Albany International's (AIN) CEO Joseph Morone on Q4 2015 Results - Earnings Call Transcript

| About: Albany International (AIN)

Albany International Corp/DE/. (NYSE:AIN)

Q4 2015 Results Earnings Conference Call

February 09, 2014, 09:00 AM ET

Executives

Joseph Morone - Chief Executive Officer

John Cozzolino - Chief Financial Officer and Treasurer,

Analysts

John Franzreb - Sidoti & Company

Steve Levenson - Stifel Nicolaus

Operator

Ladies and gentlemen, thank you for standing by. 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 Tuesday, February 09, 2016, will be webcast and recorded.

I would now like to turn the conference over to Chief Financial Officer and Treasurer, John Cozzolino, for introductory comments. Please go ahead sir.

John Cozzolino

Thank you, operator, and good morning, everyone. As a reminder for those listening on the call, please refer to our detailed press release issued last night regarding our quarterly financial results, with particular reference to the Safe Harbor notice contained in the text of the release about our forward-looking statements and the use of certain non-GAAP financial measures and associated reconciliation of GAAP.

And for purposes of this conference call, those same statements also apply to our verbal remarks this morning. And for a full discussion, please refer to that earnings release, as well as our SEC filings, including our 10-K.

Now, I will turn the call over to Joe Morone, our Chief Executive Officer, who will provide some opening remarks. Joe?

Joseph Morone

Thank you, John. Good morning everyone, welcome to our Q4 2015 earnings call. As always, I'll begin with an overview of the quarter, John will go into more detail. I'll follow with our outlook for 2016 and beyond and then we’ll go to Q&A.

Q4 2015 was another good quarter for Albany International as both businesses continued to perform well. Machine Clothing again generated excellent margins, AEC continued to grow and progress towards the LEAP ramp, and cash flow was again strong with net debt declining $18 million in the quarter and ending the year at $81 million.

Turning first to Machine Clothing, Q4 sales excluding currency were down 5% compared to a year ago primarily because of three factors, the weak economy in Brazil, that much larger than normal decline in the North American Printing and writing market that first hit us in Q2 of last year and stronger-than-normal year-end slowdowns in the packaging market in the U.S.

Nonetheless for the full year, sales were essentially flat and profitability was outstanding. Adjusted EBITDA for both Q4 and full year 2015 was 9% ahead of 2014. Roughly half of this increase was due to the favourable impact of the strong dollar on currency translation which we’ve discussed in previous quarters. The rest of the improvement and profitability was due to a combination of restructuring, higher labor productivity in several of our plants and lower material costs.

Also, during Q4, we implemented an early retirement program for our salary employees in the U.S. which accounted for most of the restructuring charge in the quarter. As for our new technology platform, it continues to gain momentum at the high end of the tissue and towel market, and we are encouraged by the R&D progress on applications aimed at the packaging grades.

And finally, during Q4 we successfully completed contract negotiations with two of our largest customers, one in the U.S. and one in Europe. Although we continue to experience competitive pricing pressures in all of our markets around the world, our prices were for the most part stable in Q4.

Turning to AEC, sales excluding currency grew about 14% for the full year. The growth was driven by a combination of the LEAP, JSF LiftFan and GE9X fan case programs. More importantly, AEC continued to progress towards the LEAP ramp, which begins late this year.

Meanwhile in R&D and business development, we are working simultaneously on three broad fronts. For the near term, continuing to support advances in the LEAP program. For the long term, positioning ourselves for content on both the engine and airframe of next-generation single-aisle aircraft and for the medium term, that is for opportunities that have potential to generate initial revenue either or later this decade or in the first half of next decade, we are focussing our efforts on the following platforms.

Boeing’s 777x, the new mid-size airplane that Boeing is reported to be considering, the Joint Strike Fighter, the Long Range Strike Bomber; and new super car and premium sports and luxury vehicles in the high end of the automotive market.

In sum, it was a good quarter and a good year with excellent profitability in Machine Clothing, good growth and progress towards LEAP and beyond in AEC and strong cash flow.

Now let’s turn to John for more detail. John?

John Cozzolino

Thank you, Joe. I would like to refer you to our Q4 financial performance slides. Starting with slide three, net sales by segment, currency rate changes compared to last year continued to have a significant effect on net sales. Excluding those currency effects, total company net sales in Q4 decreased 3.2% and were essentially flat for the full year.

