Albany International Q2 2023 Earnings Call Transcript

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July 27, 2023

There are 8 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Albany International Corporate 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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Hobbs, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Jacinda, and good

Speaker 2

morning, everyone. Welcome to Albany International's 2nd quarter 2023 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 associated reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning.

Speaker 2

Call, today we'll 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. For a full discussion of these risks and uncertainties, including a reconciliation of non GAAP measures we may use on this call to address comparable GAAP measures, please refer to our earnings release call, we will begin the call to discuss our financial results and financial results. Now, I'll turn the call over to Bill Higgins, President and Chief Executive Officer, who will provide opening remarks. Bill?

Speaker 3

Thanks, John. Good morning, and welcome, everyone. Thank you for joining our Q2 earnings call. We are pleased to report another strong quarter of results With revenues of $274,000,000 up nearly 5% compared to the same period last year and solid execution across our operations. GAAP EPS of $0.86 was down from last year's $1.25 impacted by non operational items that Rob will cover.

Speaker 3

Adjusted EPS was $0.90 and adjusted EBITDA was nearly $65,000,000 in the quarter. As a result, we finished the first half of the year in good shape time, we're raising our guidance for the full year. The Machine Clothing segment continues to deliver healthy results with revenue growth of 5.6% on a constant currency basis, gross margin is in excess of 50% and adjusted EBITDA margins exceeding 37%. Our Machine Clothing team has done an outstanding job navigating the challenges posed by macroeconomic headwinds in Europe and China, inflation and the effects of the war in Ukraine. Since the end of 2022, trends in Machine Clothing's revenues, operating profit Adjusted EBITDA have all been positive and now exceed our pre pandemic performance.

Speaker 3

These impressive results are testament to the effectiveness of disciplined operating model, the consumable nature of our products and our well earned reputation as a supplier of mission critical paper machine clothing products with exceptional reliability and value to our customers. Last month, we announced our agreement to acquire the Heimbach Group, A manufacturer of machine clothing based in Germany. Heimbach is a great fit and creates opportunities to provide our customers with even more value. Geographically, Heimbach is strong in Central Europe, which complements our Northern European presence. The addition of Heimbach's Asian operations will augment our presence and faster grow in Asia as well.

Speaker 3

Heimbach and Albany each have long proud legacies in machine clothing, and we look forward to working with the Heimbach team and leveraging the best of both companies to add value for our customers and shareholders. We expect the transaction to be accretive in both earnings and cash flow in our 2nd year of ownership. And we have good news this morning. We just heard from the regulatory authorities that we've been approved to proceed with the closure of the deal, And we're going to move towards closing. So we as we've said before, we expect closing to be in the second half of the year.

Speaker 3

We're pretty excited on the news we received this morning. The Engineered Composites segment achieved top line growth of approximately $5,000,000 in the 2nd quarter, up nearly 5% compared to Q2 of 2022. Growth in the quarter was driven by higher revenues from commercial programs and from some smaller programs that we've brought on over the past 12 months. Our Aerospace team continues to ramp up the CH-fifty three ks production line and is doing a great job managing supply chain delays and supporting our customers. Adjusted EBITDA in this segment was about $21,000,000 relatively flat with the Q2 of last year.

Speaker 3

AEC continues to do a great job for hampered by supply chain delays and other challenges. It gives our customers confidence in our ability to take on new business either through more content Our aerospace team did a great job at the Paris Air Show and our business team Our business development teams, our engineering teams had a full slate of meetings to discuss new opportunities for growth. In many ways, it built on the momentum we achieved last year at Farnborough. Finally, I can report that our Board of Directors is working diligently on my succession. The CEO search process is well underway.

Speaker 3

I'm committed to a smooth transition working with the Board and the management team to continue executing our strategy and doing a great job for customers and shareholders, And we'll let you know as soon as we have an announcement to make. So with that, I'll hand the call over to Rob.

Speaker 4

Thank you, Bill, and good morning, everyone. My first full quarter with Albany has been tremendous. I visited a number of our locations in both the U. S. And Europe and I'm impressed with the very visible operational excellence across both businesses.

