Albany International Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 7 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to Albany International's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. John Hobbs, Director of Investor Relations. Please go ahead, sir.

Speaker 1

Well, thank you, Norma, and good morning, everyone. Welcome to Albany International's Q3 2023 conference call. As a reminder, for those of you listening on the call, please refer to our press release issued yesterday afternoon Detailing our quarterly financial results contained in the text of the release is a notice regarding our forward looking statements and the issue In the use of certain non GAAP financial measures and their associated reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning. Today, we will make statements that are forward looking that contain a number of risks and uncertainties, which could cause actual results to differ from those expressed or implied.

Speaker 1

For a full discussion of these risks and uncertainties, please refer to both Our earnings release of November 6, 2023, as well as our SEC filings, including our 10 Q. Now, I'll turn the call over to Gunnar Cleveland, our President and Chief Executive Officer, who will provide opening remarks. Gunnar?

Speaker 2

Thank you, John. Good morning, and welcome, everyone. Thank you for joining our Q3 earnings call. I'm pleased to be here today on my first call as President and CEO of Albany International. The company has again produced very good results in the 3rd quarter with excellent operational execution and positive free cash flow for both the quarter and on a year to date basis.

Speaker 2

Before we get into the details, I'd like to take a moment to acknowledge Bill Higgins' steadfast leadership of Albany as President and CEO through the past several years. While he has retired from his role, he continues to provide guidance and counsel as a member of the company's Board of Directors. My transition has proceeded smoothly and Bill leaves a legacy of a great company with innovative proprietary technologies, Businesses that are performing well and a healthy balance sheet. The business segments each have impressive product quality and exceptional customer service. And all from experience, these elements are the foundation of excellent customer relationships, continued business opportunities and a sustainable competitive advantage.

Speaker 2

These factors weighed on my decision to join Albany. I spent my 1st few weeks getting more familiar with operations, traveling to numerous sites across the business, meeting with our team and having meaningful conversations at all levels of the company from the shop floor to the C Suite. Really spending my time focusing on the technology, operations and getting more familiar with the culture, Introducing myself as well as gathering impressions from our customers and the investment community. The company's technologies and track record of innovation Really strike me as strategic assets. The same underlying weaving technology is fundamental to the company's businesses And driver of ongoing technical collaboration and interchange.

Speaker 2

Within Aerospace, the push towards lighter weight, More environmentally friendly designs is the number one challenge to be solved for the next generation of commercial aircraft. Albany's proprietary composite technologies such as our 3 d woven composites are well positioned to play a role there. In machine clothing, it's clear from my conversations with that customers value Albany's industry leading Product Technology and Technical Expertise. In an industry that places a high value on operational reliability and operating efficiency, Machine Clothing's custom tailored and consumable belts are well earned reputation helping our customer make the most efficient use of their raw materials, energy and labor. I believe our company's culture and people are the key to success.

Speaker 2

Albany's operational metrics in safety, quality and customer service indicate to me a well developed operational discipline. I think of continuous improvement as a lifestyle, which I also see across Albany's operations. From my operations leadership I know how important on time delivery and quality are to manufacturing operations. Finding a supplier with Performance of Albany International is very hard and well as a customer that just makes you want to give them more business. That kind of execution is a great foundation for our long term and profitable business relationship and profitable growth.

Speaker 2

When you add the technology and innovation that we have to offer to all our customers, I think Albany International is an easy pick. Our challenge is to deliberately and strategically manage our growth, while not losing sight of operational execution and capital discipline that is foundational to the business long term success. Now let's look at 3rd quarter results We announced last night. The company completed the acquisition of the Heimbach Group on August 31st this year. So the GAAP results include 1 month of high end back operations and of course expenses associated with the transaction.

Speaker 2

The details are included in our press release. Rob will review these in more detail in his remarks. Heimbec operations added nearly $16,000,000 of revenue in the MC segment and reduced the segment's operating income by 500,000 We are reporting GAAP revenue of $281,000,000 up 7.9% year over year driven by sales Growth at AEC and 1 month of Heimbach results in MC. GAAP net income was $27,000,000 or 0 point $0.87 per share, up from the GAAP results of Q3 last year of $11,000,000 or $0.34 per share, which incorporated $49,000,000 of pension settlement charges. As expected, the high end back was slightly dilutive to GAAP EPS for the quarter, About $0.01 per share.