Also, excluding currency effects, MC net sales were down 4.9% in the quarter and down 1.3% for the year. AEC net sales increased 5.5% in Q4 and 13.9% for the year due to continued growth in the LEAP program.

Turning to slide four, total company gross margin percent stayed strong as it increased to 40.4% in Q4 compared to 38% in Q4 of last year. MC gross profit margin improved to 47.4% of sales due to lower raw material costs, improved productivity and the effect of restructuring programs. The continued weakness of the Brazilian real and Mexican peso once again had a positive impact on MC gross profit margin.

Moving onto slide five, earnings per share. We reported net income attributable to the Company in Q4 of $1.17 per share compared to $0.25 per share in Q4 of last year. Q4, 2015 EPS includes favourable tax adjustments of $0.93 per share mostly due to a U.S. tax benefit related to the company’s write off, of its investment in its German subsidiary. The Company expects that most of this tax benefit will be utilized to lower cash taxes related to future repatriations.

Q4 2015 EPS was also reduced by $0.21 per share for restructuring, principally related to an early retirement program in the U.S. and ongoing plant closure costs in Germany.

Other EPS effects in one or both periods related to restructuring, foreign currency valuation, pension settlement charge and a gain on an insurance recovery are noted on the slide. Excluding all the adjustments, adjusted EPS in Q4, 2015 was $0.46 per share compared to $0.35 in Q4 2014.

Slide six shows adjusted EBITDA for both the quarter and the full year. Adjusted EBITDA in Q4, 2015 increased to $38.7 million compared to $36.3 million in Q4 last year, bringing full year 2015 adjusted EBITDA including the $14 million BR725 charge to 141 million compared to 144.8 million in 2014.

MC adjusted EBITDA was once again strong in Q4 and grew to 47.5 million compared to 43.7 million in Q4, 2014. For the full year, MC adjusted EBITDA increased $16 million to $198 million which is above the normal range of $180 million to $195 million which we discussed last quarter.

Lastly, slide seven shows our change in total debt and net debt. Q4 was a strong quarter for cash flow as net debt, total debt less cash, decreased approximately $80 million as compared to Q3 to $81 million.

Now I would like to turn it back to Joe for some additional comments before we go to Q&A.

Joseph Morone

Thanks, John. Turning to our outlook. Our near and long term expectations for both businesses remain unchanged. Let’s start with Machine Clothing. Even though adjusted EBTIDA improved 9% in 2015 as John just described. As we emphasized last quarter, we continue to view this business as capable of generating steady year-over-year adjusted EBITDA in the range of $180 million to $195 million per year depending on the currency environment.

If currency stays at the Q3 and Q4 2015 levels, we are more likely to be in the upper half of that range. If currency reverts back to 2014 levels, we are more likely to be in the lower half. Now we’re still going to see those year-to-year and quarter-to-quarter fluctuations in our performance. Adjusted EBITDA full year 2015 was a bit above the range, in 2014 it was at the low end of the range and in 2013 it was closer to the middle.

Likewise Q1, 2015 was unusually strong, whereas Q2, 2015 was unusually weak. But overtime, across those fluctuations under normal economic conditions we view Machine Clothing as steadily generating adjusted EBITDA in that $180 million to $195 million range. What this means for 2016 is the following. We are likely to see a slower start to this year than last year, partially because Q1, 2015 was so strong and partially because of this year’s economic headwinds.

Nonetheless, for full year 2016 our margins and continuing productivity improvements should keep adjusted EBIDA well within that $180 million to $195 million range unless of course there is a serious deterioration in the global economy.

As per AEC, we anticipate annual revenue growth of at least 5% to 10% with upside depending on a number of variables related to the LEAP ramp. EBITDA should also improve and at a steeper rate than the sales. But the real significance of 2016 is that this is the final year of preparation for the LEAP ramp. So as you would expect, our highest priority will be on continuing to improve yield, reduce cost and increase capacity.

The market for LEAP continues to look very promising, despite the collapse of oil prices. At the production rates for the A320neo and 737MAX that Airbus and Boeing have recently announced, AEC will need to be manufacturing by 2020 over 40,000 fan blades and 2000 fan cases a year compared to roughly 2,500 blades and a 100 cases in 2015.

