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Albany International (NYSE:AIN)

Q4 2007 Earnings Call

November 4, 2008 09:00 a.m. ET

Executives

Joseph Morone – President and CEO

Michael Nahl – Executive Vice President and Chief Financial Officer

Analysts

Mark Connelly - Credit Suisse

Jason Ursaner – CJS Securities

Ned Borland – Next Generation Research

Paul Mammola – Sidoti & Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter earnings call of Albany International. (Operator Instructions) I would now like to turn the conference over to our host, President and Chief Executive Officer, Joseph Morone. Please go ahead.

Joseph Morone

Thank you, Mary. Good morning, everyone and welcome to Albany International's Q3 2008 earnings call. As always we'll begin with my commentary, which this time will be a little longer than normal because we think it's important that our investors understand why even despite the looming recession, we're feeling pretty good about where we are as a company right now.

And then after my commentary, as always, Michael Nahl, Executive Vice President and CFO, will add his amplifying comments which will focus on cash flow and CapEx. And then, as always ,we'll turn over to you for questions.

Despite a rapidly deteriorating general economy in the paper industry and the effects of the previous-announced slow-down in Eclipse Aviation, earnings in Q3 2008 were comparable to earnings in Q3 2007, excluding the effects of restructuring, performance improvement initiatives and income tax adjustments.

The effects of weak PMC and EF sales and AEC income were largely offset by continued reductions in cost and another outstanding quarter for all the endorsements. More generally the Q3 results offer a window into the performance trends that we anticipate for the next few quarters. The top line, particularly in PMC, is certainly being hurt by the global recession. On the other hand, even in a long and deep recession we expect to continue to make good progress just as we did in Q3 toward our twin objectives of restoring the long-term cash-generating potential of PMC and establishing a family of new businesses with a potential of significant, sustainable and profitable growth.

We are, of course, actually aware of the likelihood of a prolonged global recession, but fundamentally we are confident that our cash and growth strategy is sound and that we will come out of the recession in an even stronger competitive position in each of our businesses than we were in at its outset.

Turning to first the PMC. Q3 sales, excluding the effects of currency translation, were 8% lower than in Q3 2007. This was an across-the-board effect. Sales in every region were lower than normal, primarily due to lower sales volume. Sales were especially weak in August, 2008, suggesting that normal seasonal downturns were likely to be magnified during the recession.

Operating income in Q3, excluding costs associated with restructuring performance improvement initiatives, was 5% lower than a year ago, as continuing cost reductions partially offset the (inaudible 00:06:07). We expect this global slowdown in PMC sales to continue for the length of the recession, as paper makers in every region are reducing their operating rates, slowdown operating speeds, extend down-time periods and accelerate the pace machine slowdowns.

And yet as the paper industry weakens, our competitive strength in the PMC market continues to grow, which is why even in the face of global recession we are confident about our overall strategy to progress. We gained marketshare year-to-date in the Americas, Europe and China, and came with us for this time of year a strong order-to-sales ratio in North America. We continued to make progress with key contract negations in Europe and completed promising new product trials in each of our major product lines.

Meanwhile our three-year global restructuring process enters its final year on schedule. The pacing item now in this process is the ramp-up of our three plants in Asia. Expansion of our Korean plant is largely complete and the team there has already expanded its production rates while maintaining exceptional quality levels. And a new plant in Hang Zhou, China, passed an important milestone in early October, when it successfully produced its first set of products for shipment.

Engineered fabrics had another tough quarter in Q3. A we have discussed before, this business shares many similarities with PMC, and about 30% of its revenues derives from sales to markets adjacent to PMC. Another 20% of revenue derives from products that serve the struggling building products market.

If there's a silver lining here it is that 40% of EF's revenue derives from sales to the non-wovens industry which is still growing, even in North America in Europe. Q3 2008 orders for the non-wovens industry grew by 25% compared to Q3 2007 and by 15% compared to Q2 2008.

