Albany International Q2 2024 Earnings Call Transcript

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August 7, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to Albany International Corp. 2nd Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the conference over to JC Chaitnani, VP IR and Treasurer. Please go ahead.

Speaker 1

Thank you, Debbie, and good morning, everyone. Welcome to Albany International's Q2 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 the 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 August 6, 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 Q2 earnings call. I will provide an overview of our business performance. Rob will later discuss our financial results in detail.

Speaker 2

Overall, we had another good quarter as our businesses delivered strong results and are responding well to their industry challenges. We continue to deliver strong profitability and have further strengthened our balance sheet. Free cash flow was strong with $64,000,000 generated in the 2nd quarter. Machine Clothing revenues at $194,000,000 grew year over year driven by our Heimbach acquisition, slightly offset by lower organic demand primarily in Europe and North America. Our global order backlog remains stable.

Speaker 2

We continue to make progress with the integration of Heimach. Our performance has improved sequentially quarter over quarter with a 220 basis point expansion in machine clothing, adjusted EBITDA margins, and we took further action on our global footprint with the consolidation of 2 U. K. Facilities. We successfully implemented SAP at Heimark in the second quarter, which will enable us further execute on our integration plans for the second half of this year.

Speaker 2

We commend the team for executing the implementation with no operational disruption, and I thank them for all their hard work. Moving to our Engineered Composites segment, we are pleased report that during the quarter we received over $200,000,000 in new orders, bringing our year to date orders to over 900,000,000 dollars This will further drive revenue growth in 2025 and beyond. For the quarter, we delivered 20% year over year top line growth as our current programs ramp up. We see growth in our commercial markets, especially in space and other emerging platforms. Our defense business is also growing primarily the CH-fifty three ks and JASM platforms, partially offset by the Joint Strike Fighter program.

Speaker 2

However, our profitability for the quarter is lower with adjusted EBITDA margins at 16.9%, lower by 130 basis points versus the prior year, driven by inefficiencies related to program ramp up. We expect margins to improve in the second half due to operational improvements and program mix. Turning to the LEAP program. We've been working closely with Safran to adjust our 2024 production plan in light of the continued situation at Boeing. We now anticipate LEAP revenue to be slightly down this year versus the prior year with minimal impact to overall profitability.

Speaker 2

Despite changes to lead production, we're maintaining our full year AEC guide as other programs will serve to offset this reduction. Overall, our business is performing well. Our margins in machine clothing are improving as we execute our Heimberg integration plans and substantial new business wins at AEC have improved our backlog. I would also like to welcome Chris Stone as President of AEC. Chris brings strategic capability combined with experience in leading complex operations and supply chain.

Speaker 2

These skills will be critical to AAC as they continue to execute our growth strategy. 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 Q2 results of 2024 and then provide our outlook for the balance of the year. Consolidated net sales came in at $332,000,000 up 21.1 percent from the Q2 of last year. The growth was driven by a combination of Heimbach revenues and organic growth at Engineered Composites. Machine Clothing net sales of 194,000,000 dollars increased 21.6% versus the Q2 of the prior year driven by Hambach, partially offset by a $4,000,000 decline in organic sales on a currency adjusted basis.

Speaker 3

North America comps were lower year over year primarily due to a strong performance in the Q2 of last year. However, for the first half of the year, North America is stable and this simply reflects quarter to quarter variability. AEC net sales of $138,000,000 increased 20.5% from the Q2 of 2023. Our growth was driven by CH-fifty three ks, 787 and other commercial and space programs. We continue to see a ramp up of our various commercial and defense programs.

Speaker 3

Consolidated gross profit was $112,000,000 up $10,000,000 or 9.4 percent from the same period last year. Machine clothing gross margin decreased from 50.8% in the Q2 of 2023 to 45.9% in 2024. The reduction was driven by the inclusion of Heimbach. When you exclude Heimbach, machine clothing gross margins increased 90 basis points to 51.7% versus the prior year, reflecting continued excellent execution. We continue to progress on our Heinbach integration plans and we expect further margin expansion as a result in the coming quarters.

