Albany International Corp. (NYSE:AIN) Q1 2023 Earnings Call Transcript

Albany International Corp. (NYSE:AIN) Q1 2023 Earnings Call Transcript April 26, 2023

Albany International Corp. beats earnings expectations. Reported EPS is $0.91, expectations were $0.82.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Albany International First Quarter 2023 Earnings Conference Call. As a reminder, your call today is being recorded. I’ll now turn the conference call over to your host, John Hobbs, Director, Investor Relations. Go ahead, sir.

John Hobbs: Thank you, Alan and good morning, everyone. Welcome to Albany International’s first 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 statements apply to our verbal remarks this morning. 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 expected or implied. For a full discussion of these risks and uncertainties, including our reconciliation to non-GAAP measures we may use in this call to their most comparable GAAP measures, please refer to both the earnings release of April 25, 2023, as well as our SEC filings, including our 10-K.

Now, I’ll turn the call over to Bill Higgins, President and Chief Executive Officer, who will provide opening remarks. Bill?

Bill Higgins: Thank you, John. Good morning and welcome, everyone. Thank you for joining our first quarter earnings call. We’re pleased to report another strong quarter and we’re off to a good start this year. Both business segments executed well in line with our plan. Total company sales grew more than 10% relative to our first quarter of last year, driven by strong organic growth from Engineered Composites. Gross margins were nearly 37% and adjusted EBITDA margins were 22%. At the segment level, Machine Clothing’s first quarter sales were effectively unchanged year-over-year. Machine Clothing segment delivered excellent profitability again with gross margins over 50% and adjusted EBITDA margins exceeding 36%. To put this in historical context, these margins are in line with our 5-year averages.

Our Machine Clothing operating teams continue to execute well and deliver these attractive levels of profitability despite inflation and lingering supply chain challenges. The Engineered Composites segment achieved top line growth of approximately $26 million in the first quarter, up nearly 30% compared to Q1 of 2022. The growth is primarily driven by the Sikorsky CH-53K helicopter program, the lead program in addition to contributions from smaller programs. Adjusted EBITDA in this segment was $21 million, up about $7 million from 2022’s first quarter results. In the past, I’ve discussed our strategic goal is to become the partner of choice for our customers in both of our business segments. In Machine Clothing, we’re the leader in the paper machine clothing space and it’s our job to remain firmly positioned as the partner of choice.

Our strategy is to invest in the next generation of products, our production processes and our technical sales and service teams. This is foundational to our well-earned reputation for superior product performance, reliability, quality and customer service. In AEC, we’re continuing to build our brand. Our on-time delivery and our product quality are becoming recognized as world class. This customer recognition of Albany as a high-performance supplier, coupled with our composite material expertise has been key to securing more business with existing customers, such as the CH-53K app transition program, Sikorsky and new business with certain new customers. Building on our growing reputation, our commercialization team has significantly increased our bid and proposal pipeline.

Our engineering and operations teams are working hard to convert the most attractive of these opportunities to organic growth for our business. This pipeline of opportunities enhances our confidence that our organic growth strategy for the next few years is on track. As we discussed on our last call, our 2023 CapEx program consists of investments driven by organic growth in AEC. In addition, as part of our continued operational excellence, we’re making a significant investment and production capabilities to drive productivity gains within AC NMC as well. Turning to business development. We recently announced a contract award from the U.S. Army in support of hypersonic development activities. This award is a visible indication of the potential of our proprietary 3D composite technology and what it could play in the demanding hypersonic environment.

AEC will be utilizing its near net shape 3D technology to develop a carbon structural solution for thermal protection systems that have significant benefit in high-temperature hypersonic applications. When compared to competing technology — technologies AEC’s 3D solution provides unique thermal and structural performance advantages with superior affordability and scalability. So we’re off to a good start to the year. Our operations are performing well and we’re executing on our long-term strategy. Before moving on to the financial review, I wanted to take a moment to thank Stephen Nolan for his contributions to the success of Albany International and extend our best wishes for his continued success of this new company. Now I’d like to formally welcome Rob Starr, who recently joined Albany as our Chief Financial Officer.

