Albany International Corp (AIN) 2018 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 Tuesday, August 7, 2018, 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 Olivier Jarrault, our Chief Executive Officer, who'll provide some opening remarks. Olivier?

Thank you, John.

Good morning. Welcome, everyone, and thank you for joining the second quarter earnings call. We will follow a similar format of past calls. I will begin with an overview of the quarter. Then, John will take you through our financial results in more detail, after which I will provide an update to our outlook, and we will then take your questions.

Q2 2018 was a very good quarter for Albany International with strong performance across both businesses. Total company net sales increased 19% or 17% excluding the impact of ASC 606 and currency translation effects. Compared to Q2 2017, which included a $15.8 million pretax charge for revisions in AEC contract estimates, net income and adjusted EBITDA both increased sharply. Net income increased to $30 million while adjusted EBITDA grew to $62 million due to higher sales and improved productivity in both MC and AEC.

MC sales in the second quarter, excluding the impact of ASC 606 and currency translation effects, increased 8% compared to last year. The increase was principally due to global growth in sales for the packaging and tissue grades, more than offsetting a continuing but small decline in publication grade sales. A substantial amount of the sales growth was driven by North America, where sales increased across all paper grades.

MC gross margin was strong during the quarter, rising to 48.9%, a nice improvement compared to 48.3% in Q2 last year. The increase was principally due to higher sales and strong capacity utilization. Operating income and adjusted EBITDA both increased significantly compared to Q2 '17 with adjusted EBITDA improving to $58 million in the quarter.

Q2 was another strong quarter for AEC with significant growth in net sales, operating income and adjusted EBITDA compared to Q2 '17. Net sales, excluding the impact of ASC 606 and currency translation effects, increased 36%, while profitability continued to show improvement over last year.

The increase in sales was primarily driven by the LEAP program. Sales of fan cases, fan blades and spacers for LEAP engines, which represented about 49% of AEC Q2 2018 sales, grew 49% compared to Q2 '17, reflecting the unprecedented steep ramp-up of this jet engine program. Higher sales of Boeing 787 fuselage frames as well as F-35 and CH-53K components also contributed to the growth in sales.

AEC operating income improved to $4.1 million in the current quarter compared to a loss in Q2 '17, which included the charge for contract revision. Adjusted EBITDA also showed good improvement as it increased to $15.1 million in the quarter, or 16.2% of net sales, as a result of volume increases and productivity improvement. Excluding the impact of the Q2 2017 charge for contract revisions, AEC Q2 '18 adjusted EBITDA more than doubled compared to last year.

In R&D, our new product development activities, which focus on existing derivative and new technologies, and our process-improvement projects, which aim to optimize our operational performance across AEC, continued to progress well during the quarter. Our execution to-date on our major existing contracts along with anticipated new contract wins continue to provide the potential for AEC to reach annual sales of $475 million to $550 million in 2020.

The potential for AEC beyond 2020 will be based not only on executing on the continued ramp-up of existing programs on which we're already well established but also on increasing share or acquiring first-time content on ramping programs, while at the same time winning new contracts on future commercial and defense airframe and engine platforms.

The LEAP engine continues to be the preferred choice for single-aisle aircraft as evidenced at the Farnborough Air Show where new orders and commitments in excess of 800 LEAP and CFM56 engines were announced. This strengthens the already strong LEAP engine order backlog, which represents several years of production. It has also been reported that at least 1/3 of the A320neo family aircraft in the Airbus backlog do not yet have engines selected, providing, therefore, a deep reserve of additional potential orders.

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

Thank you, Olivier.

I'd 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 18.9% compared to Q2 2017 and (technical difficulty) both currency effects and the impact of the new revenue recognition standard, ASC 606. Also excluding currency and ASC 606 effects, Q2 MC net sales were up 8.2% compared to last year and up 2.2% year-to-date. AEC net sales, excluding currency and ASC 606 effects, increased 35.7% in Q2 compared to Q2 2017 and 34.7% year-to-date.

Turning to Slide 4, total company gross profit margin was 36% in Q2 compared to 29.3% in Q2 2017. Gross profit margin in Q2 2017 included a 7.3% impact from the $15.8 million charge related to revisions in the estimated profitability of 2 AEC contracts.

AEC gross profit margin was 13.5% in Q2 2018, reflecting higher sales and improved labor productivity. MC gross profit margin in Q2 improved to 48.9% as a result of higher sales and strong capacity utilization.

