Albany International Corp. (NYSE:AIN) Q4 2022 Earnings Call Transcript

Albany International Corp. (NYSE:AIN) Q4 2022 Earnings Call Transcript February 14, 2023

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Albany International Fourth Quarter and Full Year 2022 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. And as a reminder, your conference is being recorded. I would now like to turn the conference over to your host, John Hobbs, Director of Investor Relations of Albany International. Please go ahead.

John Hobbs: Thank you, Lois, and good morning, everyone. Welcome to Albany International’s fourth quarter and full year 2022 conference call. As a reminder, for those listening on the call, please refer to our press release issued yesterday afternoon, 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. Today, we’ll make statements that are forward-looking that contain a number of risks, uncertainties, among which are the potential effects of the COVID-19 pandemic on our operations, the markets we serve, and our financial results.

For a full discussion, including a reconciliation and non-GAAP measures we may use in this call to their most comparable GAAP measures, please refer to both our earnings release of February 13, 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. Welcome everyone. Thank you for joining our call. We’re pleased to report another strong quarter, capping a good year in 2022. Over the course of the year, our team successively navigated multiple challenges, including continuing COVID pandemic, the China lockdown, supply chain shortages, higher inflation, tight labor markets, threats of recession and geopolitical uncertainty. Despite these headwinds, we were resilient, delivered solid results for shareholders. Revenue and adjusted EBITDA continued to trend higher, approaching 2019’s record highs. Sales grew 12% year-over-year to $1,035 million. Gross margins exceeded 37% and adjusted EBITDA margins were 24.5%. We had a good year and our long-term strategy is on track, the past year benefited from our rock solid balance sheet, our global leadership position and machine clothing, organic growth from our aerospace composites business and our employees’ outstanding operational performance.

We continue to focus on customers, doing a great job in product quality, reliability, delivery, and technical service. We won new business and brought new products to market. And our strong balance sheet allows us to invest in our businesses and execute our growth strategies. At the segment level, Machine Clothing’s operational performance and financial results continued to be impressive. For the full year 2022, net sales were up nearly 2% on a constant currency basis, making up $10 million in revenue loss from our Russian market exit. The Machine Clothing segment delivered excellent profitability with gross margins exceeding 50% and adjusted EBITDA margins exceeding 37%, despite the inflationary environment. The Engineered Composites segment grew full year net sales 37%, nearly 40% on a constant currency basis with significant contributions from both new work on the Sikorsky CH-53K helicopter and recovering commercial aviation production on the LEAP program, driven by the ramp in narrow body aircraft production of the Boeing 737 MAX and Airbus A320neo aircraft.

Adjusted EBITDA was $79 million, up about $10 million from 2021’s results. As we enter the year 2023, we expect demand for Machine Clothing products to be relatively healthy. We benefit from our reputation for exceptional reliability, quality and delivery. Our focus on higher value added end markets helps drive profitability, while the replenishment nature of our consumable belts results in relatively steady demand. Tissue markets where Albany has a leadership position, holds up better and volatile economic times, packaging and printing grade markets tend to be more sensitive to economic activity. You may recall that when we entered the fourth quarter in 2022, demand in our Machine Clothing markets was strong. And through the fourth quarter, demand in the Americas stayed healthy and remained strong today.

European and Chinese market demand slowed somewhat in Q4 and now appears to be recovering on the reopening in China in the easing of European energy concerns. Overall we’re encouraged that Machine Clothing demand should hold up in 2023. In AEC, the longer term outlook for growth remains healthy, driven by recovering narrow body production in our portfolio of great programs in defense. In the near-term, as you’ve heard, demand in the commercial aerospace market is outstripping the industry’s ability to supply. As a result, the year-over-year growth driven by commercial aircraft production is more muted than we had anticipated after a year of significant top line growth in 2022. Once supply chains are improved with growing passenger travel and airplane demand, we would expect to see production growth for the Boeing 737 MAX, Airbus A320neo and Boeing 787 aircraft.

