Albany International(AIN) - 2019 Q3 - Earnings Call Transcript

Financial Data and Key Metrics - Total company net sales increased by 8% YoY, or 9% excluding currency translation effects [6] - Operating income grew by over 36% YoY, and adjusted EBITDA increased by almost 14% [6] - Gross profit for the company was $104.1 million, up 12.7$40.0 million, up 44.2% YoY, with EPS at $1.24 compared to$0.86 last year [19] - Adjusted EBITDA grew 13.9% YoY to $71.4 million [20] Business Line Performance Engineered Composites (AEC) - Net sales grew by 27$3.3 million in incremental profits [21][22] - Production of LEAP components is running ahead of deliveries, contributing to overperformance in 2019 [7][8] Machine Clothing (MC) - Net sales declined by 2.6% YoY on a currency-neutral basis, driven by declines in publication and pulp grades, partially offset by growth in packaging and tissue grades [14][16] - Gross margin improved to 52.4% from 50% YoY, driven by reduced depreciation, favorable mix, and material savings [14][16] - MC adjusted EBITDA was $55.8 million, or 36.9$57.8 million last year [20] Market Performance - North America saw mid-single-digit revenue growth in MC, while Europe and Asia Pacific experienced declines [10] - Softness in the pulp and paper market is expected to impact MC revenues in North America in future periods [10][29] Strategic Direction and Industry Competition - The company is focused on operational excellence, new business development, and advanced technology to drive future success in AEC [13] - In MC, the company maintains a competitive advantage through scale, continuous improvement initiatives, and superior customer service [15] - The company is closely monitoring the Boeing 737 MAX situation, which could create top-line pressure for AEC if the slowdown extends into 2020 [13][28] Management Commentary on Operating Environment and Future Outlook - The company expects full-year 2019 revenue of $1.04 billion to$1.06 billion, with adjusted EBITDA of $250 million to$260 million [27] - For 2020, the company anticipates headwinds, including potential softness in MC revenues due to economic slowdowns and the impact of the Boeing 737 MAX situation [28][29] - The company remains optimistic about long-term growth opportunities, particularly in AEC [31] Other Important Information - Total debt decreased by $58 million to$424 million, with a leverage ratio of 1.42 under the credit agreement [23] - Capital expenditures in Q3 were 14 million, with investments focused on supporting AEC ramp-ups [23] Q&A Session Summary Question: LEAP-1B Accounting and Inventory Build - The company is recognizing revenue and profit on LEAP components produced but not yet delivered, leading to a build in contract assets rather than inventory [32][34] - Inventory build is limited to a few weeks and is managed in coordination with Safran [32][33] Question: Cost-Plus Incentive Fee Contract Structure for LEAP - The cost-plus fee structure mitigates financial downside, with fixed costs recoverable and gross profit rates remaining stable [41][42] - Incentive fees can increase gross profit rates as production costs decrease [42] Question: Boeing 787 Production Rate Cut - The company does not expect a major impact from the Boeing 787 production rate cut, as the program represents a small portion of total revenue [46] Question: F-35 Program and Capex - The company has sufficient capacity to meet F-35 production demands without significant additional capex [48] Question: Machine Clothing Margins and Market Softness - MC margins improved due to favorable mix, material savings, and productivity gains, but the company remains cautious about potential softness in North America [52][53] - The company expects continued erosion in publication grade PMC sales, offset by growth in packaging and tissue grades [54] Question: Long-Term Contract Revisions - The 3.3 million favorable revision in Q3 was driven by strong operational performance and spans multiple programs [61][63] Question: LEAP Production Rates - LEAP production rates are driven by Safran's demand, with production running ahead of deliveries but expected to decrease in Q4 [65][66] Question: M&A Pipeline - The company is exploring inorganic growth opportunities but is cautious about valuations, targeting double-digit IRR and strong synergies [70][72]