Speaker 2

Excluding the impact of the Heimberg acquisition, revenue of 266,000,000 Was about $5,000,000 or 2% higher than the Q3 of last year, driven by higher revenue at AEC. Adjusted EPS was $1.02 per share compared to $1.15 per share reported in Q3 of last year. Adjusted EBITDA, excluding Heimbach impact, was $63,000,000 or about 24% Sales right on the company's stated long term target. The Machine Clothing business continues to perform very well, particularly in light of challenging macroeconomic conditions in Europe and China. Excluding the effect of the Heimbach acquisition, machine clothing revenue of $151,000,000 was 2% lower on a currency neutral basis, while adjusted EBITDA, again excluding the effect of the acquisition This measure was $56,000,000 This translates to 37% margin.

Speaker 2

North American markets continue to report sales growth year over year, while sales declined in other regions of the globe. The Heimbach integration is underway and proceeding as planned. Our segment President, Daniel Habtenmeier and his expanded team Have been focusing on workforce engagement, ensuring operational stability and financial integration in these 1st few weeks. We have a clear line of sight into the cost savings and efficiency opportunities that the company previously announced and expect acquisition will become accretive to earnings and cash flow in 2025. The Aerospace Composites business had a very good 3rd quarter.

Speaker 2

Revenues of $115,000,000 were up 6% year over year on a constant currency basis. Adjusted EBITDA of $22,000,000 was up about 3 The business is well positioned and continues to win new programs, both commercial and defense from existing and new customers. This will collectively contribute to AEC's long term growth over the coming years. The company is executing well. It is in great financial health and it is well positioned with unique technologies and know how across the businesses.

Speaker 2

We are in an enviable position. We will continue pursuing continuous improvement across all of our operations. We expect to deliver the benefits of the Heimbach integration as planned. We're investing wisely today in technology development that will position the company to profitably grow well into the next decade. I'm excited about the opportunities.

Speaker 2

And with that, I will hand the call over to Rob to review their results in more detail and provide our updated guidance for the year. Rob?

Speaker 3

Thank you, Gunnar, and good morning, everyone. I will now turn to our Q3 results and then provide our updated outlook for the year. As Gunnar mentioned earlier, we are reporting GAAP net sales of $281,000,000 up 7.9% from the Q3 of last year. Excluding currency translation effects and the 1 month of Heimbach sales, revenue growth for Albany was 2% versus The prior year period, machine clothing net sales excluding Heimbach declined 1.5%. Higher sales in packaging and tissue product lines were Set by contraction across our other product lines, most notably in pulp and engineered fabrics.

Speaker 3

Compared to a year ago, European markets are clearly softer, while Asian markets have been mixed. The North American market continues to perform well with modest growth over the prior year period. Engineered Composite net sales of $115,000,000 grew 5.7% on a constant currency basis compared to the Q3 of 2022, driven principally by year over year growth on the LEAP, 787 and various space programs. This was partially offset by lower CH-fifty 3 ks revenues. Our CH-fifty 3 ks results from the prior year provide a difficult comparison for us As the last year benefited from significant amounts of non recurring revenue for the Helicopters AFF Transition Program.

Speaker 3

The CH-fifty three ks non recurring items largely concluded in Q2 of this year. So we will continue to see tough comparisons through the first half of next year. Our CH-fifty three ks program sales will grow as the program moves toward full rate production. The AAC Leap program generated $45,000,000 of revenue in the Q3, nearly $5,000,000 higher than the same period last year. We now expect full year ASC LEAP revenues to be up approximately $15,000,000 compared to the full year 2022.

Speaker 3

2023 LEAP revenues are higher than we had previously guided as we manage production efficiencies on the program. Our long term revenue target of $200,000,000 for 2026 remains intact. 3rd quarter gross profit for the company was $102,000,000 up $1,400,000 or 1.3 percent from the same period last year. Within MC, higher input costs and lower overhead absorption were offset by the incremental gross margin from Heimbach. Excluding Heimbach, Machine Clothing's gross margin was 50.7%, very similar to the 50.8% we reported in the 1st two quarters of this year and down about 100 basis points on a year over year basis.

Speaker 3

At AEC, gross profit expanded $1,300,000 or 6.2%. During the quarter, we recognized a net favorable change in the estimated profitability on long term contracts of $900,000 compared to a favorable change of $2,600,000 in the Q3 of last year. AEC's gross margin was 19.7% similar to the same period last year. 3rd quarter R and D spend of approximately $10,000,000 was largely unchanged from the prior year and Excluding the Heimach revenues represented about 3.5% of sales. 3rd quarter SG and A expenses were $52,000,000 up $15,000,000 from the Q3 last year.