Speaker 3

AEC gross margin decreased 200 basis points from 19.0 percent in the Q2 of 2023 to 17%. This includes a $5,000,000 unfavorable change in the estimated profitability of long term contracts. This is due to inefficiencies related to program ramp up. For comparison purposes, in the prior year, we recognized an unfavorable $2,000,000 charge. Net R and D expenses increased $2,000,000 in the Q2 versus the prior year, remaining at approximately 4% of revenues.

Speaker 3

We continue to make strides as we focus on material science capabilities to further differentiate ourselves from our competition. SG and A expenses for the quarter increased by 18.7% nominally, but this was due to Heimbach. As a percentage of revenue, SG and A has decreased from 17.1% to 16.7% as we continue to further streamline our operations and focus on efficiencies. Corporate expenses increased $7,000,000 This is primarily due to the Heimbach IT related cost, acquisition and integration related expenses and employee related compensation. Additionally, we recorded foreign exchange hedging losses of $4,000,000 as part of our global foreign exchange hedging program.

Speaker 3

These transactions do not qualify for hedge accounting treatment and as such we will experience quarterly fluctuations in the normal course of business. The effective tax rate for the quarter was 27.9% versus 42.8% in the prior year and generally in line with our long term guidance of 30%. The rate for the Q2 of 2024 was lower than the prior year, mainly due to the unfavorable discrete adjustments we took in the prior year period. GAAP net income attributable to the company for the quarter was $25,000,000 compared to $27,000,000 last year. GAAP diluted EPS was $0.79 per share in this quarter versus $0.85 in the same period last year.

Speaker 3

After adjustments primarily related to the Heimbach acquisition and other restructuring activities as detailed in our non GAAP reconciliation, the adjusted diluted EPS was $0.89 unchanged from the same period last year. As a reminder, we also had a $0.10 headwind on foreign exchange hedging this quarter that is not reflected in our adjustments. Consolidated adjusted EBITDA $63,000,000 for the Q2 versus $65,000,000 in the prior year period. Machine closing adjusted EBITDA, including Heimbach, was $62,000,000 an increase of 5% versus the prior year. Adjusted EBITDA margins were 32.2% versus 37 point 3% in the prior year with the decrease driven by the inclusion of Heimbach.

Speaker 3

AEC adjusted EBITDA was 23,000,000 dollars a nearly 12% improvement over the prior year. Adjusted EBITDA margins at AEC were 16.9% of sales versus 18.2% in prior year. During the Q2, free cash flow was $64,000,000 with positive operating cash flow of $83,000,000 offset by capital expenditures of approximately $19,000,000 Our balance sheet remains strong with a cash balance of over 116,000,000 dollars 430,000,000 of borrowing capacity under our committed credit facility. Net leverage is below one turn. This provides us with significant financial flexibility.

Speaker 3

Turning to our outlook for the balance of 2024, we are reaffirming our full guidance for the year. I want to provide some context around the segment level guides given the dynamic environment we are in. For Machine Clothing, the low end of the range reflects greater than expected softness in our European and Asian markets and delays in the realization of our targeted synergies. The high end of the machine clothing guide reflects improving market conditions in particular Europe combined with constructive markets in the Americas and Asia with Heimbach synergies realized ahead of plan. For AEC, the low end of the range reflects further reductions in reflects better than expected performance on our program ramps, including on our new programs.

Speaker 3

Now I would like to open the call for questions.

Operator

We will now begin the question and answer Your first question comes from the line of Peter Arment with Baird. Your line is open.

Speaker 4

Yes, thanks. Good morning Gunnar, Rob, JC. Hey, guys, maybe just to start on MC, could you talk a little bit about just kind of the what you saw from the organic side of things? I guess, North America up in Q1 and down in Q2. Is that more timing related?

Speaker 4

And I guess have you seen any kind of or has that pacing kind of continued as we're halfway through Q3?

Speaker 2

Hi, good morning, Peter. The comp for year over year was difficult this year, but if you look at the overall North America for the first half, we are up. So we believe that it's a continued strong market in the U. S.

Speaker 4

Got it. And then you've continued to do footprint consolidation. Where are you, I guess, in that journey? Is that are you completed for the year or is there more to go?

Speaker 2

No, Peter. We are continuing. We are on plan and we're continuing the efforts through frankly through 2025, but there's more actions coming.

