Albany International Q4 2008 Earnings Call Transcript

Feb.18.09 | About: Albany International (AIN)

Albany International Corp. (NYSE:AIN)

Q4 2008 Earnings Call

February 18, 2009 09:00 AM ET

Executives

Joseph G. Morone - Chief Executive Officer and President

Michael C. Nahl - Chief Financial Officer and Executive Vice President

Analysts

Jason Ursaner - CJS Securities

Paul Mammola - Sidoti & Company

Ned Borland - Next Generation Equity Research

Will Nasgovitz - Heartland Fund

Operator

Welcome to the Fourth Quarter Earnings Call of Albany International. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. At the request of Albany International, this conference call on Wednesday, February, 18, 2009 will be webcast and recorded.

I would now like to turn the conference over to our host, President and Chief Executive Officer, Dr. Joseph Morone. Please go ahead, sir.

Joseph G. Morone

Thank you, Sean. Good morning, everyone and welcome to the Albany International Q4 2008 earnings call. As always, I'll open with a commentary, and then our Executive VP and CFO, Michael Nahl will provide some amplifying comments and then we'll get into Q&A.

Before we start, let me just give you a quick overview of how we're looking at this release, because we know this is a very complex quarter. It's going to take you quite a bit of time to work your way through the numbers. Please take as much time as you need on the call with questions, and we'll take as much time as necessary to answer those questions.

We are confident that when you work through all the numbers and work through the details of this very complex release, as you'll come to the same place that we're at, and where we're at is something like this; number one, we are confident that we are taking the steps necessary to deal with this recession and to leave us going into 2010 in a very strong position.

Number two, our timing on our restructuring has not changed. We have been talking about a three-year restructuring process that ends this year. We are still talking about a restructuring process that ends this year. We are still looking at clean numbers by the end of the year, good cash flow by the end of the year.

What has changed because of the recession is the scale of the restructuring that we'll go through this year. But that means that the magnitude of the cost savings and the magnitude of the cash generation potential of this company by the time we get through the restructuring and are into 2010 is all the greater, all of which means we expect to go into 2010 in a strong position, even if the recession continues into 2010. And if there is any kind of an upturn, I think you are going to see the kind of results that really excite.

So that's the overall message and the difficulties that I think you'll have in this quarter is working through all of the numbers to get to that message but that's... I thought it was important to give you a sense of how we're feeling by having faced the brunt of the recession as we look forward.

So let me turn to my written comments and then we'll go to Michael and then will go to the Q&A.

In our Q3 2008 earnings release, I said that 'we are making good progress towards the development of our cash and grow portfolio of businesses and despite the recession, we continue to expect that by this time in 2010, the cash and grow portfolio would have been fully implemented.'

One quarter later, after experiencing the full brunt of the global recession in November and December, these expectations remain largely unchanged. Assuming the sales environment that we experienced in November and December persists through 2009, we still expect to enter 2010 with restructuring behind us. Our portfolio of business is well on its way to being fully optimized, CapEx running at or below depreciation and with increasingly strong cash flow.

Sales in Q4 were down 11% compared to 2007. We think this result somewhat understates the full effect of the global recession since October was a relatively healthy sales month. November and December were much slower, as was January. If this pattern persists, sales for 2009 would be down by 13% to 15%, compared to 2008 and since Q1 and Q2 of '08 had very strong sales, the year-over-year declines in the first half of '09 would be even greater.

Q4 earnings were affected by the goodwill impairment, the Eclipse Aviation bankruptcy and other items described in the first paragraphs of the release. Excluding those items, EBITDA for Q4 '08 improved compared to Q4 '07 as our continuing efforts of cost reduction helped to offset the 11% decline in sales.

In addition, net cash provided by operating activities for the quarter increased 24% compared to Q4 '07, also reflecting progress in those companywide initiatives. While we believe that these results are a clear indication of the progress we are making, it is important to keep in mind that the Q4 results were helped by strong sales early in the quarter and favorable currency effects and do not reflect the full impact of the recession. And so, despite the strong results, we started in Q4 to accelerate our restructuring and cost reduction efforts.