Slides 5 and 6 show net income and adjusted EBITDA by segment for the quarter and year-to-date. Adjusted EBITDA for the total company in Q2 2018 was $61.9 million compared to $30.6 million in Q2 2017, which included the impact of that $15.8 million AEC charge.

On a year-to-date basis through June, 2018 adjusted EBITDA for the total company was $112.9 million. MC adjusted EBITDA was very good in Q2 at $58.5 million, bringing the year-to-date total to $107.5 million, both results well ahead of last year. AEC adjusted EBITDA in Q2 was $15.1 million and $28.6 million year-to-date, a good improvement in profitability compared to the full year 2017.

Moving to Slide 7, earnings per share, we reported net income attributable to the company in Q2 of $0.94 per share compared to $0.03 per share in Q2 of last year. Q2 2018 earnings per share included a benefit of $0.13 per share for tax adjustments mostly related to the reversal of a valuation allowance in Europe. Excluding that item and the other adjustments noted on the slide for both periods, net income attributable to the company was $0.82 per share in Q2 2018 and $0.16 per share in Q2 2017. Once again, as a reminder, Q2 2017 included a $0.31 per share impact from that AEC charge.

Lastly, Slide 8 shows our total debt and net debt. Total debt increased about $4 million to a balance of $525 million at the end of Q2. That increase was mostly offset by a $3 million increase in cash, resulting in a small $1 million increase in net debt. Payments for all capital expenditures in Q2 2018 were about $23 million, reflecting continued investments in equipment to support multiple ramp-ups in AEC. We continue to expect capital expenditures to range from $20 million to $25 million per quarter through the second half of the year.

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

Thank you, John.

Now let's turn to our outlook. The strong performance in MC over the first half of the year places the business on track to exceed the high end of our expected full year adjusted EBITDA range of $180 million to $195 million. Assuming no significant changes in global economic conditions or currency rates, we currently anticipate adjusted EBITDA in Q3 and Q4 to be in the range of $47 million to $51 million per quarter.

We expect AEC to continue to perform well over the second half of the year. For the full year 2018, we expect the increase in net sales to end up closer to the upper end of the 20% to 30% range we discussed last quarter. And while profitability could fluctuate somewhat over the second half, full year adjusted EBITDA as a percentage of sales should show strong incremental improvement compared to 2017. Beyond 2018, we remain on track towards our goal of 18% to 20% adjusted EBITDA as a percentage of sales in 2020.

So in summary, this was a very good quarter for the company with outstanding financial performance in MC and solid sales growth with good profitability in AEC. With the strong year-to-date results and our expectation of good performance over the second half of the year, our financial outlook for both businesses for the full year 2018 is for improvement compared to 2017, at levels in line with or better than previously discussed expectations.

With that in mind, let's go to the line for any questions. Operator?

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

I actually want to start with Machine Clothing. The 8% organic growth year-over-year is kind of stellar, considering recent trends in that business have been flat to down for quite some time. Could you talk a little bit about what's driving that demand?

No -- yes, sure. I think -- John, I think with -- the best thing to do is also to not only to look at one quarter, second quarter only but really to look at our sales growth, if you will, for the first half of the year versus last year. So if you look at it like this, it's really a 2%, right, a 2% growth year-over-year, right, where we have seen in the first few months of the year the decline, if you will, in publication grades, PMC sales versus last year, really on the -- not as -- on the low side of the range, the 5% to 10% decline range that we have communicated you for the past few years, right? So lesser decline than expected, than what we were used to and also those declines more than offset by, as we have said already and we continue to say, a global increase in packaging grades and tissue grades PMC sales. Overall, netting 2%, right, for the full -- for the first full.

Now if you look at the PMC market, right, introduced more detail at the height, you could say that for our expectations for the year, right, the U.S. market roughly stayed stable due to packaging and tissue consumption grades offsetting decline in publication grades. Canada, as you know, continues to shrink, driven by the decline in publication newsprint production. However, Brazil is pacing upward.

If you switch to Europe, no news for you. I mean, the -- as you know, the European market continues to drop. One of the key factor or key reason is the fact that many -- several publication machines have been converted to packaging machines, but packaging machines consume less PMC, if you will, than publication machines. So we'll continue to see a drop in the European market.

Good news, Southeast Asia is growing as well as China as we've shared with you already. So that gives you a glance at the overall PMC market, [okay, for '18].