For now, however, our outlook for 2023 does not contemplate near-term growth in these programs. On the defense side, we have significant programs including the Lockheed Martin, F-35, the Sikorsky CH-53K helicopter, and the JASSM missile. These programs have stable or growing production profiles for years to come. With the CH-53K set to enter full rate production, that program is expected to remain our largest defense program and arrive at the LEAP program in size. Additionally, we’ve won several smaller aerospace programs with new OEM customers in both defense and commercial markets, programs that our customers do not want us to disclose. These new wins add to our longer term portfolio for growth, further diversifying our customer base and leveraging our composite materials expertise.

Now let me make a comment about our long-term strategy. Our strategy for long-term growth and competitive differentiation is based on two fundamentals. The first is that we’re really good at developing advanced material solutions, and the second is that we do a great job for customers. These two things combined, material expertise and operational excellence set us up to be the partner of choice for our customers. This gives us an advantage that our customers value our product development, our ability to industrialize a process or technical support and our operational consistency to deliver the highest quality products on time and reliably We sustain this growth and competitive differentiation because we continue to invest in our employees, the capital equipment and the processes that we need to efficiently produce the advanced material products our customers value.

Effective capital allocation remains a top priority with a focus on driving long-term organic growth. It starts with research and development for both product and process advancement. You’ll notice that throughout the pandemic, we invested nearly $40 million per year on average in research and development in our business, about 4% of net sales over the past three years. These are development efforts often in alignment with customer partnerships that are specifically €“ that specifically target product development and process improvement goals. These technological collaborations and material advancements are an essential investment in our future success and both machine clothing and engineered composites. Our capital expenditures are focused not only on maintaining our current capabilities, but on advancing our production efficiency and growing our capacity and capabilities as our business base grows.

In December, we increased our regular dividend by 19% to $0.25 per quarter. During the past two years, our Board of Directors has authorized a share repurchase program and we’ve executed just over $100 million of repurchases, retiring about 4% of our shares. Finally, we’ll continue to evaluate targeted discipline acquisitions to supplement our long-term growth strategy. Historically, acquisitions have played an important role by enabling us to build on our technological leadership and strengthen global market positions with key customers in line with our strategic priorities. In summary, we ended the year 2022 in great shape with a robust balance sheet. Our employees doing a great job for customers with a relentless focus on operational excellence and developing advanced materials in both segments, and we continue to invest in R&D to position Albany for long-term organic growth.

We believe we’re poised for another solid year of results in 2023. So with that, I’ll hand it over to Stephen to provide more details on the quarter and our outlook for 2023. Stephen?

Photo by Rio Lecatompessy on Unsplash

Stephen Nolan: Thank you, Bill. Good morning to everyone. I will talk first about the results for the quarter and then about our initial outlook for our business in the coming year. For the fourth quarter, total company net sales were $268.8 million, an increase of 12% compared to the $239.9 million delivered in the same quarter last year. Adjusting for currency translation effects, principally the decline in the euro relative to the U.S. dollar, net sales increased by 15.5% year-over-year in the quarter. In Machine Clothing, also adjusting for currency translation effects, net sales were flat year-over-year with growth in tissue and packaging grades, offset by declines in pulp and engineered fabric grades. Engineered Composites’ net sales, again after adjusting for currency translation effects grew by 44.7%, driven by growth on CH-53K and LEAP partially offset by declines on the F-35 and 787 platforms.

During the quarter, CH-53K generated revenues of over $35 million, up from $13 million in the same quarter last year, while the ASC LEAP program generated revenue of about $41 million, compared to $27 million last year. We finished the year with $159 million of revenue on the ASC LEAP program and over $100 million on CH-53K. While we had seen a decline in downside risk in Q3, entering Q4, we still had been carrying some risk reserve on revenue for the fourth quarter to account for a variety of supply chain and other challenges across our portfolio of programs. However, those risks did not fully materialize, resulting in higher than anticipated fourth quarter revenues. Fourth quarter gross profit for the company was $97.1 million, an increase of 1.1% from the comparable period last year.

The overall gross margin declined by 390 basis points from 40.0% to 36.1% of net sales caused primarily by the relatively higher revenues in the lower margin AEC segment. Within the Machine Clothing segment, gross margin declined from 52.3% to 49.8% of net sales, caused by higher input costs, the absence of a one-time benefit we recorded in 2021 and lower absorption due to lower production volumes. Within Engineered Composites, the gross margin increased from 16.9% to 18.8% of net sales caused primarily by improved absorption from higher revenues and the reversal of $1.4 million of previously established reserves, partially offset by losses recognized on the startup program and by a less favorable net change in the profitability of long-term contracts.