Speaker 3

A number of factors drove the year over year increase. Machine Clothing SG and A increased $6,500,000 principally driven by Heimbach SG and A expenses and $2,300,000 from currency translation effects. AEC SG and A was $1,900,000 higher on increased incentive comp and personnel related costs. Corporate expenses increased $6,400,000 principally due to acquisition related expenses, CEO transition expenses, incentive compensation as well as IT investments in support of our CMMC requirements. GAAP net income attributable to the company for the quarter was $27,000,000 compared to nearly $11,000,000 last year.

Speaker 3

As indicated earlier, Heimbach reduced net income by approximately $500,000 GAAP earnings per share was 0 point 8 $7 in this quarter compared to 0 point 3 $4 in the same period last Steer, after adjusting for the impact of CEO transition costs, acquisition and integration costs, purchase accounting adjustments On this quarter's results and other adjustments detailed in our non GAAP reconciliations, adjusted EPS was $1.02 this quarter compared to 1 point 15 last year. Adjusted EBITDA of $64,700,000 declined $3,400,000 from the Q3 of 'twenty 2. Machine Clothing adjusted EBITDA was $57,500,000 or 34.5 percent of net sales. That is down about $1,500,000 from $59,000,000 prior year quarter. AEC adjusted EBITDA was $22,100,000 or 19.3 percent of net sales, up about $600,000 from last year's results.

Speaker 3

During the quarter, the company generated $45,000,000 of free cash flow. Cash flow from operating activities was $59,000,000 and capital expenditures totaled $14,000,000 Net cash consideration from HILOC was $133,000,000 We remain in a strong financial position with a cash balance of $172,000,000 and well over $300,000,000 of additional liquidity under our committed credit facility. We closed the quarter having refinanced our credit facility for another 5 years With a maturity into 2028 and we upsized the facility to $800,000,000 Our net leverage at the end of the quarter was a modest 1.3 times, providing us the flexibility to continue pursuing our long term growth strategy. I would like to now turn to our outlook for the full year. Please note that our full year guidance for the Machine Clothing segment includes 4 months of Heimbach operations.

Speaker 3

Please also note for modeling purposes, we will incur $5,500,000 of inventory step up for the full year 2023 relating to the transaction. The inventory step up will be complete by year end. Heimbach's estimated annual D and A including the impact of purchase accounting will be approximately $12,000,000 to $13,000,000 going forward. Machine clothing business conditions softened somewhat during the Q3. On a constant currency basis, we experienced demand growth in packaging and tissue product lines, while the other product lines were lower.

Speaker 3

Business conditions in Europe were clearly soft relative to the past few years, while Asian markets are mixed With the Americas growing modestly. Orders at the end of the quarter were lower than they were at the same time last year. We will have a full quarter of Heimlich operations in the Q4 and as a result expect revenues to increase sequentially and year over year. We are raising Machine Clothing's revenue guide to a range of $660,000,000 to $670,000,000 increasing approximately $50,000,000 including the estimated contribution from Heimbach. We continue our efforts to offset inflationary impacts through ongoing continuous improvement efforts and input cost management.

Speaker 3

As a result of the Heimbach acquisition, we are revising our adjusted EBITDA guidance Range from Machine Clothing to $215,000,000 to $225,000,000 As is typically the case, Machine Clothing's 4th quarter revenues and EBITDA results Will be modestly lower than the prior quarters. Turning to Engineered Composites, as mentioned earlier, we expect the AAC lead program to generate approximately And $15,000,000 more revenue in 2023 than we had originally guided. During the Q3, we stepped up 787 production. Based on this along with growth in smaller programs, we are raising our revenue guidance and now expect AEC revenue to be between 440,000,000 and $460,000,000 We are narrowing our AEC full year adjusted EBITDA guidance to $85,000,000 to 90,000,000 At the total company level, we are updating our 2023 full year guidance as follow. Revenue between $1,100,000,000 $1,130,000,000 up $60,000,000 Our guidance includes approximately $50,000,000 top line contribution from Heimbach Adjusted EBITDA between $238,000,000 $254,000,000 and effective income tax rate of 32% to 33%, implying an effective tax rate of approximately 28% to 30% in the Q4 of the year.

Speaker 3

Depreciation and amortization including Heimbach of approximately 75 Capital expenditures in the range of $85,000,000 to $95,000,000 GAAP earnings per share of between $3.02 $3.37 taking into account approximately $0.16 of dilution from the Heimbach acquisition, largely the result of purchase accounting. Adjusted earnings per share between $3.35 $3.70 The impact of Heimbach is anticipated to be Negative 0 point 0 $4 to 0 point 0 $6 in the balance of the year. With that, let's open the call for questions. Operator?