So would you expect the second half of the year revenue in PMC to be above or below the year ago?

Well, we'll -- I think that going forward, in the next 6 months, I continue to say from a sales standpoint that the increase in sales -- PMC sales in packaging and tissues will at least offset, right, the decline in sales in publication, right? And so we should see the second half of the year in line with that flat or in line with a little bit of increase versus last year. Okay?

Okay. And regarding GE components, you've bumped your expectations on revenues to the high end of that 20% to 30%. Could you just talk a little bit about, is it better than expected or faster than expected ramp in LEAP? Or is it other programs that are now ramping up faster than you probably expected in the beginning of the year?

Well, yes, I think it's a very good question. It's -- I think it's a combination of both, right? It's a -- as a result also, if you will, of our improvements in productivity across all the AEC plant. It's not only serving the LEAP engines but also plants serving the F-35 and the Boeing 787 or the CH-53K platform.

So as I had shared with you already when we met, you know that we've been deploying quite-strong operating systems in the aerospace vert in the past few months, which are starting to yield, if you will, some good improvement in terms of labor productivity, labor efficiency, operational effectiveness, I would say, of our key critical asset. As a result of that, we see, if you will, a nice momentum, a nice increase in our production, and therefore, our sales, right? So you saw it. You saw a 36% increase year-over-year in Q2. That follows a 33% increase we've in Q1 versus the previous year. And therefore, we feel confident, not only based on the growing demand -- steep unprecedented demand of the LEAP engine programs but also our ability to produce at a higher rate to be on the high range of the 20% to 30%, okay?

Next we go to the line of Ben Klieve with NOBLE Capital Market.

I'd like to piggyback quickly off of a couple of John's questions here. First on the MC side. Based on your comments about kind of looking at this from an overall first half level as opposed to looking at the second quarter by itself, did you have business get pushed from the first quarter into the second to deliver that kind of a growth rate?

Ben, this is John. Ben, I wouldn't really think about it as being pushed. As you know, sometimes with this business from quarter-to-quarter, you can get some timing and some other aspects. That's why we try to tend to look at it from a year-to-date perspective to really understand where we are from a sales growth perspective. So it wasn't really that it got pushed. It just happened that there was particular strength in the second quarter. And when you look at it over the 6 months -- for 6 months of the year, you kind of -- you get a better view of what the overall trend has been thus far for the year.

Okay. Yes, that's fair. And so then, I guess, based on that comment, and there wasn't any one new-customer large order, anything getting pulled in that really skewed that growth, that really was just kind of a timing issue of the business across the board just wasn't as strong in the quarter. Is that fair?

Yes. There's always -- there could be a particular customer with a certain activity that could drive strength or weakness in any given quarter, but there was nothing notable enough that I would consider significant to pull out for disclosure.

Okay. Perfect. And then on the AEC side, the -- curious if you can talk about the cadence of the ramp here for the second half of the year. I mean, based on first half results, the businesses would have to decelerate a bit to end up below 30% growth. Are there any programs that you're expecting to flatten out here in the second half of the year? I know you kind of touched on that with John. I'm just curious if you can kind of really hone in on any specific programs and -- on the build rates decelerating here?

No, actually, not at all. I mean, as you very well know, I mean, coming from the Farnborough Air Show, I mean, you very well know how strong and even stronger today the order book for the LEAP program is. I think it's before we bought into Farnborough, and the order book was about in excess of 15,300 engines, several years of production. You saw that -- you heard at Farnborough, the CEO of CFM reiterating and reconfirming the goal of 1,100 to 1,200 engines to be produced this year in '18, ramping up to 1,900 engines -- 1,900-plus engines in 2019. So really 800 CFM and LEAP-X orders' commitment plus the -- during the show. So definitely no weakness at all on the LEAP side, and you very well know that this all driven by the continuous increase, projected increase, confirmed again at Farnborough by both Boeing and Airbus in regards of the Boeing 737 MAX build rates and neo going from 52, as you say, or 50 towards -- to 57 or 60 next year. So from that standpoint, very good news, right, coming from the offshore. Nice growth, nice increase in build rates for single-aisle and for the associated jet engine LEAP program.

So now if you look at the other platforms where we have very nice position, very well-established position now, could it be Boeing 787, which, as you know, we produce frames, right, fuselage frames confirming an increase in -- an increase in build rate from 12 to 14 as we move on to next year, the F-35 programs and the CH-53K programs as well ramping up in the next few months. So very strong order book and no sign at all of any weakness. We, therefore, will keep on increasing, right, our revenue versus last year.

