Albany International Corp (AIN) 2024 Q3 法說會逐字稿

Good day. And thank you for standing by.

Welcome to the Albany International third quarter, 2024 earnings call. At this time. All participants are in a listen-only mode.

After the speaker's presentation, there will be a question-and-answer session to ask the question during the session. You will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised to withdraw your question. Please press star 11 again. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today.

JC Chanani VP, investor relations and treasurer. Please go ahead.

Thank you, Brian and Good morning, everyone. Welcome to Organ International's third quarter, 2024 earnings conference call. As a reminder for those listening on the call. Please refer to our press release issued last night detailing our quarterly financial results contained in the text of the release is a notice regarding our forward-looking statements and the use of certain non-GAAP financial measures and their reconciliation to GAAP for the purposes of this conference call. Those same statements apply to our remarks. This morning today, we will make statements that are forward-looking and contain a number of risks and uncertainties which could cause actual results to differ from those expressed or employed. For a full discussion of these risks and uncertainties. Please refer to both our earnings release of October 30th 2024 as well as our sec filings including our 10-K.

Now, I will turn the call over to Gunnar Leland, our President and CEO who will provide opening remarks, Gunnar.

Thank you JC. Good morning and welcome everyone. Thank you for joining our third quarter earnings call.

I will provide an overview of our business performance. Rob will later discuss our final results in detail.

I'm pleased with the overall results of the quarter as we focus on operational excellence evidenced by strong results at machine clothing and our ability to generate free cash flow of 78 million a year today. Furthermore, our balance sheet is very healthy.

Turning to the EC adjustments announced earlier this month, we are addressing operational issues to stabilize production and to advance the ramp up of the programs at our Salt Lake facility. Our team is making good progress, leveraging support from our other sites.

Machine clothing revenues at 183 million grew year over year driven by our Heimbach acquisition, partially offset by publication grade globally and packaging in Europe.

In the third quarter, engineered fabrics delivered year over year growth.

Overall, the industry's secular growth trends remain in place for packaging, tissue and pulp.

In terms of geographies, North America remains a strong contributor. While Europe continues to demonstrate weakness. Overall, Asia is stable except for China which is experiencing some softness.

Our global order backlog remains stable. Turning to Heimo, our integration plan remains on track. We made progress on functional organizational integration this past quarter and the closing of our South Korea and Rochdale UK facilities is largely complete revenue has seen an impact from the overall weakness in Europe combined with the S AP implementation which has delayed some sales into the fourth quarter.

In our engineered composites segment, we recorded revenues of 115 million while our profitability was impacted by our previously announced the ac adjustments in our commercial markets. We have seen near term weakness in the leap and our other grow programs. Our defense business continues to grow primarily on the Ch 53 K and Jasson platforms. Though we have seen some near term reduction in the joint strike fighter program. This year, we expect recovery in 2025 and beyond. Our backlog is well over 1 billion and longer term. We continue to see growth in space and our other commercial programs with the leap program. We're monitoring the situation at Boeing but as previously announced at our second quarter earnings call and earlier this month, we have twice lowered our 2024 production plan. We're working with Safran on our 2025 production plan and we'll share that with you when it is finalized as part of our overall 2025 guidance.

Our long term fundamentals for the business remain strong and we have new operating leadership in place, all of which gives me strong confidence in the future of the segment. It's important to note that the updated margin profile of the business remains well ahead of our peer group overall. Our business fundamentals remain solid and I have my team in place. We have Chris Stone as a new leader at Albany engineered composites. Chris brings strong experience, display and strategic agility to the segments which will support our strong growth projection in Albany machine clothing. Melstein took over leadership after several years of being groomed to the role and will take his industry experience and strong business development capability into shaping the future of our machine folding segment as disclosed earlier due to the common material science of our businesses, Rob Hanson was appointed to CTO and is leading our overall innovation and R&D.

In order to capitalize on our significant investment in R&D, we recently hired Paul Watts to lead our new business ventures. Paul has experience from Boeing and Techron and will take new product through a gated process for addition to our businesses with all this change and momentum. We also plan on hosting an Investor day in the spring of 2025 to showcase the plans for the next five year period. And give analysts and investors the opportunity to hear directly from our new management team.