That means that LEAP revenue should grow from $50 million in 2015 to close to $200 million by 2020 and overall AEC revenue without any new programs beyond the ones we have already secured overall AEC revenue should grow from $100 million in 2015 to close to $250 million in 2020, that’s assuming no new wins for AEC which obviously we think and hope there’s a conservative assumption.

The steepest ramps in LEAP production and therefore an AEC revenue and income will likely be in 2017 and 2018. 2016 should also be a pivotal year for AECs legacy operations which accounted for 40% of AECs 2015 revenue and were responsible for a significant drag on AEC profitability.

In January we announced internally that we plan to consolidate most of our legacy programs which are currently spread over two plants into our facility in Boerne, Texas. At the same time, we are finalizing with Rolls-Royce a long-term supply agreement for production of composite parts for the JSF LiftFan. The expected growth from JSF as demand begins to ramp in 2017, coupled with the consolidation into Boerne, should lead to significant improvements in margins from our non LEAP programs by the second half of 2017.

So in sum, performance in both businesses was strong in Q4 and for the full year, and we expect performance to remain strong in 2016 despite the significant economic headwinds. Barring further deterioration in the macro economy, we look for Machine Clothing to generate Adjusted EBITDA well within its normal range. And for AEC, we expect atleast 5% to 10% revenue growth coupled with improving profitability in this the final year of the lead-up to the LEAP ramp.

With that, let’s go to your questions. Kathy?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question will come from John Franzreb with Sidoti & Company. Please go ahead.

John Franzreb

Good morning, guys.

Joseph Morone

Good morning, John.

John Franzreb

Joe, it seems like you are going out of your way to temper expectations on adjusted EBITDA and Machine Clothing. On a constant currency basis though, it seems that the other half of that benefit you got was really structural and shouldn’t go away, but why are you tempering those other expectations?

Joseph Morone

Well, we think it’s important for investors not to over interpret an unusually good period of performance in this business just as we think it’s important, really important not to interpret poor performance the range and that’s why we keep trying to emphasize these balance.

Remember that for the big picture here, it’s important to keep in mind and to not loose sight of when we have an unusually weak quarter like Q2 last year and then an unusually strong period as overall 2015 was. There are -- the big picture is this, there are three downward pressures facing this business for the long haul, but the structural decline in the printing and writing grades which regardless of what’s happening in the economy are going to continue in the 4% to 5% range with larger spurts when there is a cluster of shutdowns, so that’s always with us.

Number two, constant price pressure around the globe and since because of that price pressure since its almost never get price release, labor inflation and material inflation which we have to offset every year.

So that’s always downward pressure on our business. Now we respond to that near and long term with three counter bailing moves. Number one, we invest in putting ourselves in a position to be under exposed to the printing and writing grades and over exposed to the growth grades.

Number two, growth grades and growth regions. Number two, we invest in technology and in talent in order to be able to differentiate ourselves in the market place to offset those price pressures. And number three, we are constantly trying to adapt our capacity to the market to geographic shifts and demands, that’s why you see these periodic restructurings.

Now, what’s going on right now in the macro economy is because China is under pressure Brazil is under pressure, because Europe is under pressure and even the U.S. economy isn’t exactly humming. The growth grades aren’t and regions are performing particularly well.

And so, there is more pressure on us to offset those downward pressures with margin improvement. And, that’s all a long winded way of specifically answering your question. The reason we are trying to call investors back in to our normal range after a very strong year is because we see a lot of macroeconomic headwinds out there. And so we stay within our range but Brazil is weak, China is weak. It’s hard to make a case that we are going to be north of that range given the economic climate.

John Franzreb

Well, that’s I guess my point, Joe is that I wouldn’t call last year unusually good. Surprisingly we -- the printing and writing results and you just named this is off the macros. I don’t know if I would say 2015 was an unusually good environment.

Joseph Morone

It was -- we did not really get hit with the effects of Brazil in 2015, nor did we really get hit with any serious slowdown in Asia in 2015. So, we think this will be a tough environment. We hope we are wrong. And if we are wrong then you are right and we will be banging up against the upper end of that normal range. But from everything we are seeing and reading and I’m sure you are seeing and reading, we think the more prudent place to be is back inside the normal range.

John Franzreb

Okay. Sticking with Machine Clothing, the Verso Paper bankruptcy, does that impact you in anyway, how exposed are you to them? And if not, can you just comment on what that does to maybe capacity out there and what thoughts are on that front?