Rob comes to Albany as a seasoned CFO with both public and private company experience. He knows the industries we serve and his depth of experience will be instrumental in leading our finance organization and we’re grateful to have him on board. While many of you likely know Rob from his prior roles, we look forward to introducing him to the investment community in the coming weeks. Now with that, I’ll hand the call over to Rob and I’ll be back to wrap up.

Robert Starr: Great. Thank you, Bill and good morning, everyone. I’m excited to be at Albany and working closely with the team as we continue to execute our strategy of value creation for all of our stakeholders. I have known Ablany for some time and was attracted to the company for its financial strength, operational discipline and leading-edge technologies. I found these attributes evident in both segments which I view as a clear differentiator in the market. Across the organization, there is a demonstrated foundation for success which I’m excited to help build upon. The team has a collaborative culture and have been impressed with their expertise and passion. Over the coming weeks, I will be visiting a number of sites and getting to know our team throughout the organization.

Turning to the quarter, I will talk first about the results for the quarter and then provide our outlook for the rest of the year. For the first quarter, total company net sales were $269.1 million, an increase of 10.2% compared to the $244.2 million delivered in the same quarter last year. Adjusting for currency translation effects, principally the decline in the euro and the Chinese yuan relative to the U.S. dollar, net sales increased by 12.2% year-over-year in the quarter. In Machine Clothing, also adjusting for currency translation effects, net sales were slightly higher compared to the same period in 2022 with higher sales across all paper machine clothing grades, offset by contraction in engineered fabrics as nonrevolving demand has waned in the post-pandemic environment.

Engineered Composites net sales, again, after adjusting for currency translation effects, grew by 30.3%, driven primarily by growth in the CH-53K and LEAP programs. During the quarter, CH53K generated revenues over $27 million, up from $16 million in the same quarter last year, while the ASC LEAD program generated revenue of about $43 million compared to $40 million last year. First quarter gross profit for the company was $99.3 million, an increase of 8.4% from the comparable period last year. The overall gross margin declined modestly from 37.5% to 36.9% of net sales caused primarily by the higher contribution from the AEC segment. Within the MC segment, gross margin declined from 51.5% to 50.8% of net sales caused by higher input costs. Within AEC, the gross margin increased from 13.6% to 18.5% of net sales primarily due to improved absorption in the absence of raw material write-offs recorded in Q1 2022, partially offset by losses on the new program.

During the quarter, we recognized an unfavorable net change of $600,000 on estimated profitability on contracts, similar in magnitude to that in the prior year quarter. First quarter selling, technical, general and research expenses increased from $52.6 million in the prior year quarter to $58.8 million in the current quarter and was essentially flat at about 22% of net sales. Please note from a run rate basis, Q1 corporate expenses included approximately $2.5 million of discrete items that are onetime in nature. Total operating income for the company was $40.5 million, up from $38.8 million in the prior year quarter. Higher operating income from AEC was offset somewhat by higher corporate expenses due to higher professional fees and personnel-related costs and modestly lower MC operating income.

Other income expense in the quarter netted to an income of less than $0.5 million compared to $3.9 million of income in the same period last year. The decline this quarter was primarily driven by revaluation losses due to the euro strengthened relative to the U.S. dollar during the current year quarter. The effective income tax rate of 28.2% this quarter was largely unchanged from the rate experienced during the first quarter of 2022. Net income attributable to the company for the quarter was $26.9 million compared to $27.7 million last year, caused by a $3.4 million reduction in other income, partially offset by higher operating income. GAAP earnings per share was $0.86 in this quarter compared to $0.87 in the same period last year. After adjusting for the impact of foreign currency revaluation gains and losses, restructuring expenses, acquisition and integration expenses, adjusted earnings per share was $0.91 this quarter, unchanged from the first quarter of last year.

Adjusted EBITDA declined slightly from $61 million in Q1 ’22 to $60.4 million in the most recent quarter. Machine Clothing adjusted EBITDA was $55.7 million or 36.4% of net sales this year, down from $57.7 million or 37.4% of net sales in the prior year quarter. AEC adjusted EBITDA was $21 million or 18.1% of net sales, up from last year’s $13.7 million or 15.2% of net sales. During the quarter, the company had negative free cash flow defined as net cash used in operating activities less capital expenditures of about $33 million. It is typical for the company to have negative cash flow in the first quarter due to seasonality in receipts and incentive compensation payments for performance in the past year. I would like now to turn towards the balance of the year and confirm our prior financial guidance remains in place for 2023.