With that. I'll hand it over to Rob to provide more details on the quarter.

Thank you, Gar and good morning everyone.

I will review our third quarter results and then provide our outlook for the balance of the year.

Consolidated net sales came in at 298 million. Up 6.1% from the third quarter of last year.

Machine clothing, net sales of 183 million increased 9.9% versus the third quarter of the prior year driven by Haimo North American. Comparable sales were higher year over year and reflect the strength in that market. However, we were negatively impacted by continued weakness in Europe and mixed markets in Asia.

The S AP implementation at Heimbach has also provided a near term headwind as we transition to our new systems. Organic sales for machine clothing for the period declined 1% year over year, largely due to sales delays from the SAP implementation.

A ec net sales of 115 million were largely flat versus the third quarter of 2023 on a GAAP basis inclusive of a 16 million negative top line impact from the EEC adjustments in the quarter.

We experienced growth in our space and emerging platforms offset by lower sales elite and C 53 K.

I want to highlight that excluding the cumulative catch up impact our underlying sales on our CH 53 K program increased as we work towards ramping production to meet our customers needs.

Consolidated gross profit was 90 million down from 102 million in the prior year. Driven by the E AC cumulative catch up adjustment of 22 million excluding the E AC adjustment, our gross profit for the quarter would have increased to 112 million with a margin of approximately 36% in line with last year's results.

Machine clothing gross margin increased from 47.6% in the third quarter compared to 48%. I'm sorry, increase in the third quarter of 2023 to 48.6% in 2024. Marking the 1st year over year improvement since the Hanbok acquisition, the margin increase was primarily driven by reduced input costs excluding Habo machine closing gross margins increased approximately 270 basis points to 53.4%. Reflecting continued excellent execution.

We continue to make progress on our B immigration and are on track to meet our long term synergy targets A EC gross margin decreased from 19.7% in the third quarter of 2023 to 1.3% driven by E AC adjustments that were detailed previously to 22 million E AC cumulative adjustment. A A CS gross margin for the quarter would be 18.2%. A 156 point reduction from the prior year.

Net R&D expenses increased 1 million in the, in the third quarter versus the prior year remaining at approximately 4% of revenue G A expenses for the quarter were essentially flat. However, as a percent of revenue GN A has decreased from 18.5% to 17.5%.

Corporate expenses decreased half a million versus the prior year to 14.3 million.

The effective tax rate for the quarter was 6.6% versus 25.2% in the prior year. Mainly due to favorable discrete tax adjustments.

This discrete tax benefit is mostly attributable to the tro of the prior year estimated taxes and the release of a valuation allowance in the NON US jurisdiction to the positive evidence indicating that a full valuation allowance was no longer required GAAP net income attributable to the company for the quarter was 18 million compared to 27 million. Last year. The reduction largely due to the E AC adjustments which negatively impacted net income by 17 million.

GAAP diluted EPS was 57¢ per share in this quarter versus 87¢ in the same period last year. After adjustments primarily related to the hyb acquisition and other restructuring activities as detailed in our non-GAAP reconciliation, the adjusted diluted EPS was 80¢ versus a dollar or two in the same period last year, our E AC A cumulative adjustments negatively impacted our third quarter, diluted EPS by 55¢ per share.

Please note that our third quarter EPS also benefited from the timing of certain operating expenses which we expect to occur in the fourth quarter.

Consolidated, adjusted the dot was 54 million for the third quarter versus 65 million in the prior year period.

Machine, clothing adjusted E dot Including hyb was 64 million. An increase of 12% versus the prior year adjusted even dot Margins were 35.2% versus 34.5%. The prior year with the increase reflecting improved operations across the A EC adjusted even dow was 4 million as compared to 22 million in the prior year period adjusted even Dow margin at A EC was 2.1% of sales versus 19.3% in the prior year. A AC is adjusted even do excluding the E AC cumulative adjustments would have been 26 million or 19.8% of sales during the third quarter. Free cash flow is 32 million with positive operating cash flow of 47 million offset by capital expenditures of 15 million. This brings our year-to-date free cash flow to 78 million versus 25 million in the prior year.