Joseph Morone

Yes. Everybody in related to the paper industry saw this one coming from a long distance. So, we have done all the normal measures to reduce our exposure to receivables. The share we have in Verso was pretty normal for us, is pretty consistent with our overall share in North America and we would view what’s going on in Verso as part of the long-term structural decline in printing and writing.

It’s going through the bankruptcy process and it is running. It’s continuing to run its operations and we will continue to support those operations, trying to be a good supplier. Odds are at some point down the road, there will be closures as they restructure themselves but that’s certainly something that we build into our long-term, short and long-term plan that expectation.

John Franzreb

Okay. And then switching over to your composites, you are going to have another big jump in CapEx this year and I guess, Joe, John, you also alluded to next year. Could you talk about when that spending kind of rolls in the bulk of it and what’s maybe the biggest challenge as you tool up?

John Cozzolino

We’ve been saying for the last few years is that on average in the second half of this decade, total company CapEx would be about $70 million. Sometimes lower, sometimes higher but it will be in that range and it will be the precise timing year-to-year and a precise amount year-to-year will be driven pretty much completely by the timing of the LEAP brand. And so in '14 and '15, we were under that range, that average. And in '16 and '17, we are going to be right at it or little bit over because this will be the peak investment time for LEAP.

So this is when the plants, two of the three plants already built but this is -- the capital requirement for us is to load those plants with equipment and we are timing the loading of equipment with the loading of demand. So a few months before demand hits, the equipment has to be in and qualified. So this is the surge, this year and next year. After that, assuming total LEAP demand is in the range that we’ve talked about, we are going to see a pretty sharp falloff on LEAP CapEx spending and therefore on overall spending unless there is a new program that comes along to demand more capital.

John Franzreb

Okay. All right. I’ll get back into queue.

Joseph Morone

Okay.

John Franzreb

Thanks. Okay.

Joseph Morone

Thanks, John.

Operator

Thank you. [Operator Instructions] We will go next to Steve Levenson with Stifel Nicolaus. Go ahead, please.

Steve Levenson

Thanks. Good morning, Joe and John.

Joseph Morone

Good morning, Steve.

Steve Levenson

Couple items please. Yesterday, Airbus announced that they are going to do the test flights of the A321 with LEAP engines where originally the competing engine was elected [ph] to be used on the first flight. I know some of the early deliveries with the competing engine have been delayed so and what are you feeling about the schedule and demand for LEAP? We know that Boeing had its first flight and it could be a little bit earlier than third quarter '17, if everything keeps going right. But it sounds like there is a potential for an earlier ramp in demand then just curious what you are hearing and what you expect to see?

Joseph Morone

Well, we are reading and hearing the same things you are. But as we’ve been conveying for the last few quarters, despite what’s happening to oil prices, what we are seeing on the ground is constant pressure to move forward with our ability to produce and to ramp. So, 2017, as reflected in our CapEx this year and my last answer to John, 2017 looks like a big surge. And we are not seeing any counter availing forces. We are just seeing more and more pressure to surge. And in the developments you just described are completely consistent with that.

Steve Levenson

Got it. Okay. Thanks. A question on Machine Clothing, just so I can understand properly. I know there was revenue related to sale of tooling and was probably more towards the composite side. I’m just wondering if that’s a normal course of business thing and if the expense related to that item also fell in the same quarter, where do these things sort of balance out over the year?

Joseph Morone

No. It’s on the AEC side and its development programs and so we incur the expense and then we get reimbursed for this. There is no margin attached to it. So, yes, they hit at the same time. And so there was a bump in AEC revenue above what it would have been in Q4 and that was a reimbursement for expense. So there was no margin associated with that bump.

Steve Levenson

Got it. And based on that, would it be right to guess that that was related to the launch for the GE9X fan case?

Joseph Morone

That’s a pretty good guess, yes.

Steve Levenson

Okay. And will you need more tooling like that? I know we are still a few years away but I don’t know how quickly you can make those parts and how many tools you actually need?

Joseph Morone

Yeah. There will be some more of that tooling related reimbursement in '16.

Steve Levenson

Got it. Thanks very much.

Joseph Morone

Thanks, Steve.

Operator

Thank you. And we do have a follow-up from John Franzreb with Sidoti & Company. Please go ahead.