Speaker 4

Got it. And then just quickly on AEC, you mentioned that LEAP revenues are going to be slightly down. Can you call out maybe some of the programs that are going to be offsetting or providing you the ability to grow that CH-fifty 3 ks, is it JASM, anything in particular?

Speaker 2

On the military programs, it is definitely CH-fifty 3 ks and JASM. But for our guide, some of our new programs that we reported, the $200,000,000 in new orders includes space, engine components and that will start later this year and continue through the long term. That's we are signing some good long term contracts and that's helping our backlog and future. But there's some additions this year as well. So that's how we're holding our guide.

Speaker 2

Okay.

Speaker 4

And just lastly, on the 7 37 rate, when do you expect to be back in sync with where ultimately Boeing gets to 38 by a month at the end of the year?

Speaker 2

Yes, that's difficult to answer, Peter. I think Boeing we have no challenge with meeting any ramp up. We know we have the capacity. Our work is with Safran to make sure that we do not build inventory in this period. And so we have adjusted our rates.

Speaker 2

Our ability to ramp up following that will be is not the challenge for us as and we'll monitor Boeing through this as well as what's happening with the actual LEAP engine and some of the supply chain issues they're having that. But we're tight with Safran and adjusting as necessary.

Speaker 4

Appreciate all the details. Thanks Connor.

Speaker 2

Sure.

Operator

Next question comes from the line of Pete Skibitski with Alembic Global. Your line is open.

Speaker 5

Hey, good morning guys.

Speaker 3

Hey, good morning. Good morning, Pete.

Speaker 5

Hey, Gunnar, the year I want to make sure I understood you right. Did you say the year to date orders is more than $900,000,000 at AEC or is that backlog?

Speaker 2

Yes, that's new orders we have taken this year is $900,000,000 and that transfers to backlog some this year, but 20 20, primarily 2025 and beyond.

Speaker 5

Okay. So that was the order flow. What's the backlog?

Speaker 3

It's about $1,200,000,000 Pete.

Speaker 5

Okay. Okay. And that's just for AEC you guys were talking about?

Speaker 3

Yes. That is correct. Yes.

Speaker 5

Okay. Okay. That's great. That's pretty sizable, it seems like at this point. And then you guys talked in the release yes, you guys talked in the release about the strength in space and other emerging markets.

Speaker 5

I guess that was part of that order flow. Any more details? I know you're been kind of reluctant to talk too much to the new stuff, but are we any closer to being able to talk more about what exactly you're doing in space and what other new programs you're involved with there, so we can get a sense of kind of the long term upside?

Speaker 2

I think the good part here is that we keep getting orders and they're not spot buys, they're long term agreements based on our ability to deliver both in on the space as well as in other programs. We're not yet able to share who our customers are. I think as these programs expand, my goal is to be able to share that, but we're not at that point yet, Pete.

Speaker 5

Okay. Okay. Fair enough. Last one for me. The $5,000,000 negative EAC adjustment, I think at AEC.

Speaker 5

Do you guys feel like you've got a good handle on that program now? It sounds like it was a newer program and you guys have not had a history of EAC changes of any meaningful size. And I think aerospace analysts are in shell shock because there's other firms out there that are kind of take serial EAC charges quarter after quarter on the same programs. And And so I just would like to get a sense that you guys feel like you've really got this particular program well aligned to what the future accounting looks like?

Speaker 3

Yes, Pete, this is Rob. I mean, if you look historically, our EAC adjustments have been less than 1 percent of top line. So to your point, this year to date, we're about $7,500,000 which is it's been higher than clearly that we would like. But we've been working very closely on a number of these programs and feel good about the adjustments that we've made to So So at this stage, we feel confident with the adjustments. And these are really good long term programs that are complicated in their ramp up.

Speaker 3

So we're working that very closely.

Speaker 2

And I would just add, this is the area where we added the additional content and we're going to full rate at the same time. So it is a major effort by the team, but we are ramping and we're supporting our customers.

Speaker 5

Okay. Okay. Thanks for the color guys. Appreciate it.

Speaker 3

Thank you, Pete.

Operator

Next question comes from the line of Jordan Joonai with Bank of America. Your line is open.

Speaker 6

Hey, good morning.