In short, the first quarter developed largely as we had anticipated and our expectations for the balance of the year haven’t fundamentally changed. Machine Clothing delivered another exceptional quarter. In aggregate, we experienced market growth on a constant currency basis in all paper machine clothing grades. This was offset somewhat by declining demand in our engineered fabrics business, driven by the lower demand for the belts we supply to nonwoven manufacturers. Looking at geographic markets. The market conditions we noted as we entered 2023 remain largely in place with growth in the Americas, stable markets in Asia and markets that have weakened somewhat in Europe when compared to Q1 last year. Overall, our order books are similar to this time last year with strength in tissue grades offsetting softer packaging markets.

As a result, we’re cautiously optimistic about 2023. Unlike in 2022, we do not currently expect to see a continuation of foreign exchange headwinds for the full year. We finished 2022 with an average euro to U.S. dollar exchange rate of $1.05 for the full year and the current exchange rate is above that level. Overall, for this segment, we are maintaining our revenue guide of $590 million to $610 million. As mentioned last quarter, inflationary pressures are easing with improved availability and cost of logistics and more moderate energy pricing. However, some raw material supply chains remain a challenge. We continue our efforts to offset some of the inflationary impact through ongoing continuous improvement efforts and input cost management.

We still expect to deliver margins in line with our long-term expectations for adjusted EBITDA margins in the mid-30s for the full year. Accordingly, we are maintaining our 2023 guidance for Machine Clothing adjusted EBITDA of $205 million to $225 million. Turning to Engineered Composites. Our outlook for the year has not changed. As I mentioned, the AEC elite program generated close to $43 million in the first quarter. We continue to expect 2023 LEAP revenue will be roughly stable with 2022 levels before growing again in 2024. We also expect revenue from the CH-53 program to be overall flat compared to 2022, with an increase in recurring production fully offset by a decline in nonrecurring revenue. In 2023, we also expect to see growth in a few smaller programs.

As a result, we are reiterating our revenue guidance of $420 million to $440 million and adjusted EBITDA of $80 million to $90 million. At the total company level, we are reiterating our 2023 guidance as follows: revenue of between $1.0 billion and $1.05 billion, effective income tax rate of 28% to 30%, depreciation and amortization between $70 million to $75 million; capital expenditures in the range of $90 million to $100 million, GAAP earnings per share of between $3.05 and $3.55, adjusted earnings per share of between $3.10 and $3.60 and adjusted EBITDA between $225 million and $255 million. With that, I’ll turn the call back to Bill for his final prepared comments.

Bill Higgins: As you’ve heard, the company is in great shape. Our differentiated technology, innovation expertise and solid customer relationships gives us a real competitive edge in the marketplace. We have experienced business leaders who have clearly defined long-term goals and outstanding operational track records and it’s the expertise and depth of our teams across the company to help assure the continent of our strategy and continued success. Our balance sheet is strong and we’re on sound financial footing. Rob is obviously already deep into our financial strategy and is going to be an outstanding CFO. As you know, I’ve informed the Board of my intention to retire. We have a search underway for my successor and I know the Board is pursuing the effort with thoroughness.

I’m fully committed to ensuring a smooth transition and the board knows I’ll remain in place for as long as that takes. Our team has confidence in the future and we look forward, as always, to sharing our progress with you. Now, we’ll be happy to take your questions. Alan?

Q&A Session

Operator: Our first question will come from the line of Gautam Khanna with Cowen.

Gautam Khanna: Yes. Wondering were there any positive EACs in the quarter positive or negative at EAC?

Bill Higgins: Yes. There was actually a mix of positive and negative EACs and then that…

Robert Starr: That was $600,000.

Bill Higgins: $600,000 which is about the same as last year, correct?

Robert Starr: Yes. Last year, I think it was $700,000.

Gautam Khanna: Got it. Can you update us on where you guys are on the 787? Are you guys actually producing for right now?

