Albany International Corp (AIN) 2026 Q2 法說會逐字稿

Hello everyone.

Thank you for joining us and welcome to Albany International's second quarter 2026 earnings conference call. (Operator Instructions)

I will now hand the conference call over to Karen Blumquist, Director of Investor Relations. Karen, please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Albany International's second quarter 2026 earnings call. As a reminder for those listening on the call, please refer to our press release issued this morning 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 verbal remarks this morning. Additionally, our remarks today may reference our earnings presentation, which is available on the Investor Relations section of our website, albint.com.

Today, we will make certain statements that are forward-looking and contain a number of risks and uncertainties, which could cause actual results to differ from those expressed or implied. For a full discussion of these risks and uncertainties, please refer to both our earnings release of August 4, 2026, as well as our SEC filings, including our 10-Q and our 10-K.

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

Thank you, Karen. Good morning and welcome, everyone.

Thank you for joining our second quarter earnings call. Before providing an overview of our performance for the quarter, I would like to summarize our recent visit to the Farnborough International Air Show.

Over the course of the week, we had highly productive engagements where we met with leading aerospace and defense OEMs as well as government officials to discuss the growing demand for advanced composite manufacturing solutions. Notably, the Department of War requested time with our team to explore how our differentiated commercial capabilities, including autoclave processing technologies, can support faster production rates and lighter-weight solutions for critical defense applications, such as solid rocket motors and titanium replacement. Also, as announced at the show, AEC has been selected as a collaboration partner on the Aerospace Technology Institute's Advanced Wing Enabling Ultra Efficient Propulsion 2 project.

We are excited to work with Airbus and the other partners to apply our advanced composite technologies to help develop composite wing applications for the next generation single-isle aircraft. We will share more as the project gets underway. In addition, we continue to rapidly develop our high temperature ceramic matrix composite capabilities utilizing our advanced 3D woven and infusion technologies in support of solid rocket motors and hypersonic missile applications.

We will have exciting news to share in the coming months as we grow our collaborative partnerships and expand our facilities to support the significant opportunities on this front. Turning to our second quarter highlights, our performance reflects a more focused and disciplined operating model built around the actions we have taken over the past few years to strengthen and de-risk the business.

Across the company, our focus is on areas where we have a clear competitive advantage in industrial weaving and material science, which drive more durable, higher return growth. In the quarter, we delivered adjusted EPS that exceeded our forecast range despite modestly lower-than-expected consolidated revenue.

On an adjusted EBITDA basis, we achieved the strongest results we have had in the past two years. We executed well and profitability strengthened with good execution across both segments. We are now seeing the benefits of our refined operating model in engineered composites that is focused on our proprietary 3D woven components. Our major programs are continuing to ramp, we are winning new business, execution has improved and the portfolio contains materially less program risk. This is translating to stronger, healthier and more reliable growth.

Next, I would like to discuss the result by segment beginning with machine clothing.

Revenue for the quarter was $178.7 million. Underlying sales and volume were broadly consistent with our plan. However, we incurred additional downtime related to the machine we are replacing. To restore capacity on a permanent basis, we relocated a machine from one of our close European facilities to the US. The machine has now arrived on site. And the reassembly is underway, with completion expected by the end of the year. We expect this action to strengthen our production capabilities and support our ongoing efforts to recover lost volume and customer demand.

Excluding the effect of the machine downtime, demand trends are mixed across geographies. By region, China continued to show stabilization, while Europe remained a source of strength. In the Americas, volume was below expectations as we are seeing some moderation tied to customer facility closures and consolidations, lower inventory levels and a softer demand environment in South America.

Additionally, ongoing geopolitical uncertainty and elevated energy costs across the paper manufacturing value chain could extend the challenges affecting the region.

The situation remains fluid. And we are closely monitoring potential implications for demand and market conditions.

During the second quarter, Will and I had the opportunity to spend time in China with our incredible team there. We are encouraged by the focus on safety, operational excellence and the commitment to winning in a changing market environment. We still have limited visibility in the market, but are encouraged by more stable volumes in that region for the past three quarters. By grade, tissue and packaging demand remains favorable, particularly in Asia.

These areas of strength are partially offset by long-term secular decline in publication grades and softer pulp demand in South America. Adjusted EBITDA for machine clothing was $50 million, roughly flat with the prior year period. A stable demand, continued execution and benefits from integration activities largely offset the impact of additional equipment downtime and modestly lower volume.