Operator

Thank you. Our first question comes from the line of Peter Osterholm With Chrous Securities, your line is now open.

Speaker 4

Hey, good morning. I'm on for Mike Ciarmoli this morning. Thanks for taking our questions. So first, just wanted to ask about the guidance around the Heimbach acquisition. With $2,000,000 of EBITDA assumed for the year, Seems to imply a margin of around 4%.

Speaker 4

So I was just wondering, are there any elevated cost pressures there you called out or any seasonality that is Impacting the margins in the early stages here?

Speaker 3

Sure. Yes, Peter, this is Rob. Good to see you on the call. Yes, so as it relates to Heimbach, We definitely are seeing some level of seasonality. And as we published in our materials when we announced the acquisition, Right.

Speaker 3

For the full year of 'twenty two, they were running about 9% EBITDA margin. So to see the Q4 roughly in the range of 5% is not unexpected. And as anticipated, we're working with the team and have a number of actions to really just Improve the efficiencies and the margin profile of the business.

Speaker 4

Great. Makes sense. And then just a follow-up I had on the EPS Guidance for the year. So the implied 4th quarter range would be $0.52 to $0.87 which just seems like a pretty wide range at this point in the year. So I was just wondering where are the biggest areas of uncertainty or risk that might drive the business towards the lower end of the range?

Speaker 3

Yes. Peter, that's a good question. The $0.35 range is really just a function of the math. If you look at our EBITDA guides by segment, right, we have about a $10,000,000 range for machine clothing, which is really also accounted for Heimbach, right. We just bought the business, so it's hard to know exactly what they'll deliver.

Speaker 3

And then it's $5,000,000 spread. So if you add those 2, you got a $15,000,000 Spread, which is really what translates to the $0.35 So in order for us to be at the low end, both segments would have to perform At the lower end of the range, which, while a possibility, it's certainly not what we're working towards. We have confidence in the operating team. I think what's more relevant here is to look at the mid range of the guide. And if you look at the mid range, we're at $0.70 And if you adjust the Heimbach impact of roughly $0.04 or $0.05 in the quarter, we're pretty much right on top of what we delivered last year.

Speaker 5

All right. Appreciate the color.

Speaker 4

I'll jump back in the queue.

Operator

Thank you. One moment for our next question, please. Our next question comes from the line of Ron Epstein with Bank of America. Your line is now open.

Speaker 5

Hi, good morning. This is Jordan Linas on for

Speaker 3

Ron. Hi, Jordan.

Speaker 5

So looking out towards next year, have you guys started to see any demand uptick from Safran for AEC?

Speaker 2

So we're not ready to guide for 2024. We are looking at a year where we have higher LEAP Revenue generation, and we expect to continue at that level.

Speaker 5

Okay. And then do you have a sense of how much they've burned through the excess inventory they've had earlier through the year?

Speaker 2

So inventory is a there will be inventory at our Facility and there will be inventory at Safran and there will be inventory at GE. And it's There will be some buffers at each location, and I don't have the details on that.

Speaker 3

Yes. Jordan, just one other thing. I mean, we typically go through an annual process with Safran. As we start thinking about Production volumes and demand levels for next year, we're not there. We don't have information for that.

Speaker 3

We'll certainly update The community as we get on our year end call, but certainly, we're working very closely with them to make sure that the entire chain is managed appropriately, So that our ultimate end customers get the product that they need to support the demand of commercial aircraft.

Speaker 2

Got it. Thank you, guys.

Operator

Thank you. One moment for our next question please. Our next question comes from the line of Pete Skibitski With Alembic Global, your line is open.

Speaker 6

Hey, good morning, guys. Hey, Pete. Good morning. Maybe start with 1 machine clothing. You guys mentioned some of the softness in Europe and that orders were down.

Speaker 6

I just was wondering, do you guys I mean, you are very global. Do you have a sense right now of whether the demand pull in PMC is Kind of bouncing along the bottom, if you will, or there's some concern out there, I think, that the macro is deteriorating, that maybe we'll be in Take your pick, a soft landing or a harder recession next year. Do you guys have any sense of kind of the way things are shaping In terms of the 3 major geographic end markets for PMC?

Speaker 2

And it is If you look at the 3 markets, it's kind of interesting because in the U. S, we're seeing growth. And in Asia, we're seeing mixed Markets, China seems to be up right now and then but Europe is definitely down. Where that takes us through Q4 and into next year is Not something we can predict at this point, but we're seeing Also a shift in the type of product, but I would say that we should expect Or in the short term now to be similar growth in the U. S, soft in Europe.

