too. This company is in great shape, both businesses have momentum, are in the hands of strong management teams and are well positioned for the future and the search is progressing very well.

I'll provide an update on our next earnings call, but for now, I want to assure you that there's plenty of reason to expect that we'll execute this transition without skipping a beat in the Albany cash and grow journey.

And with that, let's go to Q&A. Julie?

(Operator Instructions) Our first question will come from the line of John Franzreb.

Joe, congrats and good luck. I'm glad to hear that you're sticking around for a little while, though.

Thank you, John. I'm sticking around to make sure this works, as I tried to suggest in the comments.

Good news.

I got a lot of stakes -- I have a lot of personal stake in this, as does the board.

My first question, I actually wanted to take this back a little bit to the 2 program write-downs. Could you discuss what happened there in some detail? And in addition, looking back at some of your other programs, are any of them running behind plans relative to your expectations, I don't know, a year ago?

Right. Okay. So let's -- the -- let's take the 2, the BR725 and A380. In the world of program accounting, when you have a fixed-price contract, you have to regularly model the estimated profit at completion of the contract. So typically, these contract blocks -- let's say you're a -- you've won a position on a program, likely F-35. Your contract progresses in blocks of 2 or 3 years. And so you do this sort of calculation over that known contract block. In the case of the BR725, that contract, which we've discussed in the past, is really for the life of the program, so at a much longer block of time. The A380 is a relatively long block. It extends into early next decade. And what you have to do basically each quarter is you have to model future estimated sales for the program, future estimated cost and cost trends. And based on that modeling, you calculate your future profitability. If in that exercise your modeling shows that the program is in a loss position for the life of the contract, so total profits are a loss for the life of the contract, you need to take a charge associated with all those future projected losses in the current period. And that's what happened with both of these programs. What changed is that for both programs, coincidentally, our estimates of future sales dropped dramatically because it now looks like the BR725 has a shorter life -- significantly shorter life than we had been anticipating and A380, there have been some very well-publicized reductions in projected production because there's just -- demand is very weak. So we had to redo our models with these lower sales forecasts, and that pushed both programs into a loss position, which led to the charge. With BR725, we had been observing and had expected to continue to absorb losses each quarter for quite a few more years before our models showed our costs low enough that, that program then started showing a profit. And if we look at the future profits and sum them over the shorter-term losses, that program looked, up until this demand change, to be a little better than breakeven. But in Q2 of this year and through the rest of this year and into next year, we saw $800,000 of losses in Q2 for BR, and we're expecting to continue to take those losses. A380, we were modeling as a break-even program. And then when the -- when projection of sales dropped significantly, that really changes everything. So that's what happened with those programs. Now -- and that's why we took those charges. When you look at our other programs -- and really, I think the -- what's pertinent here is programs that are subject to program accounting. And so LEAP is a cost-plus variable fee contract, so that isn't really pertinent here. Programs where we're going PO to PO aren't pertinent, but programs where we have a fixed-price contract over a fixed contractual period, we do program accounting. So F-35, Boeing fuselage frames, the Lockheed missiles, the CH-53K, the JSF, the F-35 LiftFan. And all of those other programs, every one of our key growth programs and key legacy programs, while there are always ups and downs in the modeling, sometimes for the good, sometimes in the bad, on balance, they're all pretty much on track. There are -- in some cases, the outlook looks a little bit stronger; in other cases, it looks marginally weaker. But they're basically all on track. And we don't see any other programs that are at risk for life-of-program losses.

Got it, perfect. And is there any lessons learned here that -- or is there just a risk of operating in the aerospace and defense market?

Yes, there's a big lesson learned, which we really have tried to apply to every new contract we've negotiated since we learned the lessons -- or the lesson we learned on BR725 is you can't -- when you sign a fixed-price contract, you better be prepared to live with it. And so if you're signing a contract for a program that is early in its life where the requirements are still not well defined and your capabilities relative to those requirements are still not proven, you need to build in large conservatism for those uncertainties, you need to have a possibility of escalation for inflation, and you can't be -- you can't go chasing new contracts for the sake of new contracts unless you really are confident about your cost estimates and your understanding of the customers' requirements. And we've really tried to apply that rigorously in every new contract we've taken on. The A380 was one we inherited with Salt Lake. We knew right out of the box that, that was a troubled -- that, that was going to be a troubled contract. We actually did make some opening balance sheet adjustments to write off what we thought was impaired -- some impaired inventory. And we thought this was a break-even program, but that was assuming better outlook for A380. So yes, it's -- in some ways, it's fortuitous that we got hit with BR725 early in the history of AEC because it's had a dramatic effect on how we think about contracts and contract negotiations. And we love getting RFPs on good platforms, but we're always trying to apply the discipline and lessons learned from BR. And in fact, on the -- when we looked at acquisitions and when we ultimately settled -- went hard after Salt Lake, it was because the -- as from what we could see of the most important growth in legacy contracts that they had won, the market demand was robust and the cost estimations were relatively reasonable. It was in the front of our brains.