Our balance sheet remains strong with a cash balance of over 127 million and 440 million of borrowing capacity under our committed credit facility net. Leverage is below one term.

Turning to our outlook for the balance of 2024. We are tightening our guidance for the balance of the year relative to the guide provided earlier in the month, we have narrowed our revenue guidance for both segments effectively leaving our midpoint similar to the to the guide we provided earlier this month. Our consolidated adjusted EBIT guidance is slightly higher than our prior guide and has also been narrowed.

It should be pointed out that our full year A Ec ebida guide translates to high team margins for the fourth quarter, reflective of the underlying strength of the business.

The midpoint of our adjusted EPS guidance is $3.20 a 5¢ increase from the prior guide.

We plan on providing full year 2025 guidance. When we announce our year end results, we will also provide longer term guidance when we host our Investor Day next spring. Now, I'd like to turn the call open for questions.

Thank you at this time. We will conduct a question and answer session as a reminder to ask a question. You will need to press star 11 on your telephone and wait for your name to be announced to withdraw your question. Please press star 11 again.

Please stand by while we compile the Q&A roster.

Our first question comes from the line of Peter Arment with Bayer. Your line is now open.

Yeah, thanks. Good morning Gunner. And Rob. And so can you give us your latest, latest updated thoughts on, on one that the Gulf stream contract that you talked about earlier this month, just, you know, kind of how that progresses from here. What's the latest and how does, how do we think about, you know, kind of revenue for next year?

The there's no real change on that contract or, or performance since our call a month ago. We're, we're putting effort on the, on the program with the, with the team that is there, engineering and working with Gulfstream to, to get to the, to the rate and and deliver a apart with less hours than we do today. So the effort is there, but there's no really, not really an update. I don't expect anything to impact our, our revenues for the program next year.

Okay. That's, that's helpful. And then in your, in your kind of, I guess, I don't know what you can say about the, the classified work of business that you've been winning. How does the, how does that look in terms of, you know, a revenue opportunity when we think about, you know, next year and beyond? I know you'll probably give a lot of details, you know, next spring at your investor day. But what's going on in the defense classified world for you guys?

Yeah, we, we are, we're very active in, in on the defense side and, and also with some commercial opportunities, I'm not going to get into details there and we're not announcing any specific deals this quarter. But but there's a lot in work, I see, I see a great opportunity for us going forward. The, the buildup of our backlog over the last three quarters is indicative, I think to what we're doing.

Okay. Appreciate it. And just one quick one, Rob on your guidance for, you know, A ECs Ebida for the year kind of obviously implies a nice step up. In the, in the fourth quarter, can you talk a little bit about some of the moving parts there and the confidence level around, around that, that Ebda?

Sure. Yeah, you know, we, we have a fairly high confidence level in our, in our guide, especially considering we're, you know, we're two months out from finishing the year. You know, what we've seen is a really good, you know, increase in volume in some of our more higher margin areas as well that we expect to see continued growth in the fourth quarter. We are, you know, controlling expenses as needed. So, you know, overall, you know, certainly with Chris on board and, and the team's focus on, on turning things at Salt Lake, we feel we feel good about the, the, the guide. I mean, that the implied margin range as, as I'm sure you did. The math here is, you know, 17.5% for the fourth quarter. That's the midpoint of our a ac guide. And, it's a good business. So we, we feel good about the, the profile.

Appreciate that color and I'll, I'll jump back in queue. Thanks.

(Operator Instructions)

Our next question comes from the line of Michael Caroli with True Securities. Your line is now open.

Hey, good morning guys. Thanks for taking the question. So just, hey, just to stay on last question, I mean, 17.5% is good, but I mean, these margins are trending down, you know, how, how should we think about the longer term trajectory? And you know, you're doing more defense classified work presumably, you know, that's first of a kind, you know, products or structures which always inevitably are going to carry design, development, engineering risk. So how, how can we be confident in these margins on a on a go forward basis?