Speaker 4

The culture and our people are very inspiring and I'm grateful for the opportunity to be on the team. We had another great quarter and continue to execute on our growth strategies, including the recently announced Heimbach acquisition. As Bill mentioned earlier, Heimbach is an excellent fit for us and creates real opportunities for significant value creation for our shareholders over time. Pro form a for the Heimbach transaction, our financial leverage will remain very modest with net leverage slightly above 1x EBITDA As we plan to fund the transaction with available overseas cash, we will continue to have considerable room under the financial covenants in our revolving credit facility to invest in organic and inorganic opportunities. I will now turn to our Q2 results and then provide our updated outlook for the year.

Speaker 4

For the Q2, total company net sales were $274,000,000 an increase of 4.9% compared to the prior year period. Constant currency basis, net sales increased 4.8% year over year. In Machine Clothing, Also adjusting for currency translation effects, net sales grew 5.6% compared to the same period in 2022 With higher sales across all paper machine clothing product lines, somewhat offset by contraction in engineered fabrics as nonwoven demand has returned to its lower pre pandemic levels. Engineered Composite net sales after adjusting for currency translation effects grew by 3.8% compared to the Q2 of 2022, driven by growth over a number of programs, including some recent wins. This growth more than offset the temporary client, CAH53 ks, as we transition from non recurring development efforts last year to recurring production in 2023.

Speaker 4

The AAC Leap program generated revenue during the Q2 of about $45,000,000 approximately $5,000,000 higher than the same period last year. While our first half LEAP revenues were above the prior year, that is mostly timing and we expect our full year LEAP revenues to be generally flat call, when compared to 2022. 2nd quarter gross profit for the company was $103,000,000 an increase of about 2% from the comparable period year, the overall gross margin declined 100 basis points to 37.5 percent of net sales. This was caused primarily by higher input costs lower absorption and machine clothing combined with program mix impacts and a $1,900,000 unfavorable change in the estimated profitability of long term contracts conference call, 2nd quarter selling, technical, general and research expenses increased from $50,000,000 in the prior year quarter The $57,000,000 in the current quarter. There were a number of factors driving the year over year increase.

Speaker 4

We saw a negative FX impact of professional services related to business development activities as well as expenses related to the Heimach acquisition. We also had increased IT spend to support our growth and to enhance security. Other income and expense in the quarter netted to income of $4,500,000 compared to $7,000,000 of income in the same period last year due to lower foreign exchange revaluation gains. The effective income tax rate of 42.8 percent this quarter was unusually high due to discrete tax items, driven by withholding taxes resulting from international tax planning as well as a provision for international tax audits. As we look at the back half of the year, we expect the tax rate to normalize to our historical levels Absent unusual tax items.

Speaker 4

Net income attributable to the company for the quarter was $27,000,000 compared to $39,000,000 last year. GAAP earnings per share was $0.86 in this quarter compared to $1.25 in the same period last year. After adjusting for the impact foreign currency revaluation gains and losses, restructuring expenses, acquisition and integration expenses, adjusted earnings per share was $0.90 quarter, down from the $1.06 reported in the Q2 of 2022. Adjusted EBITDA of $65,000,000 declined approximately $1,000,000 from the $66,000,000 reported in the Q2 of 2022. Machine Clothing adjusted EBITDA was $59,000,000 or 37.3 percent of net sales, up from $58,000,000 or 38.2 percent of net sales in the prior year quarter.

Speaker 4

AEC adjusted EBITDA was $21,000,000 or 18.2 percent range of net sales approximately flat with last year. During the quarter, the company generated $12,400,000 of free cash flow defined as net cash provided by operating activities less capital expenditures, which for the quarter totaled $18,700,000 During the quarter, we experienced some working capital investment that we expect to unwind in the second half, leading to improved cash flow performance in the second half of the year. I would like now to turn to the outlook for the full year. Overall, we are pleased with our first half performance and are raising our guide for the full year. Machine Clothing delivered another exceptional quarter.

Speaker 4

Overall business conditions were similar to those we experienced in the Q1. On a constant currency basis, we experienced demand growth in all paper machine clothing product lines. And as we noted last quarter, our return to lower pre pandemic levels in our Engineered Fabrics business. Given typical vacation and winter holiday impacts in the second half of the year combined with softer markets this year in Europe and Asia, we expect revenue in the second half of twenty twenty three to be modestly lower than the first half. Take into account our strong first half, we are increasing Machine Clothing's revenue guide By $20,000,000 on the low end $10,000,000 on the high end to a range of $610,000,000 to $620,000,000 for the year.