Table three in the release demonstrates how we are approaching the challenge of minimizing the full effect of the recession. Our overarching objective is to emerge from this recession as a fundamentally more profitable company. Our primary focus is on structural, permanent reductions in cost. In essence, we are accelerating the remaining major steps in our global restructuring process, and simultaneously, initiating additional cost reduction measures that under ordinary circumstances, we would have pursued more gradually, over a period of several years. The impact on earnings from these actions will grow as the year progresses and should be fully realized by the end of the year.

The cost of this approach to the recession is clearly shown in table three. In Q4, restructuring charges, idle-capacity costs, and costs related to continuing performance improvement initiatives were higher than we had been anticipating before we felt the full brunt of the recession and totaled $0.98 per share. High levels of restructuring-related charges will continue through most of '09. We still expect a sharp decline in restructuring-related costs as we enter into 2010, and permanently lower operating costs and improved margins.

At the same time, we have sharply reduced our planned CapEx for 2009, and continue to plan for capital expenditure spending in 2010 and beyond at or slightly below depreciation.

Turning to the performance and outlook of each of our major businesses, Q4 sales in global PMC declined by 15% compared to 2007. In our Q3 release, I said that we expected the global slowdown in PMC to 'continue for the length of the recession, as papermakers in every region reduce mill operating rates, slowdown operating speeds, extend downtime periods, and accelerate the pace of machine shutdowns.'

What we did not foresee was the severity of this slowdown in Europe and Asia. Sales in the Americas were down 9% compared to Q4 '07, in line with our expectations. But in Europe and Asia, sales in U.S. dollars dropped 19% and 18%, respectively. Even with this decline in sales, we continued to strengthen our market position, with share gains in key product segments in the Americas, Europe, and China, the successful conclusion of contract negotiations with the two largest papermakers in Europe, successful trials of several new products now emerging from the R&D pipeline, and excellent progress in ramping up our new capacity in Asia.

If there is a silver lining in this sharp market decline, it is that with lower market demand, we are able to accelerate our global restructuring, and with key customers running their mills at lower than normal rates, they are more willing to run trials of our new products.

Moreover, this sharp global slowdown in the paper industry is forcing a reduction in overall papermaking capacity. While the process of consolidation is painful to our customers, as it is to our own employees who have lost their jobs in this recession, it should result in a healthier global paper industry, and therefore PMC industry, once the economy does begin to recover.

Turning next to Albany Engineered Composites, Q4 was marked by the bankruptcy of Eclipse Aviation. As we described in an 8-K filing, Eclipse filed for bankruptcy on November 25th, forcing us to write-off $10.6 million of receivables, inventory, and tooling. The bankruptcy court has approved the sale of the assets of Eclipse to its former lead investor, and while the sale has not yet closed, the buyer has indicated to former Eclipse suppliers including us a desire to revive production.

At the same time, the global recession is forcing many of our other major customers to sharply curtail production, which is putting yet more pressure on AEC's top-line. The net result is that revenue for 2009 is likely to be down as much as 15% compared to 2008.

Nonetheless, we remain as bullish as ever if not more bullish about the future prospects of this business. Even in this recession, promising new business development opportunities continue to emerge, some in new engine applications, some in new airframe applications, and some outside of aviation, in the defense sector.

Albany Door Systems had another strong quarter, growing 3% despite the recession and that was against the very strong Q4 '07. All the now familiar trends were apparent in Q4, '08 with performance led by Europe's 12% growth in product sales, and 20% increase in aftermarket sales compared to Q4, '07.

However, the strong quarter four results are not indicative of the 2009 outlook. Orders for new doors began to drop off at the end of the year and into January, and we are preparing for a substantial decline in product sales, which will only be partially offset by continued growth in the aftermarket sales. And so, as we are doing with PMC, we have been taking steps, across the business, to accelerate structural changes that permanently reduce costs and improve margins.