Turning to Engineered Composites, revenue for the quarter was $150.8 million compared to $130.5 million in the prior year. The 16% increase was driven by higher production rates across multiple programs, including LEAP, Boeing programs and CH53K. As we work to scale on a strategic next-generation contract with a defense prime, the tooling which we anticipated receiving in the second quarter has shifted into the back half of the year. This shift cost revenue to be slightly lower than our expectations.

As an update on our strategic review, we are progressing according to our plan timeline and have received multiple indications of interest, while at the same time, our team's focus remains on executing for Sikorsky and supporting the efforts of the DOW. We continue to engage closely with our customer throughout the strategic assessment process, and we will ultimately make the decision that we believe maximizes value for our shareholders.

Looking ahead, we remain confident in the growth prospects for engineered composites. Demand across our core commercial aerospace and defense programs remains strong and we continue to see production rates built across multiple platforms. Missile demand also remains elevated and we are working closely with our customer to increase output within our current capabilities.

In addition, new programs continue to advance and represent important long-term growth opportunities for the segment, like the recently announced collaboration with AMP that combines their leading braiding capabilities with our resin transfer molding expertise to support current and next-generation aeroengine programs as well as a broad range of additional opportunities.

Taken together, we believe Engineered Composites remains well positioned for long-term growth as we scale higher value programs and increase new program categories and sales. As we look to the balance of 2026, our priorities remain clear. We are focused on disciplined execution, continued recovery in machine clothing, and scaling Engineered Composites around higher value programs where Albany has a clear differentiation. While the operating environment remains fluid, we believe the actions we have taken to strengthen the business are creating greater stability, improved visibility and a stronger foundation for profitable growth.

We remain committed to driving improved cash generation, investing in innovation and returning capital to shareholders in a balanced and disciplined manner. I would like to thank our employees for their continued dedication, as well as our customers, partners and shareholders for their ongoing support.

With that, I will turn the call over to Will to review the financial results in more detail.

Thank you, Gunnar, and good morning.

Before turning to the financials, I would like to remind you that a reconciliation of GAAP to non-GAAP measures discussed today can be found in this morning's press release.

Second quarter revenue was $329.5 million, representing a growth of 5.8% year-over-year. This increase was driven primarily by higher activity levels in engineered composites as key programs continue to ramp, moderated by a modest decline in machine clothing.

Adjusted EBITDA for the quarter was $57.8 million compared to $51.9 million in the prior year, reflecting a margin of 17.6%. The year-over-year improvement was driven by stronger profitability in engineered composites and continued strong margin performance in machine clothing, partially offset by lower machine clothing volumes. In machine clothing, revenue was relatively in line with expectations despite additional downtime of a machine in North America. However, demand remained mixed across the geographies we serve. We saw continued stability in Europe, signs of stabilization in China and assault of demand in North and South America.

In the Americas, customer consolidation and capacity rationalization actions taken by papermakers over the past year have reduced volume levels in certain markets. Adjusted EBITDA for the segment was $50 million with a margin of 28%. While lower volume pressured revenue, the business continued to deliver strong margins reflecting disciplined cost management, operational execution. And the ongoing benefits from integration and efficiency initiatives. In engineered composites, segment revenue was $150.8 million, which marked a quarterly record for the segment. Performance was strong across all of our major programs, but modestly trailed our forecast range due to delayed tooling for a next-generation contract with a defense prime.

Segment growth year-over-year was widespread across programs, including higher volume of LEAP, Boeing 787 and missile programs. Adjusted EBITDA for this segment was $20 million or 13.3% of sales, compared to $11.1 million or 8.5% of sales last year. The year-over-year improvement was driven by higher production rates across multiple programs, including LEAP, Boeing programs, CH-53K and missile programs, as well as improved operational execution.

Gross profit for the quarter was $107.9 million with a margin of 32.7% compared to 31.3% in the prior year. Higher consolidated gross profit reflects strong execution and cost controls in machine clothing, a favorable mix of aerospace and defense programs and the lack of EAC adjustments in the current year.

Operating income was $32.1 million representing a margin of 9.8% compared to 7.2% last year. The improvement was primarily driven by stronger gross profit. Interest expense increased to $6.1 million due to higher debt balances throughout the quarter. Other income was a net expense of $39,000 in 2026 compared to a net expense of $3.5 million in the prior year, primarily driven by greater stability in the US dollar. The effective tax rate for the quarter was 32% compared to 31.3% in the prior year.