Got it. Now on a more positive note, you've talked throughout how AEC's revenue growth in 2017 was going to be at the high end of its 25% to 35% range. From what I recall, though, that range was kind of a 2-year outlook, and you haven't applied anything on 2018. Are we borrowing some revenue from 2018 into 2017? Or is that growth sustainable into 2018 based on the rollout of those 3 contributing programs that you cited earlier?

No borrowing. This has nothing to do with borrowing from 2018. So the only way that our estimates for '18 could down a little bit is because the base that we're calculating from is going up higher than we thought. But basically, the -- we see '18 as another very strong growth year. And there's -- we haven't seen anything to move off of what we're estimating before.

Got it. And one last question and I'll get back to the queue. The increase in your EBITDA expectations for PMC, is that a function of the publication degradation slowing, the packaging growth exceeding what you might be modeling in the second half? Or is it your own internal cost takeouts? Can you walk us through why you're comfortable at the higher end versus the middle of the range previously?

Yes, yes, I think that's an important question, John. And it's not -- the publication grades are going to -- I mean, there's no reason to think they're not going to continue to decline at the kind of rate that we've been seeing. But as we've been talking about for several quarters now, it's a small enough percentage of our total sales that the impact is shrinking. I think one of the reasons that we're inching our expectation for the second half of the year forward is just we're seeing reasonable economic activity around the world right now. And particularly for packaging and secondarily for tissue but particularly for packaging, that is so tightly tied to economic activity. And if you look in Asia -- and when we look at our bellwethers -- let's take International Paper in the U.S. and take Nine Dragons in Asia. And you -- Nine Dragons is building -- once again building new paper machines. International Paper is performing very well, and a lot of their analysts are starting to talk about the impact of Amazon-type shipments on incremental sales for International Paper. So it's decent economic activity in North America, stabilizing in South America, Europe having decent economic activity, Asia having decent economic activity. All of those translate into incremental demand and growth, which makes us reasonably confident that we should be able to continue to offset those step downs in publication. Likewise, if you see incremental increases in demand, so -- a reasonably healthy GNP around the world, there tends to be less price pressure because there's just more demand to go around. So it's much more macroeconomic that we're seeing, coupled with good performance in the first half that leads to this incremental jump up in our outlook.

(Operator Instructions) And our next question will come from the line of [Mark Guzmaski].

I guess [Jimski] doesn't roll right off the tongue. Joe, first off, congrats on your announcement. I guess I'm not surprised since you've always done what you said, which has been very beneficial to us as shareholders...

Thank you.

And -- over the last 8 years since I've been a shareholder or we've been a shareholder.

Thanks, Mark.

So -- and I must say probably one of the most forthright CEOs I've worked with, so -- which leads me kind of to the question at hand, which is around your replacement. I just want to pick your brain in terms of the skills that you think the next CEO is going to need. I'm -- obviously, a strong understanding of the manufacturing process has got to be important, I imagine, given what lies ahead for you guys. But also, curious as to what type of exposure these individuals had in the past. I mean, you have 2 different businesses. There are some similarities, but the end markets that they're serving is so different. I'm kind of curious what the -- what you and the board are sort of thinking at this point in time.

Well, the boards have spent a lot of time arguing about, thinking about the profile for my successor and very explicitly linking it to the -- what our strategy is and what it's likely to be going forward. And so the way they think about it is, number one, as would any board doing a search, they want somebody with strong leadership skills and very close to -- and right at the top of that list, it's high integrity. And then -- but when you get off the generic leadership skills to a specific link to our strategy and our strategic options going forward, it's -- nothing's going to surprise you. It's somebody who's going to be able to, a, help Machine Clothing, maintain it and extend its leadership for the long haul and its capability of good performance; b, make sure we execute on the current AEC growth trajectory; and c, and probably the most challenging and most critical to this, to define and then execute the next wave of growth; and finally, to be able to lead the company in those 3 fronts, preserve, extend the life of Machine Clothing, execute on the existing ramp, lay the foundation for the next wave of growth, do it in a way that clearly serves the long-term interests of the shareholders and that it's communicated to shareholders in a clear, concise fashion. So that's how they're -- that's their search profile. Now how that translates to particular candidates into that -- but I don't want to get specifically into particular candidates other than to say clearly, it has to be somebody with a strong industrial background. Clearly, there'll be strong candidates from the aerospace industry. I think the board doesn't want to overly constrain the pool and say only aerospace people, but -- so it'll almost surely include people beyond the aerospace industry, but it'll be a mix.