In Q4, Engineered Fabrics was hit much harder by the global slowdown than we expected, with sales down 13% compared to 2007 and operating income falling below breakeven. The single biggest factor was performance in nonwovens, the largest and most profitable product line. Since the nonwovens industry is still growing, in North America and Europe, we had expected it to be somewhat less vulnerable to the recession, but it was hit every bit as hard as the paper industry.

And as with PMC, we view sales in the last two months of Q4 and the first month of '09 as our best indicator of what lies ahead for the year. And as with PMC and Doors, we are responding to the anticipated sales decline in '09 with structural, permanent reductions in cost.

So in sum, we are preparing for a long and deep recession by accelerating and expanding the permanent, structural reductions in operating costs that would ordinarily have been implemented in a more measured pace over a longer period of time. Simultaneously, in each of our businesses, we continue to move forward with our major strategic initiatives: the introduction of new products, the development of strategic partnerships with key customers, and the scale-up of new capacity.

Because of the accelerated and expanded cost reduction on the one hand, and the continued progress with our strategic initiatives on the other, we remain confident that even if 2009 sales decline to 13% to 15%, we will exit the year as a fundamentally more profitable business, in a stronger competitive position in our most important markets, and with the capacity for sustained and growing free cash flow in 2010, even if the recession extends beyond 2009.

That's it for my commentary. So let's turnout to Michael Nahl, and then to your questions.

Michael C. Nahl

Good morning. We refer you to the comment about forward-looking statements which is contained in the press release and we note that the same statement applies to our remarks in this conference call.

In the fourth quarter despite the strong headwinds of a crashing global economy, sharply lower sales in a majority of our businesses, and the Eclipse bankruptcy, our fourth quarter net cash provided by operating activities increased to $52 million in comparison to $42 million in the fourth quarter of 2007.

And our leverage ratio as defined in our principal credit agreements improved again to 2.54 at year-end 2008 from 2.82 at the end of the first quarter of 2008, 2.80 at the end of the second quarter and 2.62 at the end of the third quarter of 2008.

The cash from operations improvement in the fourth quarter reflects both continuing improvements in our cost structure and good progress by our team in reducing accounts receivable and inventories.

Excluding the effect of changes in currency translation rates and provisions for bad debt, accounts receivable declined $10 million in the quarter, and inventories declined $9.4 million.

Net debt declined during the fourth quarter by $16.4 million. For the full year net debt increased from $362.6 million to $389 million mainly as a result of the $129.5 million of capital expenditures in 2008 and the high cost associated with the second year of the three-year restructuring program.

As of December 31, 2008, cash was $106.6 million, and the cash surrender value of life insurance policies was $47.4 million or a total of $154 million, that compares with a total debt of $543 million.

Fourth quarter interest expense net was $5.3 million in 2008, compared to $4.3 million in 2007 due principally to the higher average borrowings in 2008. Even though our net debt and leverage ratio declined in the quarter, we felt that due to the uncertainty regarding the global economic outlook for 2009, it was prudent to work with prudential capital to increase the maximum permitted leverage ratio on the $150 million term loan with them from 3.0 to 3.5 through 2010, which conforms with the maximum under our revolving credit agreement with our bank group.

As a result our interest rate on the prudential debt increased to 6.84% from 5.34%, although there are lower interest rate incentives for significant reductions in leverage. Principal payments of $50 million will be due on that facility in Octobers of 2013, '15 and '17.

Looking ahead, capital expenditures in 2009 are now expected to be approximately $50 million in comparison to depreciation of $67 million and amortization of $8 million.

If the recession is over by 2010, capital expenditures are likely to increase to a level at or below depreciation and remain below that level for the next several years, since the company's three-year restructuring program will have been completed.

Cash costs of completing the restructuring program in 2009 are likely to be significant, possibly in a range of $50 million to $60 million. While the cash required for the restructuring will be somewhat larger than originally planned, the CapEx will be correspondingly less and the cost savings from the restructuring by the end of 2009 will be significantly larger than planned. And we should go into 2010 generating substantial cash, even if the global economy remains in a recession.

Operator that completes our comments for this morning. We'll be happy to take any questions now.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). And first from the line of Arnie Ursaner with CJS Securities. Please go ahead.