Well, very good. And let's kind of -- building off that with the high demand for the LEAP here, can you comment on any additional pressures you're seeing to increase your output beyond current levels? Is there any renewed interest in your customers that's squeezing a bit more juice out of you, given that demand?

Well, I mean, we are continuously ramping up, right? I mean, we've been doing it in Q1. In Q2, we'll keep on doing it. We have definitely pressure in the system to ramp up, particularly on the LEAP, but we've been able to demonstrate it. We have very finite capacity expansion plan. We are-- we keep on hiring employees, on training them. And by the way, our employees are becoming more and more efficient. So we're pleased, while tracking on a daily manner, the labor utilization, labor efficiency to see a nice improvement. Believe me, we track that on a daily basis and by plant. So definitely some pressure that we're very well used to, but we're delivering against that ramp. And as I have said before, I continue to feel and to demonstrate that the ramp is achievable.

Next we'll go to the line of Drew Lipke with Stephens.

Just starting on Machine Clothing. Maybe just looking at the gross margin performance in the quarter. I'm sure lot of the improvement was tied to just better volume utilization. But how should we think about some of the puts and takes as we look to margin performance in the back half of the year? And should we still expect gross margins to be, for the full year, kind of in line with the average that we've seen over the last 2 years?

Well, as you pointed out, I mean, very good gross margin in Q2 at 48.9%, a nice -- as you saw, a nice -- and just noted a nice improvement versus last year same quarter at 48.3%. The full year '17 was 47.5%. We -- while we could expect a little bit lower, right, Q4 gross margins, it will certainly not be to the same extent as you saw last year, and then we might send it to higher level, right? So I think we're going to have a very good year in full year gross margin.

John, any comment?

No, Drew, and the one thing that's important, too, when you're looking at the margin -- this is a business that has pretty high fixed cost leverage, works both ways. When you get the improvement in sales you're going to see some improvement in the margins. So you've seen that really -- if you look at it from a year-to-date perspective, a little over 2% increase in sales, a good margin.

Over the second half of the year, it tends to be a little bit lower than the first half for various seasonal reasons, and that usually -- again, that fixed cost leverage can work the other way. We can get a little bit of a drop-off. As Olivier said, we don't expect kind of that fourth quarter drop-off we had last year to that magnitude, but we'll probably have some. But I think the way we're tracking is to show some improvement over last year.

Okay. And then SG&A, you guys did a great job keeping costs down there as well. I mean, is this sort of the right run rate we should think about? Or is there anything one-off there? Or just any comments around SG&A, as we look to the back half of the year for Machine Clothing?

No. I think, we'll -- we're very -- monitoring, I would say, our overall SG&A costs, very detail on a weekly, monthly basis. That's something we really pay attention to, and we continuously look for ways to, I would say, optimize our organizational structure to lower our cost. So you can expect, going forward, this year-end or in the years to come to see us, John and I, very focused and the management, the overall management, be very focused on controlling those SG&A costs, right, and on keeping them stable. Okay?

Okay. Yes, and then same thing on AEC. I mean, great job on managing costs there. And Olivier, I know you're implementing your operating systems to kind of measure efficiency in scrap rates and labor productivity, and you called out labor productivity improvements this quarter. Can you just update us on how much of that is the systems that you feel like you put in place and kind of where we are on implementing that process and how we should think about maybe SG&A costs for AEC going forward?

No, absolutely. No, I think it's part of management managing the business, right? So yes, we are at the early stage after now 5 months of deploying across those AEC plants, say, standout operating systems coupled with, as I shared with you in the past already, of a very systematic discipline. It's all about discipline execution. It's about disciplined manufacturing and financial operational execution coupled with a daily follow-up with all our team, entire team, financial and operational team follow-up of our progress month-to-date versus forecast, both in terms of production but also in terms of yield improvement, in terms of critical asset effectiveness improvement, in terms of scrap and rework reduction and overall production.

So yes, we are taking -- we are, if you will, at the beginning of developing that system, developing also with the help of the financial group the right matrix that helps us monitoring how well or bad we're doing versus on a daily basis, right? So we're seeing some very nice influx, a very nice improvement, and it can only improve, right, and keep on yielding a better result as we move on throughout the year and next year. That's why I'm confirming our objectives of 18% to 20% EBITDA margin going in 2020. But very nice progress, and I'm very pleased with the way the team has been delivering and executing in the past 5 months.