Speaker 4

As we've mentioned for the past couple of quarters, inflationary pressures are easing. And for some raw materials, we are even seeing price reductions. However, in general, raw material prices remain above pre pandemic levels. Despite the easing price pressure, it will take a few quarters to see this flow through our results As we work through the raw materials acquired in prior periods, we continue our efforts to offset the inflationary impact through ongoing continuous improvement efforts and input cost management. Logistics have largely normalized with both better pricing and better availability.

Speaker 4

We expect Machine Clothing's adjusted EBITDA margins to be in line with our long term expectations of mid-30s percent for the full year. As a result for 2023, we are narrowing our guidance for machine clothing pulling up the bottom end of the EBITDA guide by 5,000,000 We now expect machine clothing adjusted EBITDA to be between $210,000,000 to 225,000,000 Turning to Engineered Composites. Our outlook for the year improved with some recent new business wins. We are still expecting full year revenues for our 2 largest programs, LEAP tooling and NRE work on the acquisition, so revenues on that program will grow as the production ramps towards full rate over the next few years. Take into account the performance so far this year, we are raising the revenue guidance by $10,000,000 We now expect AEC revenue to be between $430,000,000 450,000,000 Our AEC full year adjusted EBITDA guidance of $82,000,000 to $92,000,000 is up $2,000,000 and implies margin expansion in the second half of the year As we see improved program mix and continued strong operational excellence in the second half.

Speaker 4

At the total company level, we're updating our 2023 full guidance as follows. Revenue between $1,040,000,000 $1,070,000,000 Up $30,000,000 on the low end and $20,000,000 on the high end from prior guidance. Adjusted EBITDA between $232,000,000 $257,000,000 tax rate of approximately 28% to 30% in the second half of the year. Depreciation and amortization between $72,000,000 $74,000,000 Capital expenditures in the range of $85,000,000 to $95,000,000 This is $5,000,000 lower than the previous guidance as we expect some investment to move into next year. GAAP earnings per share between $3.07 $3.67 adjusted earnings per share between $3.15 time, we are now at $3.75 up $0.05 on the low end and $0.15 per share on the high end.

Speaker 4

With that, let's open the call for questions.

Operator

Our first question is from Gautam Khanna time of TD Cohen, please go ahead.

Speaker 5

Hey, it's Gautam here. Thank you. Hey, guys. I was curious if you could update us on your expectations for The LEAP program this year and perhaps if you have any early view into next year and also on the CH-fifty 3 ks, I know Both were relatively flat this year, but what's your visibility on a reacceleration into next year, if any? Thanks.

Speaker 3

Yes. Let me start, Gautam. We're pretty excited about there's some just good news out there on the 7 production rates going forward longer term A320 narrow body is the place to be as we all know. How that manifests itself, we'll have to wait and see in the next year. As we reported, We overachieved a little bit in the first half of the year versus our lead plan for the year, which kind of is testament to our ability to ramp up real quick.

Speaker 3

Operations running really well and inventories are moving through. So we're encouraged as we look at next year, but we don't really have any updates at this point to Anything different for this year, we're still maintaining kind of a flattish level this year, although we're on a better run rate than that right now. And then expect to see growth next year, but don't have any numbers on it yet. That's on the LEAP program. On the CH-fifty three ks, as I think Rob mentioned, we've gone from the tooling and development stage into the production stages where we've got one line up and running and very successful.

Speaker 3

We've shipped product to Sikorsky on the CH-fifty 3 ks and continue to and we're bringing the 2nd production line online, which is an automated production line this In the next couple of months, so we expect to begin production and shipping off that second line in the second half of this year. So things are going really well there. And Again, good news on the CH-fifty three ks demand longer term as well. So excited about that.

Speaker 5

Okay. And then just if you could also update us on your view on 787 and F-thirty 5, Boeing says they're at 4 a month on the way to 5 on the way to 10. I didn't know if you guys are finally starting to see demand pick up with the Boeing subcontract manufacturers That you shipped to and likewise on the F-thirty five, if you have an update. Thanks.