Jason Ursaner - CJS Securities

Good morning, it's Jason Ursaner for Arnie.

Joseph Morone

Hey Jason, good morning.

Jason Ursaner - CJS Securities

Industry data from Europe indicated as much as a $1 billion in PMC inventory, did you add customers? Do you have any sense of your levels of inventory of customers?

Joseph Morone

In Europe, we're on a make and shift basis. So there isn't an accumulation of inventory and the customers. In Asia, if you're looking for examples of markets where there are likely to be build ups in inventory of our products or our industry's products with our customers, I think the place where there may be an issue within Asia, because as of October they were still in a rapid growth mode and so still expanding capacity and raw materials and finished goods inventory ahead of demand.

By November that market was crashing, and so they are likely to be stuck with more inventory than... which will slowdown a recovery there from our industry's point of view, but no, Europe is make and shift.

Jason Ursaner - CJS Securities

Okay. And I know PMC is used for all types of paper which is being impacted cyclically, however certain types such as newsprints, new magazines you are probably seeing net over decline, can you see what's your exposure at various paper markets?

Joseph Morone

It's interesting that we are fortunately least exposed in the most vulnerable segment which is newsprints, primarily centered in Canada. We are especially strong in tissue and craft and it's actually has enough side an awful lot of new product development activity on the tissue side, where we have very strong share, working with the best customers in the world we're really on some innovations there.

I think the bigger... the long-term sectoral decline in newsprint is not the story for us. The story for us in '09 and in Q4 is really the more general global recession, and if you think about our strength in craft which is where the boxes come from for shipping, that's the bigger issue, that's the bigger impact of the recession on us. We're not unlike a couple of our largest competitors we're not nearly as exposed on the newsprint side as some other people are.

Jason Ursaner - CJS Securities

All right. In Albany Engineered Composites, axe the one-time Eclipse charge. The segment still had about $4 million operating loss. Is there... what should make this improve on a quarterly basis, given a 15% overall decline in segment revenue as opposed to development cost on them?

Joseph Morone

What's going on in Composites is there are some changes of pulse above the surfaces and above the surface that are visible to investors and changes below the surface that aren't above the surface.

We have a number of legacy customers, mostly coming out of the old Texas composites business. That, where we are supplying parts for business jets, for the smaller end of the aircraft spectrum or engines for the, engines, parts for engines and parts for the fuselage of smaller aircraft and that segment is the one that has been hit hardest by the recession. And so when you see these top-line declines in AEC, that's really what's driving it is order of ramp downs or production ramp downs by the makers of business jets.

Underneath the surface what you don't see is and which we can't really talk about for confidentiality reasons though we would love to is increasing possibilities and probabilities of new development contracts for future projects on new parts of the engine, on new engines, on new parts of the fuselage and in some really exciting defense applications that we can't talk about.

Now, we made an accounting change, the change in our accounting treatment of these program investment expenditures that brought us more in line with standard aerospace industry practice, which is we're now be... as of Q4, we are capitalizing the program, development program investment expenditures. So you won't, while they have a cash effect which we cover, most of the cover in CapEx. You won't see an income effect of that growing activity and program investment which was what really drives the future annuities and cash flows of this business.

So sum it all up, the top-line is being affected by declines in some of the legacy programs. Our underlying enthusiasm for the business is growing, because of the growing array of possibilities on the program investment side. We are able to scale back our costs on the production side. We have to do that which is minimizing the impact on the bottom-line of these production ramp downs. But because we're capitalizing the program investment, we're able to ramp that up without hitting the bottom-line, which means that if things work the right way on an EBITDA basis, this business should be close to breakeven in 2009.

Jason Ursaner - CJS Securities

Okay, great.

Joseph Morone

All winded answer, but it's not a complex at all. Everything about this quarter is complex. So I'm afraid a lot of our answers, Michael and my answers are going to be a bit more on winded.

Jason Ursaner - CJS Securities

That was what I was looking for and I think you're close to $2.8 million expense related to SAP implementation in the quarter?