Okay. And maybe just one kind of operational question.

Sure.

In terms of AEC, incremental margins, has that changed at all? We've got to -- you've walked everyone through the incrementals and how we step up. But just kind of -- any change to that?

No, we're feeling pretty good about the march to 18% to 20%. And for the reasons that I've talked about before, we -- if you just -- if we just manage SG&A correctly, and the SG&A leverages will get us most of the way there. But there's also plenty of opportunity to improve our gross margins.

And at this time, there are no further questions coming from the phone line.

Okay, we do have a few questions on the webcast. We have a couple questions from Tim Todaro at Rice Hall, the first question being the split in the charge between BR725 and A380 program, which I can provide. The BR charge was $10.1 million and the A380 charge was $5.7 million. And Tim's second question is to discuss more the organic growth at core AEC and the growth at the acquired AEC business in Salt Lake City and their respective margins.

Tim, thanks for the question. Really appreciate your weighing in here. Let me try to answer the organic growth question this way. The -- if you array the buckets of organic growth opportunities from largest to smallest from what we see today, I think it goes something like this. LEAP, #1. CH fits -- CH -- so that would be by -- in terms of your question, that would be core AEC. CH-53K, #2. Probably the new middle-of-market opportunity if it flies given that there's both opportunity on airframe and engine, #3. #4, F-35, both the airframe parts and also the LiftFan parts. So that's both Salt Lake, airframe; and LiftFan is legacy. #5 -- so LEAP, CH-53K, new middle-of-market, F-35. The fifth is really a cluster of other engine parts for other growing engines. That would be the one like the GE9X and another one that we've won or that we're actively bidding on. #6 I figure, the 787 fuselage frames. #7, Lockheed missile bodies. #8 is a cluster of opportunities in military and space aerostructures. #9, the waste tanks, which would be Salt Lake. And #10 are activities in diversification. And so from largest to smallest, those are the general categories that we're currently looking at. And you push it one step further, there's still additional growth potential on almost all of them beyond what we've projected to 2020. So LEAP, I mentioned there's still more demand. CH-53K, we haven't really built in the potential for foreign sales, which could be significant. Middle-of-market is all upside. F-35, we haven't really talked at all about the impact of spares. Once that fleet is flying, there's a significant demand for spare parts. #5, other engine parts, we are actively right now either expecting or responding to RFPs on -- or are working in development phase of 3 or 4 other engine parts. 787, #6, the fuselage frame, there's the potential for a little more content. Missile bodies, #7, there's a lot of potential for growth on -- as programs ramp up and as new versions of missiles get added. And then the military and space aerostructures is all pretty much upside. For example, the long-range strike bomber. Tanks, with every new Boeing program, we have a chance to bid. We're in a reasonably strong position. There's no guarantee. And it's, again, about margins and making sure you don't sign up for bad contracts, but there's potential upside there. And diversification is all upside. So we're -- that's why we feel pretty good about the organic growth potential of the business, what's locked in or what we're executing to for 2020 and then beyond. As for respective margins for the core AEC or legacy AEC and acquired AEC, we haven't differentiated between those. We've tried to be pretty consistent on saying our goal is 18% to 20% EBITDA margin by 2020, and we're marching incrementally progressively toward it and took another step, excluding the charge, in Q2.

Thanks for the questions, Tim.

We also have a question from Roger Rama at Cortina Asset Management. Could there be further write-downs on BR725 and A380?

Well, in theory, there could be. I mean, we've -- but it would -- we've taken the sale projections way down in those programs and have taken pretty large reserves against future losses. So it would have to be something else unexpected, some clear error that we've made in our estimates of our cost burn-down in each of those programs. But I wouldn't call that a very high risk.

Okay, we have no further questions on the webcast. Operator, we would like to go back to the call line for any questions.

Okay, we do have a question coming from the line of Gautam Khanna at (inaudible).

Yes, I was wondering if you could talk a little bit about where the big opportunities are for cost reduction on the LEAP engine within your manufacturing process. I know you have a big learning curve assumed over the next 5 years and just wanted to see, is it materials? Is it -- it's some internal debottlenecking? What -- where do you see the biggest buckets of opportunities?

Thanks for the question. It really -- at this point with the ramp that we're looking at, it is classic -- it's 2 buckets: it's classic learning curve efficiencies, which would affect labor efficiency and potentially material efficiency. So direct labor, material consumption. And then just given the very sharp increases in volume, there's fixed cost leverage. So it's exactly what you'd expect for a learning curve this deep.

And to that point, is there -- can you break out sort of the buckets of costs by their relative contribution today? Is it mostly material? Is it mostly labor? I mean, any sort of proportion would be helpful.