Our sales to the building products industry appear to have bottomed. Orders in Q3 2008 were comparable to Q3 2007, and considerably stronger than in Q2 2008. For this reason even though EF sales performance to Q3 were similar to PMC's there is reason to believe that the recession will not have as large an effect on this business as it is already having in PMC.

Turning next to Albany door systems, Q3 2008 was another strong quarter, compared to Q3 2007, and excluding currency effects, sales grew by 16% and operating income by 250%. Once again performance was strong across the boards in all regions and in both product sales and after market. Orders in Q3 2008 were 20% higher than Q3 2007. Nonetheless, we still expect a slowdown in this business next year.

How severe the effect will be is uncertain. Product sales will likely decline, which will especially affect North America, where product sales represent 90% of revenue. On the other hand, in Europe, which represents 70% of total segment sales, the impact of recession should be lessened by the after-market business, which should continue to grow during the session.

Europe's after-market business represents about 35% of European sales, and an even larger fraction of total segment operating income. And even in the product side of the business, we've been preparing for a downturn for at least a year by reducing fixed costs in our manufacturing operations and shifting the underlying operating model to one with a heavier reliance on variable costs.

Turning finally to composites, in August we announced that at Eclipse Aviation, AEC's largest customer, was substantially cutting back production. For AEC, this meant a complete stoppage of production of parts for Eclipse. We also stated in August that we expected Eclipse to ramp back up in 2009. Indications from Eclipse are that they are on track for a 2009 recovery, which would mean that AEC Production of Eclipse components would return to at least Q2 2008 rates by Q3 of 2009.

In the short term, the slowdown has clearly affected our results. We have been expecting AEC to at least break even in Q3, instead it lost $3.3 million or $0.09 of a share. Even without Eclipse, AEC did grow by 29% compared to Q3 2007, but since Eclipse represented by far our highest volume, and therefore most efficient production line, losing those sales had a disproportionate effect on income.

We will update our sales and profitability five-year projection for AEC in our Q1, 2009 release. For now, in the short term, we still believe AEC has the potential to continue to grow along the five-year, 35% compound annual growth rate that we projected at the end of 2007. Our experience in Q3 suggests that short-term setbacks to the realization of this potential will likely be of the sort that we experience at Eclipse rather than a more general recession earning pressures.

Beyond the five-year horizon, the Eclipse slow-down in no way alters our view of the long-term potential of this business. We have spoken in the earlier announcements of AEC's potential to become significantly larger than the $150 million enterprise we had earlier envisioned and to become a second core business of the company.

During Q3, we conducted a comprehensive analysis of the size and nature of the AEC market opportunity. We now see a business with a potential to grow organically to 400 million in sales, with operating income margins at least comparable to PMC by the time the next generation single aisle aircraft goes into service late next decade.

In sum, across all of our businesses, Q3 suggests to us that we continue to make progress with our cash flow and growth strategy, and that our long-term vision of the mutually-reinforcing portfolio of advanced textile businesses continues to unfold in the manner we've been anticipating. That said, we're under no illusions about the economic environment that we are facing. While we hope we are wrong about this, we are preparing for a long and deep global recession.

And so company-wide we are approaching 2009 with two overarching principles. On the one hand, our goal for each of our businesses is to come out of this recession in an even stronger competitive position than we were in when we entered the recession. This means we will continue to push ahead with our various strategic initiatives, whether they be new business development in AEC, growth of the aftermarket in doors, introduction of new product lines in EF, or completion of the three-year restructuring plan and introduction of new products in the AEC.

On the other hand, we must do and are doing everything possible to maximize the cash flow. WE have frozen travel, except when it entails working with our customers, frozen hiring, except when it entails bringing up more exceptional talent, or delaying capital expenditures, except when they directly promote advancement of our strategic initiatives, have slowed down the global rollout of SAP, which compared to this year will reduce cash-outlays by as much as $10 million in 2009.

Our accelerating efforts to reduce working capital and in general have instilled a sense of awareness throughout the company, that in a recession as long and deep as this one is likely to be, cash is unquestionably carried.