John Franzreb

Yeah. Joe, can you talk a little bit about the decisions to repatriate cash? How much you are looking to repatriate this year and do you need the money in order to your budgetary plans for 2016?

Joseph Morone

Well, John, we don’t need to do the repatriation. We’ve reduced our -- we've just controlled that quite a bit and we have plenty of capacity on our revolving credit facility. So, we don’t need to do it. We’ve tried to have a disciplined approach to repatriation over the years and we tend to target say $20 million to $30 million per year. We probably -- hopefully, maybe towards the lower end -- we probably will be towards the lower end of that range this year. So to try to limit the cash tax impact of doing it, we try to target that amount each year.

John Franzreb

Okay. And maybe, Joe, in Machine Clothing, the new platform?

Joseph Morone

Yes.

John Franzreb

I understand, still in trials. When do you expect to see any kind of meaningful revenue contribution from that program or could you just update on it completely?

Joseph Morone

There are few -- we are seeing, we are starting to see meaningful revenue contribution from it in the upper end of the tissue and towel market. And so if overall tissue and towel, which is one of our growth segments, is ballpark, 15% of sales, we are starting to see a real impact in the upper end of those sales in the new tissue and towel machines that are being built. We are doing really well because of that new technology platform and it’s a case where the tissue and towel market with the upper end. The customer really cares about performance.

Tissue, there was a big market impact for our customer if the tissue is softer and fluffier. And this platform for a number of reasons allows us to make belts that enable the customer to make higher performing softer and fluffier tissue and towels. So that’s really helping in that segment with new machines. So it will be a slower impact on revenue. It awaits the higher performing new -- construction of higher performing new machines but we are doing really well on those.

John Cozzolino

So, we haven’t yet -- as I think I have mentioned before the price here is to see if we can break out of that segment and use this platform either to improve margins or to improve customer performance or some combination to see if we can break into a bigger segment and that would be the publication, the packaging grades. And we’ve got some -- we had couple of early trials that are very preliminary, that show some interesting performance improvements and so now we will -- this year, we will be running some more trials to see if we can build on those early, call them partial successes.

John Franzreb

So as you improve the quality at the customer level is the consumable portion for you still the same or does that change in the new platform?

Joseph Morone

Unclear. The key is -- a different way of asking that question is what shape or what is the -- in what way does this new platform create value and either the value for the customer through improved performance and one of the improved performance features could be longer life. And for us how does that translate into higher margin. And the answer to that two-sided question, what’s the value proposition here for the customer and for us, appears to vary from application to application. So, as I said on the tissue and towel side, the primary value of the new platform is better performance for the customers, which if we do this right, it should translate into better price for us.

In other applications, it might be -- it might look differently. It might be something that just enables us to resist price pressure. It might be something where we are able to offer the same product, same performing, same performance but at lower costs or some combination of lower cost to us and longer life to the customer. There are a variety of ways that plays out and I can’t give you a generic response because it depends application to application.

John Franzreb

Okay. All right. We will revisit in six months.

Joseph Morone

Yes.

John Franzreb

And lastly, you highlighted five potential revenue items for later in the decade or to be the next.

Joseph Morone

Those mid-range opportunities.

John Franzreb

Right. Right. Could you take those five items and reshuffle them into the ones you think are the most probable on a near-term basis to strike?

Joseph Morone

Probability rather than magnitude.

John Franzreb

Correct.

Joseph Morone

Well, we are on the 777x with the fan case.

John Franzreb

Right.

Joseph Morone

And we are on the JSF with and we are right on the verge of signing a product in LTSA to cover the production period, a long-term supply agreement. So those are certain. The question is, is there upside there that we can expand? If you flip the question and say which is the one that would be in this particular timeframe that would have the biggest potential opportunity that’s tough but it is probably if Boeing actually introduced a new midsized aircraft. That’s a big opportunity.

John Franzreb

Okay. Right. I appreciate you reshuffling my questions for me, Joe. Okay. That’s all for me now. Thank you for taking my questions.

Operator

Thank you. And gentlemen, we have no further questions. Please go ahead with any closing remarks.

Joseph Morone

Okay. Thank you, everyone for participating on the call. And as always, John and I will look forward to seeing you over the course of this quarter and then talking to you again next quarter. Thanks again for participating and we will talk to you soon. Thanks, Kathy.

Operator

Thank you. And 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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