Yeah. So I mean, of course, once, once we we'll give the 25 guide when we announce our year end results and we're planning on investor day. But Mike, I think what, what should give us a lot of confidence is a lot of the areas where we're seeing good levels of growth are in higher margin programs, especially on the commercial and, and you know, kind of emerging or advanced air mobility platforms and space. So, you know, those those are very good areas for us and, and you're absolutely right. We, we definitely have a focus on some defense work which you know, does provide in the right contract setting, you know, really good margin opportunity and predict and visibility. So we, we feel really good about the blend. I mean, we're definitely looking to have you know, visibility given our strong backlog on what the margin profile should look like and it, and it's going to come down to execution to, to your, I think to your point, Mike, right? We on the commercial and space and other programs we need to execute. And you know, we, we're definitely feeling good about where we're situated going forward.

Are, are these classified? Are they cost plus initially or did you bid anything in the more high risk from fixed price development or, you know, because I would, I would think if it's cost plus that would be a little dilutive as you kind of go through them at first.

Yeah, I mean, Mike, I mean, when when we're looking at these development programs, you know, we're very careful about the amount of risk we're going to share with our customers. You know, we, we will typically look for some level of self protection. So I I don't think, you know, we're putting our ourselves at very significant risk on these development programs. Like, like some others. So.

Okay. Fair and then just shifting gears to leap. I mean, you know, the, the output has been revised down now, you know, down 10%. I mean, that's the third time. Can you talk to maybe the, the, you know, the ramp trajectory? I mean, I know you're not going to give 25 guidance, but it seems like the overall ramp there is going to be lower than planned. And I mean, can you give us any sense of what, what kind of inventory in the channel you might have? I mean, it seems like there might be at least 200 ship sets, you know, based on, you know, kind of if you were tracking tightly with Saffron and how many revisions they've done this year? So a any color on, on the lead program you can give us.

Yeah. You know, we, we're comfortable with where we're at for the year and we are, we're working with, Saffron on our 2025 plan and there is a, there's a balance there, right. We, our, our reductions have, have fit with where Safron is. And we, we'll continue to do that. It's a tight relationship. We also know that there is growth in the future and, and we can't pull back too far and not be able to do the wrap up. So, so that's part of the balance as well. We're not going to to give guidance for for next year. But you, you can imagine that there is a balance there between maintaining the capability and the ramp up as well as minimizing the, the.

Inventory and, and Mike. And just one other thing to kind of keep in mind when, when we provided our leap guide for the year, we were, we were holding flat and that was against a backdrop of a 25% expected increase at the beginning of the year. And obviously, that's been ratcheted down as the situation of Boeing has unfolded during the year. But the relative impact to us relative to, you know, those expecting those 25% increases was much more modest. We have taken our estimates down but not. And you know, if you look at Safran's most recent earnings release, they were very clear to state that they, they understand the balance of their supply chain. They, you know, the the long term program is in excellent shape, the backlog is there. They, they want to be very careful not to damage the supply chain of which we're, we are a very important part of that.

Okay. Okay. Sure. Is the 600 million in ac revenues in 26. Still good.

Yeah, Mike, we're, we're, we're, we'll, we'll, we'll be providing long term guidance when we come out, you know, with our Investor day. You know, so, so let's let's wait until then.

Okay. Sure. Thank you. Good question. Fair question.

(Operator Instructions)

Our next question comes from the line of Jordan Lion with Bank of America. Your line is now open.

Hey, good morning. Thanks for taking the question again, looking at long term.

Good morning. I appreciate you won't give guidance on it now, but on the 787 NG nine X and NX, how are you guys thinking about the programs given?

We've seen this off Nissan, the seven and eight, the 707 X just got delayed and presumably those engines will also have an impact.

So 787, we expect the growth so they're not affected by the, by the strike and and there, there is demand there. So we believe that that's a good program going into into next year. There is a delay on nine X.

There's no no impact this year. And I think for next year as this is development and continued development of the engine, it minimal impact Jordan.

Got it. Awesome. Thank you.

(Operator Instructions)

Our next question comes from the line of Chigusa Katoku.