We have told investors for the past two years that our objective for 2009 was to generate significant cash flow. While the recession means that we will not generate as much cash as we've been anticipating, we do still expect 2009 EBITDA to significantly exceed capital expenditures, and to therefore enable the Company to significantly reduce debt.

Like everyone in this economy, we are sobered by the prospect of global recession. And there is no doubt that revenue and income are being affected by it. Q3 results, especially in PMC, give us an indication of the magnitude of that effect. But we are also confident that the strategic pathway we set out on two years ago is the right course for Albany International and its investors.

We're making good progress toward the development of our cash and grow portfolio businesses and despite the recession our timeline for the development of that portfolio remains unchanged. We continue to expect and by this time in 2010, the cash and grow portfolio will have been fully implemented. Now we'll turn the call over to Michael Nahl for some amplifying comments. Michael?

Michael Nahl

Thank you, Joe. Good morning. First a reminder that the comment about forward-looking statements contained in the press release applies equally to our remarks in this conference call. In the last conference call we provided some color supplementing the balance sheet and the cash from operations. In our forward-looking comments we explained that we were, "assuming we do not experience a major global recession." Three months later we find ourselves in the midst of a global major recession.

Joe and the management team have been moving aggressively and proactively to continue reducing costs, assure that we reduce debt in 2009 regardless of the global economy, complete the three-year restructuring program designed to secure our continuing leadership in our paper machine clothing business, and continue to lay the foundation for profitable growth in our emerging businesses.

We are in the final months of our major capital expenditure program supporting that transformation. Capital expenditures in 2007 were $149 million. Capital expenditures this year were 31.7 million in the first quarter, $41.9 million in the second, 31.4 million in the third, for a nine-month total of $105 million, with an additional $45 million capital expenditure planned and underway in the fourth quarter, total capital expenditures for 2008 are expected to be approximately $150 million.

Of the $150 million, approximately 120 million is for the paper machine clothing business, $19 million is for Albany engineered composites and the balance of $11 million for our other businesses, engineered fabrics, door systems and PrimaLoft.

Depreciation for 2008 is currently estimated to be approximately $60 million and amortization $7 million. After this quarter's large capital requirements, capital expenditures for 2009 are expected to decline sharply to approximately $60 million. We expect depreciation and amortization in 2009 of approximately $79 million for depreciation and $8 million for amortization.

Just as our capital expenditures will decline sharply in 2009, the end is in sight for our other restructuring metal capacity costs and performance improvement initiatives. We are now two-thirds through our global restructuring program. In addition to the capital expenditures for this program, we have incurred associated expenses of $52 million in 2007 and will have spent approximately $57 million more by the end of 2008.

In 2009 we expect expenses associated with the completion of the global restructuring program to be a little less than we're spending in 2008. The portion of those costs for SAP Enterprise resource planning system should decline by approximately $10 million next year.

As Joe described, we are clearly on track with all of the strategic initiatives that have been a part of the company's three-year transformation. And we are proactively positioning to assure that we generate free-cash-flow in 2009 regardless of the length and depth of the recession.

Our highest priority for using that cash during 2009 is to reduce debt. In the last two quarters, eve while incurring the high capital expenditures and costs related to restructuring and performance improvement initiatives, we reduced our leverage ratio as defined in our principle debt agreements with our bank group and with Prudential, from 2.82 at the end of the first quarter, to 2.80 at the end of the second and 2.62 at the end of the third quarter.

While we would prefer to operate in a more favorable economic environment, we've experience severe recessions before and we believe we have demonstrated that we know how to manage through them. Most importantly, regardless of the extent of the recession, we are clearly on track to complete by 2010 the transformation of our company into the cash and grow portfolio of businesses that we've been outlining for investors over the past three years.

Now that that completes our comments, we'll be happy to take any questions at this time.

Question–and–Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Mark Connelly from Credit Suisse. Please go ahead.