Free cash flow was a net use of $14.5 million compared to a net gain of $17.8 million in the prior year. The year-over-year decrease was driven by inventory growth to support a ramp up in engineered composites, as well as an increased inventories in machine clothing to support continued deliveries to customers during the seasonal shutdowns in Europe. Capital expenditures totaled $11.9 million, focused on facility optimization and investments tied to key customer programs. R&D expense was $11.7 million, reflecting our continued commitment to innovation. We ended the quarter with $77.3 million in cash and $450.7 million in total debt, resulting in a net debt of approximately $373.3 million. Including revolver availability, we have approximately $427 million of available capital, providing flexibility to support ongoing investments and return capital to shareholders.

Turning to our outlook and beginning with machine clothing, the demand environment remains fluid and mixed by geography. We continue to see stable demand in Europe, signs of stabilization in China at current levels and softer demand in North and South America.

Given these trends and the impact of customer consolidation and capacity rationalization across parts of the paper industry. We now expect full-year machine clothing revenue to be slightly down compared to 2025. In engineered composites, we expect continued year-over-year growth supported by ongoing program ramps across both commercial and defense platforms. We also expect the timing of certain tooling shipments that move out of the second quarter to benefit the second-half of the year.

For the third quarter, we expect consolidated revenue in the range of $320 million to $330 million. We anticipate adjusted EPS in the range of $0.60 to $0.70. And an effective tax rate of approximately 31.5%. While we are taking a more cautious view of machine clothing revenue, we remain confident in the underlying margin profile of the business and our ability to manage costs while continuing to support our customers. Across the company, we remain focused on execution, cash generation and disciplined capital to points.

Now I would like to open the call up for questions.

Operator.

(Operator Instructions) Peter Arment, Baird.

Hey, thanks. Good morning, Gunnar, Will.

Thanks for your time.

Gunnar, could you maybe give us a little bit more of a high-level update on AEC? LEAP seems like it is synced up and performing well, but also want to try to understand some of the new defense program wins and how those ramp and also any color on the GTF contract win, which was pretty significant. Thanks.

Yes, good morning, Peter.

The ramp-up on LEAP obviously follow the ramp-up both from Boeing and Airbus and delivers that we are seeing of engines and you are seeing coming from Safran and GE. The ramp-up is significant. We are this summer moving to seven days a week, 24-hour operations across our three sites. And then we are improving our efficiency and output throughout the year. And we expect that program to continue to ramp and settle sometime late in 2027, depending on how the program.

Right now, we are looking at 2028 as a potential for 75 aircraft a month from Airbus, so we will assess that as well. Across the other programs, there is a continuing ramp on the commercial aircraft, the Boeing programs, whether that is tanks or the one piece frames. So it is a good challenge to have to continue to ramp and the team is executing well.

On our current programs for the defense, we have mentioned there are some new programs coming online. I can't really talk about that, but it is good business for us and new programs, both on aircraft as well as missiles. JASM, LRASM, we are continuing to ramp up. As we mentioned last quarter, we have Department of War visiting us in Salt Lake City and looking at our capacity and working through our prime there being Lockheed Martin on how we can ramp up. I think the last part of your question was on Pratt & Whitney, very excited to have the Pratt & Whitney contract on Gerd turbofan. It is a complement of resin transfer molded parts in the inlets of the two engine variants. We will be making that in Mexico. It is a significant. Portion or it is a significant addition to our portfolio and we are pulling up in Mexico and we will be starting production early next year.

Thank you for that. Just on Salt Lake, could you give us a little more of expectations on.

Where things stand on the sale, obviously going through the process and obviously it is been hard to handicap from here, but how is that process going and when do you think you will have a resolution?

The process is going exactly to the plan that we are we we had laid out. We had a multitude of IOIs received, we have down selected to eight final candidates. That tells you the interest in the site. At the same time, I want to remind everyone that this is a strategic review of the site and we are continuing to work with Sikorsky. In the end, we will make the decision that is best for our shareholders.

But clearly, we are going through the sales process and it is moving at the rate that we expected with as we are finalizing the bidding in the coming weeks.

Andrew Steinhardt, Bank of America.

Good morning. This is Andrew on (Viran). Thanks for taking our questions.

Good morning.

So we are seeing strong demand in engineered composites, and it sounds like that momentum was reinforced in the field based on the talks you guys had at Farnborough.

I guess thinking longer-term, how much growth in engineered composites can be supported with current capacity? If demand for critical materials composites stays elevated, is investment in production going to be necessary to support elevated demand?

Right now, what we are seeing in the immediate future, we can use our current. Facilities and equipment. But you are right, with the demand that we are seeing, there will be investment in the short to medium term to meet that demand. But I do not expect it to happen in a very short time frame.