Bill Higgins: Yes, good question. The 787, as we described it as we went through the year last year, we idled the production line. Prior to that, we had been keeping it running warm at a level at a very low rate of production. So we maintain the ability to produce. And when we idled the line, we moved employees to other parts of the business to keep the talent that we need to run the production line. And this year, we have started the line back up. We’re running at a slow pace but running it enough so that we’re assured that it could run effectively. And so we have started back up which would be new as compared to, I think, the last time we talked. So we’re getting ready. We’re expecting that in the back half of the year, we’ll see a little bit more production.

Gautam Khanna: And on the LEAP program, are you still expecting it to be relatively flat year-over-year in terms of units produced in revenue?

Bill Higgins: We are — we do plan the LEAP program for the year when we plan the manufacturing plan, we plan to — we level load the plan as we did. As we described in our last meeting, we did plan it to be flat this year. We’re still running at that pace. We had a good first quarter. We’re excited about the news coming out of Boeing and we’re looking to see if the 737 Max production picks up in the latter part of the year. But for right now, we’re sort of holding to the plan that is flat.

Operator: We’ll next go to the line of Michael Ciarmoli with Truist Securities.

Michael Ciarmoli: Just to stay on Gautam’s question with the LEAP, obviously, the news out of Boeing which I think has come out a couple of weeks ago, too. They want to be at 38% and 42%. And I guess, just the flat run here is the disconnect with Safran, I guess, planned production and deliveries. But when would you start to ramp up to meet that 38 later this year or even if it’s 42% into next year? I mean do you have pretty good line of sight into that inventory burn down or that Safran? Or can you give us a little bit more color there?

Bill Higgins: Sure, Michael. We have ongoing regular discussions with Safran. We are very close with them. As you know, we’re co-located in the same facilities in our 3 plants around the world. So we’re talking to them constantly. We would need a few months to start ramping up. We would — we have the capacity to ramp up. We have the machinery in place. And I think if you look at the last couple of years, our production probably got a little bit ahead of the engine delivery rate which is a testament to our ability to produce and produce on time. So we’re ready to go. We’re having discussions. And if we do ramp up, we need a few months ahead. But as I described earlier, we typically plan for the full year to get — to optimize the production and the efficiency of it. So in the second half of the year, we would be adding people if we were going to ramp up.

Michael Ciarmoli: Got it. And from an inventory perspective, would you have enough raw material and fiber? Or how should we think about I think the inventory was up significantly on a sequential basis. But when would you start to sort of pulling on inventory to get ready? Is that sort of all in the few months kind of contemplated with labor and raw materials as well?

Bill Higgins: Yes. I think on a material side, we’re fine. We’re working those plans. There aren’t any shortages.

Michael Ciarmoli: Okay, got it. And then, Rob, I know you obviously just got on board but you obviously had a really nice Q1 here, reaffirm the guidance. I know it’s obviously earlier in the year — early in the year here, there’s a lot of broad-based economic unknowns. But the $3.10, the low end of that range implies a major step down in an earnings trajectory. I mean what are the puts and takes from the high end to the low end? I mean I think it’s pretty easy for us to get to the high end on sort of just a flat run rate basis here. But what sort of contemplated to maybe take that earnings trajectory down significantly on the low end?

Robert Starr: Yes. Michael, it’s a very fair question. I mean I think what you would have to see is a real degradation in some of the Machine Clothing markets relative to our expectations given what the drop-through would look like there. And then any change in overall production rates as it relates I mean, we have a handful of very large programs at AEC that could really move the needle. Any change in assumption there from what’s expected broadly in the market. So there may be a little level of conservatism there but we want to make sure that our low end of the range captures kind of any unforeseen changes in the macro environment.

Bill Higgins: Again I would add we’ve taken out the risky area 787. I mean they’re basically not — there’s not much in the forecast. So there is upside more than downside, I think, there.

Michael Ciarmoli: Got it. Just the last one on that topic of Machine Clothing. On that degradation, should we be or how are you looking at maybe the erosion of cargo and we saw UPS and thinking about that packaging side of the business. Is that — is there a lot of revenue tied to more on the packaging? I know it sounded like tissue was pretty stable but what specifically would degrade and should we be watching the overall sort of e-commerce shipping retail trends for some clues there?