Speaker 3

Yes. On the 787, we're pretty much synced with the Boeing demand, we are running the production line. As you know, last year, we had stopped the line and prior to that, we had run at a really low level. So the line is up running, we were, how would I say it, cautious in how we started up the line to make sure that demand was coming and it looks like It's pretty good so far. So we're in sync with that 4 going to 5 rate level as we go from this year into next year, And we'll continue to ramp up from there.

Speaker 3

So that looks pretty good so far. So we haven't heard any changes to the production demand there. The F-thirty five, also good news out there about longer term demand. So we're waiting to see. We don't have I don't have anything report today on the demand for it, but we're excited as we look at next year and beyond.

Speaker 5

Thanks, guys.

Speaker 4

Thank you.

Operator

Please hold for our next question. Our next question comes from Michael Ciarmoli time of Trudis Securities.

Speaker 6

Hey, good morning guys. Thanks for taking the questions here. Maybe just to stick with Gautam's line of questioning on some of the platforms. Obviously, still early with the Pratt and Whitney disclosure, and I know there's been some chatter out there if airlines or deliveries from Airbus Get held up, could there be a shift to more LEAP platforms? I mean, how are you guys is it too early or how are you guys thinking about that in the trajectory of LEAP production here?

Speaker 3

Yes, I think we're watching it with interest. And full disclosure, my first job was at Pratt Whiting and the Turbot Engine Group, so I'm watching it with a lot of interest. The longer term, it's just a great program to be on the LEAP program and we look forward to increasing our share and being real competitive. So let's see, we're just going to watch and see how it goes.

Speaker 6

Got it. Got it. And then I don't want to be kind of flipping here with this question, but the Heinebeck deal looks like a solid acquisition. But From a strategic standpoint, how did that come about, the decision to acquire them? Rob, I'm assuming You were too new to be intimately involved.

Speaker 6

Bill, you're on the way out. Was this from maybe Daniel The machine clothing side was the Board. I mean, I'm just trying to figure out strategically who really pulled the trigger on this thing.

Speaker 3

Yes, it was a real strong team effort. The Board, Daniel and his team, myself, we're all very highly engaged and it worked for a long period of time, I So it's we're very excited about it. It's as I said, Heimbach has a long tradition. It's got a great brand in the And we're excited about working together with them. So it was a collaborative approach, a lot of work, but we're really excited to get moving forward here.

Speaker 4

Yes. And Michael, I'll just add. Yes, I'll just add, I came in obviously late into the picture, but giving an independent view of it coming in, it's a phenomenal deployment of capital for the company, when you look at the opportunities to create value and to really build out the machine clothing business, which as we all know, generates ton of cash and has given us the strategic flexibility to pursue a lot of growth across the company.

Speaker 6

Yes. No, I totally agree. I mean, it sounds like a great path to earnings and EBITDA accretion for sure. Just the last one for me and I'll get out of the way here, I guess. Just looking at the guidance, what has to happen For second half earnings to be down 26% versus first half to get to the low end of the range.

Speaker 6

I mean, I know you talked about machine clothing and normal European seasonality and other pressures, but I mean it just seems like it would be a real struggle to get down there. And I mean you even had a pretty big tax headwind here in this current quarter. So can you maybe give us some of the mechanics on the ranges out there for the guidance?

Speaker 3

Yes. Let me start and I'll hand it over to Rob. It's a fair question. It's We look at we do a bottoms up. We look at all our programs that are on.

Speaker 3

We go through platform by platform in AEC. We look at the marketplace in machine clothing. And as you know, the Machine Clothing business, we have bookings that go out a period of time, but they don't go out a long distance. So we look at the market, we look at what The paper companies are doing the machine and there's a lot of machine downtime right now where they're doing maintenance and Quite often, we sell when they do maintenance even if they take extended downtime because perhaps the demand is slower right now. So publication is down In Europe, particular, quite a bit down, there's more closures coming there.

Speaker 3

So we're just watching it. So yes, it is it would take a lot to get down to the lower end of that range, but we look at the perturbations of what could happen and without having bookings that go all the way through the end of the year, at least not significant quantities, We're just trying to put bookends around it. So it's not likely we're going to go to that end of the range, but that's kind of how we teed it up.

Speaker 4

And Michael, I mean, I think it's really just a real caution that we have around The macro is in Europe and some parts of Asia, including China. So we wanted to just ensure that the range, as Bill said, Kind of captured that possibility. We don't think it's a high probability we're going to wind up at the low end of course, but we just wanted to bookend it. And I think you raised a fair point that a lot would have to happen negatively for us to get there.