During the quarter, we recognized an unfavorable net change of $1.7 million in these contracts compared to a favorable change of $1.7 million in the prior year quarter for a net year-over-year difference of $3.4 million. Fourth quarter selling, technical, general, and research expenses increased from $53.2 million in the prior year quarter to $59.3 million in the current quarter and were essentially flat at about 22% of net sales. The increase was caused by higher foreign currency revaluation expense, increased our incentive compensation expense and investments in sales and marketing. Total operating income for the company was $37.9 million, down from $41.7 million in the prior year quarter. Machine Clothing operating income fell by $9.5 million caused by lower gross profit and higher STG&R expense, while AEC operating income rose by $7.8 million, driven by higher gross profit.

Other income and expense in the quarter netted to an expense of $3.8 million, compared to income of $1.2 million in the same period last year. The decline this quarter was primarily driven by unfavorable foreign currency revaluation effects of $8.8 million, partially offset by a gain of $3.4 million from the sale of excess IP addresses. The income tax rate for this quarter was 42.1%, compared to 27.3% in the prior year quarter. The higher rate this quarter was caused by discrete tax adjustments primarily related to incremental foreign withholding taxes and the guilty provisions of the U.S. tax code plus a true up of prior quarters tax rate. For the full year, our effective tax rate was 26.9%. Net income attributable to the company for the quarter was $18.1 million, compared to $28.6 million last year caused by lower operating income, unfavorable other income and expense and the higher tax rate.

Earnings per share was $0.58 in this quarter, compared to $0.89 in the same period last year. After adjusting for the impact of foreign currency revaluation gains and losses, restructuring expenses, expenses associated with the CirComp acquisition and integration, and the exclusion of the gain from the sale of IP addresses this quarter, adjusted earnings per share was $0.75 this quarter, compared to $0.86 last year. Adjusted EBITDA fell from $60.6 million in Q4 2021 to $58.4 million in the most recent quarter. Machine Clothing adjusted EBITDA was $52.2 million or 34.7% of net sales this year down from $59.7 million or 38.1% of net sales in the prior year quarter. AEC adjusted EBITDA was $22.3 million or 18.8% of net sales up from last year’s $16.1 million or 19.3% of net sales.

During the quarter, the company generated free cash flow defined as net cash provided by operating activities less cash used in investing activities of a little over $17 million. We finished the quarter with net leverage ratio of about 0.58. I would now like to turn towards the coming year and provide our initial financial guidance for 2023. Machine Clothing delivered another exceptional year in 2022 with strong top line performance and profitability in the challenging environment with Russia’s invasion of Ukraine and our subsequent exit from a Russian market, the inflationary environment, Europe’s energy crisis, and China’s COVID challenges, all creating headwinds for the business. As we enter 2023, conditions are ripe for another good start to the year, particularly in the Americas.

For the full year 2022, orders in the Americas were up mid-single digits over 2021 and again for the full year 2022, orders to sales was greater than one. While Eurasia was strong for 2022 overall with orders to sales above one, we did see some tail end weakness in the year. In Q4 2022, orders to sales in Eurasia was below one driven by macroeconomic conditions in both Europe and China. However, we do not expect this to be a long-term trend. And in fact, we have already seen stronger orders activity in those regions in the first few weeks of 2023. Unlike in 2022, we do not 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 modestly above that level.

That said, we will see some challenging year-over-year comparisons in the front half of the year, as the exchange rate in the first half of last year was above current projections for this year. From a product mix perspective, we expect the market for packaging and tissue grades to remain robust and we do not expect to see any material shifts in those grades. However, we do not expect the rebound we have seen in publication grades since COVID to be sustained in 2023. Overall, for the segment, we are providing initial revenue guidance of $590 million to $610 million. From a Machine Clothing profitability perspective, in Q4, we saw the continuing impact on gross margin of the current inflationary environment as more of the higher cost raw material that had been sitting in the inventory was incorporated into cost of goods sold.

