Corteva Q1 2024 Earnings Call Transcript

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April 30, 2024

There are 10 speakers on the call.

Operator

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 Chaddnani, VP of Investor Relations and Treasurer.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to Albany International's Q1 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 verbal remarks this morning.

Speaker 1

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 implied. For a full discussion of these risks and uncertainties, please refer to both our earnings release of April 29, 2024, as well as our SEC filings, including our 10 ks. Now, I will turn the call over to Gunnar Cleveland, our President and CEO, who will provide opening remarks. Gunnar?

Speaker 2

Thank you, JC. Good morning and welcome everyone. Thank you for joining our Q1 earnings call. I'll provide an overview of our business performance and Rob will later discuss our financial results in detail. We had another good quarter as our businesses delivered solid results and are executing to their plans.

Speaker 2

Machine Clothing grew year over year, primarily driven by our Heimbach acquisition, offset by lower organic demand, primarily in Europe. North America remains strong and our global order backlog has improved from the beginning of the year, which provides us confidence in our full year guide. Integration at Heimbach is making excellent progress. We implemented a 2 brand strategy, which has been well received by the market. Procurement and supply chain continued to see savings and we have been integrating functions across both our organizations.

Speaker 2

We continuously assess our global manufacturing capacity and footprint. And recently, we announced that we are closing our South Korea facility and transferring capacity to other sites. We also sold a non manufacturing location in Sweden, further optimizing our footprint. We'll continue to evaluate other opportunities as the year progresses, with integration actions occurring in late 2024 and into 2025. We expect meaningful margin expansion as the integration progresses.

Speaker 2

Moving to our Engineered Composites segment. We're pleased to see continued ramp up on our programs, especially on the commercial side, including space and other emerging platforms. On the defense side for the year, we see growth on our CH-fifty 3 ks and JASM platforms offset by relative weakness on our Joint Strike Fighter program. Overall, we're reporting growth of over 10% in revenue versus the prior year on a constant currency basis. Additionally, our profitability continues to improve with adjusted EBITDA margins of 19.4%, up 120 basis points versus the prior year.

Speaker 2

This reflects our long term strategy of winning newer programs with higher profit margins. Turning to the LEAP program. We've been working closely with Safran to set the 2024 production plan in light of the situation at Boeing. We anticipate LEAP revenue to be relatively flat with the prior year. As a reminder, the LEAP engine is used on both Boeing and Airbus aircraft, both of whom have multiyear backlogs.

Speaker 2

Finally, for AEC, we continue to develop a healthy business development pipeline with continued wins across various platforms. In the quarter, Sikorsky awarded Albany a long term agreement for future CH-fifty three ks lots on all our legacy content similar in duration to the previously announced Aft Transition LTA. This represents the largest contract award in AEC history next to our LEAP program. Given that our expertise in research and technology is critical to the success of Albany, we have created a new role of Senior Vice President and Chief Technology Officer of Albany International reporting directly to me. We have promoted Rob Hanson from his prior role as Senior VP of Research and Development at Machine Clothing to this role.

Speaker 2

By aligning closely with the leadership team, we have the opportunity to leverage our unique competitive technological capabilities to accelerate impactful innovation across our businesses. And with that, I'll hand it over to Rob to provide more details on the quarter. Rob?

Speaker 3

Thank you, Gunnar, and good morning, everyone. I will review our Q1 results of 2024 and then provide our outlook for the balance of the year. During the quarter, our businesses executed to their plans. Consolidated net sales came in at $313,000,000 up 16.4% from the Q1 of last year. The growth was driven by a combination of the contribution from Heimbach and organic growth at Engineered Composites.

Speaker 3

Machine Clothing net sales increased 20.9% versus the Q1 of the prior year driven by Heimbach, excuse me, partially offset by a 2.8% decline in organic sales, which was largely concentrated in publication grades. Market conditions remain largely unchanged with North American markets remaining strong, European markets continuing to be soft and Asian markets showing signs of slow recovery. AEC sales of $128,000,000 increased 10.6% from the Q1 of 2023. Our growth was driven by our commercial programs, especially on our 787 space and emerging platforms. This growth was slightly offset by our defense programs.