Speaker 6

Yes. Okay. Okay. Fair. I'll jump back in the queue, guys.

Speaker 6

Thanks.

Speaker 3

Thanks.

Operator

Thank you. Please hold for our next question. Our next question comes from Jan Frans Engelbrecht of Baird.

Speaker 1

Good morning, Bill, Rob and John. I'm on for Peter this morning. So just a quick question. Morning. So just a quick question on how we should think about Machine Clothing and the margin since it seems like The acquisition probably closed a little earlier than expectations.

Speaker 1

So if you look at the first year first half of the year, so 35.8% EBITDA Margins in Machine Clothing and the guide at the midpoint implies about 35.4%. So I assume that excludes obviously the HIVEA acquisition, but can you just talk about how we should think about the second half of the year for MC From a margin perspective?

Speaker 4

Yes. JF, I mean, just so I mean, there is nothing in our guide that has anything with Heimbach. Mean, Heimach is not included in any aspect in our and I think what we're looking at is to your point, The second half of the year tends to be a little bit softer, right? And we have slightly lower sales, which does also impact absorption Machine Clothing, so that also has a bit of an impact on what we would expect in the second half of the year. And if you were to look very I mean, there's a slight level of seasonality that we typically experience in machine clothes in first half to second half.

Speaker 4

So that is really what's impacting the margin.

Speaker 3

There's also some costs that we incurred higher from the inflation we've experienced where we had material costs we brought in We've got to work through the system. It'll take a few more months to work through that into the Q4 probably before those higher cost materials flow through the P and L.

Speaker 1

Okay, perfect. Thank you. Thanks for the detail. And then if I could just have a quick follow-up. And I understand 2026 is far out, but if I just looked at the Investor Day targets For LEAP, CH787 and CH53 ks, are you sort of still comfortable with those targets?

Speaker 1

If you just look at I think we're doing, let's say, about $5,000,000 this year and that's the previous target was at $40,000,000 for 2026 For annual revenues, if you can just talk to those 3 programs, I

Speaker 4

can Yes. I think certainly kind of looking at We're at a low point right now clearly with the production, but if Boeing's forecast is correct and they ramp up to those production levels, Then I think we would feel pretty comfortable with our longer term outlook for 787. And in terms of CH-fifty three ks, I mean, we definitely feel comfortable with that. And certainly, if you were to look at our backlog numbers that we report in the queue, a lot of growth related to CH-53 ks. We've done very well in getting contracts there.

Speaker 4

And then on F-thirty 5 or LEAP, we feel comfortable with where those projections are based on everything we're seeing.

Speaker 1

Okay, great. Thank you. Appreciate it. I'll jump back in the queue. Thanks.

Operator

Thank you. One moment for our next question. Our next question comes from Ron Epstein of Bank of America.

Speaker 7

This is Jordan on for Ron.

Speaker 6

Good morning. Good morning, Jordan.

Speaker 7

So actually on the 2026 targets to with defense spending and all the restocking and also the European spending, Are you guys thinking about those targets, especially for missiles, improving long term? And then also to Anything else that you guys are seeing down the pipe that you think would be really interesting for hypersonics?

Speaker 3

Yes, we didn't talk about technology on this call. We usually do. I get pretty excited when I get into hypersonic discussions. But yes, we are excited about that longer term and We are making some investments there. But again, it's a little bit longer term.

Speaker 3

Regarding the 2026 targets that we've talked about in the past, if you go back to last investor conference where we said we're going to double the AEC business over that timeframe. We're still on track to doing that. The mix has changed a little bit. We won Some business to cover for some of the areas that were maybe have been a little bit shorter than we thought. For instance, the 787 didn't ramp back up quite as quickly as we thought, but we've been The team has done a great job winning new business and multiple of applications.

Speaker 3

So that adds up to it. So we're pretty confident we get to those 2026

Operator

I'm showing no further questions at this time. I would now like to turn the conference back to Bill Higgins for closing remarks.

Speaker 3

Great. Thank you. Thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany International. And of course, if you have any questions, feel free to reach out to John Hobbs, our Director of Investor Relations.

Speaker 3

So thank you and have a great day.

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