However, on the inflation front, we are beginning to see some bright spots ahead of us. Logistics and energy input prices have both seen reversals of prior increases and while raw material and labor input prices remain higher, we’ve been able to offset some of that impact through higher pricing to our customers. In 2023, we may have some tough year-over-year adjusted EBITDA margin comparisons in Machine Clothing, particularly in the first three quarters of the year, as we compare ourselves to periods prior to recognition of the full impact of inflation in our financial results. However, we still expect to deliver margins in line with our long-term expectations for the segment of adjusted EBITDA margins in the mid to high-30s for the full year.

As a result for 2023, we are providing initial guidance for Machine Clothing adjusted EBITDA of $205 million to $225 million. Turning to Engineered Composites. The segment significantly overdelivered on the top line in 2022. While none of this was an intentional pull forward revenues in 2023, it does given the nature of the programs in which we’re performing limit the upside in 2023. As Bill referenced, our guidance does not envisage any material upside on the Boeing 787 frames program in 2023. There was also limited near-term upside on the LEAP program. In 2022, ASC’s LEAP program generated close to $160 million of revenue through the supply of engine cases, fan blades and spacers on the 737 MAX and A320neo platforms. However, as has been well publicized both Boeing and Airbus are facing supply chain challenges that are limiting their output of single-aisle aircraft.

We now expect that in 2023 ASC LEAP revenue will be largely flat compared to 2022 before growing again in 2024. We also expect revenue from the CH-53K program overall, including the Aft Transition work package to be more or less flat to 2022, with an increase in recurring production fully offset by decline in non-recurring revenue both tooling and non-recurring engineering related to the Aft Transition portion. That said, as Bill indicated, longer-term as we transitioned full rate production in that program, we expect solid growth on the CH-53K. In 2023, we also expect to see growth on several other programs, including some recent wins. Overall for the AEC segment, we are providing initial revenue guidance of $420 million to $440 million. From a profitability perspective in AEC, we expect to see some inflation headwinds primarily respect to labor costs in 2023.

However, we expect better overall operation performance and better overhead absorption than in 2022. As a result, we are providing initial AEC adjusted EBITDA guidance of $80 million to $90 million. At the total company level, we are providing initial 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 and $75 million, capital expenditures in the range of $90 million to $100 million, GAAP and adjusted earnings per share of between $3.10 and $3.60, and adjusted EBITDA of between $225 million and $255 million. Returning to the present, we are very pleased with how the company performed in 2022 overall. We’re also excited about the long-term positioning of both segments and look forward to delivering another strong year of performance in 2023.

With that, I would like to open the call for questions. Lois?

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Q&A Session

Operator: Our first question is from the line of Peter Arment from Baird. Please go ahead.

Peter Arment: Yes, good morning, Bill and Stephen. Wondering if I could just touch based on the LEAP program, you mentioned that it had a €“ kind of a really strong 2022. Could you maybe Stephen provided low clarity on just kind of €“ are you currently kind of in sync with the existing build rates or are you kind of lagging because you’ve kind of already delivered some additional ship sets?

Bill Higgins: Yes. Peter, this is Bill. As we look at the year, we set a plan and we level load the factory for the full year in cooperation with Saffron our customer based on their outlook. There is some material in the channel inventory that we’ve produced and imagined further down the channel. But it’s not at an unusual level that I’m aware of. So we’re €“ if that’s your question, what the channel looks like. So it €“ as we look at the first part of the year, we’re setting a plan, it’s relatively flat and if things pick up on the latter half of the year, we could improve that.

Peter Arment: Okay. That’s helpful. And then €“ and just as you mentioned 787 also kind of looking relatively not a big contributor, I guess, this year. But Boeing has some longer term outlooks. Maybe your thoughts on just kind of syncing up and what you’re seeing for 787 demand to step up?

Bill Higgins: Yes, 787 is a great airplane. So we’re hoping to see that pick back up. But at this point, we’ve nearly idle the production line. We’re keeping it process qualified but we don’t have any expectations at least in the beginning part of this year to do any production there. So we’re waiting for the call to ramp that back up, but it’s not in our guidance.

Peter Arment: Okay. And then just one last follow-up on just staying with an AEC, you mentioned the kind of the non-recurring on the CH-53K, we’ll be coming down, but offset to a degree on kind of production picking up. Are we expecting any impact on kind of margin mix there or how do we think about that? Thanks.