Speaker 5

Good morning, Jordan.

Speaker 6

On the AEC guide, I appreciate the color that you gave earlier. Just in that downside risk, how much of how much is being considered if there were to be an extended strike at Boeing and what that would mean for follow on production rates for the LEAP?

Speaker 3

Yes. Jordan, it's a really good question. I mean, I think if there were a strike at Boeing, clearly, I mean, we've taken some of that into the downside, but it really just it would depend on the length of that strike and really what that really looks like. And that comes down to length. I mean clearly that's hard to forecast.

Speaker 3

But we definitely the downside does reflect lower lead production, which certainly would result if there was a strike.

Speaker 6

Got it. Okay. And then on the new orders strong backlog, how do you feel about current headcount to meet the ramp across these programs?

Speaker 2

I think hiring is has been challenging over time. I think Salt Lake is our biggest site and where we're hiring the most. We are almost at the rate that the headcount that we need for the current ramp up. And so now the trick is to keep everyone. So I'm the team is our HR team is performing well.

Speaker 2

We're bringing people in and they're becoming effective. But hiring is more challenging in Salt Lake than any of our other sites. We and I will say that both for MC and AAC, we do not have a challenge on hiring in any of the other sites.

Speaker 6

Got it. Thank you so much.

Speaker 3

Thank you,

Operator

Jordan. Next question comes from the line of Jack Ayers with TD Cowen. Your line is open.

Speaker 7

Hey guys, good morning. Thanks for the question. Hey, yes. So, just kind of wanted to drill down again on, sort of the LEAP production forecast. I know you guys are just kind of calling it down year over year.

Speaker 7

I wonder if you can maybe refine that a little bit more. And then I guess going into next year, how we think about 2025, just given the assumptions already at CFM about the 40% sequential ramp in LEAP output in H2. If those guys don't hit those targets, kind of what that means for 2025? Just any color there would be helpful. Thanks.

Speaker 3

Yes, Jack. I mean, I think for 2024, I mean, we're looking at approximately $5,000,000 or so reduction in leave revenues and approximately about $1,000,000 or so of EBITDA impact. The planning, of course, is underway for 2025. We're not in a position to necessarily provide any outlook towards 2025. But as Gunnar referenced, we are very much aligned with Safran who clearly is in close discussions with their customers regarding the LEAP engine.

Speaker 3

So we have the flexibility to adjust our output either up or down. And to your point, right, there's just a lot of volatility right now around the leaf supply chain, nothing to do with us, but we're just going to have to navigate.

Speaker 7

Okay. That makes sense. And then just a quick one on 787. I know you guys called it up this quarter. Can you size that like basically how big that program is today for you guys?

Speaker 3

Yes. No, we haven't I mean, it is an important commercial program for us. We have not in the past discussed the relative program size. For us year over year if you recall 787 went to a pretty low production rate for a long time and year over year, it's been a favorable comp for us. But we are clearly aligning our production with Boeing's run rate as they ramp back up to 5 per month.

Speaker 7

Okay, great. And then I guess just one high level question, I guess, for Gunnar here. Kind of coming into this relatively new, I think for the past few quarters, just would love to hear your sort of perspective on the portfolio. You've got a ramping aero business here and a kind of unique MC business. So would love to hear your impressions of the MC business and kind of moving forward how you kind of see the portfolio evolving?

Speaker 7

Thanks so much.

Speaker 2

Thank you, Jack. And we are going through our strategy review and strategy planning for the next 5 years now. So I'm well versed. I do appreciate being called new still. I think I have another month.

Speaker 2

But it is I really I love the machine clothing business. And I think the name is a misnomer in a way. It is a great business. I think the acquisition of Heimark was a good opportunity. As we integrate, that will continue to be a strong business for us with great returns and great cash flow and what's not to like about that.

Speaker 2

So Machine Clothing, I like. The foundation I want to repeat is material science and we have this ability to use our technology, our material science to expand on what was started with machine clothing and expanded into aerospace with the 3 d woven parts. And I think we have lots of opportunity there. The growth rate on Aerospace Business is very good. We need to be able to manage the growth and I see continued growth, but maybe moving more towards our technology there.

Speaker 2

So 3dwoven is a focus in years to come.