(Operator Instructions) We go to the line of John Franzreb with Sidoti & Company.

A key competitor recently found themselves a buyer. I was wondering if you -- in Machine Clothing -- I was wondering if you guys could just address the competitive landscape there and how do you think that will play out now?

Yes, sure. Listen, I mean, Andritz, as you know about, which, as you just said, bought Xerium, so listen, Andritz is a good company, and this transaction will certainly increase, right, their presence in the global machine clothing market. That being said, way below our existing global industry leadership across the various segments of the Machine Clothing business, publication, packaging -- board and packaging and tissues, and towel papers.

We will -- we're the leader, as I said, global leader far away from anyone else, and we will stay definitely focused on providing superior value to our customers in terms of advanced technological solutions, helping our customers improve their productivity, decrease their maintenance costs, increase the effectiveness of their key assets. We'll stay extremely focused on improving our service levels in terms of -- our global service levels in terms of on-time delivery, lead times, and of course, very -- increase our awareness and willingness to basically improve 0 defect and yield 0 defect quality products, right? So definitely that's what we're doing.

In addition to that, we'll continue globally across our manufacturing footprint to drive process and manufacturing productivity savings, and therefore, as a result, we all know it was the MC team of Albany that we will maintain and even strengthen, I would say, our global position, global industry leadership position, okay?

Okay. And in your prepared remarks, Olivier, you kind of touched on the opportunity pipeline in aerospace. But there was talk in the past in the engineering component side of the business of exploring opportunities in the automotive sector. I wonder if you could kind of give us your thoughts about what that opportunity looks like in your -- now that you've been at the firm for a while?

Well, I mean, first, you know very well that we don't like to talk publicly about any potential strategic transaction. That being said, I mean, as the first part of your question, that being said, we'll always -- and we will always stay open, right, to any transaction in case they will provide very strong return, and of course, maximize the shareholder value.

Now I think your question was centered more particularly around automotive, and I think that, on the automotive side, I would answer you that I prefer -- we prefer right now to stay focused for growth really on the aerospace side. We have a lot of work to do there. There's a great market to be in. And I don't want for the time being to, I would say, to -- I would prefer to stay focused on our key markets being Machine Clothing and aerospace for the time being. Okay?

And our next question is from the line of Christopher Hillary with Roubaix.

I just wanted to ask as you're heading out towards your 2020 targets in aerospace and the success that you're having, could you help characterize where you see the next chapter of growth coming from, just given where the company's assets and footprint and expertise lie?

Yes, sure. I mean, as shared already by my predecessor, I think, that the -- listen, the 2020 objective of delivering, if we summarize around about $100 million of EBITDA in aerospace is a good, healthy and good target. We're going to wait and see how we finish 2018. We'll see if we should revise those targets. But, I mean, for the time being, I keep roughly that 18% to 20% of $475 million to $550 million, $100 million of EBITDA in '20 is a good objective.

Now looking, I guess, beyond 2020, one, definitely, there are 3 drivers of growth -- long organic growth, first one being to continue to execute on the ramp-up of the platforms on which we're very well positioned. You know that the CH-53K, you know that the F-35 and the Boeing 787 and even the single-aisle platforms and their engines will continue to grow past 2020.

Then we have second key lever of growth is to acquire -- increase the content on those platforms. I cannot -- both commercial and military. I cannot describe, of course, in details publicly what they are, but we're working on it, and there is potential.

And then there is also -- regarding existing programs, there is also -- there are several opportunities, which we're working on as we speak to acquire content, ongoing platforms on which we are not today, especially in Europe, which we're also working very closely on.

And then the third lever of growth beyond 2020 is really to win new contracts on the future, right, jet engines and airframe platforms, and of course, one of them that we have in mind, all of us, is the potential launch, right, of the Boeing NMA 797 and all the opportunities, if you will, that platform and its engine would offer to us in light of our competitive advantage and the mechanical properties and the weight reduction and the damage, the tolerance properties that are proven, in particular 3D woven RTM technology offers. So ample opportunities, if you will, past 2020. Once again, I'm talking about organic growth.

And we have no further questions. You may continue.

Thank you all for attending the call today. I really did enjoy speaking with you and look forward to meeting you in person in the future.

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