Speaker 3

Much of the Q1 drop in defense related to the rolling off of one time revenue related to standing up the CH-fifty 3 ks aft transition production line in 2023. However, we could see continued ramp up of recurring CH-fifty 3 ks production for the balance of 2024. Consolidated gross profit was $109,000,000 of $9,000,000 or 9.4 percent from the same period last year. Machine clothing gross margin decreased from 50.8% in the Q1 of 2023 to 45.7% in 2024, with the reduction primarily driven by the inclusion of Heimbach. Excluding Heimbach, machine clothing gross margins increased to 52.1%, reflecting favorable mix and cost controls.

Speaker 3

AEC gross margin also grew with margins at 18.8%, up 30 basis points versus the same period last year. This reflects our strategy of pursuing higher margin programs and the resulting improvement in product mix. Note that for the quarter, we recognized a net unfavorable change in the estimated profitability on our long term contracts of $900,000 in line with a net unfavorable change of $700,000 in the Q1 of last year. Net R and D expenses were generally in line with the prior year and represent approximately 4% of our revenues. This represents our continued investment in research and development to further differentiate our products.

Speaker 3

SG and A expenses for the quarter increased by 13.1%, but this was due to the Heimbach acquisition. As a percentage of revenue, SG and A decreased from 18% to 17.5% as we benefit from increased scale. Corporate expenses increased $500,000 primarily due to acquisition and integration related expenses. However, adjusted corporate expenses decreased by $1,500,000 versus the prior year. Our effective tax rate for the quarter was 28.2% in the prior year and generally in line with our long term guide of 30%.

Speaker 3

GAAP net income attributable to the company for the quarter was $27,300,000 compared to $26,900,000 last year. GAAP diluted EPS was $0.87 per share in this quarter versus $0.86 in the same period last year. After adjustments primarily related to the Heimbach acquisition as detailed in our non GAAP reconciliation, the adjusted EPS on a diluted basis was 0 point $9 compared to $0.91 in the same period last year. Consolidated adjusted EBITDA of $65,000,000 for the Q1 increased 8% from the prior year period. Machine closing adjusted EBITDA including Heimbach was at $55,500,000 and was generally in line with the prior year at $55,700,000 Adjusted EBITDA margins were 30% versus 36.4% of the prior year with the decrease driven by the inclusion of Heimbach.

Speaker 3

AAC adjusted EBITDA was 24,800,000 dollars a 17.9% improvement over the prior year. Adjusted margins at AEC were 19.4 percent of sales, 120 basis point improvement over the prior year period. During the Q1, free cash flow was a use of 17,000,000 dollars with positive operating cash flow of $10,000,000 offset by capital expenditures of $27,000,000 We further strengthened our balance sheet and paid down over $17,000,000 of debt and are focused on repatriating our non U. S. Cash to help minimize our outstanding debt.

Speaker 3

Our balance sheet remains strong with a cash balance of over $125,000,000 and over $370,000,000 of borrowing capacity under our committed credit facility. Our net leverage at the end of the quarter was 1.2 times. Turning to our outlook for the balance of 2024, we are reaffirming our guide for the year. Our Q1 performance was in line with our plan and we are confident that we will meet our full year guide. Now I'd like to turn the call over for questions.

Speaker 3

Operator?

Operator

Thank you. At this time, we'll conduct a question and answer session. Our first question comes from the line of Peter Arment of Baird. Your line is now open.

Speaker 4

Hey, thanks. Good morning, Gunnar and Rob and JC. Thanks. Good morning, Peter. I wanted to ask a question on maybe you can level set us on kind of the LEAP program.

Speaker 4

I know you've got a 2026 target out there for revenues. Just how do we think about kind of where you are today and how you see that 2024

Speaker 2

as a flat year, 2024 as a flat year going into 2025 and 2006, Boeing will recapture and continue to grow. And if you look at the whole portfolio, Peter, I see still no challenges with meeting our 2026 goal.