Bill Higgins: No. It’s — there’s not a direct correlation. The markets right now, there’s — we have an interesting mix where tissue has done well. It’s covered a little bit of softness in packaging, publication has slowed down a little bit but the Americas have been stronger than Europe. Europe has been a little bit slower. Asia has been pretty good. So it’s a real mix around the world. But in aggregate, in nonwovens, we’re coming out of the pandemic. So it’s more like a kind of a reversion to the mean in nonwovens. And then there’s a little very small business in the buildings industry. That has slowed down a little bit. But overall, we’re pretty positive. Things look pretty stable with a little bit of growth.

Operator: We’ll go next to the line of Jordan Lane with Bank of America.

Jordan Lane: So I just had a quick question. For just details you guys gave around Machine Clothing. Is there anything else happening in the broader economy that’s impacting the business right now?

Bill Higgins: I’m sorry, I didn’t understand the question. Is there something in the broader economy?

Jordan Lane: Yes.

Bill Higgins: I don’t think so. I mean, we’re — Machine Clothing demand has held up. It’s about the same as last year. As I said, it’s a little bit stronger in the Americas and in Europe. So the slowdown in Europe because of energy and the general economic weakness there is the overall driver. But overall, as I said, it’s pretty solid.

Operator: We have a follow-up question from the line of Michael Ciarmoli with Truist Securities.

Michael Ciarmoli: Just thinking about, I guess, some of the longer-term opportunities, you called out in press release the Army hypersonic. Anything you can talk about in terms of Flora and potential opportunities there? Is that now we have a production decision and that contract has been awarded?

Bill Higgins: Michael, there’s nothing we can talk about specifically. I will say I get pretty excited because the team has, as I mentioned, has a number of programs. And I’ve mentioned in prior calls where we’ve actually won programs that our customers don’t let us disclose. And we’ve been adding to that list which is wonderful for the longer term. So we don’t have anything specific to disclose but we’re pretty excited about the long-term opportunity. And that comes out of doing a great job with the customers having a technology that can play in the future that the most advanced composites. So I think we have a lot of opportunity we’re working on.

Michael Ciarmoli: Okay, fair. Last question. Rob, again, not to put you on the spot but I think it was maybe a year ago, you guys had the Investor Day, put out the 2026 longer-term operating model and some targets. I know you’ve been on board a short time here but maybe drinking from the firehose. But any thoughts on kind of the trajectory of the business over the longer term? And how you’ve kind of looked at those targets coming on board here?

Robert Starr: Sure. Yes. No, I mean, when you think about the guide, right, 5% organic growth really looking to see very meaningful expansion, in particular in AEC’s top line and then the overall earnings growth. I think we have a super strong balance sheet. Everything that I’m seeing in my first couple of weeks in the role is that the programs are in place, the BD environment — we have a terrific BD team across both sets of businesses. So — and then when you think about just the large macro, right? If you look at Machine Clothing and we just kind of look at the trend towards tissue and packaging which is where we’ve centered our production in our sales, especially compared to a few years ago, I feel that we’re very much on track to deliver on that. And especially with the — and that’s the organic side. And of course, we are evaluating in a very disciplined way, other inorganic opportunities to further accelerate that growth.

Michael Ciarmoli: Got it, helpful. All right. Welcome aboard, Rob.

Operator: Gentlemen, we have no further questions in queue or pardon me, we do have a line of Tony Bancroft with Gabelli Funds.

Tony Bancroft: Okay. I just had one maybe last question sort of longer-term big picture sort of as the Engineered Composites business matures and sort of gets to a run rate, maybe just longer-term plans, strategy of the business. Would it ever make sense for separation? And could you maybe just sort of review that? I know we’ve talked about in the past but maybe update us with sort of the outlook that you see now.

Bill Higgins: Yes. Thanks, Tony, for the question. We — the teams are working really well to grow the business, grow the AEC business and our research development technology teams actually are working together across the businesses, develop the next generation of materials. And we’ve got a lot of opportunities to create value organically. We’re going to keep working on that.

Tony Bancroft: Great. Thanks for all your hard work, Bill and Rob, welcome aboard. Good to see your name there and thanks gentlemen.

Bill Higgins: Yes. Good to hear from you, Tony. It’s been a little while.

Tony Bancroft: Yes.

Operator: We have no further questions in queue at this time.

Bill Higgins: All right. Thank you, everybody, for joining us on the call today. We appreciate your continued interest in all the international. 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: Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T Event Teleconferencing. You may now disconnect.