Oh, with JP Morgan, your line is now open.

Hi, this is Chigusa Katoku on for Steve Tusa. Thanks for taking my question. My first question is on Good morning. My first question is on free cash flow. Year-to-date. The free cash flow conversion has been pretty good improved over last year. But how should we think about conversion in 2025? And do you have any color on how it is by business? Does ac continue to be a user of cash versus a generator?

Sure. Now, great question. So yeah, the year to day conversion ratio is about 110% which is certainly probably a bit higher than we would expect over a very long term cycle. So but we are focused on it, I mean, cash flow has become a very critical focal area for us because it's, you know, what's going to drive our future growth. So as the release of the business, you know, we do expect ac they they were significant users of free cash flow capital last year. We're seeing some of that come off this year as as we are better managing our inventory, working capital balances at that business, but also at machine clothing. So I think, you know, going forward, you know, and the airspace side cash flow would tend to be a bit more volatile depending on the types of programs that we sign up for because typically early stage programs are a user of cash. So, but that's a balance that we're we're working on. I think what you should expect in from Albany consolidated is continued strong cash flow generation as we go out into the future.

Okay, great, thanks. And then shifting to MC, the margins were stronger than we had expected and you attributed it to operational execution. But can you elaborate that on that? And what's the right runway to think about as we head into 2025?

Well, II, I can start with that. I think it reflects the efforts that we're doing with the integration. It's not only affecting the improvements that we're getting from that you see at Heim, but also at the core, core business. And it's also just excellent execution and cost management by the team in a, you know, a little bit of an uncertain, uncertain time. So yes, kudos kudos to the team for, for performing at that level.

Okay. Thank you.

Thank you so much. And as a reminder, everyone to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced to withdraw your question. Please press star 11 again, one moment for our next question.

Our next question comes from the line of Gam Khanna with TD Cohen. Your name. Your line is now open. Sorry.

Yeah. Hey, hey guys, this is Jack Arison for, for Gotham today. Thanks for the question.

Hey, hey, Rob, just for Leap. Hate to go back to it but, but just to be clear, did you guys take production down incrementally more from your last update? Because I think you guys called it down modestly last quarter. Or, or maybe the 10 3 update, but, you know, since G took it down 10% now, just, just want to be, be clear for you guys for, for 24.

We, yeah, so, so we had a lower plan for the year than what was projected from both Saffron and G and then we took it down in the second quarter and we took it down again on the 3rd of October. We have not changed it since then.

Okay. And, and, and would you be willing to maybe quantify the sort of step change? I think you guys put some numbers around it last quarter.

Yeah, it was, it was very minimal. I mean, we're talking maybe a few million dollars jack from, you know, the second quarter to the October 3rd call pretty, pretty nominal.

Okay.

All right. Okay. And then just F-35. I know, maybe in your script, you talked about you, you discussed some softness there, expectations this year. But I guess like moving forward does the Lockheed sort of, you know, delivery restart? Does that help you guys at all? And, and I guess how far away are you guys from that? I think 80 million target you might have called out. Last Investor Day just wanted to kind of get the cadence of the growth trajectory there. Thanks so much.

We've seen a soft, softness. Through the middle of this year. And we expect that to come back, starting into, into next year for a joint strike fighter. How, you know, we're pretty far out in the, in the supply chain here. So that does affect us maybe to a lesser degree. But, but I expect the Trump's strike fighter numbers to be, to be steady in, in, into next year.

And Jack, I, you know, and we provided a view in 2022 on kind of what the potential was for F-35. And you know, we'll certainly update that again at the Investor Day. But you know, we, we, we believe in the program long term, the fundamentals remain intact. You know, the program, the lockheeds now that they've got the tech tech package three and up and running, That's all, they're all positive signs that we're seeing right now on F-35.

Awesome. Okay. Thanks guys. Appreciate it.

Thank you.

Thank you so much for your question.

I am showing no further questions at this time. I would now like to turn it back to Gunner Cleveland for closing remarks.

Thank you and thank you everyone for joining us on the call today. We appreciate your continued interest in Albany International. Thank you and have a good day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.