Speaker 4

All right. Very helpful. And then just on MC, I guess, it sounds like the integration of Hambach is going very well, but you talked a little bit about footprint consolidation in South Korea and Sweden. Is there a number in mind? I mean, you have, I think, prior to maybe the South Korea announcement, you had 23 plants in R and D centers.

Speaker 4

What's optimal for the MC business?

Speaker 2

Yes. I think as we look at the whole business and the South Korea business was Albany business, not a Heimark business. So when we look at our total footprint and where our customers are, we will make decisions based on that. And I'm not going to go into details for what we're going to do, but we will continue to evaluate the situation throughout the year and continue to take actions that optimizes our footprint and our ability to support our customers.

Speaker 4

Okay. And just one last one. Rob, you mentioned that publication grades was weak. If I remember correctly, that was still kind of overall mix was like kind of in the teens as a percentage. Is that still correct?

Speaker 3

Yes, it is.

Speaker 4

Okay, great. I'll jump back in queue. Thanks.

Speaker 3

Great. Thank you, Peter.

Operator

Thank you. One moment for next question. Our next question comes from the line of Michael Camardis of Trust Securities. Your line is now open.

Speaker 5

Hey, good morning guys. Thanks for taking the questions here. Gunnar or Rob, maybe just to go back to Peter's first line of questioning. Can you kind of just dissect the AEC growth this year at the midpoint? And I think you already had LEAP as being flat.

Speaker 5

So I guess that program is flat. I guess the CH-fifty 3 ks on the kind of one time down F-thirty 5 under pressure. Can you give us maybe some of the buckets that are driving growth, maybe talk to the Gen X, talk to if there's any progress with the 9X or what's really kind of anchoring that growth at the midpoint of the guidance this year?

Speaker 2

Yes. And we really see most of the growth this year coming from new wins and new programs. Space is a significant growth area for us. And but when you look at the CH-fifty 3 ks, there is growth there throughout the year, even though we don't have the NRE. I think JSF will also be flattish together with the LEAP.

Speaker 2

So but I still have no full confidence that the other programs that we are growing on the military side, JASSM is a strong growth for us. But our new wins and additional wins will gives us confidence on the growth rate.

Speaker 5

Okay, got it. And then just I guess shifting to machine clothing, I guess organically down 4% in the quarter, Europe weak, but I think if I heard you correct, you said the backlog was up and you've got confidence there. Can you maybe just give us what you're seeing kind of geographically and what's sort of driving some of that, I guess, positive book to bill and order activity?

Speaker 2

Yes. The macro we had a very strong 4th quarter on machine clothing and coming into Q1, we kind of expected it to be a little lighter. We saw that, but as we come to the end of the quarter, our backlog is growing in line with our expectations. North America is very strong. We see some recovery in Asia and Europe.

Speaker 2

Europe remains very soft. Some of the macro indications, some of our end customers are seeing signs of recovery around the globe. I think Europe will probably have soft through the year, but offset by the U. S. In particular and Venetia.

Speaker 5

Got it. Last one for me. I think you talked about the with Heimbeck, the 2 brand strategy. Can you maybe just elaborate what exactly you're doing there? And maybe give us some details, whether it's by product offerings, by pricing or and how that how you expect that to play out?

Speaker 2

And it's exactly that, Michael. We're going in with the 2 brands that our customers are used to. We have differentiated technology between the 2 businesses and in some paper machines, for example, we have we can come in with forming, pressing, drying and other belts, supporting belts from the 2 companies and really complement the entire machine. So this is working. I know that the company many years ago had done integrations before and not used the 2 brand strategy and it wasn't very successful.

Speaker 2

So, so far, I would say that we're very positive on this approach and our customers are staying with us.

Speaker 5

Got it. All right. Helpful. Thanks guys.

Speaker 1

I'll jump back in the queue.