Mark Connelly – Credit Suisse

Thank you, Michael and Joe. Always nice to hear you say that you're going to have less restructuring costs. I hope the charges go away too. If we could start - it looks like despite the big drop in revenue, your margins held up pretty well. Can you talk about where specifically you're making the most progress on the cost side? Because something looks like it could work reasonably well here, I mean, relative to my numbers you are 30 million light on the top line and just a couple million light on the operating profits. Could you just give us a sense of where the costs have been more successful or less?

Joseph Morone

Hey, Mark. This is Joe. It's across the board. This three-year plan really, three-year restructuring plan really touches every dimension of our operations from our manufacturing structure. A lot of the cost savings are the impact of the consolidation of our plants starting to fully wash in. and they haven't completely washed in yet. Cost reductions in how we in restructuring we've done in the SDG&A for example, that shared services organization that we put in place in Europe has had a big effect.

The global procurement system that we put in place, which actually led to an increase in expenses and SDG&A as we built the global procurement team has clearly led to a reduction in our procurement expenses globally.

So as all of these costs associated with restructuring and performance improvement that Michael just enumerated has been leading to a global restructuring of the business with the intend of leading it down and reducing costs.

And they're seeing that wash in, and it will continue to wash in both the steps we've taken and steps we’re still taking and will be taking over the next year. You're reading it exactly the way we're reading it. The topline pressure, mostly related to volume, because of this recession, being offset in large measure by this comprehensive restructuring.

Mark Connelly – Credit Suisse

When you talk about selling technical general and research, with the composition of your business changing so meaningfully over the next couple of years, is the composition of that number changing a lot? I remember years ago talking about changes you were going to make in the sales force in PMC but, I mean with all the different moving parts is SAP a big driver of that number now? And just wondering if you can give us a sense of how we should be thinking about that as it plays out across several businesses they're getting more important.

Joseph Morone

A lot of the restructuring is still almost exclusively the focus of the PSE. If you go back to the beginning of this three-year effort, we were starting with a business that was structured around 12 profit centers. And so now we're really down to two profit centers. We have Americas corridor and a Eurasia corridor. And it used to be we went from 12 to 3, America, Europe and Asia, now it's down to 2. Americas and Eurasia.

And the implication of your question is dead on. You can't go through that kind of radical restructuring with fundamentally changing how we approach everything from R&D to product management to product engineering to the way we sell to the way we service. And the way we purchase to our information systems.

So I can't give you a single silver bullet that explains what we're doing in SDG&A because it's a radical overhaul beginning in the corporate offices and spreading through to how we organize in the field. The frustration for us over the past two years has been we’ve been showing the cost of that overhaul but the benefits from a cost side were – there was a time lag before you’d start seeing them on the bottom line. You’re now seeing them on the bottom line.

Mark Connelly – Credit Suisse

Well and that’s, that’s why I was asking. You’re clearly seeing that you’re making progress and I was trying to get a sense of precisely where. On that point about Americas in Eurasia, you know, Albany historically has tried to, from time to time; align its production with its customer base, currency wise. That worked out well in Mexico and presumably in Brazil for quite a while.

I’m curious with the rising dollar, whether what you’re doing in China is really as important as it felt before. My recollection was that you were selling you know, fabrics in dollars out of Europe which had to be just disastrous. So, now with the US Dollar coming back up, is all this money you’re spending in China really as important as it was before and as a sideline, could you give us an update on Brazil and how that is faring?

Joseph Morone

Okay. Well, that is a complex question and let me try to answer it in a number of ways and then ask Michael to weigh in as well. First point is that if we have to do it all over again, you know our expansions in China and Brazil; we would absolutely positively do it again. And it is because the primary driver of those investments were not currencies but was emerging markets and where the markets are growing in the paper industry and positioning ourselves long term for the growth in those markets.

So, if you step back from the paper industry for a second and think about what is going to drive us out of this global recession. All of the previous recessions in our professional lifetimes, the recovery has been driven by the American consumer. And secondarily by the Europeans, who in turn were, particularly the American consumers, were enabled by cheap credit. That’s not going to happen this time.