Stephen Nolan: Yes. I think Peter, look, the gross margin is comparable on both the non-recurring and the recurring production. The difference is the recurring production is out on the factory floor to absorbing plant overhead. And I’ve referenced in my comments where I was talking about the AEC profitability guidance that we do expect improved overhead absorption in 2023 leading to better margins. And that’s part of what’s driving that. So while the gross margin is comparable, the contribution margin is higher on recurring CH-53K revenue than on non-recurring revenue.

Peter Arment: Appreciate all the details. Thanks guys.

Bill Higgins: Thanks, Peter.

Operator: And the next question is from Gautam Khanna from Cowen. Please go ahead.

Gautam Khanna: Hi, good morning guys.

Bill Higgins: Good morning.

Gautam Khanna: I was curious, I’m trying to square the LEAP commentary just because if you listen to what CFM has said, is they’re going from approximately 1,100 units in 2022 to 1,800 or more a target of 2,000 this year. So what explains the disconnect? Did you actually ship much closer to the 2,000 unit level? Maybe I’m not following.

Stephen Nolan: I think Gautam, part of what happened here is as Saffron put together thier demand plan for us for 2022, they had anticipated entering 2023 at our higher production rate for Boeing and Airbus on their aircraft. And so they had us probably produce more than they might have done had they known what that actual profile would look like as Boeing and Airbus ramped up. And so I think they’re in a situation where they may have a little more of our product than they’d anticipated and therefore, we’ll burn through some of that inventory in 2023. And so they may end up €“ and we don’t full insight Gautam, I’ve seen the public statements, you have to €“ I don’t have additional insight into their production rates, but they may produce more engines in 2023 than we deliver certainly produce components in 2023.

Gautam Khanna: Okay. I mean, do you anticipate at any point a sequential dip or are you getting destocked or just held at a flat rate in the guidance that you’ve embedded in Q1, Q2, et cetera?

Stephen Nolan: Look, it bounces around always quarter-to-quarter, there’s rises and dips. Certainly, as we look for the year, and as Bill mentioned, we endeavor to the great extent possible to level load across all four quarters. There’s no material dip. It’s rough. It’s effectively flat from 2022 to 2023. But quarter-to-quarters a little noisy depending on how many holidays and other things in any given quarter, but roughly flat.

Bill Higgins: Yes. As I said, we try to plan the year working with Saffron setting a level loaded plan for the year. So if the 737 MAX goes from the low 30s per month to the high 30s per month, that might change. But right now, we’ve planned it as it is for the year, and we’ll come back later in the year and adjust it if things pick up. But we’re not expecting things to do.

Gautam Khanna: Would you be willing to opine on what your unit shipments were by 1A/1B in 2022, 1,500 in aggregate or

Stephen Nolan: Yes. We haven’t in the past nor are we going to get into right now disclosing production rates or delivery volumes. What one of the reasons being our customer has asked us to not discuss, what we’re charging per ship set? We do disclose the full revenue obviously for the program, given its materiality to the company. We don’t want to get into giving exact ship set quantities because it’s pretty easy to calculate the price at that point.

Bill Higgins: Yes. I think when Saffron reports in the next few days, you can listen to what they say about engine production. We’re closely sync with them.

Gautam Khanna: Yes. Last one for me, in your opening remarks, I think you made reference to some unnamed aerospace programs where you picked up some content. Are these new programs or are these €“ is this gaining additional content on existing in production programs? If you could at least give us some color around

Bill Higgins: There actually new programs with new customers. So as you think about the customers that we talk about, hear us speak about with Safran or or was it €“ we work on the hypersonics and a few different programs anyway. We €“ there’s a number of customers we are working with in both commercial and defense that are new customers and new programs.

Stephen Nolan: Yes. And in some cases, Gautam, it would be a program that’s certainly on a platform that is new for us, but might be an in production platform. So in some cases, they are new programs, genuinely new in some, it’s a switch over from an incumbent to us on an existing

Bill Higgins: Yes, they’re not new aircraft to put it that way.

Gautam Khanna: Okay. I appreciate it. Thank you guys.

Operator: The next question is from Steve Tusa from J.P. Morgan. Please go ahead.

Sam Yellen: Hi, this is Sam Yellen on for Steve Tusa. I was just wondering what the overproduction loaded was into Q4. I don’t recall hearing this through Q3, just as a follow-up to the last one.