Speaker 3

Thank you. Thank you, Michael.

Operator

Thank you. One moment for next question. Our next question comes from the line of Jordan Linus of Bank of America. Your line is now open.

Speaker 6

Good morning. Thanks for taking the call.

Speaker 2

Good morning.

Speaker 1

Could you

Speaker 6

guys be able to quantify how many blades are in excess inventory for Safran, GE, CFM overall and what visibility you guys have into those excess inventory levels?

Speaker 2

We do not have insight into what our customer have in inventory. We have a plan, like I stated earlier with Safran on what we're building to and we're building that being that the growth of the engines are 10% to 15% this year and we will stay at a flat level. I would venture to guess that the inventories are going to be smaller, but I don't know what it is. I expect us to continue to grow next year, but flat this year.

Operator

Okay.

Speaker 6

And then just a follow-up too. So on the fence for the F-thirty 5 and the JASM missiles, the cuts that came in with the Presidential Budget request, is there any concern from your end if JASM was cut almost 45%, but that's going to be one of your growth pieces for defense?

Speaker 2

So what we're seeing right now is significant growth from where we were last year and the year before. We did see the reductions that has not been in the presidential budget that has not been translated to orders to us. But the growth in this year and into next year is quite significant.

Speaker 6

Got it. Thank you.

Operator

Thank you. One moment for next question. Our next question comes from the line of Guwam Khanna of TD Cowen. Your line is now open.

Speaker 7

Hey guys, good morning. This is Jack on for Gautam. Nice results here. Hey Rob. Quick question just on AAC and totally understand the dynamics with LEAP kind of flat this year.

Speaker 7

GE and Safran are both talking about LEAP up 10% to 15%. And really the rationale of my question is, for you guys, it's a cost plus contract. And I know you guys don't have great visibility into sort of channel inventories. But how should we think about that moving forward, taking into account it is cost plus? So quarter after quarter, year after year as you guys get up the learning curve, costs come down.

Speaker 7

How should we think about unit volumes versus absolute sales dollars for your lead program? Thanks.

Speaker 2

What we have and it's a good question. And we are looking to improve the cost on this program. But there's also some improvement in margins as the cost comes down. So what we have forecasted for 2026 at the $200,000,000 level for this program remains accurate. You want to add?

Speaker 3

Yes, I would just add, Jack. I mean, what you'll see is there's not a linear relationship between revenue and unit volume to your point as we do take cost out. So, we feel really good about the strength of the lead program and we are going to be able to grow revenue there just not as quickly as the underlying volume increases would indicate. But it's also the LEAP program is super critical for the commercialization of our 3 d technology, which allows us to produce at a lower cost, which then opens up a lot of other avenues for that technology.

Speaker 7

Yes. Okay, totally. No, I get it. And then just kind of switching to MC here, Rob. For Heimbach, are you guys still thinking that is going to come in relatively flat year over year?

Speaker 7

Any incremental updates for Heimbach in 2024 sales?

Speaker 3

Sure. Yes. I mean, I think the general perspective is we're going to be somewhere around flat for the year for Heimbach. And the focus there, of course, is not it's on integration, is really combining the teams. I mean, that's going to be a huge focus for us as we go throughout 'twenty four and into 'twenty five.

Speaker 7

Okay. And then just one last one off of that. Obviously, the integration is going well, it seems like. Are you guys still kind of sticking to that year 3 target of that 3.5, 4 times sort of net synergy post synergy purchase multiple? Is that still hold today for Heimbach?

Speaker 3

It does. It does. We're executing on the integration plan. And at this stage, we're definitely confident in our ability to achieve those synergies over that time frame.

Speaker 7

Okay, great. Thanks guys. I'll jump back in the queue.

Speaker 3

Great. Thank you, Jack.

Operator

Thank you. One moment for next question. Our next question comes from the line of Chigusa Kotoku of JPM. Your line is now open.