Joseph Morone

Jason, we just lost you a bit, could you repeat that?

Jason Ursaner - CJS Securities

I think you had around $2.8 million expense related to SAP implementation in the quarter, is there anything you can update us on expected SAP implementation cost--

Joseph Morone

We should see a decline in those expenditures, they will continue into 2010 but they will be substantially lower than they were in 2009, in 2008 substantially lower.

Jason Ursaner - CJS Securities

All right. Thanks a lot, sir.

Operator

Our next question is from the line of Paul Mammola with Sidoti & Company. Please go ahead.

Paul Mammola - Sidoti & Company

Hi, good morning guys.

Joseph Morone

Hi, Paul.

Michael Nahl

Hi, Paul.

Paul Mammola - Sidoti & Company

I'm not sure if you can comment, but can you give us a general sense of how much of the core PMC top-line decline was price versus volumes so excluding currency?

Joseph Morone

Mostly volume, in fact that's really the story right now, the recessionary effect is the volume effect swaps to price effect. There was some price effect mostly in North America because of the washing in of the effect of what for us is successful contract negotiations. We'll see a gradual decline in price in Europe in 2009, as we always do after major contract negotiations, but as I alluded to you in my commentary we were very happy with other contract negotiations that turned up very different from two years ago.

And we should see if we weren't in recession we'd see volume increases offsetting the prices, volume increases and cost reductions offsetting the price declines.

Paul Mammola - Sidoti & Company

All right, okay. So is there a general sense of what industry pricing is in terms of may be competing customers, improving price at this point, have you seen any of that?

Joseph Morone

Could you ask that one again Paul and quick?

Paul Mammola - Sidoti & Company

Sure, sure in terms of general industry pricing, there was a thought that competitors may be raising price to improve their own financial condition. Have you seen any of that or is it more just stable low pricing at this point?

Joseph Morone

I would characterize that at this point as stability in a recession it's deep. People will start getting desperate, they always do in every industry and some will start try to price at the margins. But remember the big periods of instability occur when the window for contract negotiation is open and the contract negotiation windows are shut right now.

So at the margin there will be some pricing stability but we're in a really predictable environment on the price side for the next couple of years because of the contracts. That's not to say they won't glide downward but they're... that uncertainty about prices just isn't there right now.

Paul Mammola - Sidoti & Company

Okay. That's very helpful. And then--

Joseph Morone

There's another big swing Paul and--

Paul Mammola - Sidoti & Company

Sure.

Joseph Morone

And I think it's worth mentioning even though there is a lot of uncertainty around it. There's two ways that this recession can go; one, is we start to see a gradual recovery late near beginning next year. And the other is this thing is longer than anybody is willing to admit now. I am not just talking about paper industry, I am talking about the global recession because basically particularly on the, in the growth markets, the economy drives the paper industry.

When you get exports going in China, you get a healthy paper industry. So if this thing goes longer than a year we are going to start seeing some major second order effects and the second order effects are consolidation, up and down the supply chain. And we will see it among our customers, we'll see it in our industry, we'll see it in our supply base.

And this is going to become a very devonian (ph) process in which only the strong survive, that's the consequence of the kind of recession this is starting to look at.

We are very confident that we're going to go into the, we are going to get through '09 fine. We're going into 2010 in a strong position. If this thing is longer than people think there will be consolidation or has to be. And we'll be on the good side. It will be on the favorable side of that consolidation.

Paul Mammola - Sidoti & Company

Sure. Hopefully--

Joseph Morone

It has the biggest effect possibly on pricing I think.

Paul Mammola - Sidoti & Company

No, definitely. And then is there a sense that there could be meaningful impacts from polymer price improvement given what raw materials have done recently in the first half of '09 I should say?

Joseph Morone

Yes.

Paul Mammola - Sidoti & Company

Okay. And then finally, on the, I know you did that utilization at Hangzhou is that, going to be a comparable work charge, which you say through the first three quarters of around $1million?