Stephen Nolan: So, I went to clarity €“ sorry, it went a little fuzzy in the moment there. You’re asking for the overproduction

Sam Yellen: Yes, the overproduction. Was there overproduction at all in Q4?

Stephen Nolan: Sorry. Look, as we mentioned on LEAP for the year overall, we probably €“ and as we €“ as Bill mentioned, we effectively level load quarter-to-quarter. So it’s not that there was necessarily overproduction in Q4. For the year overall, the rate was probably higher chosen by our customers Saffron in consultation with us. Then they might have chosen had we known the profile from Boeing and Airbus production profile. But I wouldn’t look at Q4 and think that was some big overproduction quarter. We certainly did not intentionally pull additional production into Q4 from future periods. But just given the nature of program, if you take a LEAP, if we produced more collectively over 2022 than our customer might have decided they have perfect insight into the future that means we’ll produce less than 2023 than we otherwise might have done.

So in some ways, there has been a shift of revenue from 2023 to 2022. But I don’t want you to look Q4 and think it’s materially higher because of that. This was over the full year.

Sam Yellen: All right. Got it. And then on the LEAP inventory, does that sit at the CFM JV or at Safran?

Stephen Nolan: It’s a combination. So we certainly recognize revenue as we produce parts, and when we ship them, we invoice for them. Prior to us producing €“ or sorry, after we produced them prior to us shipping, they sit in contract assets in our book. We have recognized revenue on them, and they’re sitting in our books in contract assets. When we deliver them, which entails shipping them across a yellow line in the middle of the factory floor, they flip over to be an accounts receivable until we collect the money for them. But so, right now some of that is in our books, but not a huge amount of inventory. It’s not sort of situation we’re in a couple of years ago where we talked about having 250 ship sets, I think in the factory of excess inventory. But Safran does hold some excess inventory, I think of our product as well, we have to burn through.

Bill Higgins: And just as part of our arrangement with them, we will always hold some. So that if things happen €“ if the business were to pick up, we have inventory in the system, that’s part of the arrangement that we ship to, but it’s not at an unusual level.

Sam Yellen: All right. Got it. And then just one last one for me. It looks like in ASC Q1 seasonality typically calls for a high-single-digit sequential step up. How should we think about the seasonality this year? Any reason Q1 should be different than normal?

Stephen Nolan: Yes. And look, I understand it looks like seasonality. The nature of our ASC businesses, it really isn’t seasonable. It’s more that when it’s growing and the fact that we level load, for example, on LEAP, when LEAP sees a lot of growth one year to the next that appears in Q1 because we step up all of the quarters. And so there’s a big jump from Q4 in the prior year to Q1 in the current year, and it’s not really seasonality, it’s more effects like that. I wouldn’t expect to see some big jump up in Q1 of this year. In fact, look, if you look at Q4 what we delivered revenue of in last year quite high. I would expect this year €“ I’m not saying the quarters will be identical, but you’d get close by just taking our annual guidance and dividing by four.

Bill Higgins: Yes, and even some of the programs are €“ I was going to add, some of the programs are not seasonal, like as we go from the establishment of the production lines for the app transition, CH-53K as we’ve done all the tooling work and all that. And then as we convert it over to actual production, there’s a change over there. So it’s not seasonal at all. It actually may be counter seasonal.

Sam Yellen: Okay. Thank you very much.

Operator: Thank you. And the next question is from the line of Pete Skibitski from Alembic Global. Please go ahead.

Pete Skibitski: Hey, good morning guys. Couple housekeeping questions. Steve, I might have missed this, but what are you guys assuming even directionally for corporate expenses in 2023? And then second one just on CapEx kind of came in above the guide for 2022 and it stays elevated for 2023, so I was just wondering what was going on there? Thanks.

Stephen Nolan: Yes. We don’t explicitly guide corporate, but you can certainly get there by taking our segment guidance and our overall company guidance, and looking at that a couple of factors contributing to a somewhat higher corporate expense in 2023 and 2022. One is just compensation overall, which is a combination of a higher normal increase in merit raises just given the current inflationary environment, plus the additional €“ addition of some targeted headcount where we felt we were lacking some capabilities at corporate. We’ll add those in 2023. And secondly, in the GIS area where we’ll €“ sorry, IT area, we call it GIS internally. In the IT area where we are continuing to add some expenses to comply with U.S. DoD cybersecurity requirements for our programs as a government contractor.