So, where’s the recovery going to come from? Well, part of it surely will come from government spending on this side. But globally it’s going to come from growth in domestic markets and merging markets, probably led by China. And so our view is we’re even better positioned for what’s to come than we thought we would be when we set out on this investment.

As far as currency, you know, we, our footprint – manufacturing footprint is spread out in so many parts of the world that there’s almost a natural hedging coming on similarly. When you make in China and sell in China, we make in renminbi and we sell renminbi. We make in China and sell outside of it and sell it to Europe, we make in renminbi and sell in Euros. When we make it in Canada and sell it in Canada, it’s Canadian dollars Canadian dollars. Make it in Canada and sell it in the US, it’s Canadian dollars to US dollars and vice versa. Brazil, we make in reaise, we often sell in dollars.

So, when you try to integrate across all of those effects and try to predict the impact of currency swings, the net net net effect on the operating income tends to be relatively muted. This quarter was probably with the strengthening dollar was probably a half a million dollars of positive effect. Which – and we can go into more detail if you want but for us, we don’t make these kinds of strategic decisions like the China investment or the Brazil investment on the basis of currency. We think there are underlying strategic forces that wash out that are more important and that are far more determinative than the currency effects would be on us. Which tend to wash out over time.

Michael Nahl

There’s one thing I’d add, Mark to Joe’s comments and that is, if we were to do it all over again, we couldn’t do it all over again as inexpensively as we were able to do it by virtue of being at the leading edge. We spent, as you know, a combination of capital expenditures and the costs associated with this transformation, over 400 million dollars in two years.

Joseph Morone

At a time when capital was cheap.

Michael Nahl

At a time when capital was cheap. And the inflation rates that have been going on during that period really would make it very prohibitive for any of our competitors to try to duplicate on any, anything approaching our scale at the same cost. So, we’re feeling very good that the reason Joe brought to this game three years ago, close to completion now, is exactly where we want to be. Operator are you there?

Operator

Yes, are you ready for the next question? All right, we go to the line of Arnie Ursaner from CJS Securities. Please go ahead.

Jason Ursaner – CJS Securities

Good morning, it’s Jason Ursaner for Arnie. For PMC you mentioned promising new product trials. Can you expand on that at all?

Michael Nahl

We’re having trouble hearing you.

Jason Ursaner – CJS Securities

Can you expand on that at all?

Michael Nahl

We’re having trouble hearing you.

Joseph Morone

Can you repeat the question Jason?

Jason Ursaner – CJS Securities

For PM, can you hear me now? Can you hear me?

Joseph Morone

Barely.

Jason Ursaner – CJS Securities

Can you hear me? Better? For PMC you mentioned promising new product trials. Can you expand on that at all?

Joseph Morone

Yeah, we have four major categories of products or four major product lines for each section of the machine, paper machine, basically. Forming, pressing, drying and processed pelts. And in each of those product lines we are in the process of trialing them in the market, new, significant new products which at least in one paper grade will bring substantial performance benefits to our customers and could also provide cost benefit to us. But the main driver of these new products in each product line is benefit to the customer.

And the way this works in this industry is we need to convince a paper mill to trial to run a trial with the new, with one of these new products. And since it’s a product that hasn’t been tried, there’s a fairly high failure rate, historically, in this business, whether it’s us or somebody else, trying out the new product in these trials. Our trials have been unusually successful with these new products. And they come across the board. And then behind these new products that we’re trialing, in each product line there’s another major wave of new product families behind them, in some cases right behind them, in some cases a couple years.

We’ve gone from feeling confident that we have a good R&D pipeline to now watching that pipeline hit the market. The first wave hits the market through some trials, prove to the customer that it works in the way we suggested and then based on that, the customer will reorder and then the word gets out and you start gradually diffusing the innovation through the market. And at the same time, we’re still feeling good about our R&D pipeline, there’s more behind it.