Speaker 8

Hi, this is Chigusa Kotoku on for Steve Dusa. Thanks for taking my question. My first question is on the AEC margins. Think it looks like historically Q1 is the low point for margins seasonally for AEC. I was just wondering if we should expect margins to be higher than these levels for the balance of the year?

Speaker 3

Yes. No, good question. So I mean, if you look at our kind of implied margin guide for the balance of the year, on average, it will be higher than the 19.4% we posted in Q1. The implied range for the balance of the year is 19.4% to 20%. So we're certainly working hard to do well on the margins.

Speaker 3

And we feel really confident with our backlog and the position we have on the contracts to have a very solid year at AEC.

Speaker 8

Okay, great. Thanks. And then on MC, so core revenues declined this quarter after growing last quarter. And I was just wondering if the environment deteriorated this quarter and also if you expect core revenues to decline for the balance of the year?

Speaker 3

Yes. I think what you saw, we came off a very strong Q4 and it's really as we look at the backlog building, that's what gives us confidence in the full year top line forecast for machine clothing. So we are expecting to see in the back half of the year higher average quarterly sales levels in machine clothing relative to what we saw in Q1.

Speaker 8

Okay, great. Thanks.

Speaker 3

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Pete Skibitski of Olympic Global. Your line is now open.

Speaker 9

Hey, good morning guys. Hey, Pete. So one thing I wanted to clarify, we've been talking about JASM a lot. I want to understand, do you guys also have content on the LRASM, which my understanding is it's sort of a cousin variant of JASM. And so I wasn't sure if you also had content there, but just don't talk about it a lot.

Speaker 9

I guess I'll start with that one.

Speaker 2

Yes. We have several new programs in missiles that we have not announced yet that we are in the early phases of providing parts and potentially getting contracts.

Speaker 9

Okay. That was actually my next question, Gunnar. When would you guys be comfortable, do you think, talking about some of these new programs and potential sizes, I guess, not just in missiles, but space as well?

Speaker 2

Yes. And I we will and we announced our contract with Sikorsky today. We'll continue to update you all on new contracts as we win them. But in some cases, our customers it takes a while before they let us share the content of the contracts. But that is our intention and we'll continue to do that.

Speaker 2

Big programs like that is definitely something we want to share and continue to follow.

Speaker 9

Understood. Appreciate it. And then I just want to ask, we haven't talked about 787 yet, I don't think. And not necessarily your biggest program, but still I think kind of a chunky program for you. And of course, Boeing is talking about taking down production rates this year because of some supply chain issues, I think unrelated to you guys.

Speaker 9

But has your expectation for revenue on that program changed this year? Is it maybe looking flat to down this year with a 25% recovery expected?

Speaker 2

So we had a good Q1 on 787. And you're right, it's the supply chain issues is not us. It is I think we expect it to grow to 7% through the end of the year. It might the forecast right now says 5%. So it will be a little lower than we expected, but not material for the AZ business.

Speaker 9

Yes. Okay. Got it. And then last one for me. Rob, you talked about, I think, repatriating non U.

Speaker 9

S. Cash. I'm just wondering kind of what percentage you guys hold overseas and if you expect to take any kind of a tax hit on that or not?

Speaker 3

Yes. No, a good question. Yes, the majority of our cash, the large majority of our cash is overseas. And we have the ability to working through the different government contracts or to bring back the cash pretty much tax free. Not always, it will depend.

Speaker 3

I mean, we did have an exit tax that we paid. We brought some cash back from Asia. But by and large, it's pretty nominal, Pete, the friction that we see and the opportunity cost, right? Our debt right now on the floating side is about 7%. So it really is an important initiative on our part to really optimize our cash balances globally.

Speaker 3

And JC and the team have been working very hard on that.

Speaker 9

Got it. Okay. That's great. Thanks guys.

Speaker 3

Thank you, Pete.

Operator

Thank you. I'm showing no further questions at this time. I'd now like to turn it back to Gunnar Klabin, President and CEO for closing remarks.

Speaker 2

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.

Operator

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

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