As these come to fruition. There are right now, there is so much demand that if we do win it all, that might change in the next year. But like I mentioned, this is a good challenge to have. We have a great team and we have expansion opportunities within our current sites.

Got it. I appreciate that color. And I guess just to follow-up in a little bit of a different direction here, can you talk a bit about the equipment failure that impacted the machine clothing business? How long was it down? What caused it?

Any color if you are able to quantify the financial impact? I would appreciate it. Thanks.

I would say it drove a modest impact for the quarter and as we stated, the miss in revenue for the quarter was completely attributable to that machine failure. We are in the process of replacing that equipment.

The team is performing well and we are planning to catch up that loss volume by the end of the year. So a modest impact, team recovered from it. It wasn't down a long period of time and we will catch up the volume by the end of the year.

Got it.

Thank you. I will pass it back there.

Alexandra Mandery, Truist Securities.

Good morning, Gunnar, and thanks for taking my question. So in machine clothing, can you provide more color on the cyclical declines in America, including maybe what products are being impacted and when you expect demand to pick back up?

Good morning, Alexandra.

What we have seen in the US late last year and the beginning of this year was an adjustment by the papermakers to what they saw in demand. So they took out some of the older equipment and we were affected by that, which is what we are seeing through this year.

The result of the papermakers taking that supply out is that they are now, if you are following several of the papermakers, they are increasing pricing. So it was a good decision by them to move to consolidate and curtail. What happens for us is that there is a lull between when these machines are down and we get new belts on the new equipment.

The good part and what we see for future is that these machines need to run at very high speed where we have a competitive advantage. When they run at high speed, it is more likely for the paper makers to make money. And so as we look at the outlook past. The next quarter towards the end of fourth quarter and into next year, we see a pretty healthy order backlog. So that means we are getting back into these newer and more advanced machines, which is what we expected, but we are seeing that lull as these curtailments happen late last year and beginning of this year.

And I would just add to it. So we are obviously taking a prudent view of our outlook for Q3, but we are maintaining our pricing. We are maintaining our cost discipline. The margins are still strong in their business.

We are continuing to add value to our customers. And so overall, we are happy with the performance. But as Gunnar mentioned, we are just adapting to the market outlook and what's taking place in the market as you think of the Q3 guide.

That makes sense. And then can you provide any updates on the overcapacity issue in Asia in terms of visibility? Has it increased there?

I think in Asia, they havenhave nott done what was done in the America. That is where they have taken out.

In fact, we have seen growth. There is some growth in tissue, which makes a lot of sense. That is a strong place where we have a strong position as well. The overcapacity is being handled, but it is being handled with lower speeds basically on the machines.

And if you look at the paper makers there, they are not making money or breaking even. So the lower output is going to last for a while until. Until the demand is back. And we mentioned a little bit that is probably a little geopolitical as well, but we expect it to come back to a healthy level over the medium term. That is why we are saying we are still uncertain about when Asia is going to come back. So it is still moderated compared to what we saw, for example, one year ago or two years ago.

Chigusa Katoku, JP Morgan.

Hi, good morning. Thanks for taking my question.

I just wanted to ask about your progress on the negotiations with Lockheed and also the.

Maybe you discussed it earlier, but just more color on, I think right now, the asset isnis nott held for sale, so you expect to divest by the end of this year, but any progress there? And are you leaning more toward divesting or renegotiating with pocket and keeping the asset?

Good morning, Chigusa.

The process is continuing, it is on track to our schedule.

We have down selected on the sales process to eight and that progress, that is going according to our plan. And of course, we are continuing to talk to Sikorsky as part of our assessment of the site and the viability for us to keep it.

We are getting close to being able to announce something, but we are going to let the process play out and we will make a decision that is what's best for our shareholders and the best return. So we are doing the math or Will is doing the math and making sure that we are making a good decision here.

So it is progressing to plan, Chigusa.

All right, great, thanks for that. And then maybe you addressed earlier, I am sorry if I missed it, but what kind of impacted the free cash flow? I think there was an outflow this quarter versus seasonally it should be an inflow.

Yeah, I mean, the best way to think about it is it is related to working capital timing. As we stated in Europe, we are operating a stronger overall demand backdrop and build excess inventory in the region with their seasonal shutdown. And so we expect as we end Q3 and move into Q4, our cash flow is going to be consistent with what we have done historically.

Q2 was just really working capital timing.

Okay, thanks for the caller.

(Operator Instructions)

There are no further questions at this time. I will now turn the call back over to Gunnar 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.

This concludes today's call.

Thank you for attending. You may now disconnect.