Jason Ursaner – CJS Securities

Okay. And for a composite, just to clarify, the 400 million revenue target for the end of the next decade. What revenue opportunities do you see over the next three years and do you expect to achieve profitability in that time?

Joseph Morone

In the next three years we haven’t provided any kind of an update beyond – we’re basically saying, take that projection of potential growth that we made at the end of ’07. And using ’07 as a base, we said figure 35% per annum growth of the next five years and expectation of break even this past quarter. Well, we’re saying that our revenue projection’s still good and we’ve clearly missed because of the eclipsed slowdown, we clearly missed our goal of getting to break even this quarter. We think we would have. Now we’re—

Jason Ursaner – CJS Securities

What would have to occur for that to happen?

Joseph Morone

We think we got a shot at it next year but that’s why I said we’d rather give you an update, give everyone an update in our Q1 release on what we’re expecting in terms of revised projections on top line. Probably won’t be that much. And revised projections on when we think we can break even. But for now, figure that break even mark has been pushed off by at least a couple of quarters.

Jason Ursaner – CJS Securities

Okay. Thanks.

Operator

Thank you, our next question is from the line of Ned Borland from Next Generation Research. Please go ahead.

Joseph Morone

Hi Ned.

Ned Borland – Next Generation Research

Hi, good morning. Just a question on the competitive landscape within PMC, I was just wondering if there’s any takeaways from either past negotiations in the quarter or current negotiations that you know, alters your view of the competitive landscape there given the state of the economy. I mean, are some of your competitors a little more you know, frozen outs given the state of the latest negotiations or what gives you the confidence that you’re going to be gaining share? Is that just from what you’ve already gone through or what you see on the horizon?

Joseph Morone

Well, there are multiple issues there, Ned. Ned, when we say we’ve gained share, it’s not a future projections based on the data available to us now. So, that, that’s not we will gain shares, the statement was, year to date, we have gained shares in all of our key markets. The – as you well know, the big uncertainty is PFC over the past couple of years, and really just the single biggest risk for investors in Albany International has been the risk of major disruptions in price driven by the competitive dynamic. And as we’ve discussed, the window for those disruptions opens when there’s a major contract negotiation. That window is now pretty much closed for at least the next several quarters.

In Europe, the two major contract negotiations that we’d been telling investors about have taken place. They’re done. UPN and Stara. And the customers have asked us to not – let them be the ones to announce the results of those negotiations.

So, I would just assume leave the statement that I made in the release stand on its own. We made progress in those negotiations. But the window is now closed. So, in Europe we’re not concerned about the wildcard of major unexpected swings in prices going forward for at least the next couple of years. Now the result of the contract negotiation is that we get in exchange for volume, as we have always done, as we’ve tried to manage that price premium, the prices will go down some over the next couple of years and we believe we can offset those price declines with volume increase and cost reduction as we’ve done before. But the key point is that window for wildcard instability in Europe is closed.

In North America, we had been saying that we were expecting a big negotiation in January with Abbot T D Bowater. They’ve now put that negotiation off till sometime in the second half of the year. The beginning of the negotiation.

So, International Paper will be the other big negotiation toward the end of the year. But you can assume no changes in pricing, in the pricing environment, no unexpected changes between now and the end of ’09. So, basically the window there is shut as well. The real issue for the next five or six quarters in PFC, the unknown if you will, is really the effect of recession on the top line. And that’s going to be a volume effect more than a price effect. Other than the pricing effect I talked about in Europe as a result of the contract negotiations. It will be a volume effect. And I think we got a pretty good case of what that’s going to look like in Q3.

Ned Borland – Next Generation Research

Okay, that’s all very helpful Joe. And then a follow up on the last question of composites. Well, from 150 to 400 million, I mean, what makes you guys more optimistic about the long term prospect of the business? You know, is there something, some incremental business that you feel real good about or what’ll be out there?