Well, we tend not to break those out, but we certainly do internally and we do with our customer. But I think if you view material as on the order of 25% to 30% of -- if -- first, approximation. If you went 1/3 material, 1/3 labor and 1/3 overhead, you're not far off. But that's a rough swag, but that's probably a pretty good way to think about this. And really a lot of composites. Material is a big component of cost in composites.

And within materials, how much -- like where do you think the buy-to-fly goes from where it is now? Do you think it's a 50% reduction over the next 4 or 5 years? Any sense for that?

Yes, you're going beyond what we've disclosed and can disclose. It's certainly something we actively work with, very close concert with our customer. But I think the best I can give you is that those learning curve efficiencies apply in all 3 categories and are very much in the front of our brains as we map out and express with confidence this journey from 10% -- a little over 10% adjusted EBITDA as a percent of sales to 18% to 20% by 2020. That's a big part of our story, right, the -- in LEAP, in the way you're thinking about it.

And we have a follow-up question from John Franzreb.

Yes, can you just talk a little bit about the CapEx spending next year and when you'll be through with this process and how the facility tooling and how that's working out right now?

Yes, the -- where we've -- what we've said is the 2 peak years for cash expenditures on CapEx are this year and next year. And that's the actual payments for capital expenditure. So the leading indicator that we see, and that is what new projects are we approving. And the new projects for LEAP are -- will come down fast in '18 as all 3 plants get close to being fully ramped. And then they'll be again lower in 2019. So we would expect new capital projects for the full company next year to actually be below that $80 million average that we've talked about and then the following year to be even lower. Cash spending will lag that because we're still making cash payments to vendors as the equipment is coming online. So '18 will probably be cash -- expenditures for CapEx will probably still be pretty close to what they are in '17. But then, as those projects that we approved in '18 decline, and then '19 cash expenditures should come down pretty fast in '19 and '20. As for how we're doing, by early next year, we're close to being fully equipped in Rochester and France, and we're -- we're then finishing off the equipping of Mexico. We're -- we will be producing parts in Mexico this year, the end of this year, the fourth quarter. They'll be just -- they'll be initial parts, but it will be in significant -- making significant number of parts for LEAP next year. So by next year, we'll pretty much in full production. And we won't be fully ramped, but we'll have 3 plants at full production and pretty much fully equipped. The caveat in all this always on CapEx is if some major new project comes along, which would be good news, CapEx spending would grow. But right now, we think the estimates that we've been giving, that average of $80 million over -- between '16 -- $80 million a year between '16 and '20, above the average in '17 and '18, below '19 and '20, that's still good, and that does take into account additional spending for incremental projects.

And I guess on the flip side, what are your thoughts about capacity in PMC during the current environment?

I don't -- I think we have the capacity we need to meet the demand that we project. The real issue is to make sure the capacity is in the right places, A; and then B is to utilize that capacity effectively. It's -- you never want to -- the cycle -- I think I've talked about so the cycle times are so short now -- the demand cycle is so short. Large percentage of the orders we get, we get in the current quarter. And so if -- so you always have to have a little flex to respond if there's an uptick in demand, and you don't want to overreact if there's a downtick in demand. Right now, one of the reasons that the margin in this business are so strong is because the management team has just done an outstanding job of balancing capacity with demand.

Okay. And I guess one last question. Can you give us an update on non-aerospace AEC initiatives in the programs?

Well, we're always probing. We're still probing automotive. We're probing a few other areas. I'll just give you one example. And it's just a probe, so don't get too excited by it. But one of the areas that we've always explored is armor applications. And we're still exploring it. There's still some interesting possibilities there. So that would be a second example.

Okay. And how is the automotive industry going?

It's -- we've -- we're getting a clear -- we've made clear progress on understanding what our cost performance curve looks like. And we're -- we continue to explore with OEMs, but we are not ready to pull the trigger on any project. We're also looking at some other potential applications, beyond crash-worthy structures in automotive. This is still, at this point, very much R&D modeling the behavior of our materials, exploring combinations of 3D, 2D in metals. And I'd say there's a lot of learning going on that we're not in a hurry to pull the trigger to an application because we just don't -- we don't think we've gotten far enough down the cost performance curve. But still, it looks like a very promising area of opportunity, but out there.

And at this time, there are no further questions coming from the phone line.

Okay, thank you, everyone. We really appreciate all the calls and the email, the questions coming in from the webcast as well. Thanks for the good conversation. We -- John and I have a busy schedule of investor conferences and investor visits for the remainder of the year, so look forward to meeting with many of you over the course of the next few months. And if we don't talk to you or don't meet you before our next earnings call, see you on the next earnings call. Thank you.

Ladies and gentleman, 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.