Joseph Morone

We expect that plant to be fully running by the end of the second quarter. But, and so it's ramping up, so I would expect the charges to decline through the first two quarters.

Paul Mammola - Sidoti & Company

Okay, perfect. Thanks for your time.

Joseph Morone

We're still, we are expecting clean numbers by the end of the year. Because the restructuring will be behind us and that includes the ramp up of these Asian plants.

Paul Mammola - Sidoti & Company

Looking forward to those clean numbers. Thanks again.

Operator

(Operator Instructions). And we'll go to the line of Ned Borland with Next Generation. Please go ahead.

Ned Borland - Next Generation Equity Research

Hi, good morning, guys.

Joseph Morone

Hi, Ned.

Ned Borland - Next Generation Equity Research

I joined late, so I apologize if you covered this already, but Joe I think in the past we've talked about the competitive environment and that there's been some contract negotiations that would sort of stabilize things. But as the world fell of a cliff in the fourth quarter, has there been any meaningful changes in the competitive environment in PMC?

Joseph Morone

Ned, were you on for the last... for Paul's question?

Ned Borland - Next Generation Equity Research

I just got on.

Joseph Morone

Okay, all right. So let me try to give you a recap. In the short term, in Q4 the primary change in the competitive environment was that we concluded very successfully the contract negotiations with the two largest paper makers in Europe. And they both were big deal and had a significant impact on the landscape in Europe going forward.

The pricing was relatively stable, the big effect in Q4 and we think the big effect in '09 is the volume effect. And since there won't be, unlikely to be any major contract negotiations in '09 that window for instability we always talk about will be pretty much shut. There will be gradual glide down in pricing in Europe because of the contract negotiations, but if we weren't worried about the recession, we'd certainly see those declines offset by volume decreases and cost reductions.

As mills shutdown, there will be a differential effect on the different competitors and so some competitors will try I think to grab some business by pricing at a margin, but again with the window for contract negotiations closed, there's only so much of that, that can occur.

So we don't expect the kind of pricing stability we have seen before and then going forward the big story is volume. The point I tried to make with Paul was if this recession, if the global economy starts bouncing back in the second half and first approximation the paper industry does follow the global economy, if you just think about all important craft sector, that's driven heavily by export activity in Asia by shipping activities or economic activity because all those are all boxes.

So if the economy starts to recover in the second half of the year, then I think everybody comes out of this, our customers, PMC, our suppliers without any major structural change and we are still in the same competitive dynamic we were in before.

If on the other hand, which is probably more, which we think is more likely, this recession, the global economic recession extends past 2009 into 2010 then the likelihood of consolidation gets higher and higher, up and down the supply chain on our customers, in our industry, in our supply chain, among our suppliers.

And this is going to be very devonian process, the strongest players, the largest players, the players with the best balance sheets are the ones that are going to do best. Everyway we look at this, we are going to be on the right side of that devonian process. And that's the silver lining in this recession. It lasts long enough and we do what we need to do which we tried to lay out in this release. And I think odds of consolidation start to increase.

Ned Borland - Next Generation Equity Research

Okay, thank you.

Operator

And our next question is from the line of Will Nasgovitz with Heartland Fund. Please go ahead.

Will Nasgovitz - Heartland Fund

Hi, good morning. Thank you for taking my questions. Mike, you covered the debt-to-EBITDA ratio. I appreciate that, what is the threshold level that you have, did you state that?

Michael Nahl

Yes, the threshold level is 3.50.

Will Nasgovitz - Heartland Fund

And did that ramp down or that stays consistent?

Michael Nahl

It stays up through the end of 2010.

Will Nasgovitz - Heartland Fund

Okay. And Joe you mentioned in your prepared remarks and also in the press release that I guess pro forma EBITDA was better than last year, what is the actual number, did you state that?

Joseph Morone

Well, it's non-GAAP. So you got to do the math. If you go to the--

Will Nasgovitz - Heartland Fund

It's okay, all right.

Joseph Morone

I'll tell you this, what we in the press release gross margins are up, if you look at EBIT, if you look at STG&R expenses both in absolute terms and as a percent of sales they are down, again you have to do the math.