We’re required to comply with CMMC, the Cybersecurity Maturity Model, which requires some degree of separation of our data within AEC and some additional expenses. Some of that will hit in 2023 disproportionate to 2022, and that’s why you see the somewhat higher corporate expense level next year. From a CapEx perspective, there’s a number of things going on. One is, new program growth as we’ve discussed we would be spending significantly on programs such as the app transition program 53K. Portion of that was in 2022, a portion of that will be in 2023. Also look in general there were certain capital expenditures which were approved back in 2021 and even 2022, which we thought were good expenses to make or good investments to make, sorry. But which were deferred because what was going on with the pandemic and some uncertainty around cash flow and future program growth.

So a lot of those expenses were now playing catch up where we’re incurring those in expenses as we make those investments here in 2023. So it’s a combination of some of those deferred catch up spending. I wouldn’t view our 2023 as a new normal, it’s aberrantly high, I think driven by both of those factors.

Pete Skibitski: Okay. Appreciate the color. Thank you.

Operator: Thank you. And we’ll move to the line of Michael Ciarmoli from Truist Securities. Please go ahead.

Michael Ciarmoli: Hey, good morning guys. Thanks for taking the questions. Just to go back to the LEAP and production. Just for clarity, what’s your lead time? If we are expecting rate breaks high or later in the year, if Boeing is successful getting the eight, seven up to five per month, how soon or how far ahead do you guys start ramping up that production?

Bill Higgins: Yes. We don’t think about that particularly as a lead time, but from an ability to ramp the business and the processes, as you may recall, we have the capacity, we have the equipment in place, and it’s about training people. Maybe that’s a few months to bring somebody new on and train them. But we’d be ready to go. So I don’t think we €“ I don’t think it would take us too long.

Stephen Nolan: Yes. Some of €“ if you think about as the rate increases as Safran gets that, when do they have to switch us on, it does vary based on how much finished goods inventory Safran has at that time and how much of that kind of safety stock, if you like, they’re willing to absorb in anticipation. So it does vary. But if you think probably something like six months might be a reasonable thing if you both step up, when would we step up? But as I say, it does vary depending on how much Safran is willing to do with its existing finished good.

Bill Higgins: And we would know well ahead of time. It’s not the kind of thing what happened the last minute.

Michael Ciarmoli: Okay. Okay. And then Bill, you just mentioned training people, new employees. I mean, are there any other choke points out there in the supply chain? I mean, as you look at your current staff and think about where you might need to be. I mean, is there going to be a significant demand for new employees or how are you thinking about additional staff here?

Bill Higgins: Yes. The labor markets been really tight in general, if we look back over the last year or so, and they’ve gotten a little bit better. I won’t say they’re wide open, but we’ve been able to get the people we need and focus on training new folks and bringing them up to speed and doing a lot of training with existing employees. So we’re feeling more comfortable. Things have gotten a little bit better on the logistics side as well. So I don’t see anything that that’s a major bottleneck at this point.

Michael Ciarmoli: Okay. Okay. And then Steve, just one for clarity, the engineered EBITDA margins in the quarter down year-over-year down sequentially. Was that just due to mix? Was that just the higher revenues from the CH-53K or anything that that happened in the quarter to push those margins down?

Stephen Nolan: No. Look, let me touch on, CH-53K is certainly not a low margin program. It’s a good solid program. I think it’s a combination and I mentioned this briefly in my remarks. One of our newer programs had some startup challenges. And one of the challenges on new programs is as we think about the process we go through, the terms of this long-term program accounting where we spread the pain or gain, either bad news or good news over the life of a program and adjust the booking rate. On the new program, we typically have an order for just a very short period. So that gain all gets kind of recognized almost like a period expense rather than doing long-term program accounting. So there’s significant hit in the quarter related to that.

Michael Ciarmoli: Got it. Okay. Helpful. Perfect. Thanks guys.

Operator: Thank you. And at this time there are no further questions in queue. Please continue.

Bill Higgins: All right. 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. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T TeleConference. You may now disconnect.