Speaker 2

And maybe we should look at China and see if that picks up.

Speaker 3

Yes. And Pete, just I think it's important to really To note that we've been very successful. I mean, if you look at overall demand across publications and some other grades, those have clearly softened. And what really distinguishes our machine clothing business is the ability to generate a pretty consistent level of gross margin Really through various different demand scenarios. So I think, Daniel and his team Have done a good job.

Speaker 3

So we'll manage the demand. I mean, this is one where the brand and product quality actually should hopefully provide us An advantage in a tough market.

Speaker 6

Yes, yes, it is cloudy out there, that's for sure. Okay. Maybe just one more for me, just switching gears, to CH-fifty 3 ks. Rob, I don't know if you could share with us, maybe I missed it, what Total revenue for the 53 ks was this quarter. And then I think so you'll be at 0 next year.

Speaker 6

I think you said that before in NRE For the 53, and I'm just wondering if we should expect, because I know Lockheed got a pretty sizable, I think either LRIP or production contract for CH-fifty 3 ks. So it seems like production volume should be up for you guys next year. I'm wondering if it will all Kind of equal out year over year if you're still determining that. Thanks.

Speaker 3

Yes. No, Pete, no, good question. And you're Correct. I mean, the NRE is pretty much going to run off. As we exit this year going forward, we're not expecting to see any notable NRE whatsoever.

Speaker 3

And then on a kind of full run rate operational basis, even this year, if you strip out the NRE relative to last year, we expect sales to be up on CHF53 ks In the mid teens or so. So we feel really good about where the program is trending. If you were to visit our Salt Lake facility, Right. We got the next the automation line. We just actually had a ribbon cutting, with Sikorsky on that line.

Speaker 3

So things are progressing really well for CAC to 3 ks. And as you said, the order book looks terrific. So this will be a good long term program for us.

Speaker 6

Okay, great. Thanks guys.

Speaker 3

Thank you,

Operator

On your telephone, please wait for your name to be announced. Our next question comes from the line of Jack Ayers with TD Cowen. Your line is now open.

Speaker 5

Hey, guys. Good morning. Thanks for the question here. And welcome, Gunnar. Great to have you.

Speaker 2

Thank you.

Speaker 5

Quick question, and I hate to go back to the Q4 sort of implied guide here. And If my math is right, just AEC specifically, I mean, are we kind of thinking Q4 is going to be down sort of High single digit, low double digit, sort of in the Q4 implied there With margins actually stepping up both sequentially and year over year, so the sales So sales down year over year sequentially, but margins up year over year and sequentially. I guess like what's going on there? And just The wide range, is that conservatism or just other moving pieces with sort of Leap, inventory like sort of just excess, just any color there would be helpful. Thanks.

Speaker 3

Sure. Yes. Jack, happy to help. So your math is correct, as we would expect. And we are probably being a bit conservative On top line at AEC, but we are going to see a couple of programs, volumes in the 4th quarter come off.

Speaker 3

So we're just trying to And as it relates to the margin, that's really a function of the shift in mix of programs that we expect during the quarter. As you can imagine, right, LEAP, we're running ahead. That will kind of cool off in the Q4 is our expectation. So, we are expecting to see a higher implied margin. There are some programs like 787 and others where the margin profile is Much better than LEAP, and we're seeing those filings pick up in the Q4.

Speaker 5

Okay. Okay. Thank you. And then just one quick follow-up on Heimbach. And I appreciate sort of the moving Sort of demand dynamics going on there, but Q4 implied sales of like $35,000,000 to hit the $50,000,000 for the year.

Speaker 5

I mean, if we run rate that, that looks like we're getting to like $140,000,000 What Is that the right way to think about that as we sort of roll that forward into 2024, Rob?

Speaker 3

Yes. No, I Yes. So the math once again spot on, Jack. But no, you really shouldn't be run rating Q4 sales In Machine Clothing and at Heimbach, that is definitely seasonally and I think it's probably even a bit more pronounced For Heimbach, more seasonal in the Q4. So if you look at what we delivered in 'twenty two for what Heimbach delivered It was about €160,000,000 and we're certainly working with the team to make sure that the sales volumes stay where they need to stay.

Speaker 5

Okay. Thanks, guys. Appreciate it.

Operator

Thank you. I would now like to turn the conference back over to Mr. Gunnar Cleveland, President and Chief Executive Officer, for closing remarks.

Speaker 2

All right. Thank you, Norma. And thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany And of course, if you have any questions, feel free to reach out to John Hobbs, our Director of Investor Relations. Thank you and have a good day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.

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