Will Nasgovitz - Heartland Fund

Yeah, I understand, I just. Okay, and final question you have obviously still some optimism for the Composites business, in the past conference calls you've articulated a potential revenue goal in future years out, and I am just curious what percent of that revenue goal included Eclipse we'll just assume they don't come back what percentage what will they of that goal I guess?

Joseph Morone

They were... they accounted for a jump-up in sales in the short-term. They accounted for less than... about 5% over the long-term potential.

Will Nasgovitz - Heartland Fund

Okay.

Joseph Morone

They were--

Will Nasgovitz - Heartland Fund

Thanks for your time.

Joseph Morone

Long-term but in the short term they were a big and could still be they were a big customer. And so, this business has two halves to it, there are the legacy programs that were giving us the short-term revenue and then there are these longer term program investment development programs which really create all the future in the way we strength this.

Will Nasgovitz - Heartland Fund

Actually, I have one more quick question for you. I know you guys that you haven't been active buying back stock, I think you still have an authorization still in place and I recognize that 2009 being the economic landscape might not be the year to be, obviously buying a stock given that the cash is king here. But as the year progresses and hopefully things pick-up in the economy and the cash and grow strategy takes hold, is that a priority for the company in terms of buying back shares at this level?

Joseph Morone

I have seen best use short-term is paying down debt. What we've told investors before and we still feel strongly about this is by the time we are in the third quarter 2010 we're pretty much optimized, our portfolio of businesses is optimized. And then it's really all about how do you maximize shareholder value and there are all kinds of possibilities in that point and we're not ruling anything out.

Will Nasgovitz - Heartland Fund

Okay. Thanks for your time.

Joseph Morone

Thanks, Will.

Operator

And we do have a follow-up from the line of Arnie Ursaner. Please go ahead.

Jason Ursaner - CJS Securities

Hi, it's Jason here. In your prepared remarks--

Joseph Morone

Hi, Jason.

Jason Ursaner - CJS Securities

You mentioned PMC customer is willing to test the new products?

Joseph Morone

Yes.

Jason Ursaner - CJS Securities

That were trials from the R&D pipeline?

Joseph Morone

Right.

Jason Ursaner - CJS Securities

Can you expand on those trials at all and may be the effect it could have on segment margins?

Joseph Morone

Yes. It's always tough to answer these questions because we don't want to...our, for my competitors Jason on our calls and so we got to be careful what we say. But in each of our product lines forming, press, drying, shoe press belts, transbelts, we have one or two or three new products coming out of the pipeline as we speak. And they will have... I can't tell you that they it's going to be effect on the numbers will vary and in some cases it counteracts what otherwise would be price erosion.

In some cases it leads to increase share and in other case it leads to an actual improvement in pricing. You just have to go case-by-case and it really depends on the structural dynamics of the market. I'll just give you some quick examples. There is a machine in Europe in Northern Europe, Scandinavia that just broke the world record for run-rate for speed, it's a fine paper machine.

We were running our products on there and one of our key new products was running on that machine when it broke the world speed record. There is a new start-up which are rare these days in Southern Europe, another a world-class reference machine and we have, we are going to have very strong share in that machine. And it's because of the technologies not because of price.

And again a couple of our really important new products, at least one of our major new products will be running on that start-up. I alluded to on earlier in my comments in one other question is there's a awful lot of innovative activity going on across the board for us in tissue and tissue related industries. And some really interesting innovative work going on tightly connected with our customers, and the customers are also mainly in the tissue business.

So I think that this is one of the reasons where we're pretty optimistic even in the face of what's likely to be based on November, December, January of 13% to 15% down top-line is there is a lot of redundant product line.

Jason Ursaner - CJS Securities

Okay. Thanks a lot.

Operator

We've no further questions in queue. I'll turn it back to the presenters for any closing comment.

Joseph Morone

Thank you all for participating on the call and hanging in there with us as you work through what is a complex quarter. Michael and I look forward to meeting with you at conferences. And thanks for joining us, see you next time.

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. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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