Speaker 7

Great. Thanks guys. I'll pass it on. Great.

Speaker 3

Thanks, Jack.

Operator

And we have our last question comes from the line of Michael Ciarmoli with Tuohy Securities. Your line is open.

Speaker 8

Hey, good morning guys. Thanks for taking the questions. Just to maybe keep beating this LEAP issue. Can you just maybe give us a better sense of do you have an idea of what kind of inventory is in the channel? And I know you said a couple of times you're aligned with Safran.

Speaker 8

I mean, they were originally planning 20% to 25% growth in LEAP for the beginning of the year, which I guess would have been nearly 2,000 engines. They scaled that back to 10 to 15 and now flat. So I mean, are you guys actually producing units now or are they or is it an inventory burn down situation? Can you give us any more color of maybe what's in the channel there?

Speaker 2

Yes. We are continuing to produce. It is important that we continue to produce and keep our people both engaged and the technology fresh there. We were flat from last year, which means we had started the inventory burn down. As we're coming into the second half, we are further reducing our rates, which will have an impact on inventory going forward.

Speaker 2

But we're maintaining we're trying to maintain an inventory for the contract with Safran. Okay. Where the inventory is beyond that, I don't know.

Speaker 8

Okay. And then just thinking about knowing that that's a unique contract and not as accretive to margins, the second half AEC and obviously you had the negative EAC this quarter, but it looks like you got a 21% or so run rate in the second half. What are the big sort of drivers that kind of give you the confidence in that margin level in the second half?

Speaker 3

Yes. Michael, this is Rob. There are a few things that give us that confidence. The first is there is going to be a bit of a shift in program mix. A lot of our space and other programs that we expect to see improved sales in the back half of the year carry higher margin.

Speaker 3

The operational challenges that led to some of the EACs, we're working to overcome those and we feel confident that we'll be able to produce more efficiently in the second half. So you have that. And then thirdly, a number of these restructuring activities you see at AEC are really about getting the cost structure to a much better place at AEC and that is also going to be a significant contributor in the second half of the year based on the SG and A reductions that we've made there. So it's really those three items that give us the confidence the back half of the year margin. Okay.

Speaker 8

Got it. And then just one more broadly on that, not to hone in directly on that negative EAC, but clearly you're winning more defense and space work and presumably those programs come with a lot more risk. I mean, as you look at your bidding process, contracting terms, design analysis, program management. Do you feel that everything is robust enough to sort of contemplate and capture any potential overruns or challenges, so you kind of don't get into this sort of persistent negative EACs?

Speaker 3

Yes. I'll start and I'll look in our way, Anne. But Michael, I mean, we have a very robust bid review process. We have over the last handful of years, we've built out a very strong business development team that works very closely with program management and supply chain to really understand the program and what's required. I mean, we've walked away from a number of potential opportunities just given the economics don't pan out and the risk is too high.

Speaker 3

So what we're experiencing this quarter is very significant ramp ups on very large programs in a very difficult labor market. So that's really the largest contributor to the EACs that you're seeing. If you take out just a couple of programs, the rest of the programs net net have been fairly neutral. So we feel overall very, very good about our review process and that type of work that we'll take. As Gunnar mentioned, we're going to continue focus on our 3 d woven technology in particular and focus on opportunities.

Speaker 3

But you're right, I mean, in any firm fixed price contract, the risk and opportunities related to supply chain, labor, you name it, right, have to be taken into account when you price. And contractually, we feel that we've done a good job of protecting ourselves as much as we can. And we have a good team executing.

Speaker 2

I'll add to that. We have the opportunity to be selective. And so we'll select the programs that makes the most sense for us. And I have to emphasize the ability of this team to execute is great. So we're going through a significant ramp and we're seeing some effects of that.

Speaker 2

That ramp was the beginning of this year. We're continuing to ramp up through the end of the year. We're adding new programs. Some of the new programs are added at our various facilities, which help us disperse the risk. So I'm going to support Rob fully in that answer.

Speaker 2

Got it. Thanks, guys.

Speaker 3

Thank you, Michael.

Operator

There are no further questions at this time. Mr. Gunnar Glivland, I turn the call back over to you.

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

This concludes this conference call. You may now disconnect.

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