Joseph Morone

So, the underlying business models here is you invest today in program development with the customer for a future platform of some sort. Whether it’s an engine or a new aircraft or part of an aircraft. But there’s basically a five to seven year lag between when you get selected to be a development partner and a production partner with a customer. And the whole process of developing the part, qualifying the part and actually having the system that the part is going to be sold, is going to be built into. Having that system actually go into service. Once that system is in service, whether it’s a new engine or a new plane, you basically have an annuity for 20, 30 years that’s relatively predictable.

So, you have expenditures and investment today to create an annuity five to eight years from now. So, the basic business dynamic is the more of these clusters or expenditures today, the more layers of annuity you have five to seven years out.

So, our projection about the future of this business is based on our best sense of the – where we are today in working with customers. Either having gotten on or working to secure positions in new platform development. Coupled with our projections of new, major new opportunities that are likely to arise over the next five years and the probabilities that we will get our fair share of those new platforms as well.

So, it’s a combination of how are we doing today in program developments with an array of customers. Let’s look at the new opportunities that will bubble up over the next two years, particularly around the next generation single aisle aircraft. But also next generation business aircraft, next generation of regional jets and all the engines and parts that go with that. And what’s a reasonable estimate of how we will do on those new platforms as well. Analyze all of that, make some conserve, do some conservative discounting and you project out to 400 million dollars organically or annually without stretching very much.

Ned Borland – Next Generation Research

Okay, thanks.

Operator

Thank you. Our next question is from the line of Paul Mammola from Sidoti and Company, go ahead.

Paul Mammola – Sidoti & Company

Thank you, hi, good morning guys. I have a question on PMC. Would you suggest that people stretching paper machine clothing in the quarter as having a magnified affect on the drop in sales? And if so, do you think we can expect that lumpiness to continue through ’09?

Joseph Morone

I think the weakness we saw in PFC sales in Q3 was recession like. And one of the reasons we were pretty cautious, despite a very strong second quarter, is we were seeing signs that the paper industry was going into recession sooner than the general economy. It’s ironic we had, you know, we were feeling pretty cautious then and everybody was asking us why we were cautious. Now we’re feeling pretty good and everybody must be asking us why we’re feeling pretty good.

Paul Mammola – Sidoti & Company

Right.

Joseph Morone

Q3 was a pretty good indicator of what the recession will feel like. I mean, the magnitude might shift up or down, but I think, we think that gives you a pretty good sense. One of the really striking patterns that we saw in Q3 was we know there’s always a seasonal effect in August with the summer slow downs. Always a lower PFC sales in August. That effect was magnified this August. And it was a really weak August by historical standards. Which we have us to think that whenever we’ve seen seasonal affects like the back end of December, we’ve noted several times now we saw a seasonal affect. We assume in a recession that seasonal effect is going to be even more severe.

So, first approximation, PFC revenue in Q3 and how we at least partially off set that revenue decline, it’s a pretty good indicator of what’s going to happen during the recession.

Paul Mammola – Sidoti & Company

Okay. That’s helpful and Michael, is the tax, the discreet tax charge related to I think it was foreign tax payments the same as the second quarter?

Michael Nahl

Yes, that’s correct.

Paul Mammola – Sidoti & Company

Okay. And then on financing, is there any concern for aging receivables or customer financing, I guess I’ll throw Abbott (inaudible 00:45:30) out there at this point.

Joseph Morone

You know our view is that it’s a long and deep global recession, one of the ways you absolutely have to positively prepare for it is to be carefully monitoring credit risk and doing whatever you can to mitigate that risk. So, we’re all over that one.

Paul Mammola – Sidoti & Company

Okay, thanks for your time.

Operator

Thank you. And there are no further questions. We’ll turn it back for closing comments.

Joseph Morone

Thank you all for participating on the call and we’ll see you again at the Q4 call if not before. Thank you.

Operator

Ladies and gentlemen, a replay of this conference call will be available at the Albany International website beginning at approximately noon, Eastern Time today. This does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: Albany International Q4 2007 Earnings Call Transcript
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